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Operator: Good morning, and welcome to the Victory Capital Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Mr. Matthew Dennis. Chief of Staff and Director of Investor Relations. Please go ahead, Mr. Dennis. Matthew Dennis: Thank you. Before I turn the call over to David Brown, I would like to remind you that during today's conference call, we may make a number of forward-looking statements. Victory Capital's actual results may differ materially from these statements. Please refer to our SEC filings for a list of some of the risk factors that may cause actual results to differ materially from those expressed on today's call. Victory Capital assumes no duty and does not undertake any obligation to update any forward-looking statements. Our press release, which was issued after the market closed yesterday, disclose both GAAP and non-GAAP financial results. We believe the non-GAAP measures enhance the understanding of our business and our performance. Reconciliations between these non-GAAP measures and the most comparable GAAP measures are included in tables that can be found in our earnings press release and in the slides accompanying this call, both of which are available on the Investor Relations section of our website at ir.vcm.com. It is now my pleasure to turn the call over to David Brown, Chairman and CEO. David? David Brown: Thanks, Matt. Good morning, and welcome to Victory Capital's Third Quarter 2025 Earnings Call. I'm joined today by Michael Policarpo, our President, Chief Financial and Administrative Officer; as well as Matt Dennis, our Chief of Staff and Director of Investor Relations. I'll start today with an overview of the quarter, after which I will expand on our distribution opportunity outside of the U.S., update you on Victory shares, our fast-growing ETF business, then I will provide some perspective on the depth of the M&A opportunities that we have before us. After that, I will turn the call over to Mike to review the financial results in greater detail. Following our prepared remarks, Mike, Matt and I will be available to answer your questions. The quarterly business overview begins on Slide 5. We had an excellent third quarter. We achieved record high gross flows, and our net flows continue to improve and finished just under flat for the quarter. We ended the quarter with total assets of $313 billion. Long-term gross flows rose 10% quarter-over-quarter to $17 billion, reflecting our expanded U.S. distribution team that is continuing to coalesce and gain traction. And we also had strong sales outside of the U.S. at an annualized rate of $68 billion or 23% of long-term AUM. We are in the best position we have ever been into execute on consistent long-term organic growth. Adjusted EBITDA set a new all-time quarterly high at $191 million, resulting in an adjusted EBITDA margin of 52.7%. Adjusted earnings per diluted share rose to a record $1.63, up 4% from the second quarter and 20% higher than the quarter immediately preceding the Amundi transaction. We've already exceeded our low double-digit accretion guidance for this transaction, achieving these results even before capturing the complete benefit of our targeted net expense synergies. During the third quarter, we repurchased 1.8 million shares. At quarter end, we still have $355 million of capacity on our existing repurchase authorization. We will remain opportunistic and flexible with future repurchases, factoring in the current facts and circumstances. Turning to our integration process of Pioneer Investments. We are slightly ahead of plan on the timing of achieving our net expense synergy goals. At the end of the third quarter, we achieved approximately $86 million of net expense synergies on a run rate basis. There is a clear line of sight for the remaining $24 million of net expense synergies to reach the previously disclosed total of $110 million. Our U.S. distribution teams have been integrated and cross-trained with the territories being reconfigured to optimize coverage. As with all our previous acquisitions, the investment team remained uninterrupted, and there has been little to no impact on the client experience during the integration process. Turning to Slide 6. As we look at the distribution opportunity outside of the U.S., we are very encouraged by our position as essentially Amundi's U.S. manufacturing arm for traditional active asset management products. We currently have $52 billion of AUM from clients outside the U.S. from 60 countries where net flows remain positive. The Pioneer Investment's U.S. sales infrastructure that was present before we closed the transaction remains intact and is operating well and coordinating with Amundi's distribution teams in their local geographies throughout the world. We are investing in this area to increase capacity for more sales outside of the U.S., which will include legacy Victory products going forward. We currently manage 19 UCITS and are working on several new ones that we will be launching in the next quarter or so. These new UCITS will be a mix of Pioneer Investments and legacy Victory franchise strategies. Priorities for the launch of new products outside of the U.S. were established through a bottom-up approach with Amundi's distribution teams, advising on which products have the greatest demand. Another immediate opportunity identified relates to the current demand from their clients in Asia for U.S. exchange-listed ETF products. The investment performance of our existing UCITS is excellent. The average performance ranking is in the top quartile for all periods and year-to-date average ranking is in the 11th percentile per Morningstar rankings. What makes this partnership unique is its structural design compared to historical and typical industry cross-border distribution agreements. When Amundi contributed its U.S. business to Victory, it was their in-house U.S. investment manufacturing arm, which they sought to expand to better satisfy demand from their clients across the globe. Victory Capital now serves as Amundi's U.S. manufacturing platform, which includes the legacy Pioneer Investments product set, but also includes the legacy Victory product set. Most of the other cross-border distribution deals are not set up this way. Essentially, we took over an efficient and highly productive U.S. investment manufacturing arm that was deeply ingrained in the Amundi distribution system, and we are now adding legacy Victory products to it. Think of a freight train moving forward on the tracks, and we are just adding the Victory freight cars to an already fast-moving and fully operational train. This is why we are so excited about the opportunity over the long term. The economic alignment is there for the organizations as well, in addition to Amundi's 26.1% economic ownership. There is a sharing of the fees by both organizations at the point of sale. Amundi earns fees if they sell Victory products and Victory earns fees for being the investment manager. In a lot of cases, the Amundi point-of-sale fee exceeds the stand-alone fee if they were selling an Amundi manufactured product, given the active nature of our product set, and that is all before factoring in the 26.1% economic ownership. As far as the opportunity set goes, we are very excited about the entire Asia region where there is a high demand for U.S. dollar-denominated products. The Middle East is another market that has caught our attention. Amundi has a great distribution network in both regions. In Europe, Amundi enjoys a dominant position in many distribution channels and geographies that are very difficult to penetrate. I also want to make a point here with some of the recent news reported from Amundi around their UniCredit distribution relationship that this is not a material part of our business and we don't expect this to impact the momentum outside of the U.S. Through Amundi's international networks, joint ventures and third-party distributors, they have one of the industry's most effective and deep global distribution engines. The combination of our expanded U.S. product set, Amundi's existing infrastructure, aligned incentives at the point of sale and Amundi's global competitive positioning creates a transformational opportunity for Victory. We look forward to reporting on our progress in these markets as sales begin to ramp up in 2026. Slide 7 showcases VictoryShares, our rapidly expanding ETF platform. The beginning of 2023, we saw a market opportunity and evaluated our ETF product mix and positioning. We began investing more in marketing and distribution resources, specifically dedicated to growing sales of our ETFs. Since then, we have launched several new active and rules-based ETFs and rationalize others to optimize our offerings. We also began hiring dedicated ETF sales professionals and entered into several strategic distribution partnerships. The result has been an acceleration of growth with year-to-date positive net flows of $5.4 billion, which represents a 53% organic growth rate through the first 9 months of this year. On an annualized basis, this is tracking at a greater than 70% organic rate of growth. We currently have a suite of 26 ETFs, spanning from active to rules-based with an average fee rate of 35 basis points. We entered this business 10 years ago when we acquired CEMP, which had less than $200 billion of ETF AUM. Since that time, we have grown this part of our business at a 29% compound annual growth rate with AUM currently approaching $18 billion. Moreover, our operating platform enhances the benefits of scale and reduces the cost of manufacturing ETFs, which results in margins that meet our firm requirements. Our expectation is that this strong sales momentum will continue to accelerate in the U.S. and that it will be compounded by the non-U.S. sales of our ETF products that I just covered. Turning to Slide 9. Our investment performance remains excellent. Nearly half of our mutual fund and ETF AUM ranks in the top quartile based on Morningstar's 3-year rankings. Nearly 2/3 of our mutual fund and ETF AUM, which is rated by Morningstar, earned a 4- or 5-star overall rating. This encompasses a diversified set of 56 different products. Majority of our AUM continues to outpace respective benchmarks over all measurement periods. On Slide 10, we highlight our capital allocation strategy. Our deployment of capital is primarily targeted at both organic and inorganic growth opportunities. As a growth company, reinvesting in the business and pursuing strategic acquisitions represents our most compelling use of shareholder capital. Given our growing earnings and cash flow, we can also return capital to shareholders. This flywheel effect has resulted in returns to shareholders of more than $1 billion since we went public, which is particularly noteworthy when you consider that the company received just $156 million in net proceeds from the initial public offering. This demonstrates our ability to create substantial shareholder value through disciplined capital allocation, coupled with consistently excellent execution. Our presentation deck includes a chart showing our industry-leading earnings growth on Slide 21 and which highlights our quarterly fully diluted EPS growing from $0.40 to $1.63 for a compound annual growth rate of 21% since our initial public offering in 2018. When we discussed our acquisition strategy, we are often asked about industry fragmentation and our ability to continue executing on our strategy, given we have grown so quickly as we are a much larger company now. On Slide 11, we highlight the opportunity set that we see before us. It is important to note that our core strategy has not changed since the management buyout in 2013. We built a unique platform that is ideally suited to thrive given the secular trends challenging the industry. It is also especially conducive to creating value and growing earnings from acquisitions. Considering that every deal starts with a strategic foundation to it, our company has become much better positioned over the years from a competitive perspective. Each of the acquisitions listed on the left-hand side of the slide was highly strategic. We diversified our investment and product capabilities, enhanced expanded and globalized our distribution capabilities, gained firm-wide size and scale and added leadership talent with each of these transactions. The financial benefits were a positive outcome, allowing us to generate growing cash flow, increase earnings and perpetuate our strategy for creating shareholder value. Our runway is very long. We intend to increase further in size and scale, not for growth's sake alone, but to enhance our competitive position in our distribution channels by investment and adding complementary investment capabilities to optimally position us at the point of sale with our diverse set of clients. As the industry remains very fragmented, the reason for joining forces with a larger partner have only intensified over the years, increasing complexity, regulatory burdens, technology requirements and access to distribution are all becoming more difficult for asset managers that are not mega-sized. Even with the large acquisition universe, we will always remain selective, disciplined and strategic. As you can see from the graphic on this slide, the opportunity set is vast. According to Simfund data, there are currently more than 450 asset managers in the U.S. with more than $10 billion of assets under management. Our focus area has increased in size that we have grown over the years, and we are focused on evaluating firms with between $50 billion and $200 billion of assets under management, where there are more than 110 prospective targets, managing $11.1 trillion. In the event we execute on a transaction on the smaller side, it would necessitate being something highly strategic in the areas of investment capabilities or distribution access. We are also routinely asked about our views on adding alternative investments to our product range. While we do not aspire to become a full-on alternatives manager, we do want to have a curated alternatives product set as we are projecting that some of our clients will increase allocations to alternative investments. Over the years, we have actively evaluated opportunities to acquire, partner or organically add alternatives. We have been disciplined and avoided rushing into this space. However, we do remain attracted to the principles associated with alternative investments around diversification for clients' portfolios. We've never tried to offer every product in every asset class and instead centered around where we have expertise. For alternatives, we will center around specific investment themes, such as income, for example. Our strategy here is consistent with our broader approach of selective expansion, and we will continue to maintain focus on our core strengths as a firm. With that, I will turn the call over to Mike, who will go through the financial results in more detail. Mike? Michael Policarpo: Thanks, Dave, and good morning, everyone. The financial results review begins on Slide 13. Revenue increased 3% from the second quarter to $361.2 million. Average assets for the quarter rose 7% quarter-over-quarter, and our fee rate was 47.2 basis points. GAAP results include approximately $21 million of transaction-related compensation, restructuring and integration costs, which was down from $54 million in the prior quarter. As a result, GAAP operating income was $138 million, a 47% increase from the second quarter. On an adjusted basis, we delivered adjusted EBITDA of $190.5 million, which yields an adjusted EBITDA margin of 52.7%. Adjusted net income with tax benefit grew to $141.3 million or $1.63 per diluted share, up 6% and 4%, respectively, from the prior quarter. Our weighted average shares rose in the period due to having a full quarter of the shares issued to Amundi from the acquisition outstanding. If you recall, we delivered the share consideration to Amundi in multiple tranches during the second quarter. Our capital allocation strategy remains active and disciplined. We opportunistically repurchased 1.8 million shares during the quarter as we took advantage of market conditions to return capital to shareholders. The Board also declared the regular quarterly cash dividend of $0.49 that will be payable on December 23 to shareholders of record on December 10. Combined with our regular quarterly dividend, we returned a total of $163 million to shareholders in the quarter, which was an all-time high. Our balance sheet remains strong with $116 million of cash and a net leverage ratio of 1.1x, providing us with financial flexibility to continue pursuing our inorganic growth objectives. On Slide 14, you can see the diversification in our $313.4 billion in total client assets. In addition to diversification in the U.S. across channels, client types and asset classes, our mix of business continues to benefit from meaningful diversification into non-U.S. geographies. As of quarter end, 17% of our AUM was from investors outside the United States. Our long-term asset flows continued to improve on all metrics, as you can see on Slide 15. We've now achieved our fourth consecutive quarter of improving net long-term flows with net outflows of $244 million. Annualized, this is just 33 basis points of our AUM. Gross sales of $17 billion represent a 10% increase from Q2, displaying the growing traction of our expanded distribution platform. Particularly encouraging is the breadth of positive contributors during the quarter. Multiple investment franchises generated positive net long-term flows, including Victory Income Investors, Pioneer Investments, RS Global, Trivalent and our VictoryShares ETF platform. This diversification across franchises demonstrates the strength of our platform and successful distribution across all channels. Our revenue performance on Slide 16 reflects the enhanced scale of our platform and higher average AUM in the quarter. We expect the fee rate to remain in the 46 to 47 basis point range moving forward, reflecting the current mix of our business. On Slide 17, you can see our expense details for the quarter. Overall, expenses declined from the second quarter. Recall that we incurred several onetime expenses associated with the Amundi transaction in the previous quarter. Compensation expense on a cash basis was 22.8% of revenue. To date, we have achieved $86 million of net expense synergies on a run rate basis and should have $100 million of net expenses removed by the end of the first quarter of 2026, the first full year of ownership. After which, the final $10 million in net expense reduction will be realized over the course of the next 12 months. Turning to Slide 18, we cover our non-GAAP metrics. Our adjusted metrics highlight the underlying strength of our business platform. Adjusted net income with tax benefit increased 6% quarter-over-quarter to a record $141.3 million. Earnings per share grew 4% to $1.63, also a new record high. It is worth highlighting the power of our unique and successful inorganic growth strategy to deliver significant earnings growth. Adjusted EBITDA has grown 57% when comparing Q3 2025 to Q3 2024. Similarly, adjusted net income with tax benefit grew 59% over the same period. These metrics demonstrate our ability to generate strong cash flow and maintain strong, consistent margins even while we are integrating a new business. Wrapping up on Slide 19, the balance sheet continues to strengthen and provides us with enhanced financial flexibility. We successfully refinanced our term loans during the quarter. We combined them into a single loan, lowered our interest rate by 35 basis points and extended the maturity out 7 years to 2032. Our net leverage ratio is at our lowest level since our initial public offering. This deleveraging, combined with our strong cash generation, positions us with significant financial flexibility to execute on inorganic growth opportunities. Our capital allocation strategy remained active during the quarter. We opportunistically repurchased 1.8 million shares as we see tremendous value in our stock at current prices. Combined with our regular quarterly dividend, we have now returned over $272 million to shareholders year-to-date. And during the quarter, we surpassed a total of $1 billion returned to shareholders since becoming a public company in 2018, which is a gratifying milestone. We ended September with $160 million in cash on the balance sheet and our $100 million revolver remains undrawn. When we refinanced our term loan, we also extended the maturity on our revolver by 5 years to 2030. Looking ahead, we expect to continue to return capital via buybacks and dividends while simultaneously pursuing growth initiatives and investing in the business. Our ability to generate robust cash flow puts us in the enviable position to effectively balance investments, pursue strategic and transformational inorganic opportunities and deliver ever-increasing shareholder returns without compromising our financial strength. With that, I will turn the call back to the operator for questions. Operator: [Operator Instructions] Your first question comes from the line of Craig Siegenthaler with Bank of America. Craig Siegenthaler: Congrats on the 21% annual EPS growth since the IPO. David Brown: Thank you. Craig Siegenthaler: So we wanted to start with an open-end question on M&A. And I heard some of your commentary on the different size ranges of targets and how the larger focus today is in the $50 billion to $200 billion AUM range. But can you refresh us on your views on pursuing more cheap consolidation transactions that are highly earnings accretive versus strategic and organic growth synergistic deals? It sounds like maybe you might be leaning towards larger deals today. David Brown: Well, let me start off and say that, as an organization, we aspire to be a $1 trillion firm. That is our internal goal from a size perspective. And we think eventually, that you will need to be that size to effectively be able to compete over the long term. So our goal is to be a $1 trillion under management. We're $313 billion today at the end of the quarter. And to get there, we'll do a number of different things. The first will be everything we'll do will be strategic. So we are not interested in just doing financial transactions where you're buying businesses, consolidating and there's no strategic element to it. So everything starts for us, does it make our company better? Does it satisfy one of the strategic elements that we're trying to satisfy? And so a lot of that will come with the size and scale of transactions. So we will move up. If you think about that triangle, we'll be at the top of that triangle. And we could do something larger than the $200 billion focus area. Anything on the smaller side would be highly strategic. It could be a product perspective. It could be a distribution or something else. But for us, it starts off with strategy. And then what comes from it because of our platform are really the ability to create shareholder value through earnings growth, through margin expansion and through organic growth. And I think we can satisfy all of those things with our acquisition strategy. And lastly, I'd say is we really believe that the industry is going to go through an even more intense consolidation phase as we look forward. All of the reasons firms want to partner to get larger, to deal with issues such as technology, regulatory access for distribution, those things are intensifying. So we're going to go through a phase where there's going to be lots of consolidation. And we think we have an unbelievable platform to be a really good partner to those firms. And I think we have a great track record and history of executing on them. Craig Siegenthaler: Our follow-up question is on the Pioneer acquisition. You're running ahead of even the more recently revised synergy target. So we're curious, what is driving that? Is it conservatism? Is it use of AI and other technologies that have improved operating efficiencies? Did you find more redundancies in certain functions? And I heard your commentary that it's not from the investment team. So just curious on that. Michael Policarpo: Craig, it's Mike. Yes, I think as we approach every acquisition and evaluate the opportunity to consolidate operations and administrative functions onto our platform, as you said, it does not impact the investment teams. And so that's our #1 goal. It doesn't impact the investment teams, their process, leave them alone, let them have all the tools that they need to manage money and continue down the path that they're on from a strong investment performance perspective, and we've accomplished that with the Pioneer Investment integration. Of course, as we look at planning, we go through the exercise and spend time, figuring out where the opportunities lie. We probably tend to be conservative as we go through that because there's always unknowns as you're going through an integration. But as we've gone through the Pioneer integration, I think we found opportunities around technology, we found opportunities in kind of investment operational areas to provide technology to alleviate some additional costs that we anticipated. So I think it's really just the opportunity set to go through an integration. We've got highly skilled people that have done this for a number of years, and we're able to find opportunities as we go through the process. So I think, again, conservatism and then execution has allowed us to kind of achieve quicker and then higher than we had originally anticipated from a net expense synergy. But we are making investments. I just want to reiterate that, that these expense synergies are net of investments that we're making in areas of the business. Dave's comments on the non-U.S. distribution in the prepared remarks, I think, is an area we're making investments because we see a tremendous opportunity there, product development, data, technology, distribution partnerships. So as we think about all of that bundled together, I think we've just been in a position where we've been able to accelerate some of the recognition and be a little bit higher than we anticipated as well. David Brown: Yes. And I'd like to add to that. I think the other perspective is we are in the investment management business, but we're also in the acquisition business. And I think unlike many other investment managers, who are in the investment management business that have decided to do acquisitions because they need to grow, we are in the investment management business. But we've also developed a skill over a long period of time on doing acquisitions. And so part of the success we've had in synergies, the ability to invest while we do acquisitions on our platform and the ability to exceed some of the goals we put out there maybe from a numbers perspective and from a timing perspective, really comes down to is we have a second part of our business, which is doing acquisitions. Operator: Your next question comes from the line of Michael Cho with JPMorgan. Y. Cho: I just want to start on the non-U.S. business. You walked through some commentary there. You said positive net sales in third quarter since the close. Wondering if you could give some color on the magnitude of the flows and maybe the strategy that help drive those inflows. And Dave, you talked through about sales ramp in this segment into '26. And so maybe some more color on your expectations on the magnitude of uplift for Victory in this segment. David Brown: Sure. Thank you for the question. So a lot of the sales because of the infrastructure that has been set up has come through really the Pioneer franchise. The Pioneer franchise is well distributed within the Amundi distribution network. So since acquisition -- since we've closed the acquisition, most of the sales have come through the Pioneer side. That will change going into '26. We'll still have strong sales within the Pioneer side. And we did note on our prepared remarks how good the investment performance is within the UCITS platform. But what will happen in '26 is as we launch kind of the legacy Victory products into the platform through UCITS, through the U.S.-listed ETFs, you'll start to see flows into the legacy Victory products. We've also invested in the infrastructure around selling RFPs and marketing and servicing for the non-U.S. side. As far as sizing, we don't really disclose what the size of the flows are. But I think we did put in our prepared remarks that we do think it's a transformational opportunity, which would lead you to believe that over '26 and forward, we think it's going to be an important sizable part of our growth. It's white space for legacy Victory. We have some distribution outside the U.S. pre the close, but nothing to the scale and nothing to the depth that we have with Amundi. Y. Cho: Great. And if I could just ask a follow-up on the acquisition opportunity set discussion. I mean on the slide and your comments, I mean, it's a pretty wide set of opportunity out there. And I guess that's not -- hasn't changed in years, and it's an attractive segment and strategy. But you have a $100 billion integration going on with Pioneer at the moment. I don't want to rule out mega deals. But are there segments that maybe you're more focused on near term when you look at that triangle chart? And as it relates to all, you called out income, and I don't know if you meant it to call that out in a specific way, but are there classes or themes that you think would maybe fit better with Victory's current platform? David Brown: On the first part, as far as in the middle of the integration, we're well through the integration and you can kind of see that the way the numbers, the net expense synergies have progressed and what our projection is. And so we're really doing well with the integration. And we're getting close to being at a point where we'll be wrapped up. And so we are fully kind of open for business from an acquisition side. I would not rule out a mega size deal. We have the $50 billion to $200 billion as the focused area, but that doesn't preclude us from going above $200 billion, and that doesn't preclude us from going below $50 billion either. And I'd say as far as areas of focus, as I said, we really do start off with the strategic side. We're interested in high-performing products. We're interested in products that have demand today and that we think we'll have demand in the future. We know we have to offer a larger set of products for our distribution partners. And so we'll be focused on all of those things. From an alternative perspective or private markets perspective, the themes that we're interested in income is an example, but not the only one. There are other areas that we think fit nicely with us. And they really do span across different asset classes. And I'd say, I don't want to focus on one of them. But income is an important one. I think income is something that has lasted over time. We have income products today. They're selling well. We know how to sell them. There's lots of demand for them. And so income is one of the themes. But for us, around the private markets and alternatives, we don't want to be all things to all people. We want to do certain things really well, and we want to matter for those certain things, and that's how we'll approach the private market/alternative side. Operator: Next question comes from the line of Alex Blostein with Goldman Sachs. Alexander Blostein: Dave, just building on that last thread, thinking about the private markets and the alt opportunity, in what form do you guys see yourself partnering with somebody in the alt space? We've seen various structures out there, so just curious to think about how. Whether it's explicit M&A or potentially equity stake in you guys by some of the old managers or some form of like investment outsourcing agreements that could be coming up in the next several quarters? Kind of how do you see that volume because clearly, that's -- it's a big part of the market, and it's important part of the sort of toolkit for the wealth advisers that you guys don't penetrate fully? David Brown: Alex, thanks for the question. I would start off saying that we probably are not interested in investment outsourcing. I think that's challenging. I think all of the other scenarios you laid out around ownership, investment, acquisition are within our universe. And I think we're exploring all of them. In our prepared remarks, we have talked about how we have not done a transaction. But over the years, we have been very involved in discussions, analyzing and so we feel really good about our understanding of the space. We feel really good about what we think our clients are desiring and what they will desire down the road. When alts and private markets opens up, especially on the RIA side, on the intermediary side on the retirement side, I think we have a really good understanding. And I'd say from different versions of M&A is how we will approach it. Alexander Blostein: All right. And just to clean up modeling. Fee rate, so I remember there was a bit of an outsized. I think performance fee benefit last quarter. So you kind of saw that step down a bit this quarter. How are you thinking about sort of the go forward on the fee rate relative to the kind of mid- to high 40s where you guys have been? And ultimately, given the mix shift in the business, anything notable you would think about over the next sort of 12 months as the fee rate evolves? Michael Policarpo: Yes. Thanks, Alex. It's Mike. Yes, I think we have kind of said our fee rate should be in the 46 to 47 basis point range long term. We don't anticipate any significant fee pressures. Clearly, the mix of business will impact that. But as we look out for the next 12 months, we feel pretty confident of the 46 to 47 basis points from an ongoing perspective from a fee rate. Operator: Your next question comes from the line of Ben Budish with Barclays. Benjamin Budish: Maybe just following up on that last question from Alex. I think he mentioned the performance fees, which we saw in your Q were quite outsized in Q2. I'm just curious, when we look at the maybe quarterly run rate over the last few years, it's kind of been like the low single digit amount. Is there anything different about the Pioneer assets that you acquired where performance fees might be higher on a run rate basis or should be structurally higher? Anything like that to call out? And I guess what a lot of investors are trying to figure out. Michael Policarpo: Yes. I think the fee rates, again, the 46 to 47 kind of includes how we think about any kind of annualized or annual performance-related fees. The Pioneer funds do have a couple of mutual funds that have fulcrum fees, much like the legacy USA mutual fund business that we acquired. There's a couple of fulcrum fees there that are classified as performance fees. But nothing that I would say is unique or specific. I think as you mentioned, they've been in the 1 to 2 basis point range on an annualized basis for us, and that's probably the same level going forward. It will vary based on business mix again. If we see opportunities to risk share pricing with institutional clients, there could be a component of those fees that are more based on performance. But I think as we look at the business, it's a pretty small amount overall. And again, the way we've built the business, while we are very -- when we look at fee rate, we're very focused on the margin. And so as you think about the way we've structured the expense base of the business with being greater than 2/3 variable, we expect to kind of continue to hold our margins with respect to all the fee rates that we have. Dave mentioned in the prepared remarks, our ETF business, those are, on average, 35 basis points, so a little bit below our fee rate. But again, the margins on that business are strong and contribute to our overall margin base. So that's how we think about it. The performance fees are pretty immaterial from a business perspective. But we focus really on the bottom line, the margin components. Benjamin Budish: Okay. Understood. Maybe just another follow-up too on the M&A and alts discussion. When we listen to a lot of the large cap alt managers, we kind of hear this theme of GP consolidation of more LPs wanting to do more with less. In the credit space, we kind of hear that you need to have really massive sourcing capabilities in order to be effective. Just curious your response to that early. How do you think about what makes sense given the magnitude of what you might be able to acquire in that space? David Brown: Yes. I think for us, we are -- always have been focused on areas where we can win and compete. I think a lot of the large cap alt managers are focused on very large areas, and we're not looking to really compete exactly with them in a lot of those different areas. I also think there is a new kind of area in the market that they're trying to penetrate. And I think traditional managers are there today, which is a lot of the intermediary market, the retirement market, a lot of parts of the RIA market. And I think to win there, there will be different selling strategies that we have used on the traditional side that we'll use on the private side. From an acquisition standpoint, we will approach if we do an acquisition on the alternative side. We'll approach it as we've always approached traditional acquisitions. I think we've been very value conscious. We focus on shareholder value. We focused on acquiring excellent products. And we focus on products that we think we can help grow. And we'll do the same thing there. And I think we have a really good track record. And I think we are an excellent partner for private market investors and also traditional market investors. Operator: Next question comes from the line of Michael Cyprus with Morgan Stanley. Michael Cyprys: Maybe just continuing along the themes on the inorganic topic. I was hoping maybe you could elaborate a bit on the inorganic pipeline, how that composition looks today? How would you just sort of characterize that size, quantity types of properties? How that's evolving now versus 3 or even 6 months ago? And anything you would mention in terms of how close you might be on any of those? David Brown: Our pipeline is full. We're very active in discussions. I don't think that there's anything that we want to talk about today on timing or different types of acquisitions that we would do. But we're having lots of discussions. I think the environment has gotten progressively better over the last couple of quarters from an acquisition standpoint. I think there's a lot of things happening in the industry. The industry is going through a lot of change very quickly because of technology, because of regulatory changes, because of the ability to access distribution is getting harder by the day. And so we've had a lot of discussions, and we're really active. And as I said earlier, we are well through the Pioneer-Amundi integration. So that sets us up to -- when the opportunity presents itself, we'll be able to execute on it. Michael Cyprys: Great. And then just a follow-up on that. As you think about executing on this M&A pipeline over the next 12, 18 months, maybe you could elaborate on what sort of risks that you see that might result in not much getting done there over the next 12, 18 months? And when you're speaking with prospective targets, what is it that may hold them back from looking to transact? David Brown: I think the risks become very unique to the acquisition. So I don't think there's a general thing that I'm concerned about. I think the risks are very focused on the exact target the type of transaction, the structure of the transaction. Most of the risks could be mitigated restructuring and especially with the way we approach acquisitions where it's really around partnering and growing forward as opposed to succession-type planning acquisitions. But as we look at it today, we think the environment is really conducive. And like I said, we're coming to the end of our integration with the Pioneer-Amundi. So we're ready to go. Operator: Your next question comes from the line of Kenneth Lee with RBC Capital Markets. Kenneth Lee: Just following up on the theme of inorganic opportunities, specifically on alternatives, how do you think about the challenge integrating potentially very different cultures or mindsets between traditional and alternative as you look at some of these opportunities, that's usually a point of potential friction there. David Brown: Yes. Thanks for the question. We think about it a lot, and we think about it very carefully. It's probably one of the driving factors why we have decided over the years to just sit back and watch and observe and learn. I think there are different strategies that you can employ to mitigate some of those challenges. You can do that through structuring, you can do that through the types of product sets you talk about. But private market and alternative businesses are different than traditional. And I think that's the challenge. And I think it's why we have sat back and kind of studied and learned and been very patient. And so anything that we do going forward in this space, we will address that issue. We recognize it, and we're glad that we have been able to observe what others have done in the space. Kenneth Lee: Got you. Very helpful there. And just one follow-up if I may, a little bit more housekeeping. Global non-U.S. equity net inflows pretty positive there. Anything to call out either outsized mandates or things of that nature? David Brown: Not specifically in the global asset class, we are seeing a lot of demand for that asset class inside the U.S. and outside the U.S. We have 2 excellent products with 2 different franchises there. So we have good performance, and we also have really, really good distribution around this asset class inside and outside the U.S. So it's just in demand by clients wanting to get access to a global portfolio. Operator: And that is all for the Q&A session for today. This concludes today's conference call. You may now disconnect your lines. Have a pleasant day, everyone.
Operator: Good morning. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Interfor analyst conference call. [Operator Instructions]. Thank you. Mr. Fillinger, you may begin your conference. Ian Fillinger: Thanks, operator, and hello, everyone. With me on the call today are Rick Pozzebon, Executive Vice President and Chief Financial Officer; and Bart Bender, Senior Vice President of Sales and Marketing. Thank you for joining us. Before commenting on the quarter, I want to step back and provide some perspective on how Interfor is positioned and how we're addressing the near-term challenges while setting up for long-term success. As you're all aware, we're in the midst of a prolonged down market with several factors creating significant challenges for our industry. These include economic uncertainty and housing affordability concerns, which are weighing directly on building products demand as well as cross-border trade tensions. Combined effect has been a persistently weak price environment. Against that backdrop, our leadership team remains focused on what we can control, driving out costs, reducing risks and positioning our business for success when the market turns. The top of our list is supply discipline. We've led the industry in taking proactive steps to preserve our position today and to prepare for improving conditions ahead. For Q4, we announced reductions of approximately 250 million board feet of lumber, representing about 26% when compared to Q2 volumes. We've consistently acted early from curtailment announcements this year to the divestiture of our Quebec assets and the indefinite curtailment of 2 U.S. sawmills. These decisions reflect our fundamental commitment to maintaining a responsible operating posture across the portfolio. Interfor has a top-performing platform in North American lumber industry, optimized for both tough times like today, but also for better markets when they return. Our second priority is cost discipline. We already delivered top quartile EBITDA margins and that performance continues to drive our team. Our Canadian platform has remained resilient despite difficult markets and punitive duties. We continue to optimize our portfolio for operations that support industry-leading margins and position us to capitalize what markets recover. Fundamentals exist for strengthening lumber markets, particularly owing to the pent-up housing demand. Economic indicators suggest improvements starting in 2026 with continued upward trends in 2027. While that recovery will take time, we believe we're as well positioned as anyone to benefit once it comes. We're moving forward with a solid foundation. We've significantly strengthened our balance sheet through a recent equity raise that was well supported by long-term shareholders. Combined with the renewal of our credit facility, this gives us flexibility to weather the downturn for several years, if necessary. With that backdrop, I will turn to the most recent quarter, where our results reflect the challenging operating environment that I've been speaking about with pricing down across all regions, particularly in the U.S. South. These conditions and our philosophy of adjusting quickly were the catalyst for lumber production adjustments last month. While prices are fine in ground, we've seen similar curtailment announcements across the industry. The market remains in balance. We'll continue to align our production with market realities in a disciplined and proactive way. Looking ahead, these are undeniably tough times. And like others in our industry, our numbers reflect that, but we're confident in our portfolio, balance sheet and our clear plan to manage through the uncertainty and position Interfor to thrive as conditions recover. With that broader perspective, we see considerable opportunity and long-term value in our company, and we're committed to delivering that to our shareholders. With that, I'll turn it over to Rick for a closer look at this quarter's financial results. Over to you, Rick. Richard Pozzebon: Thank you, Ian, and good morning all. Please refer to cautionary language regarding forward-looking information in our Q3 MD&A. Overall, our financial results for the quarter reflected significant lumber price weakness, especially in Southern Yellow Pine and significantly higher duty rates imposed by the U.S. As Ian alluded to, earnings continued to be constrained by a general oversupply of lumber in the market despite significant production curtailments across the industry since the beginning of 2024. Interfor contributed further to these supply curtailments with recent announcement indicating plans to significantly reduce production across all regions through the end of this year. In August, the U.S. more than doubled the combined rate of antidumping and countervailing duties imposed on lumber shipments from Canada from 14.4% to over 35%. This increased duty rate directly impacts approximately 25% of Interfor's total lumber shipments. With respect to earnings, Interfor generated an adjusted EBITDA loss of $36 million, excluding noncash duty-related adjustments on total revenue of $689 million. Total revenue dropped 12% quarter-over-quarter, driven by a 6% increase in the volume of lumber shipped, a 10% decrease in the average realized lumber price and a slightly weaker U.S. dollar. Decrease in volume reflects production curtailments and lower demand, a portion of which is seasonal. Lumber price declines were led by Southern Yellow Pine, whose benchmark composite average price fell nearly 20% quarter-over-quarter. On the cost side, reported production costs per unit of lumber increased 2% quarter-over-quarter, reflective of the lower shipment volume, partially offset by a slightly weaker U.S. dollar. From an operating cash flow standpoint, $26 million was consumed in the quarter driven by negative cash margins on lumber sales, partially offset by an $18 million reduction in working capital. Beyond operations, we invested $32 million in capital projects and generated $1 million from the sale of assets. Over the remainder of this year and next, we anticipate generating net cash flow from ongoing sale of B.C. Coast forest tenders in the ballpark of $30 million to $35 million. This following quarter end on October 1, Interfor completed a bought deal equity offering, which generated $144 million of gross proceeds. Including this, financial leverage as measured by net debt to invested capital would have been 35.2% at the end of Q3 with available liquidity of $386 million. This equity raise, combined with the credit facility renewal in July have provided Interfor with enhanced financial flexibility to navigate through the ongoing downturn. To wrap up, Interfor's financial results for the third quarter reflect significant lumber price weakness and higher duty rates imposed by the U.S. We anticipate continued lumber market volatility going forward as supply continues to rebalance with demand and trade actions by the U.S., including the Section 232 tariff of 10% implemented in October. Therefore, we'll continue taking actions that position its high-quality and geographically diverse operations to succeed through this volatility and capture the upside when the market returns to strength. That concludes my remarks. I'll now turn the call over to Bart. Barton Bender: Thanks, Rick. Lumber markets remain challenged given the uncertainty we're seeing at both the macroeconomic and geopolitical level, multiyear lows on consumer sentiment, low U.S. home building confidence and elevated mortgage rates all represent headwinds. And that's impacting new home construction, industrial activity and repair and remodel demand. This uncertainty continues to put downward pressure on the demand for lumber, which we expect to see for the balance of this year. Looking ahead to 2026, we anticipate that affordability will begin to improve which should lead to better market conditions. On the supply side, production curtailments are increasing in response to unsustainable pricing in all markets. We expect this to continue until a balance is achieved. Although difficult to be exact, it's our position that end market inventories remain very low, less demand and low lead times have allowed distributors to run comfortably with much lower inventories than normal. The strategy works until it doesn't. Interfor specifically, our diversification of species producing regions and product mix allows for a targeted market approach and access to a broader range of the lumber market, beneficial in times of oversupply. Lastly, Interfor will continue to monitor our customers' needs and adjust our production levels accordingly. With that, back to you, Ian. Ian Fillinger: Thanks, Bart. Operator, we're ready to take any questions at this point. Operator: [Operator Instructions]. Thank you. Your first question will be from Hamir Patel at CIBC Capital Markets. Hamir Patel: And we've seen some more industry capacity closures announced yesterday in British Columbia. How are you feeling about your cost position in the province? And how much additional industry capacity do you think needs to come out? Ian Fillinger: Thanks, Hamir. Yes, our B.C. operations in Adams Lake, Grand Forks and Castlegar as you know, have been modernized over the last number of years and are very competitive on a cost basis and also on a product mix basis, with being much different where some of our competitors are in the North or central interior. So a lot more species variability, product mix that aren't on random length pricing. So in addition to that, all 3 of those operations have extremely high percentage of secure fiber through licenses, et cetera, probably, I would say, in province. So very good opportunity to log from our tenures or if we have to go to an open market, we can be very strategic about that. So very competitive operations in B.C., Hamir. As far as volume goes out, I think the way out of where we're at now is supply. It's the adjustments that industry needs to make to be able to get out of this situation we're in and it's part of our responsibility to do that, and we've been doing that, as you know, usually first and leading in the industry on some of those difficult decisions. Hamir Patel: Great. Thanks, Ian. And Rick, a question for you. I know the company has close to, I believe, $550 million of goodwill on the balance sheet. How should we think about risks of further impairments there? Richard Pozzebon: Our goodwill on our balance sheet is about $500 million today. and that's within the total assets on the balance sheet of about $3.1 billion and a book value per share of about $21 today. So when we think about goodwill testing, it typically happens for us every Q4, it's an annual testing requirement required by IFRS. So the testing, Hamir, involves multiyear discounted cash flow model -- so we're in the process of doing that right now. It would be too early for me to speculate on what the results are. However, I think it's worth noting that the testing uses long-term lumber prices, so long-term trend lumber prices, which haven't really changed year-over-year. And we've made improvements in terms of the quality of our portfolio over the last year, just given some of the asset sales we've made. So I'm feeling good about where we're at with the testing, but it's too early to speculate at this stage. Operator: Next question will be from Matthew McKellar at RBC. Matthew McKellar: In your opening remarks, you talked about continued efforts to drive out cost, are there any recent initiatives you'd highlight or any items on the docket for 2026 that we should be considering? Ian Fillinger: Yes, Matt, kind of in this type of format, we're a little bit reluctant to share the internal plans that we have. We've been running a targeted initiative through the down market each year and readjusting depending upon our outlooks in current conditions. So I would say we're as an executive team, pleased with both the cost side and the product mix side, internal initiatives that we're doing in and I think that's reflective in our benchmarking of our margins compared to our public peers. But yes, it's significant, but would be hesitant to kind of share it in this forum with you, Matt. But I can say that the entire organization whether it's in offices or mills or Woodlands or sales all have very good targets set in place and they're making good progress on all of them. Matthew McKellar: That's very helpful. Last for me, we've seen pretty substantial changes in duties on Canadian lumber new tariffs and significant changes in FX rates this year. With the changes we've seen and I guess reflecting on some of the challenges the European producers are facing as well. How do you expect imports from Europe into North America to trend from here? Ian Fillinger: Yes. Well, we -- as you know, we don't really have operations in Europe to really completely understand that picture. But obviously, with 10% being put on European imports into the U.S. should help North American producers compete against that volume. But yes, we don't really have much more of an insight than you do on that front. Operator: Next question will be from Ketan Mamtora at BMO Capital Markets. Ketan Mamtora: Maybe first question. If I'm looking at this correctly, it looks to me that your lumber production was actually up 1% on a year-over-year basis in Q3. Can you provide some perspective on what is driving that? Richard Pozzebon: Ketan, it's Rick speaking. I think looking at Q3 last year, we had taken significant curtailments a little bit more than we had taken in Q3 this year. And I think that's the main reason. We will expect an increase in curtailments and production reductions in Q4 here based on our announcement that we made in October, Ian referenced in his remarks. Ian Fillinger: Yes. And further supporting what Rick is saying is curtailments, we were winding up a couple of operations in the U.S. South, plus the Quebec mills from last year too where they were at. So -- and we were in that process. So yes, lots of moving parts from last year to this year, Ketan. Ketan Mamtora: Okay. I see. And then recognize that you've announced curtailments for Q4. I'm just curious, given sort of how prolonged this downturn has been and given sort of where lumber prices have been. Can you provide some perspective on how you are thinking about temporary curtailments versus kind of more indefinite or permanent curtailments and sort of what -- how are you all thinking about those 2? Ian Fillinger: Yes, Ketan, we have a model internally where we put in a bunch of obviously factors market being one of them, demand being one of them, inventory levels, pull-throughs on what have you, input costs for logs and conversion costs in that model, which we review on a weekly basis. So we make some of those decisions, which are -- we don't take lightly, obviously, impacts many people, but yes, we do have a robust model that's been built and refined over the last 5 or 6 years. And so to answer your question, we're looking at it every week, we'll make adjustments. We're not shy about doing that. We believe that as difficult as they are, they're needed in these environments. So yes, we're continuing looking at those and ready to make the decision when needed and be proactive about it. Ketan Mamtora: Yes. And Ian, I recognize these are kind of very difficult decisions and to everyone who is affected, I appreciate that. What do you need to see to either kind of make the decision or kind of not make that decision? What factors are we looking at? And recognize it's not just like 1 month or 1 quarter, right? You need to think kind of ahead. But outside of the fact that we've all looked at data around pent-up demand. But outside of that, what are the things that you're looking at to sort of decide this? Ian Fillinger: Yes. Basically, Ketan, the main driver is the lumber demand and lumber price. And so it's a mathematical model on that. But when we do see demand there to support either a shift coming up or a shift or a mill going down. That's a fairly easy decision for us to see with our model. And then on the pricing side, does pricing support at cash breakeven and above? Or does it support cash breakeven and below? And then where those costs inflection points are would drive whether we reduce and curtail or whether we add volume back in. And so we need to see sustained improvement to bring back any kind of production. And on the other side, when it doesn't look great, and we really kind of look out 2 to 3 weeks because that's the best sort of insight and after that, it gets a little bit cloudy. We will make decisions to curtail and it's a real-time model. Operator: [Operator Instructions]. Next, we will hear from Sean Steuart at TD Cowen. Sean Steuart: Ian, another question on the supply response and the thought process that goes into it. And maybe I'm thinking too far ahead here, but is a part of the thinking on the rolling downtime versus permanent or indefinite shuts at this point? We're 3 years plus into an extended trough, which is abnormal. We're probably closer to the end of this than the start, hopefully, at this point. Does the duration of this downturn factor into the decision or the decision against permanent closures at this point, i.e., when things get better, you want to be able to respond. Is that a part of the thought process for the company at all? Ian Fillinger: Well, it is, Sean. I mean these are big decisions when we're talking permanent, and I think that's what your question is driving towards. And so when you look at operations and you kind of see where they're at on the cost curve, product mix and then you look at a trend price. I mean, you kind of got to have that in the back of your mind. But at the same time, the factor for us is our goal has always been to be in the top quartile in any operation we're at. So from the time that you kind of look at a permanent or nonpermanent decision, it also has to factor in what's the time line to move that operation even in a trend market to where we want to be. And so those are the factors that we look at and we got to get comfortable around and then make the appropriate decisions, which, as you've seen, we've done multiple times in the past. Sean Steuart: Yes. Understood on that front. And Ian, can you give us some updated perspective on if it's EBITDA per 1,000 board feet or relative margin metric? I'm not asking for the specifics region by region, but can you give us an idea of how wide the spread is at this point across your platform region to region? Ian Fillinger: Not really, Sean. I think that would be kind of difficult for us to share in this environment. But the one uniqueness and you know this, being in New Brunswick and Ontario and B.C., it really diversifies our Canadian mix. We have an engineered wood product division also, which is helpful and strong and then being in the Pacific Northwest and the U.S. South, as these trade actions against the Canadian lumber continue, we feel that being in Washington and Oregon, is an advantage to maybe some interior BC operations in the Central and North, given our stud production in the Pacific Northwest. So each one of our regions actually is from a product mix, specie and geographical log cost differences really gives us a balanced portfolio, and that's part of our growth strategy over the last 5 years and when the market turns. I think we're in exceptional shape to capitalize. Operator: At this time, I would like to turn the conference back over to Mr. Fillinger. Ian Fillinger: Okay. Thank you, operator, and thank you, everybody, for attending and your questions, and have a great day, and we'll talk to you next quarter. Thank you. Operator: Thank you sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we ask that you please disconnect your lines. Have a good weekend.
Operator: Good day, ladies and gentlemen. Welcome to the ePlus Second Quarter Fiscal Year 2026 Earnings Conference Call. As a reminder, this conference call is being recorded. [Operator Instructions] I would now like to introduce your host for today's conference, Amanda Dupree, Associate General Counsel. You may begin. Amanda Dupree: Thank you for joining us today. On the call is Mark Marron, CEO and President; Darren Raiguel, COO and President of ePlus Technology; and Elaine Marion, CFO. I want to take a moment to remind you that the statements we make this afternoon that are not historical facts may be deemed to be forward-looking statements and are based on management's current plans, estimates and projections. Actual and anticipated future results may vary materially due to certain risks and uncertainties detailed in the earnings release we issued this afternoon and our periodic filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K, quarterly reports on Form 10-Q and in other documents that we file with the SEC. Any forward-looking statement speaks only as of the date of which the statement is made, and the company undertakes no responsibility to update any of these forward-looking statements in light of new information, future events or otherwise. In addition, we will use certain non-GAAP measures during the call. We have included a GAAP financial reconciliation in our earnings release, which is posted on the Investor Information section of our website at www.eplus.com. I'd now like to turn the call over to Mark Marron. Mark? Mark Marron: Thank you, Amanda. Good afternoon, everyone, and thank you for joining us today for our second quarter fiscal 2026 earnings call. This quarter represents a significant milestone for ePlus as we delivered the first quarter in our history with over $1 billion of gross billings, underscoring the momentum across our business and the strength of our diversified model. Our performance this quarter again reflects our unrelenting focus on delivering the products and services our customers require in today's market. We are seeing this growth not only in the quarter, but in our year-to-date results as well, with revenue up over 20% and total gross billings of almost $2 billion in the 6-month period. I want to highlight 4 key messages. First, as I mentioned, our record $1 billion in gross billings in the quarter underscores strong and broad-based demand across our portfolio, customer segments and verticals. Notably, most of the growth was organic with acquisitions accounting for only 10%. Second, our consolidated net sales for the quarter grew 23.4%, but adjusted EBITDA grew at a rate that is more than twice that of net sales as operating leverage continues to shine through. This was supported by increased demand for our products and services, underscoring the resilience in our strategy and internal automation initiatives. Third, we continue to invest and align our resources in higher-growth areas of AI, security and cloud to deliver value-added products and solutions, enabling us to both grow our customer base and increase sales to existing customers. And fourth, our balance sheet remains strong, closing the quarter with over $400 million in cash, giving us flexibility to continue investing organically and inorganically while returning capital to shareholders. Let me start with a brief overview of the quarter's financial results. As a reminder, we completed the sale of our domestic financing business on June 30, 2025, which is now accounted for as a discontinued operations. During the quarter, we had solid execution across the board, delivering strong financial results with most of the growth organic. Net sales increased 23.4% year-over-year with broad-based growth across products, professional services and managed services. Additionally, growth was across all customer sizes and industries with notable performance in the mid-market and enterprise segments. Lastly, we saw especially strong performance across almost every vertical, except state and local government, where budget constraints persisted. Let me talk about some additional drivers of this robust performance as it relates to fast-growing areas. Security continues to be a standout performer with gross billings of security products and services up 52% year-over-year, now representing 24% of trailing 12-month gross billings, up from 21% last year. Networking posted its second consecutive quarter of sequential growth, which we believe is being fueled by AI-driven infrastructure investments. And in Data Center and Cloud, net sales grew nearly 30% year-to-date, reflecting customer modernization initiatives tied to AI deployments. Shifting to profitability. Second quarter adjusted EBITDA increased 62% and the 6-month adjusted EBITDA was 40% higher than the same period of the prior year. The operating leverage reflects our strategic alignment of headcount towards high-growth focus areas of AI, data center and cloud, security and networking. We have also leveraged AI internally to provide faster incident resolution and closure, leading to a better customer experience. Although we have grown through automation, we have been able to maintain headcount in parts of our internal and external services teams over the last couple of years. These actions provide a solid platform to build upon. Now let's turn next to AI, an area that continues to accelerate across our customer base and within ePlus itself. Our recently released AI industry pulse poll revealed that nearly 3/4 of IT and business leaders now view AI primarily as a driver of revenue growth, surpassing cost savings and customer satisfaction. This marks a significant shift in how organizations approach AI from efficiency to expansion. At the same time, the survey showed that 81% of leaders are concerned about whether their infrastructure can support advanced AI applications, underscoring the opportunity for ePlus to help customers scale securely and effectively. During the quarter, we acquired Realwave, a cloud-based AI-powered software that integrates video, Internet of Things and sensor data to detect events, make decisions and trigger automated actions, expanding our ability to deliver real-time AI-driven insights to customers. Shifting to our balance sheet and capital allocation. We have a healthy balance sheet with over $400 million in cash, enabling disciplined capital allocation, both organically and through M&A that can fuel long-term growth. In summary, our second quarter results reflect continued progress across our segments. We remain focused on driving growth, optimizing margins and deploying capital to maximize shareholder value over time. I want to close by thanking all of our ePlus teammates for their efforts in delivering a strong quarter and first half for ePlus and our shareholders. I will now turn the call over to Elaine. Elaine? Elaine Marion: Thank you, Mark, and thank you, everyone, for joining us. I will review our financial performance in the second quarter of fiscal 2026. Continued momentum across our business led to another quarter of double-digit increases in our key financial metrics. Consolidated net sales totaled $608.8 million, up 23.4% year-over-year, driven by sustained demand across our focus areas of security, networking and cloud. As Mark mentioned, we continue to see demand across all customer sizes with particular strength in the mid-market and enterprise segments. As you may recall from our last earnings call, enterprise customers resumed purchasing in the first quarter following a period of product digestion, and we saw a continuation of this trend in the second quarter. Gross billings of $1.02 billion in the quarter represented a 26.5% increase in year-over-year with the majority of this growth being organic. This milestone underscores the strength of our diversified business model and our strategic focus on high-growth areas, including offerings that enable AI consumption. Product sales in the quarter totaled $485.1 million, up 24.5% from the prior year, led by robust demand in networking and security solutions, aided by increased AI adoption as well as growth in data center and cloud. Service revenue reached $123.8 million in the quarter, representing growth of 19.4% year-over-year. Professional Services grew 23.3%, led by the addition of Bailiwick in August of 2024, while managed services increased 13.5%, led by the strength in enhanced maintenance support and cloud offerings. Services remain a strategic focal point for ePlus, and we remain committed to add to our capabilities in this segment to build out our strong recurring revenue base over the long term. Taking a look at our customer verticals, Sales remained broad-based. Telecom, Media and Entertainment and SLED, our 2 largest verticals accounted for 27% and 14%, respectively, of net sales on a trailing 12-month basis. Health Care, Technology and Financial services represented 13%, 13% and 9%, respectively, with the remaining 24% divided among other end markets. Second quarter gross profit totaled $162.1 million, up 27.4% from the prior year quarter. This represents a consolidated gross margin of 26.6%, up 80 basis points from 25.8% last year, driven by increased product margins. Product gross margin expanded 160 basis points to 24.5%, reflecting a favorable mix as we sold a higher proportion of third-party maintenance and services in the quarter, which are recorded on a net basis. Professional Services' gross margin was 38.2% compared to 41.3% a year ago. This change was due to the acquisition of Bailiwick, which had lower gross margin than our legacy Professional Services. Managed Services gross margin was 29.5%, in line with the prior year quarter. Consolidated operating expenses increased 12.9% to $113.3 million, reflecting higher salaries and benefits, primarily from a full quarter of Bailiwick and additional variable compensation due to the increased gross profit generated in the quarter. Headcount from continuing operations at quarter end was 2,138, down 6% from the prior year quarter as we focus on roles in high-growth areas, including AI, cloud, security and networking. Operating income rose 80.9% to $48.8 million, significantly outpacing the increase in operating expenses, demonstrating meaningful operating leverage. Earnings before taxes increased to $54 million from $27.3 million in the prior year quarter. Other income was $5.2 million, which includes $4.5 million in interest income and foreign exchange gains of $700,000. Our effective tax rate for the quarter was 29.3% versus 27.5% in the second quarter of fiscal 2025. Consolidated net earnings from continuing operations were $38.2 million, above net earnings of $19.8 million in the prior year quarter, and net earnings from continuing operations per diluted share was $1.45 compared to $0.74 in the prior year quarter. Discontinued operations net loss was $3.3 million compared to net earnings of $11.5 million in last year's quarter. Diluted loss per share from discontinued operations was $0.13 compared with earnings per share of $0.43 last year. Non-GAAP diluted earnings per share for continuing operations was $1.53, up from $0.94 in the prior year. Our weighted average diluted share count was 26.4 million compared to $26.7 million in the second quarter of fiscal 2025. Adjusted EBITDA totaled $58.7 million, up 61.6% from $36.3 million a year ago. Adjusted EBITDA grew more than twice as fast as net sales, underscoring the operating leverage inherent in our business model. Moving to our results for the 6 months ended September 30, 2025. Consolidated net sales totaled $1.25 billion, up 21.1% from $1.03 billion in the first half of fiscal 2025, driven by an 18.8% increase in product sales and a 32% increase in services revenue. Year-to-date gross billings totaled $1.98 billion, an increase of 20.3% year-over-year. Consolidated gross profit for the first 6 months was $310.3 million, 22.1% above the $254.2 million in the first half of fiscal 2025. Gross margin expanded 20 basis points to 24.9%, led by an increase in product margins. Year-to-date consolidated net earnings from continuing operations were $65.3 million or $2.47 per diluted share compared to $44 million or $1.64 per diluted share in the first half of fiscal 2025. Discontinued operations net earnings for the first 6 months was $7.3 million versus $14.7 million in the first 6 months of fiscal 2025. Diluted EPS from discontinued operations was $0.28 compared to $0.55 in the comparable period last year. Non-GAAP earnings per share from continuing operations were $2.79, up 42.3% versus $1.96 in the prior year period. Turning to our balance sheet. Cash and cash equivalents at quarter end totaled $402.2 million, up from $389.4 million at the end of the last fiscal year. Our cash position remains robust, providing us with significant flexibility to continue investing in both organic and inorganic growth initiatives as we support our capital allocation strategy. Inventory at quarter end was $154.1 million, up from $120 million at the end of fiscal 2025. Inventory days outstanding were 15 days, slightly above 14 days in the prior sequential quarter and 12 days in the prior year. Despite the slight uptick of inventory days outstanding, our cash conversion improved to 30 days from 32 days in the prior year period. Our capital allocation strategy remains focused on 4 priorities: strategic acquisitions that complement our capabilities, organic investments in high-growth areas, quarterly dividends and opportunistic share repurchases. Consistent with these priorities, we repurchased 60,000 shares during the quarter after our stock repurchase plan authorization began on August 11, 2025. In addition, we are continuing to deliver shareholder value with the announcement of our second quarterly dividend of $0.25 per common share payable on December 17, 2025, to shareholders of record on November 25, 2025. In summary, we delivered strong second quarter and first half results, demonstrating superb execution by our employees, momentum in our business and the success of our strategic initiatives. Now I will turn the call back over to Mark. Mark? Mark Marron: Thank you, Elaine. The second quarter and year-to-date growth reflects momentum in the business and is aligned with our focus on high-growth areas. Underlying end market demand is healthy across much of the portfolio, and we continue to be pleased with our current positioning. Reflecting the strong financial performance to date and momentum we expect to continue, we are increasing our fiscal year 2026 net sales, gross profit and adjusted EBITDA guidance. Net sales growth over the prior fiscal year is now expected to grow at a rate in the mid-teens from fiscal year 2025's $2.01 billion from continuing operations. Gross profit is also expected to grow at a rate in the mid-teens from fiscal year 2025's $515.5 million from continuing operations. Adjusted EBITDA is expected to increase from fiscal year 2025's $140 million at approximately twice the rate of net sales growth for fiscal year 2026 as continuing operation results are expected to benefit from operating leverage. We also announced today our quarterly dividend of $0.25 per common share, which will be paid on December 17, 2025, to shareholders of record on November 25, 2025. Our solid cash balance positions us well to allocate capital to growth while returning capital to our shareholders. It was a significant quarter and first half for ePlus with double-digit growth across all key metrics. The sale of our domestic financing business has simplified our business model and allowed us to focus on being a pure technology player. It also gives us the financial flexibility to expand our footprint and customer base, both organically and through acquisitions while continuing to expand and enhance our solutions and service offerings. We are well positioned to build on our momentum, capitalize on new opportunities and deliver value to stakeholders over the long term. Thank you for joining us today. We will now open it up for questions. Operator: [Operator Instructions] Your first question comes from the line of Maggie Nolan with William Blair. Margaret Nolan: Congratulations on the results. I'm hoping that you can double-click for me on the strength in security. It was a pretty impressive numbers that you shared there. So what is driving the strength in that offering? Mark Marron: Well, a couple of different things, Maggie. So Security was up 56% in terms of gross billings. Overall trailing 12 months, it's up nicely as well. What we're starting to see is a lot of the AI initiatives with customers making investments, looking at data classification, data cleanliness and projects along those lines. And then just the normal network security and all the other things that we've done over time. We are starting to see an uptick in, I'll say, AI-related deals across compute, storage and security. And that's part of the reason we had a nice quarter in those areas. Networking, by the way, I know you didn't ask for it, but Networking was up nicely. So that also contributed nicely to the quarter. And if you remember, a few quarters back, it was actually down due to the supply chain issue with the digesting of product that Elaine talked about. That's actually starting to pick up as customers look to modernize their networks to be ready for AI. Margaret Nolan: Okay. Great. And maybe to round it out, can you talk a little bit about what you're seeing by customer end market as well? There seem to be some variability in strength and weakness across your different end markets. Mark Marron: Yes. In terms of -- well, let me touch on 2 things, make sure -- as it relates to the verticals, we had a strong quarter across almost every vertical. The only thing that was down was our state and local, which I think had to do with a lot of what's going on in the government and funding and things along those lines. Otherwise, all the verticals were up. And as it relates to our customer size segments, Maggie, the mid, the 500 to 10,000 and the 10,000 and above, which we consider to be enterprise was up real nice. So across, I'd say, all 3 of our segments, product, professional services, managed services, across all the verticals, except for the state and local in the SLED space, and then across all the different product areas, we were up significantly, except for collab -- collaboration, I should say. Operator: Your next question comes from the line of Gregory Burns with Sidoti & Company. Gregory Burns: It's good to see the AI starting to now translate into some order flow for you. Could you just talk about maybe how the pipeline looks? What gives you confidence in kind of the raised outlook for the year? Any kind of color you can give on preorder or demand activity and pipeline, how the pipeline is shaping up? Mark Marron: Yes, Greg. So a couple of different things. So as it relates first to the quarter, really proud of the team in terms of the execution, especially in a kind of an uncertain economic market with what's going on with the government shutdown, tariffs and inflation up or down, right? So team really did a nice job in the first half. We also -- as we talked about on previous calls, we do a nice job of tracking the pipeline and opportunities that are in there. We did have a couple of nice large deals that fell in Q2. But as you can see, based on our guidance, we're still very optimistic about the rest of this year. And I think that kind of shows in our guidance. Gregory Burns: Okay. And then the leverage, obviously coming through really nicely now. How should we think about leverage versus need to invest. Obviously, there's a lot of growth opportunities out there for you, particularly maybe now with AI becoming more of a meaningful driver. So how should we think about leverage and how much the margins could expand from, I guess, where you're guiding to for this year? Mark Marron: Yes. So 2 things there, Greg. One, I think you can expect operating leverage for a little period of time here. But as we've talked about on previous calls, we're a growth company. We're in -- after selling a finance, we're in a pretty strong, I'll say, cash position that we have a lot of flexibility in terms of how we can go grab market share, expand our footprint, our customer base, and that could be through organic hires, which we will be making to kind of build out our services and AI capabilities and also through acquisitions. So short term, I think you continue to see some operating leverage, but we're still going to be active in looking at where we can build out our footprint and customer base, both organically and inorganically. Operator: That is all the questions that we have. I would like to turn it back over to Mark Marron for closing remarks. Mark Marron: Okay. Thank you, operator. Everybody, thank you for joining us on the call today. Once again, we feel good about what the team put up this quarter and for the first half and want to thank you for joining us on this call. Take care, and have a great holiday season, if you can. Take care. Operator: This concludes today's conference. You may disconnect.
Operator: Greetings. Welcome to the Celanese Corporation Third Quarter 2025 Conference Call. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the conference over to Bill Cunningham. Thank you. You may begin. William Cunningham: Thanks, Darryl. Welcome to the Celanese Corporation Third Quarter 2025 Earnings Conference Call. My name is Bill Cunningham, Vice President of Investor Relations. With me on the call today are Scott Richardson, President and Chief Executive Officer; and Chuck Kyrish, Chief Financial Officer. Celanese distributed its third quarter earnings release via Business Wire and posted prepared comments as well as a presentation on our Investor Relations website yesterday afternoon. As a reminder, we'll discuss non-GAAP financial measures today. You can find definitions of these measures as well as reconciliations to the comparable GAAP measures on our website. Today's presentation will also include forward-looking statements. Please review the cautionary language regarding forward-looking statements, which can be found at the end of both the press release and the prepared comments. Form 8-K reports containing all of these materials have also been submitted to the SEC. With that, Darryl, let's go ahead and open it up for questions. Operator: [Operator Instructions] Our first questions come from the line of David Begleiter with Deutsche Bank. David Begleiter: Nice quarter for Q3. Scott, looking at '26, can you give us an early look at what you can -- your control for '26 and what's not in your control for '26 relative to earnings? Scott Richardson: Yes. Thank you, David. Let me just start by saying how we have focused on 2025, continues into 2026. The priorities of increasing cash flow, intensifying our cost improvements and then driving top line growth. And that third piece, I think, is going to continue to be more important as we're seeing progress from our EM pipeline. Those are going to be our priorities going into '26, and we've laid a really nice foundation here in 2025. And so that foundation, even if we're in an environment where we see flattish demand, and I kind of look at flattish demand on what we've seen, say, Q2 through Q4 here in 2025, if we're in that type of demand environment, just to make it easy, I believe we're going to be able to grow EPS by $1 to $2 next year. And that's going to come from the cost actions that we've already put in place and that yielding increments next year. And then the second big piece is going to come from EM pipeline and the success we're seeing driving that, including the high-impact program growth, which is starting to yield results. And certainly, we won't have the Micromax EBITDA, but I think that's going to be offset by the fact that we don't expect to have the significant auto destocking that we saw in Europe in Q1 of this year. So I think when you put it all together, we feel confident in about $1 to $2 even if the world around us isn't growing. David Begleiter: Very good. And just on EM pricing, the best in 8 quarters. Can you discuss how much more there is to go in EM on the pricing front? Scott Richardson: There's always more that can be done here, David. We have gotten price in some of the standard grade materials in the Western Hemisphere, not as much across the board as we want to see. So I think there's still going to be opportunities there. In addition, where we're seeing nice benefit is on the price for the new elements from the pipeline that are being launched. So this is going to continue to be a very critical area of focus for us as we go into 2026. Operator: Our next questions come from the line of Vincent Andrews with Morgan Stanley. Vincent Andrews: Could you speak a little bit about the operating rates and the acetyl chain? I know there was the comments in the prepared remarks about sort of flexing Singapore based on demand and Frankfurt is going to be, I guess, offline for the balance of the year. But what do you anticipate or maybe just back up and how -- what rates did you run at in the second half of this year? And then what do you anticipate in the first half of next year? Scott Richardson: Yes. Thanks, Vincent. Not to be flippant, but every day is different in this business. And I don't say that as hyperbole, it's true. When you look at our lowest cost assets, our lowest cost assets are running at 100%. And then the balance of the network, which is really our asset base outside of the United States is being flexed to meet demand, flexed to meet industry conditions and we're going to continue to operate that way. We've block operated Singapore as well as Frankfurt. We would expect that to continue going into next year. And part of that is our manufacturing team has done an excellent job of being able to continue to operate with high degrees of reliability as well as find ways to no capital debottleneck our assets to where we have more capacity at those lower-cost assets. So we're going to continue to flex that to meet demand, but I'd really look at lowest cost asset base running full and then the rest of the network operating as needed. Operator: Our next questions come from the line of Jeff Zekauskas with JPMorgan. Jeffrey Zekauskas: In the acetyl chain, when you look at sequential pricing through the year, it's gotten tougher. And prices had come down a lot in China earlier in the year. Where is the sequential price pressure coming from in the acetyl chain, either by product line or geography? Scott Richardson: Yes. Thanks, Jeff. I think we've seen a little bit of pressure in Europe in kind of what I would say more of the downstream. So getting into the vinyls chain, VAM and emulsions as we've worked our way through the year, and that was really demand driven. As demand has come off, we've seen a little bit of pricing pressure there. We've seen a stabilization of pricing in China now over the course of the quarter or so. And in fact, pricing went up a little bit here at the beginning of this quarter, not significantly, but we did see a price lift as we got into October really across all product lines in China in acetyl. So the U.S. has been relatively stable. So that's kind of how I would look at it. It has been more around a function of demand where demand has been weaker, and we've seen a little bit of softening of price in Europe. Jeffrey Zekauskas: Okay. And in Engineered Materials, year-over-year, your consolidated volumes were down 8%. Which product lines are, I guess, falling more than that and which product lines are falling less than that? Can you help us -- I mean, it might be that there are particular pockets of weakness? Or is it across the board? Can you talk about that? Scott Richardson: Yes. It's mainly the product lines, Jeff, that we have higher levels of volume and have just generally more market exposure in the standard grade materials. And so that tends to be more of your engineered thermoplastics. So that's your POM, your nylon and then into GUR and polyesters. Our thermoplastic elastomers have held up extremely well, and the team has actually found nice pockets of growth there. It's just -- that's not where we have as much volumetric exposure. So it tends to be more on the engineered thermoplastic side of things. Operator: Our next questions come from the line of Michael Sison with Wells Fargo. Michael Sison: Nice third quarter as well. For 2026, if I take a look at Slide 11, it looks like cost savings could represent somewhere between $0.40 to $0.50. How much -- in terms of the rest of the $1 to $2, how much comes from potentially lower interest expense? And just trying to gauge how much could come from volume growth and new products. Scott Richardson: Yes. I mean, given kind of the $1 to $2 that I talked about earlier, Mike, I would look at that's really split largely in 2 areas. One, about half of that is cost. And we didn't put all of the cost actions on that slide. We have kind of an ambiguous bucket there on that last line of that graph. And I think I would look at -- there's more to come. We had the announcement last week about the Lanaken closure. We're continuing to work the cost side of the equation extremely hard, and we'll talk more specifically about those as we complete those actions. So about half of it is cost. And the majority of the rest of it is really coming from the pipeline. And that's kind of how we're thinking about things right now. I mean there's definitely going to be some things around the edges like interest, et cetera, but those are the 2 big buckets that we're looking at currently. Chuck Kyrish: And Mike, this is Chuck. The interest expense, I would pencil in $30 million to $40 million reduction year-over-year. Michael Sison: Okay. And then a quick follow-up in EM in terms of the volume growth potential, how much is that coming from sort of the legacy, if you can think about it that way, the Celanese businesses and then how much comes from some of the DuPont? Scott Richardson: I'll be honest with you, Mike. Right now, we're looking at that portfolio as all Celanese. And we're not breaking it out. We're not operating the business or the company that way anymore. It really is about Celanese and products. What I would say is that engineered thermoplastics piece and the portfolio we have there has proven to be a really nice add for us. Part of that came from M&M, part of that came with Santoprene, and that's a really nice area of growth going into next year. It's a really important area for us to be differentiating the offerings that we have. And then the -- so that's been a really nice driver for us. And then we are seeing really as we look at this high-impact program area, I mean, there's end uses there that are extremely attractive where we're bringing both the engineered thermoplastics. So that's both historical Celanese and M&M as well as the elastomer portfolio to bear in really high-performance type applications, whether that's data centers or in high specification EV opportunities, medical opportunities. So there's -- across these spaces, we're really seeing as we've gotten extremely focused from a commercial team perspective on these areas, we think we're going to have nice pockets of growth in '26. Operator: Our next questions come from the line of Ghansham Panjabi with Baird. Ghansham Panjabi: Scott, just given the evolution of the macro throughout the course of the year end markets such as building and construction and autos and so on sequentially weakening, are you starting to see more accelerated inventory destocking at the customer level throughout the year-end? Or are inventory is already pretty low. So what you're mirroring is just basically the end markets themselves at this point? Scott Richardson: Yes. Thanks, Ghansham. As I look at where demand is, it's certainly on a lower base than what we've seen historically. But if we look at what we called out for seasonality from Q3 into Q4 on a volumetric and percentage basis, it's very similar to what we've seen in the past from Q3 to Q4. So we're not necessarily seeing accelerated destocking. There's a few pockets. For example, our channel partners here in North America came to us at the beginning of the quarter and talked very openly about wanting to bring inventories down a little bit by year-end. And so that was great that we're able to partner with them. We can take rates down at our asset base and do it really in a thoughtful way over the course of the quarter and not just get to the end and have this big slug down. So I think there is -- there's definitely, I would say, pockets, but I wouldn't say it's something we're seeing extensively across the board because we've been seeing this kind of work its way through the value chain in various areas now for about 6 months. Ghansham Panjabi: Okay. Got it. And then maybe a question for Chuck on free cash flow. What's the expectation for working capital contribution for this year in 2025? And then how would you have us think about some of the parameters for 2026 free cash flow? I think you said at the low end of your guidance for this year. Chuck Kyrish: Right, right. Yes. So working capital so far this year has been a source of cash of $250 million as we've really focused on cash generation. I really don't expect much change in working capital, either source or use of cash in fourth quarter. So I would just -- I would model in 0 at this point for working capital. As you look ahead for 2026, with that, we don't expect with similar demand levels that we would repeat that $250 million of working capital source of cash, but we are continuing our inventory actions in Engineered Materials. So there will be some level of free cash flow source there. At this point, Ghansham, our cash outlay of restructuring, which is adjusted out of EBITDA is looking to be lower in 2026 as we have some projects that have rolled off from prior footprint. So adding to that, the EBITDA improvement that Scott's talked about on the cost and commercial side, that gives us confidence next year in free cash flow, at least at the low end of that $700 million to $800 million range. And I think it's important to understand, as we look ahead in the next few years, we think this level of free cash flow is sustainable. Operator: Our next questions come from the line of Patrick Cunningham with Citi. Patrick Cunningham: The decision for the Lanaken closure, you cited evaluation of longer-term end market trends. I guess did anything change in terms of your forward view on either the demand or supply side? And then as you look to evaluate other more targeted measures in AC, should we be looking to the Frankfurt facility? Or do you expect more of a smaller collection of savings across the asset footprint? Scott Richardson: Thanks, Patrick. First of all, I think it's important. Look, we don't take any of these types of decisions lightly. We look at where things are in the near term, long term, and we study them. And we also look at our ability to continue to supply our customers. And acetate tow has faced challenges, including declining demand over a period of time. Lanaken is our highest cost asset. And so as we looked at where things are, we're able to meet all of our customer needs from our network and subsequently drive productivity savings with this move, both in the short term and long term, no matter what may materialize from a demand perspective. And so this closure will yield probably in the neighborhood of $20 million to $30 million of productivity savings in 2027. We get a little bit at the end of next year, probably on that, but certainly for the full year of '27, that's the types of savings we're looking at. And we're going to continue to look across our whole footprint in both businesses for similar types of examples. And so there's no specific asset, I would say, that we're looking at right now. It continues to be kind of crosschecking where industry demand is, where is our capacity, where do we maybe have excess capacity in the network that will allow us to drive that productivity, but still be able to meet customer demand even if we were to see a big increase down the road in a recovery period. Patrick Cunningham: Understood. Very helpful. And then maybe one for Chuck. Just in terms of progress on inventory reduction, they're still tracking well towards that goal. And then just in the context of some of your comments in the prepared remarks, what percentage of SKUs are made to order today versus made to stock? And what goal are you working towards there? Chuck Kyrish: Patrick, look, it's an ongoing effort to be more efficient with inventory. I don't have that percentage right in front of me of the number of make-to-stock SKUs, but it's one of the several levers that EM is working on to reduce inventory. It also includes logistics and warehousing and testing lead times, et cetera. Operator: Our next questions come from the line of Kevin McCarthy with Vertical Research Partners. Kevin McCarthy: I think you identified $30 million to $50 million of additional savings that you're targeting in Engineered Materials. Can you elaborate on the sources of those and the flow-through timing? And remind us if those figures are gross or net of inflation? Scott Richardson: Yes. Let me hit the last part of your question, Kevin, I would look at those as net of inflation because we will work inflation through our productivity pipeline to offset that. So look at these as definitely being net. And it is really looking across the board. There is continued SG&A and R&D savings there as we optimize that side of the business on a global basis. Footprint continues to be an area of focus that will be in there. And then the last area is really things that we kind of call complexity reduction. So streamlining of our supply chain and our logistics network and really getting that optimize. I mean, Chuck just talked about the benefits we get from that on an inventory reduction. We also get cost reduction from that. And so a good chunk of that, we're going to get for full year 2026. Some of it will phase in through the year, but we definitely are confident that we'll be able to get to those levels next year. Kevin McCarthy: Great. And then a second question for you on divestitures, if I may. Congrats, first of all, on the Micromax deal. It looks like you got a nice multiple for that relative to your own trading multiple. Can you talk about the after-tax cash proceeds from that $500 million deal? And then more broadly, if we remain in the current environment of, I'll call it, industrial malaise globally, what additional portfolio actions or at least the magnitude thereof are you thinking about over the next several years? I think you said in your prepared remarks, you are actively pursuing additional. So any color on that would be appreciated. Scott Richardson: Yes. Kevin, let me start, and then I'll turn it to Chuck to answer the tax question. Our principles really around divestitures have not changed. We have what we believe are 2 leading franchises here at Celanese. And in acetyls, it's about leveraging kind of this integrated up and downstream operating model that starts with methanol and acetic acid and goes downstream and it is really uniquely globally positioned to kind of operate to drive value on a daily basis. And in Engineered Materials, it's about driving unique customer solutions and leveraging the globe's leading portfolio around engineered thermoplastics and thermoplastic elastomers. So if we have things in the portfolio that are not part of that acetyl value chain or not a differentiated thermoplastic or thermoplastic elastomer, then we are going to look to see if it's worth more to someone else than what it's worth to us. And that has been the principle that we've been operating on now for a number of years around divestitures. And that's what led to the food ingredients transaction. That's what's led now to the Micromax transaction because they didn't fit in the Engineered Materials business in that thermoplastic or elastomer bucket. JVs is another area that -- where we don't have as much control and that value that they create to the enterprise is not what the rest of the portfolio creates. And so that's the principles that we're operating under, and that's the principles that we'll continue to look at being able to monetize different assets around. And we committed to $1 billion of divestitures by the end of 2027. And this Micromax transaction gets us around halfway there. And so we are very much in line with achieving that target, and we're going to continue to focus on that here as we finish this year and get into 2026. Chuck Kyrish: Yes. On the tax leakage, Kevin, that's expected to be 5% of the final gross sales price. Operator: Our next questions come from the line of Salvator Tiano with Bank of America. Salvator Tiano: Firstly, I want to continue on Kevin's question on divestitures, and you mentioned JVs as a specific area of focus. I'm wondering, though, how are you thinking about the methanol JV? Because on one hand, it is one where you are a partner with someone else. On the other hand, it is, I guess, your main way of being integrated into methanol in the U.S. So how strategic is that business to you? Scott Richardson: Look, I'm not going to comment on specific joint ventures. What I have said around methanol in the past is it really is about leveraging methanol and acetic acid. And so as we look at all of our joint ventures, we have a partner that is in those JVs. And so JVs can be harder to monetize across the board, and we'll continue to look at the partners. We'll continue to look at other potential counterparties who are interested in having ownerships of our joint ventures. But our focus really is around value creation. And so if value is there to be created and it is higher than what we believe is inherent in the current and potentially future stock price, then we will definitely look at it. Salvator Tiano: Great. And I also wanted to ask about your nylon chain. I know you've been deemphasizing nylon polymerization instead doing compounds. So at this point, how much of your nylon volumes and sales, perhaps profit comes from actual nylon standard grades versus the compounded value-add products? Scott Richardson: Yes, Sal, almost all of our profit in that business is really created by compounds. And so now to make a compound, you need polymer. And so whether we make that polymer or buy that polymer, the key is getting that polymer at the most optimized economics possible because we create our value really through that compounding step. Operator: Our next questions come from the line of Aleksey Yefremov with KeyBanc Capital Markets. Aleksey Yefremov: I just wanted to continue down this line of questioning. I think you just earlier said, Scott, that you don't foresee any major capacity closures. But I recall earlier, there was a discussion about maybe buy versus make in polymers and potentially some rationalization there. So should we take it that the rationalization of polymer capacity is off the table for now or that's still being considered? Scott Richardson: No. Let me be very clear, Aleksey. We are taking bold actions across the board. And we have continued to be I think through this year, every single quarter, we have had another cost reduction announcement. We are looking at all elements of our business in both acetyls as well as in Engineered Materials, and we will take action around cost, including footprint, if there's value creation opportunities there. Aleksey Yefremov: Okay. Makes sense. And then as a follow-up on your EM pricing, I realize it was relatively modest, but do you see any signs of more rational competition sort of improvement in competitive environment maybe across any of the end markets or types of polymers? Scott Richardson: Look, we can't control what others are doing. What I will say about our EM commercial team is they are energized by the opportunity that's in front of them, not just around making sure that we're getting full value for the materials that we sell, but on partnering with our customers, about being connected to our customers, being current about what's happening in the marketplace and being able to respond to customer needs and leverage and drive new solutions. And I think we believe that, that team is going to continue the trajectory that they have been on this year despite the fact that through the year, the volume side of the equation has been difficult, but to be able to drive price, drive mix improvement through the year, I think, is a great accomplishment and is a really good starting point for us going into 2026. And we think we will be able to drive volumes through the pipeline next year. Operator: Our next questions come from the line of Frank Mitsch with Fermium Research. Frank Mitsch: Congrats again on the Micromax sale. To that end, Chuck, I believe you indicated that with the $3 billion plus debt due '26, '27, you were fairly comfortable being able to pay that -- or you indicated that you -- given the free cash flow and expected divestitures that you would not need to tap a revolver and that you felt like you would -- or issue more debt, you'd be able to cover that. Do you still feel that way today? Chuck Kyrish: Yes, Frank. I mean, if you look at ahead at our 2026 maturities, we've got about $900 million due. So we look at between the Micromax proceeds, the cash -- the excess cash we have on hand, Q4 cash generation, those are spoken for. We've already been looking ahead at the '27s and we made several payments to our '27 term loan over the last few quarters. We're confident in the cash generation and ability to pay off the '27s. We do know that sometimes that cash is back-end loaded in any given calendar year. So as we've done a few times, we'll continue to be prudent and opportunistic in the debt markets, refinancing a small portion of our maturities to align the maturities 1, 2 years out with our free cash flow generation. And that's just to bridge the timing of those repayments. But we're confident that we can generate the cash to pay those off and continue to deleverage. Frank Mitsch: Helpful. And then, Chuck, if I could ask you a more esoteric question. very sizable write-down this quarter. I'm reading the press release, and it's tied to Zytel and nylon. And then in the prepared remarks, it's talking about your stock price and so forth. I'm sure others understand what's going on there, but I don't. Can you please expand on that? Chuck Kyrish: Sure, Frank. Look, the third quarter is our annual quarter to test our goodwill and certain intangibles like trade names. We did this using the same third parties that we always do, and we did record an impairment. I think what's important, Frank, is there was not a reduction in the projected cash flows of Engineered Materials since the last time we did this test. This impairment was really driven by a reduction in our market cap, created by a reduction in the stock price because part of the test is sort of a market-to-book analysis this year. So no change, no decline in the cash flow projections, but it was really driven by the market cap of Celanese. Operator: Our next questions come from the line of Hassan Ahmed with Alembic Global. Hassan Ahmed: Just wanted to get a bit more granular about the sort of near-term guidance. I know in the past, you guys have talked about trying to get to a quarterly EPS run rate of $2 per share imminently, right? So I know the guidance, obviously, for Q4, $0.85 to $1 bakes in seasonality. It's not really in an otherwise abnormal environment, it's not really sort of the right starting point. So maybe if we could start with like the $1.34 you guys reported in Q3, right, where in the near term, you see that going on a quarterly run rate basis via self-help via obviously now with Micromax almost about to close, reduced interest expense there and the like. And again, I understand that you guys are talking about an incremental $1 to $2 from self-help, which is $0.25 to $0.50, but would love some more granularity around that. Scott Richardson: Yes. Thanks for the question, Hassan. We continue to be focused around driving controllable actions that will, as a first step, get us back to that $2 a quarter run rate. That hasn't changed even with where demand is at from a seasonality perspective, and we will get there. If demand stays lower, it may take us a little bit longer to get there. But if you look at where we were performing in the middle part of the year, Q2, Q3 from an EPS perspective and you just take the actions that I've talked about that we have going to next year, it starts to really get to a point where you're approaching kind of that level as you're getting up into the $1.75 to $2 range. And that's where continuing to stack wins, as we called them in our prepared comments, additional costs continuing to drive the pipeline. And then if we get any inkling of a demand improvement and even if you were just at the demand levels we saw in the second quarter, you're effectively there. And so the multiplying effect of the actions that we're taking are significant. We look at our enterprise right now as a coiled spring that when released is going to really drive very substantial and increased earnings levels as we go forward. It's tough right now. The demand environment is not tough, but I'm extremely proud of the resilience and the actions that the team here at Celanese has taken this year to position us going into next year and beyond. Hassan Ahmed: Very helpful, Scott. And as a follow-up, I would love to hear your views about Anti-involution as it affects the acetyls chain and you guys. And more specifically, why I asked this is that it seems a bit -- just yesterday, PetroChina, it seems came out and announced that they're studying 19 sort of different refining and petrochemical assets to potentially retire. And those include methanol assets as well, right? So it seems it's moving away from the pipe dream phase and actually becoming real. So how do you see Anti-involution impacting you guys? Scott Richardson: It's hard to say exactly how it will materialize, Hassan. But look, the dialogue on the ground in China, and I was there in the quarter and was talking with the team, it's palpable, more so than I would have expected. I don't know that it's had a really direct impact thus far. I mentioned we've seen some price movement, albeit small, but some price movement in the quarter. I don't know how much of that is Anti-involution or just kind of normal market changes and some of the inventory getting absorbed after some new plants started up. But the reality of it is that people are talking about it there. And I don't know how it comes in fruition to the business, but I do expect that we're definitely going to see this be an important step going forward because I do think the profitability of assets in China need to be higher than where they are today. Operator: Our next questions come from the line of Josh Spector with UBS. Joshua Spector: I wanted to follow up just on the Acetyls utilization rates. I think my understanding prior was maybe you had rates lower in some of the Western markets, so some of your low-cost regions like the U.S. to basically react to some of the weaker demand. I guess your earlier comment was that it's your low-cost assets running full out. So specifically, can you comment on that and maybe your U.S. asset base utilization rate where that is today? And then related with that, if we think about what gets utilization rates higher, if you're running at a high rate in the U.S. today, does U.S. demand improvement help you? Or do you really need Europe or other regions to improve to get your utilization rates up? Scott Richardson: Yes. I mean, look, Josh, we've always run our U.S. assets at pretty high rates. That really hasn't changed dramatically. And I'm not saying we don't have room there. We probably have a little bit of room, but you definitely see the uplift. And when you see Western Hemisphere improvement, the netback is significantly higher than moving that product around to different regions where it's better than running other assets, but certainly, U.S. demand flows directly to the bottom line in that case. So we do think the assets are extremely well positioned. We've done debottlenecks of the U.S. asset base over the last 5 years. And so we have the ability to move those up. And when I said full rates, I was really particularly on acetic acid in the U.S., really referring to we kind of operate that at kind of the capacity that we've historically had, not necessarily operating both acetic acid plants at full rate. So we kind of look at those as still operating kind of at the levels they historically did on a combined basis with the ability to ramp up going forward. Joshua Spector: Okay. No, that makes sense. And just a quick follow-up on the cost savings side. Just I mean... Operator: Apologies. It looks like we lost Josh. Our next questions come from the line of Arun Viswanathan with RBC Capital Markets. Arun Viswanathan: So if I just go back to that $1 to $2 of uplift, maybe can you just frame that out? I think in the past, you had said maybe $0.35 from some of your cost actions. Is that accurate? And then maybe what would be kind of a restocking amount? Is that also included in there? Or maybe -- could you maybe frame it as what the destocking amount was for '25? Scott Richardson: Yes. Arun, as I said earlier on the call, we look at that $1 to $2 really as a rule of thumb if we're not seeing the market really change at all off of where we've been over the last several quarters. So there's no kind of restock element in there. And what I said earlier is make the assumption about half of that is coming from cost actions and then the balance coming from the EM pipeline and then some other things, as Chuck mentioned, maybe interest expense. Arun Viswanathan: And then could you just also provide an update on maybe some of your recent actions to maybe change the commercial strategy or extend your legacy commercial strategy within EM, maybe on the project pipeline or anything else that we would find relevant to track your progress there? Scott Richardson: The EM team has been modernizing its strategic orientation. That's the best way I can put it. We're evolving. And just where our world is, where we have the ability to really win is in the differentiated spaces where we can leverage our widespread unique portfolio. We have more engineered thermoplastics, more thermoplastics elastomers in our portfolio than anyone else has in the world, bringing that full portfolio to customers to meet unique challenges that they have around solution sets. And it is about partnering and really getting focus around where we spend our time and then leveraging innovation that we've had. We've launched publicly our grade selection tool for customers called Chemille, where it's an AI-driven tool, which is allowing grade selection around our materials for the customers as well as our commercial organization to very quickly meet the needs and streamline that commercialization cycle. And so it's investments we've made in areas like that, that are really bringing the EM team to the leading edge as it comes to creating new opportunities and partnering with our customers. William Cunningham: Darryl, we'll make the next question our last one, please. Operator: Our last questions will come from the line of John Roberts with Mizuho. John Ezekiel Roberts: Will the European acetate tow closure have any ripple effects across the rest of the acetyls network, either upstream or even downstream, maybe some of your JVs? Scott Richardson: No. I would not look at it that way, John. William Cunningham: Thank you. We'd like to thank everyone for listening in today. As always, we're available after the call for any follow-up questions. Darryl, please go ahead and close out the call. Operator: Thank you, ladies and gentlemen. This does now conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
Operator: Good afternoon, and thank you for participating on today's third quarter 2025 earnings conference call and webcast for Barfresh Group. Joining us today is Barfresh Food Group's Founder and CEO, Riccardo Delle Coste; and Barfresh Food Group's CFO, Lisa Roger. Following our prepared remarks, we will open the call for your questions. The discussion today will include forward-looking statements. Except for historical information herein, matters set forth on this call are forward-looking within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements about the company's commercial progress, success of its strategic relationships and projections of future financial performance. These forward-looking statements are identified by the use of words such as grow, expand, anticipate, intend, estimate, believe, expect, plan, should, hypothetical, potential, forecast and project, continue, could, may, predict and will and variations of such words and similar expressions are intended to identify such forward-looking statements. All statements other than the statements of historical fact that address activities, events or developments that the company believes or anticipates will or may occur in the future are forward-looking statements. These statements are based on certain assumptions made based on experience, expected future developments and other factors that the company believes are appropriate under the circumstances. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the control of the company. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. Accordingly, investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. The contents of this call should be considered in conjunction with the company's recent filings with the Securities and Exchange Commission, including its annual report on Form 10-K and in the quarterly reports on Form 10-Q and current reports on Form 8-K, including risk factors and cautionary statements contained therein. Furthermore, the company expressly disclaims any current intention to update publicly any forward-looking statements after this call, whether as a result of new information, future events, changes in assumptions or otherwise. In order to aid in the understanding of the company's business performance, the company is also presenting certain non-GAAP measures, including adjusted gross profit, EBITDA, adjusted EBITDA, which are reconciled in tables in the business update release to the most comparable GAAP measures and certain calculations based on its results, including gross margin and adjusted gross margin. The reconciling items are nonoperational or noncash costs, including stock compensation and other nonrecurring costs, such as those associated with the product withdrawal, the related dispute and certain manufacturing relocation costs and acquisition-related expenses. Management believes that adjusted gross profit, EBITDA and adjusted EBITDA provide useful information to the investor because they are directly reflective of the performance of the company. Now I will turn the call over to the CEO of Barfresh Food Group, Mr. Riccardo Delle Coste. Please go ahead, sir. Riccardo Delle Coste: Good afternoon, everyone, and thank you for joining us for our third quarter 2025 earnings call. I'm extremely pleased to report that the third quarter marked a transformational period for Barfresh as we delivered our highest quarterly revenue in the company history, positive adjusted EBITDA and completed a strategic acquisition that fundamentally enhances our business model and long-term growth trajectory. Before I discuss our quarterly results, I want to highlight a pivotal development that occurred immediately following the quarter. the completion of our acquisition of Arps Dairy in early October. This acquisition fundamentally changes our business model, providing us with own manufacturing capabilities that will drive top line growth. Arps Dairy brings us an operational 15,000 square foot processing facility along with a 44,000 square foot state-of-the-art manufacturing facility in Defiance, Ohio, that is nearing completion and expected to be fully operational in 2026. We have already commenced production at the existing facility, and I'm pleased to report that the integration is proceeding smoothly with immediate benefits from enhanced supply chain control and operational efficiency. Now turning to our third quarter results. Revenue for the third quarter was $4.2 million, representing 16% year-over-year growth. This record performance was driven by several factors: improved production consistency from our co-manufacturing partners, a successful start of the '25-'26 school year with expanded distribution and continued momentum with our Pop & Go 100% Juice Freeze Pops in the lunch daypart. We achieved this even though we faced additional manufacturing challenges and start-up issues for our Juice Freeze Pops at one of our co-packers. The manufacturing capacity issues that constrained our first half performance are expected to be fully resolved by the end of the fourth quarter. Our 2 smoothie bottle co-manufacturing partners are now operating with improved consistency and the inventory we built over the summer enabled us to service customer demand throughout the critical back-to-school period. We are in the process of bringing back customers who had temporarily removed our products due to spring supply constraints, with many reintroductions occurring in the fourth quarter. The 2025-2026 school year bidding process has concluded with positive results. We've seen strong uptake across our existing Twist & Go portfolio, and our Pop & Go 100% Juice Freeze Pops have gained meaningful traction with several large school districts, and we expect to add additional schools during the fourth quarter. The Pop & Go product specifically addresses the lunch daypart, a significantly larger market opportunity than breakfast and early adoption rates are encouraging. We remain at only approximately 5% market penetration in the education channel overall, which continues to represent substantial runway for growth. Most significantly, I'm pleased to report that we achieved positive adjusted EBITDA in the third quarter, a major milestone that demonstrates the operational momentum we're building and validates our path to profitability. With the operational improvements we achieved in the first half of this year, combined with the transformational Arps Dairy acquisition, we raised our fiscal year 2025 revenue guidance back in September to a range of $14.5 million to $15.5 million, representing a 36% to 46% year-over-year growth. More significantly, we issued preliminary fiscal year 2026 revenue guidance of $30 million to $35 million, representing a 126% increase compared to the high end of our fiscal year 2025 guidance. This substantial growth reflects the full year contribution from Arps Dairy, continued market penetration in the education channel and the expansion of our Pop & Go product line. I'll now turn the call over to our CFO, Lisa Roger, for a detailed financial review. Lisa Roger: Thank you, Riccardo. Let me walk you through our third quarter financial results in detail. Revenue for the third quarter of 2025 increased to $4.2 million, representing our highest quarterly revenue in company history and 16% year-over-year growth. This record performance was driven by the consistent production capabilities we established through our co-manufacturing partnerships, enabling us to meet increased customer demand during the critical back-to-school period. Our operational improvements are reflected in our margin performance. Gross margin for the third quarter of 2025 improved to 37% compared to 31% in the first half of 2025. The improvement reflects better operational efficiency as our co-manufacturers reached full capability and more favorable product mix with higher-margin products representing a larger portion of sales and reflects a return in performance to the adjusted gross margin of 38% achieved in the third quarter of 2024. Looking forward, our recent Arps Dairy acquisition will create some near-term margin dynamics. We're transitioning Barfresh production to the new facility to capture long-term operational efficiencies and scale benefits, which will involve typical start-up and implementation costs that will temporarily impact Barfresh margins. Additionally, we're continuing Arps Dairy's existing milk processing business, which operate at different margin profiles than our core business, but provides stable cash flow and diversification. These are strategic investments in our long-term growth. We expect margin recovery once the Barfresh transition is complete and we fully optimize our expanded manufacturing capabilities. Operating expenses remained well controlled as we scaled revenue. Selling, marketing and distribution expenses were $941,000 or 22% of revenue compared to $990,000 or 27% of revenue in the third quarter of 2024. G&A expenses for the third quarter of 2025 were $844,000 compared to $705,000 in the same period last year. The year-over-year increase was primarily due to $214,000 in acquisition-related expenses associated with the Arps Dairy transaction. Excluding these onetime costs, G&A would have been down 11% year-over-year. Net loss for the third quarter of 2025 improved to $290,000 compared to a net loss of $513,000 in the third quarter of 2024. The improvement was driven by increase in revenue and gross margin, partially offset by acquisition-related expenses. Adjusted EBITDA for the third quarter was a gain of approximately $153,000, representing substantial improvement from the prior year period loss of approximately $124,000 and demonstrating the operational momentum we're building. We expect to achieve positive adjusted EBITDA in fiscal year 2026 as we realize the full benefits of our integrated manufacturing model. Turning to our balance sheet. As of September 30, 2025, we had approximately $4.4 million of cash and accounts receivable and approximately $1.1 million of inventory on our balance sheet. The Arps Dairy acquisition was funded through our existing credit facility, and we continue to manage our liquidity through various measures, including receivables financing and our credit facilities. With the completion of the Arps Dairy acquisition, we have significantly enhanced our balance sheet with valuable manufacturing assets, including an operational 15,000 square foot processing facility and a 44,000 square foot state-of-the-art manufacturing facility that will be completed in 2026. Additionally, the $2.3 million government grant that has been preliminarily approved for Arps Dairy will support the construction and equipment needs for the expanded facility. Now I will turn the call back to Riccardo for closing remarks. Riccardo Delle Coste: Thank you, Lisa. The third quarter of 2025 marks an inflection point for Barfresh. We have not only delivered record financial performance and achieved positive adjusted EBITDA, but we have also positioned the company for unprecedented growth through our strategic acquisition of Arps Dairy. The Arps Dairy acquisition provides us with several strategic advantages, direct control over a significant portion of our production capacity, enhanced operational efficiency, flexibility to innovate and scale new products more rapidly and reduce dependency on third-party co-manufacturers, which has been a source of operational challenges and revenue limitations. As we look ahead, we have multiple drivers of growth, our own manufacturing capabilities through Arps Dairy, expanded capacity reaching significant scale with our new facility and continued growth in our core education channel. The integrated manufacturing model we are building through Arps Dairy will enable us to pursue opportunities with improved economics and operational control. The guidance we've reiterated today of $14.5 million to $15.5 million for fiscal year 2025 and $30 million to $35 million for fiscal year 2026 reflects the transformational nature of our strategic initiatives and our confidence in executing our growth plan. More importantly, we expect the Arps Dairy acquisition to be accretive to earnings in fiscal year 2026, positioning us to deliver top line growth and bottom line profitability as we scale. We are building a scalable, profitable business model that positions us to capitalize on significant market opportunities while delivering sustainable long-term value creation for our shareholders. The operational improvements we've achieved, combined with the successful integration now underway with Arps Dairy position Barfresh for a breakthrough period of growth and profitability. We look forward to updating you all on our progress as we close out fiscal year 2025 and enter what we expect to be an exceptional growth year in fiscal year 2026. And with that, I would like to open up the line for questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Nicholas Sherwood with Maxim. Nicholas Sherwood: My first question is, what have you been doing to build trust with some of those schools that you had to pull product from or you weren't able to deliver product to last school year and that you're reintroducing your products to this fourth quarter? Riccardo Delle Coste: Yes. So we've been staying in close contact with our customers and really communicating where things are at. That's the benefit of being able to have a broad broker network and our own sales team and the ability to let them know that we've just gone into our own manufacturing facilities and just building the relationships really to make them aware that we have got product coming down the pipe. And that's really why we've been going back out to them and letting them know now that we've got manufacturing coming on board, they can start putting us back on their menus, and we've got a lot of that happening now in Q4 and more so even into Q1 of next year. Nicholas Sherwood: Okay. So when you talk about the Q4 to Q1 switchover, so is it almost like a pilot trial in this fourth quarter and then you'll probably properly kind of be reentering the school districts in the first quarter with like full steam ahead? Riccardo Delle Coste: You mean in terms of the customer sales process or in terms of the production at the new facility? Nicholas Sherwood: Yes, sales to the schools. Riccardo Delle Coste: Yes. I mean when we go back to the schools and they put us back on the menu, the sales go back immediately. We don't need to retrial the product. So it's more just about communicating when we have product available and then putting it back on the menu. There's no need for trials to start over again. The sales process doesn't start over again. It's more just about them placing the orders and it goes back on the menu and the sales basically start immediately from when they place the orders. Nicholas Sherwood: Okay. Understood. And then talking about those manufacturing facilities, can you give some detail on your CapEx expectations as you retrofit those facilities for your products? And just kind of like what that entails and how long you expect that to take? Riccardo Delle Coste: Yes. So we're working through that now. We have a -- we've already been approved for -- preliminarily approved for a $2.3 million government grant. So we expect that to go towards the remainder of the fit-out for the construction of the new facility. We also have the existing facility that is operational where we're making product. Nicholas Sherwood: Okay. So there wasn't any major -- like there wasn't any equipment that was needed to change their equipment, like any parts to change your stuff, okay? Riccardo Delle Coste: Yes, there's a complete operational facility already in place. The plan is to move into the new facility out of the old facility. So a lot of the equipment would be going over. And if we need some new pieces to be upgraded as we move into the new facility, we'll address those at the time, and we may look at how we finance those at that point in time. Operator: [Operator Instructions] There appears to be no further questions. This now concludes the question-and-answer session. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.
Operator: Good morning. My name is Joanna, and I will be your conference operator today. I would like to welcome you to Canopy Growth's Second Quarter Fiscal 2026 Financial Results Conference Call. [Operator Instructions] I will now turn the call over to Tyler Burns, Director, Investor Relations. Tyler, you may begin the conference call. Tyler Burns: Good morning, and thank you for joining us. On our call today, we have Canopy Growth's Chief Executive Officer, Luc Mongeau; and Chief Financial Officer, Tom Stewart. Before financial markets opened today, Canopy Growth issued a news release announcing the financial results for our second quarter fiscal 2026 ended September 30, 2025. The news release and financial statements have been filed on EDGAR and SEDAR and will be available on our website under the Investors tab. Before we begin, I would like to remind you that our discussion during the call will include forward-looking statements that are based on management's current views and assumptions and that this discussion is qualified in its entirety by the cautionary note regarding forward-looking statements included at the end of the news release issued today. Please review today's earnings release and Canopy's reports filed with the SEC and SEDAR for various factors that could cause actual results to differ materially from projections. In addition, reconciliations between any non-GAAP measures to their closest reported and GAAP measures are included in our earnings release. Please note that all financial information is provided in Canadian dollars unless otherwise stated. Following remarks by Luc and Tom, we will conduct a question-and-answer session where we will take questions from analysts. With that, I'll turn the call over to Luc. Luc Mongeau: Good morning, everyone, and thank you for joining us today. It's great to be with you again to share the continued progress we're making in building a competitive, profitable and trusted leader in the global cannabis market. The second quarter was one of our strongest to date, reflecting real measurable progress driven by our continued disciplined focus on fundamentals. Q2 highlights included continued momentum in our Canadian adult-use cannabis business, consistent growth in our Canadian medical cannabis business and a stronger and significantly healthier balance sheet. Together, these actions give me confidence in our ability to sustain progress and deliver results for quarters to come. Turning to our Canadian adult-use cannabis business. Net revenue increased 30% year-over-year in Q2, driven by demand for our Claybourne infused pre-rolls and our new All-In-One vapes from Tweed and 7ACRES. Stronger relationships with Canadian boards, large accounts and independent retailers drove continued distribution gains, including a 20% year-over-year distribution increase amongst Alberta independent retailers. We also improved our service levels with on-time, in-full rates across key accounts, reinforcing our reliability with retail partners. For the 6 months period ending September 30, 2025, revenue is up 37% compared to the same period last year. This growth reflects the renewed momentum of our adult-use cannabis business following the actions taken earlier this year to tighten our product portfolio, streamline execution with boards and retailers and refine our sales model. Looking ahead, we're building on this momentum with additional Claybourne innovation, new genetics across our core flower portfolio and PRJ brands and plans to reach a broader group of consumers later this year. We're also elevating our cultivation standards, including manual and refined post-ARBT processes to deliver superior flower, ensuring consumers experience the very best of what Canopy has to offer. In our Canadian medical cannabis business, net revenue grew 17% year-over-year, marking another consecutive quarter of growth. We're staying true to our medical strategy, offering the right products at the right price, consistently in stock and for the right patient segments. During the quarter, our BC Georgia site became an exclusive medical cultivation facility, producing craft and small batch cannabis dedicated to Spectrum patients. DOJA is also exclusively end bucking and hand trimming all product, which is a deliberate investment to drive quality and consistency in the Spectrum patient experience. We're also seeing continued growth among insured patients with registration up 20% year-over-year and almost tripling since 2021. This continued growth speaks to the reliability and care within our medical business. Looking ahead, delivering a superior patient experience remains central to how we will continue growing this business despite proposed government changes to medical reimbursement. In international markets, frankly, I'm disappointed with our performance during the quarter, where net revenues declined $3 million. Performance in Europe was primarily the result of supply constraint and internal process challenges. Flower sourced from sales in Europe did not meet required quality standards and internal process gaps limited our ability to deliver supply to Germany from our Canadian GMP facilities. I want to be clear, Canopy Growth is fully committed to the European market. We have already mobilized a dedicated effort to improve supply chain execution, which includes daily management oversight of logistics, product road maps and licensing. We expect operations to stabilize and begin improving as we exit the fiscal year with international markets remaining a key part of our path to profitability. At Storz & Bickel, the launch of the new VEAZY Vaporizer was received with great enthusiasm by consumers globally and generated early sales momentum, helping contribute to sequential quarter-over-quarter revenue growth. While the VEAZY only contributed to 3 weeks of performance during the quarter, we're seeing positive signals into Q3 and together with holiday seasonality, expect continued growth through the remainder of the year. Looking ahead, I'm encouraged by the momentum at Storz & Bickel. The team's commitment to precision engineering, medical grade quality and design excellence continues to set the brand apart, and that's what will drive performance in the long run. On operating expenses, our SG&A savings program launched earlier this fiscal has delivered over $21 million in annualized savings, surpassing our $20 million target ahead of schedule. As we build a culture of fiscal responsibility, the team continues to identify additional savings opportunities while delivering top line growth. On profitability, we made strong progress this quarter with margin expansion and disciplined cost management that's moving us closer to positive adjusted EBITDA. We're also taking further steps to meaningfully lower our cost of goods sold through streamlining processes, smart investment to deliver improved yield and quality as well as tighter supplier management. Before I close, I'd like to touch on the Canadian federal government's recent proposal to reduce reimbursement for veterans who use prescribed medical cannabis. These proposed changes have the potential to seriously impact access and quality of the care and services that veterans have come to rely on. As one of Canada's leading medical cannabis providers, we believe consistency and fairness in access to care is critical. We're continuing to assess the proposed changes and are engaging across the country to ensure the needs of patients remain front and center. In closing, Q2 demonstrated continued progress across our core businesses, including positive momentum in our Canadian medical and adult-use businesses and expanded product lineup at Storz & Bickel and a clear action plan underway to improve execution in our international markets to drive future success. As we further sharpen our focus on quality, patient and consumer experiences and disciplined execution, I'm confident we have the right strategy, focus and team to become a trusted global provider of elevated cannabis experiences. Thank you. I will now turn the call over to Tom to walk through the financial results in more detail. Thomas Stewart: Thank you, Luc, and good morning, everyone. I am proud of our disciplined execution, including stronger financial performance, rigorous cost-saving initiatives, a significantly deleveraged balance sheet and sustained cash flow improvements. Our adjusted EBITDA loss narrowed significantly year-over-year, driven by growth in the Canadian cannabis business, along with lower SG&A expenses and efficiency gains. As a result of the progress made, we have eliminated the conditions that once raised substantial doubt about the company's ability to continue as a going concern. This is a significant accomplishment for Canopy Growth. We had $298 million of cash and cash equivalents as of September 30, 2025, which exceeded debt balances by $70 million. During Q2, we prepaid USD 50 million on our senior secured term loan, capturing roughly USD 6.5 million in annualized interest savings. As a reminder, the company has no significant debt maturities prior to September 2027. Moving to our detailed segment results and starting with cannabis. Q2 cannabis net revenue was $51 million, up 12% compared to a year ago. This growth was led by the Canadian adult-use business, up 30% year-over-year, primarily driven by strong consumer demand for our Claybourne infused pre-rolls and our new Tweed All-In-One vape offerings. Canada Medical also continued to perform well, up 17% from the prior year, supported by growth in patient registrations, larger order volumes and a broader assortment of products on our Spectrum Therapeutics store. International cannabis sales underperformed during Q2, decreasing 39% from the prior year, which was driven by supply challenges. While we expect this decline in sales to improve in the back half of the year, we are proactively identifying opportunities to mitigate the near-term impact on revenue and preserve our focus on consolidated profitability. Cannabis gross margin in Q2 was 31%, down year-over-year, but up sequentially from 24% in Q1. The sequential improvement in cannabis gross margin primarily reflects the impact of price increases on select Canadian products, improved sales mix within Canada and improvements to flower and fulfillment costs. These improvements were partially offset by the previously discussed European underperformance and inventory provisions. I will now speak about the performance of our Storz & Bickel segment. Storz & Bickel net revenue in Q2 was $16 million, up 5% sequentially, driven by strong consumer demand for the new VEAZY vaporizer. Year-over-year, revenue declined 10% as the prior year period benefited from strong Venty and Mighty sales as well as strong performance on the back of favorable German regulatory reforms. Storz & Bickel gross margins increased to 38% in Q2 compared to 32% in the prior year period. Gross margins in the prior year were adversely impacted by discounts provided to clear out the remaining Mighty stock, which was retired in favor of the Mighty+ device. Moving on to operating expenses. SG&A expenses in Q2 declined 13% year-over-year, reflecting disciplined cost management and the benefits of our ongoing restructuring program. The decline in SG&A expenses year-over-year was primarily driven by reductions in headcount and professional fees, partially offset by higher investments in advertising and promotions made in support of new product launches that occurred during the quarter. Since launching our cost-saving initiatives in March, we have achieved $21 million in annualized savings, exceeding our initial $20 million target. We are continuing to identify and implement additional cost reductions to further improve our structure while ensuring no disruption to our core capabilities and ability to execute in key markets. Turning to adjusted EBITDA. Our Q2 loss was $3 million compared to a loss of $6 million a year ago. The year-over-year improvement was driven in part by the positive impact of our lower cost base and improved margins, partially offset by the negative impact of lower international cannabis revenues and inventory provisions. I'd like to now review our cash flow. Free cash flow was an outflow of $19 million in Q2 fiscal '26, down from an outflow of $56 million in the same period last year. The year-over-year decrease in free cash flow is primarily driven by a reduction in cash interest payments as a result of our debt paydowns as well as year-over-year improvements in working capital. For fiscal '26, we expect to achieve significant improvement in free cash flow, driven primarily by a reduction in cash interest costs due to lower debt balances, tighter management of working capital and improved financial performance. I'd like to now provide our outlook and priorities for the remainder of fiscal '26. In our cannabis business, we expect improved performance in our Canada adult-use channel over the remainder of fiscal '26, driven by a robust innovation pipeline of focused product formats and tight alignment with cannabis boards and retailers. We will continue to monitor developments around the Canadian federal government's proposed changes to the medical cannabis reimbursement program for veteran and RCMP patients. As more information becomes available and should the budget pass, we will assess its impact on our business and what our next steps may be. Excluding any impact of these potential changes, we would expect Canada medical cannabis top line to continue to grow in the back half of fiscal '26. In international markets cannabis, we are focused on stabilizing and realigning operations in Europe. For the remainder of fiscal '26, we expect revenue in the region to remain generally consistent with the second quarter levels with growth expected as we exit the fiscal year. In Australia, we anticipate that our recently launched flower products, along with upcoming new format introductions will support continued sequential growth in the second half of the fiscal year. For Storz & Bickel, we expect stronger performance over the remainder of fiscal '26, driven by the successful launch of the VEAZY at the end of our second quarter as well as strength coming from the holiday selling season. However, the year-over-year comparison comparisons are likely to be challenged due to the ongoing economic uncertainty that exists, particularly in the U.S. and the negative impact this is having on consumer sentiment. While U.S. tariffs have created pressure on Storz & Bickel's profitability, we remain focused on mitigating their impact through disciplined cost management and operational efficiencies. Turning to cannabis gross margins. Excluding the potential impact to Canadian medical reimbursement levels, we expect sequential improvement in cannabis gross margins over the remainder of fiscal '26, driven by top line growth and additional production efficiencies and cost savings. In our outlook for Storz & Bickel gross margins, we expect sequential improvement over the remainder of fiscal '26, driven primarily by top line growth and cost-saving initiatives. As we move into the second half of the year, our priorities remain firmly grounded in execution, efficiency and disciplined financial stewardship. The deliberate actions we have taken to improve our operations, launch exciting new products in core categories, strengthen the balance sheet and reduce costs have materially reinforced Canopy's foundation for long-term stability and growth. This concludes my prepared remarks. We will now take questions. Operator: [Operator Instructions] The first question comes from Bill Kirk at ROTH Capital Partners. William Kirk: Luc, you talked about the supply chain challenges impacting international. I know you mentioned quality standards. But what specifically do you have to change to reopen that pipeline? And is the solution going to be more costly than the prior product pass into the German market? Luc Mongeau: Thank you for the question. Let me just give you a bit more context on this. So I've been in the business with 9 months. We pretty much started the transformation on the organization on day 1. I'm thrilled overwhelmingly with everything that's happening in the business, and we see it in the results today. So we're driving growth in Canadian medical and adult-use business. Margin is improving sequentially. Cost control, we're well ahead of objective, of targets and chasing for more of supply chain, is improving. As I said, Europe, sadly, I'm disappointed, and I thought we would be ahead in the transformation. That being said, we're on it. We've moved to, as I mentioned, a daily management oversight of the situation. We're retooling the route to market end-to-end, and we're making significant progress. Let me get now to the specific of your question. So we're retooling to a place where we will be able to satisfy European demand for the foreseeable future from our Canadian GMP facilities. So Tom, please feel free to jump in while I'm done. But I do not see any increases in the cost of the flower that we will be providing to Europe. So we should be able to achieve superior margin there in the quarters to come. And as we -- I see us -- the outlook for me is a much stronger position as we exit the fiscal year. So Tom, anything to add? Thomas Stewart: No, I think the only other thing I would say, Bill, is there's not a lot of additional investment. This is about execution with the assets that we have today. So we also need to make sure we're -- we have a proper supply coming out of kickern. But overall, this is a story of execution, and Luc and I are managing this quite closely. Luc Mongeau: Absolutely. And if I may add, as you can see by the amount of time we're spending on this, this is extremely important to us, and we're extremely close to situation. We're expanding the number of strains we are growing for Europe, which allows us to broaden our portfolio of products significantly. At the same time, we are broadening our distribution retail offering in Europe, which as well will open up the market for us quite significantly. William Kirk: And then, Tom, the ATM was used pretty aggressively in 2Q. Can you talk about the decision to use it now and in that size? And then given the magnitude in the quarter, how should we think about issuance going forward? Is it done? Thomas Stewart: Yes. So I would say, Bill, we're continuously evaluating our capital requirements and funding strategies to ensure we have an optimal capital structure and that balances cost efficiency with financial flexibility. You're aware, we launched the new program at the end of August. Ultimately, for us, we want to make sure we have that optionality in the market. But I think it'd be -- it wouldn't be appropriate to speculate on how it would be used. We have the program in place to the extent we need to draw on it, but we're active prudently with those proceeds. Operator: The next question comes from Aaron Grey at Alliance Global Partners. Aaron Grey: First question for me. I just wanted to double back a bit on international. I know we've talked about it in the past. I just want to bring it up again in terms of your current supply chain. Are they still happy with some reliance on third-party products? Obviously, you guys have some of your own product, you can also export internationally. Do you feel like there's any need to increase the verticality that you have to supply the international markets because of some of the supply chain issues? Or do you feel like there's still a lot of opportunity to find quality product to sufficiently meet the potential demand in international markets? Luc Mongeau: Yes. Some of our -- thank you for the question, Aaron. Some of the challenges came from flower sourced out of Portugal. So we're out of this right now. As I said earlier, we have plenty of capacity within our own GMP -- Canadian GMP facilities. So we're confident that we will be able to supply from our own source grown flower. We're not writing off having third-party flower in the future. But right now, we're really retooling the entire route to market with our own grown flower, which we have enough capacity for the foreseeable future. Aaron Grey: Okay. Great. Second, you made some nice progress on the profitability. And you mentioned continued progress towards positive EBITDA. Any updates in terms of some of the key levers and timing of when you might expect to get to profitability? I know it's something that you guys have stopped doing in terms of specific time lines, but fair to say you'd be disappointed if you didn't achieve it in some time of calendar 2026, your fiscal year either back half or front half of '27. Thomas Stewart: I would say, Aaron, we're controlling what we can control. And right now, the cost savings measures we're taking, we know will empower us to get to an improved adjusted EBITDA performance. I think it's too early to speculate at this point in terms of when that would be. But I think as you can see from the results, this has been our strongest quarter, while albeit a loss, it's our narrowest loss that we've had to date in my recent memory. So I think your -- the changes we're making in the organization is going to fully support that. And we'll keep pushing as much as we can here. Luc Mongeau: Yes. If I may add on top of this, positive adjusted EBITDA is our main and remains our main priority. That's why we're over-indexing and really retooling Europe to make sure we fire on all cylinders. Operator: [Operator Instructions] The next question comes from Frederico Gomes at ATB Capital Markets. Frederico Yokota Gomes: First question, just given the growth that you're seeing in your cannabis platform, the outlook for an adult-use, Canadian medical, international medical as well, how are you looking at your capacity right now? Do you foresee any need to invest an additional capacity, I guess, in the near future, like meaningful investments if the business keeps growing? Luc Mongeau: Thank you for the question. As I mentioned, we're doing smart investment to really unlock yield and quality of the flower that we're growing in our own facilities. We've looked at this large and wide. We're confident with limited investment that we can meet the demand and meet the growth targets that we have. Tom? Thomas Stewart: Yes. Thanks for the question, Fred. Yes, we believe our footprint, primarily with our cultivation in Kickern is sufficient to meet our needs. A lot of the focus and investment that we're making is really to improve our yield and the quality of our flower coming out of that facility, but we wouldn't expect a significant amount of additional capital investment needed to meet the demand. So I think it's -- again, it's executing with the assets that we have and improving utilization across the board. Frederico Yokota Gomes: And then just a second question, just on the -- I guess, related to that, balance sheet now in a net cash position. You obviously have access to capital and you're a good position here. But I guess if you could talk about the capital allocation priorities that you have now that you have no significantly reduced debt. Thomas Stewart: Yes. So from my view, Fred, the $300 million of cash with no near-term debt obligations, it really provides further optionality for us when it comes to evaluating our capital structure and evaluating potential investment opportunities to grow and strengthen our business. The cash also provides us with flexibility to capitalize on these potential opportunities, but also mitigate risks as market conditions fluctuate. As we all know, cannabis is a highly volatile space. So I think for right now, we're evaluating potential accretive options that are out there. But ultimately, we want to make sure we remain resilient and stabilize this company and focus on the business that we have today. Operator: The next question comes from Pablo Zuanic at Zuanic & Associates. Pablo Zuanic: Luc, I will ask my two questions upfront. One, on the vape launch. I mean, obviously, the Claybourne launching pre-rolls has been very successful. Can you give more color in terms of the vape launch? Is it just in All-In-One? Or are you also planning in 510 cartridges -- are we talking All-In-Ones just in distillates or also live resin or live rosin, liquid diamonds? If you can just give more color on how you think about the category, especially in terms of room for innovation and also the price competition there. There's been a bit of a race to the bottom, it seems on All-In-Ones. That's in terms of vape. In terms of -- my second question is more in terms of the U.S. business. I know that you've said, look, the U.S. is more of a long-term opportunity, and I understand that. But it would help if you can give an update in terms of where things stand with Canopy USA, especially in terms of any help you had to give to Acreage in terms of balance sheet or guarantees. I think in the past, the company bought debt from AFC Gamma. I don't know what happened recently in the June quarter or September quarter in terms of help Acreage operate, especially from a balance sheet and cash flow perspective. Luc Mongeau: Hope you are doing well. Let's start with the vapes and Tom will jump in for the U.S. So we're thrilled with the early results we're getting with our All-In-One. So as I mentioned, we launched Tweed, 7acres. We did really well. We actually ran out of stock. So we had to accelerate replenishment of first wave. As I mentioned, we're launching -- we're about to launch Claybourne in all-in-one vapes as a first entry. We're very encouraged by the gross margins that we're able to achieve with these products. So we're putting out there product of superior quality. So we're pricing them appropriately. And they've been margin accretive for us. As it comes to the full spectrum of live resin and so on distillate and liquid diamonds and everything. There's more developments to -- that will come there. We're committed to being a leader in All-In-One vapes. It is a key market, key growing market. So more news to come there and make sure to try the new Claybourne All-In-Ones as they come out. I was able to sample them this week. And it's what we stand for, superior elevated experiences with quality products, and those deliver on all of that. Tom, do you want to give some insights about the U.S.? Thomas Stewart: Yes, sure. So Pablo, a couple of points in your U.S. question there. So there are no guarantees between Canopy Growth and Canopy USA. So Canopy USA is an independently run and managed enterprise. They did have new financing over the summer from their lender, and the team has been working diligently to deploy that capital in the areas where they see the highest return. Overall, their focus now is on execution and really bringing the 3 companies together and executing well in the U.S. space. But to be clear, there's no funding new or otherwise with Canopy USA and Canopy Growth. Operator: This concludes Canopy Growth's Second Quarter Fiscal 2026 Financial Results Conference Call. A replay of this conference call will be available until February 5, 2026, and can be accessed following the instructions provided in the company's press release issued earlier today. Canopy Growth's Investor Relations team will be available to answer additional questions. Thank you for attending today's call.
Operator: Thank you for standing by. This is the conference operator. Welcome to the Third Quarter 2025 Results Conference Call and Webcast for Canadian Utilities Limited. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Colin Jackson, Senior Vice President, Financial Operations. Please go ahead, Mr. Jackson. Colin Jackson: Thank you, and good morning, everyone. We are pleased you could join us for Canadian Utilities Third Quarter 2025 Conference Call. On the line today, we have Bob Myles, Chief Executive Officer of Canadian Utilities Limited; and Katie Patrick, Executive Vice President, Chief Financial and Investment Officer. . Before we move into today's remarks, I would like to take a moment to acknowledge the numerous traditional territories and home lands on which our global facilities are located. Today, I am speaking to you from our ATCO Park head office in Calgary which is located in the Treaty 7 region. This is the ancestral territory of the Blackfoot Confederacy comprised of the Siksika, the Kainai and the Piikani Nations, the Tsuut'ina Nation and the Stoney Nakoda Nations, which includes the Chiniki, Bearspaw and Goodstoney First Nations. I also want to recognize that the city of Calgary is home to the Metis Nation of Alberta, Districts 5 and 6. During the quarter, employees across Canada recognized the National Day for truth and reconciliation by walking together to honor indigenous communities and their experiences. May we continue to reflect, learn and respect the diverse history, languages, ceremonies and cultures of indigenous peoples as we move forward towards understanding healing and reconciliation. Today's remarks will include forward-looking statements that are subject to important risks and uncertainties. For more information on these risks and uncertainties, please refer to our filings with the Canadian securities regulators. During today's presentation, we may refer to certain non-GAAP and other financial measures, including adjusted earnings, adjusted earnings per share and capital investment. These measures do not have any standardized meaning under IFRS, and as a result, they may not be comparable to similar measures presented by other entities. Please refer to our filings with the Canadian security regulators for further information. And now I'll turn the call over to Bob Myles for his opening remarks. Robert Myles: Thanks, Colin. Good morning, everyone. I want to begin by highlighting 3 key pillars of our long-term strategy. growth and prosperity. This includes our robust project pipeline and our policy and regulatory partnerships. Operational excellence, which includes modernizing our operating model with safety and reliability at the forefront and financial leadership, which touches on our funding strategy and financial performance. . Moving to our first pillar, growth and prosperity. Foundational to our growth at Canadian Utilities are the economic drivers we are seeing in the province of Alberta. Alberta continues to lead population growth in Canada and in Q3 2025, Alberta's population reached 5 million people, up 2.5% year-over-year. Canadian Utilities plays an essential role in enabling this population growth. In 2025, we are on track to connect over 19,000 customers in ATCO Energy Systems, particularly in our Alberta gas business, in line with the strong growth we delivered in 2024, which saw our highest number of customer connections in almost a decade. When we look at the projects driving our growth and prosperity pillar, I want to begin with our Central East Transfer-Out project or CETO. At a high level, this $280 million project assigned by the Alberta Electric System Operator upgrades and strengthens the transmission system in Central East Alberta. Alberta's electric transmission system has experienced ongoing congestion challenges affecting the reliability of the grid, the market efficiency and the integration of new energy sources. In response, CETO was developed to directly address these constraints. CETO is a critical energy infrastructure investment, representing meaningful progress for Alberta's electric system by enhancing the efficiency of how power flows across the electric grid, CETO makes it easier to deliver energy to where it is needed most, like major demand centers in Calgary, Edmonton and Northern regions. CETO is deep into construction and remains on track to be completed in the first year -- first half of next year. The project will have a significant benefit to our customers across the province modernizing and enhancing the reliability of the transmission system. Beyond CETO, we believe further opportunities exist to improve congestion. An example is the McNeill converter station, currently the only intertie point between Alberta and Saskatchewan, as shown on this slide. The McNeill station recently underwent repairs and is being evaluated for a capacity upgrade. Once complete, this upgrade will enable more generation to flow between Alberta and Saskatchewan, representing the next step in addressing regional congestion. Moving to natural gas. Our assets are strategically positioned in areas that allow us to capitalize on the spectrum of energy opportunities being delivered. On the map, you can see our 3 gas storage assets are well positioned near natural gas production zones, major project infrastructure as well as locations associated with the planned data center developments and links to LNG development. Our Yellowhead pipeline project that I have discussed previously is a required addition to the natural gas network in Alberta and it will be a key conduit to connecting supply to demand growth. Yellowhead creates a new direct corridor from the Northwest Alberta supply region to the Greater Edmonton area, debottlenecking constrained segments and reducing reliance on longer, more complex flow paths. This relieves pressure on the entire Alberta integrated system improves delivery reliability for all types of customers across the province and frees up capacity for not only residential demand, but industrial, power generation and commercial growth making it a foundational investment in Alberta's energy future. Overall, it is evident that natural gas is needed more than ever in Alberta, and we remain in a very strong position to capitalize on the growth opportunities within the province. There have been positive developments on our Yellowhead pipeline project during this past quarter. We are pleased to announce the approval of the needs application from the Alberta Utilities Commission, or AUC, I'm also excited to announce that we filed the facilities application with the AUC earlier this week, which will provide detailed technical, environmental and consultation data required for construction approval. The filing of the facilities application is a key milestone in the regulatory process and demonstrates that we have completed sufficient consultation with communities, environmental studies and engineering to permit the construction of the project. The Yellowhead pipeline project remains 90% contracted and will deliver long-term economic benefits while strengthening the provinces natural gas network. In the third quarter, 2 additional service offerings to the market were undertaken. We expect that some or all of the remaining capacity provided by Yellowhead will be contracted through these offerings. While we waited on final regulatory approvals, we have successfully awarded major equipment contracts for the compressor facility. In the fourth quarter, we will place major contracts for the supply of steel pipe. Ordering these long-lead materials is prudent to preserve our in-service date and avoid cost escalations and supply chain delays. As you can see on this slide, the Yellowhead pipeline runs through Treaty 6 territory in Alberta, which is why we continue to pursue partnership arrangements with indigenous partners, First Nations and Metis. Early meaningful and continuous economic indigenous participation in infrastructure projects on traditional land is essential for development, reconciliation and long-term project success including the Yellowhead Pipeline project. An integral part of our nonregulated growth at Canadian Utilities is from our natural gas storage operations. We've had a strong year in natural gas storage with increases in seasonal spreads, driving strong customer demand for our facilities. We have successfully optimized our storage facilities by contracting through staggered contract maturities over the coming years. The plans I have previously discussed to expand our existing storage capacity from 117 petajoules to date to 130 peta joules in late 2026 positions us for continued growth and financial performance in the years to come. As we look at the future of storage and the broader market trends, a number of fundamentals are driving the demand for gas storage. Storage capacity growth across North America has slowed to less than 1% annually since 2016. While gas demand across North America continues to increase driven by industrial demand, LNG demand and new power generation accelerated by the build-out of data centers. As a leader in natural gas storage, we have the technology, the infrastructure, customer base and experience to execute and build out additional storage capacity. Beyond the brownfield expansion that we have already identified, we continue to explore strategic opportunities for additional growth in storage capacity, both within Alberta and the broader North American market. Similar to the opportunities ahead of us in Alberta, our ATCO Australia businesses, which is a provider of regulated natural gas distribution services in Western Australia and a developer and owner of gas-fired generation is also well positioned given Australia's evolving energy landscape. The developing regulations, government emissions reduction targets and associated investment incentives present ATCO Australia with opportunities which the business is well positioned to pursue. Our gas utility business in Australia has developed a strong -- delivered a strong 2025, and we expect this growth to continue into the years ahead. as the Australian government remains focused on enabling the development of new infrastructure to meet increasing population growth. In response to this, we continue to focus our new customer connections. Under our new access arrangement, AA6, our 5-year plan sees us growing by approximately 80,000 new connections as customer sentiment towards gas continues to be positive in Western Australia. This amounts to a 27% increase in expected customers compared to our previous access arrangement. For the 5-year AA6 period, we're operating under a higher return on equity of 8.23% driving consistent earnings for Canadian Utilities. Our second pillar, operational excellence, is anchored on safety, reliability and operational outperformance. Safety is a key element linked to our long-term growth by continuing to foster a strong safety culture. We ensure that operational efficiency and reliability are achieved without compromise. Safety across Canadian Utilities requires collaboration and a continued focus on our commitments. We must learn from incidents, promote safety initiatives and champion workplace safety across the business. From an outperformance perspective, our utilities are known for their ability to drive operational efficiencies. In 2024, our Australia utility delivered over 550 basis points of outperformance above the regulated ROE, while our utilities in Canada drove almost 100 basis points of outperformance above the regulated ROE. As we move ahead, we will share our learnings across all businesses like Canadian Utilities with a focus on driving further efficiencies across IT, supply chain and administrative costs. I look forward to sharing further updates on this over the upcoming year. Our third pillar is financial leadership. And with that, I'll pass the call to Katie to discuss this in further detail. Katie Patrick: Thanks, Bob, and good morning, everyone. And can I say what a great quarter we had, but I'll start with our external funding. I want to provide an update on our successful financing we executed in the third quarter. On September 8, Canadian Utilities Limited announced a $750 million transaction of hybrid notes at a fixed rate of 5.45%. And on September 11, CU Inc. announced a $370 million transaction of debentures at a rate of 4.787%. I am proud to say that these offerings had significant interest from the investment community at approximately we're 3x oversubscribed across a strong pool of buyers. This confirms that there is sufficient investor demand to satisfy the funding requirements for the total investment in Yellowhead, which will be funded according to the regulated capital structure of 63% regulated debt and 37% regulated equity. We continue to pursue partnership arrangements with indigenous partners that may contribute up to 30%. The remaining investment of approximately $750 million will be funded through Canadian utilities with gross -- with proceeds coming from diverse capital sources, including the $500 million from the September 2025 fixed to fixed rate subordinated notes, cash from operations and other future potential issuances of hybrids or preferred shares. I look forward to updating you very shortly on this. As with all our capital decisions, we will review all options and choose what is in the best interest of shareowner value creation. Looking at our third quarter performance for Canadian Utilities as a whole, we delivered positive earnings growth year-over-year. We achieved adjusted earnings of $108 million or $0.40 per share up from $102 million for the same period in 2024. This was despite headwinds, including a reduction in their approved ROE for our Alberta utilities and the conclusion of the efficiency carryover mechanism or ECM. Our strong performance was driven by growth across all of our core businesses. ATCO Energy Systems delivered adjusted earnings of $98 million in the quarter, $4 million higher year-over-year. Despite $6 million of headwinds from the reset in our approved ROE and the conclusion of the ECM for our distribution utilities. We still deliver growth within Energy Systems. While ATCO Energy Systems has seen an increased earnings year-over-year. We expect to face headwinds in the upcoming quarter as we will not have the same tax efficiencies that we achieved in Q4 of 2024. ATCO EnPower delivered adjusted earnings of $16 million, up $2 million year-over-year. In the Storage and Industrial Water segment, we continue to deliver growing earnings. As Bob mentioned earlier on the call, we plan to grow the storage business and capitalize on brownfield expansion opportunities. In electricity generation, adjusted earnings were up for the quarter driven by higher compensation related to turbine availability guarantees at our Forty Mile wind facility and higher generation at the Veracruz Hydro facility in Mexico. ATCO Australia delivered adjusted earnings of $27 million during the quarter. This is $12 million or 80% higher than the same period last year. As Bob noted earlier, we continue to see momentum within our ATCO Gas Australia business with earnings growth driven by higher rates and outperformance. This accounted for the majority of the improvement. At ATCO Power Australia, higher earnings were primarily due to the settlement of the South Australian Hydrogen jobs plan project. From a cash flow perspective, our cash from operating activities increased 12% compared to the same period last year. The cash we generate will be used in combination with the external funding I previously discussed to fund our enhanced capital program that will generate future earnings growth. Overall, we remain in a strong financial position as we round out the last quarter of 2025 and head into 2026. We continue to remain focused on finding efficiencies across the organization, including supply chain improvements, repatriating some IT operations internally and consolidating senior levels of leadership, all while executing on our strategy to generate long-term value for all stakeholders, including our shareowners. I will now turn the call back to Bob for closing remarks. Robert Myles: Thanks, Katie. It's evident from this quarter that we've seen strong momentum across our businesses when we work together as one organization. To reiterate, our 3 pillars guiding our future include growth and prosperity, operational excellence and financial leadership. It's an exciting time at Canadian Utilities. The environment in which we operate continue to have positive tailwinds, including Alberta, where we are positioned to benefit from the province's focus on natural resources and economic growth. Our unique position as an operator of utilities, storage and generation assets positions us to capitalize on the opportunities ahead of us and to be a key provider for all of our current and future customers. . I look forward to leading us through this period of growth, and we'll share our progress on our initiatives throughout 2026. That concludes our prepared remarks. I'll turn the call back to Colin for our question period. Colin Jackson: [Operator Instructions] I will now turn it back to the conference coordinator for questions. Operator: [Operator Instructions] The first question comes from Rob Hope with Scotiabank. Robert Hope: Hoping we can dive a little bit deeper into ATCO Gas Australia or even the Australian business in aggregate. Year-to-date, you're up 42% and the ATCO Gas under AA6 has been quite strong. So can you maybe help us understand kind of the key drivers of the strong growth with the outlook for Q4 and whether or not you would get back to a more normal kind of growth rate in '26 and '27? Katie Patrick: Sure. Rob, it's Katie. We're really happy with the AA6 parameters that were set out. And you can see a lot of our strong earnings growth there. That being said, there were some onetime items that we had this year that we would not repeat next year, including the settlement on the South Australia hydrogen jobs plan as well as some cleanup of a previous project that we are working on Central West Pumped Hydro. But all that said, we do expect the continued strong growth that we had in the outperformance that you can see specific to ATCO Gas Australia. Those 2 onetime items that I'm talking about mostly show up in the ATCO Power part of the segment. So I think we continue to have headwinds behind us there. We also do benefit from the inflation indexing, and we're watching that closely, but I think that could help in the future a little bit as well going forward on some of our earnings there in Australia. Robert Myles: Rob, if I could just add, I also think there's some great opportunities to look for efficiencies across our operations in Australia as we align across Canadian utilities. So I do think there's some great potential for Australia. Robert Hope: All right. I appreciate that. And then maybe more broadly, looking at the electric transmission opportunities in Alberta. You have a potential for a significant increase in load in the province. However, the system operator is trying to minimize transmission investment. How does that kind of balance for the growth outlook for that business? Robert Myles: Yes, Rob, I really enjoy talking about that topic because we do think there's some great opportunities for electric transmission build in the province. We do have to consider that as we look at affordability across this province as it impacts the consumer. But in the capital forecast that we've been giving, we don't have capital in there for things like interties, and we do think there's some great opportunity with interties. But the projects that are in our service territory, we think we're well positioned to capitalize on those. And much of the growth is actually in our service territory. So we do see there's some great potential there. . Operator: The next question comes from Maurice Choy with RBC Capital Markets. Maurice Choy: I just want to come back to Slide 17 about the funding of the Yellowhead pipeline. Can I just ask how advanced you are in terms of securing the 30% investment with indigenous partners. And if you could help break down that $261 million of remaining funding a little bit more, what drivers are there to determine how much from cash from operations and how much from, I suppose, equity raises? Robert Myles: Maurice, thanks. I'll comment on the indigenous kind of status and then let Katie comment on the rest of your question. I personally have had a lot of conversations with the indigenous communities. I'm very optimistic that we will have that in place. It takes a little bit of time, but we've had really good conversations. And we, as an organization, are very committed to making that happen. And I know the conversations I've had with those indigenous communities, we're also getting a lot of support from their side as well. So I'm pretty confident in that. . Katie Patrick: And Maurice, to your second question related to the $261 million. I would just say stay tuned, but we don't -- just to be quite clear, we don't anticipate having to access the public equity markets for that amount of money. And I think there's a depth in other capital areas, in some of the hybrid preferreds in some of those markets to be able to fulfill that need shortly. Maurice Choy: Understood. That's great color. And if I could just look into your discussion about, I guess, hydrogen. Not a whole lot of mention here, but I suppose if we look at the Canadian budget and you look at the major projects office, how do you feel about your projects? Were there any takeaways from the budget or even from the initial list of comments from MPO that you think would be positive takeaways to facilitate your H3 ambition? Robert Myles: Maurice, we've spent a lot of time, as you know, working with the federal government on our project that we are pursuing, ammonia by rail based on hydrogen development. And there are some encouraging things that are in the budget, but we do not have a lot of capital put in our plan for the hydrogen project, because we just don't have the full confidence that that's going to develop. We're continuing to do some work on it, but we need to see more definitive signs from the federal government that they'll support the project. And specifically, we need to see more certainty across Canada for the project. So -- we're still having conversations, but it's not -- it's definitely not one of our key opportunities right now. . Operator: Next question comes from John Mould with TD Cowen. John Mould: Thanks for that Yellowhead financing slide that really helps lay things out. I guess -- on the nonregulated side, beyond the storage opportunity that you discussed earlier, where do you feel like you've got the best line of sight or best potential on possible regulated investments over the midterm -- excuse me, possible investments over the midterm outside of the regulated platform. Robert Myles: John, again, Bob here. We do -- first of all, I don't want to dismiss the gas storage because I think there's such great opportunities in gas storage. But in addition to that, we do see some opportunities in generation, but primarily in gas-fired generation, not in really going out and building a lot more renewables. We do think there's pockets of electric storage. In other words, batteries that we can pursue. And then And when I say gas-fired generation, I'm saying both in Alberta and in Australia, we think there's opportunities there in the near term. John Mould: Okay. And then just speaking about generation more broadly in the province of Alberta, can you maybe speak a little bit to your engagement on -- and I know it's an ongoing process, but your engagement on the market design reforms there. And also on the transmission side, what you're hoping to see -- sorry, I should say the transmission regulation side as it applies to generation. And what you're hoping to see as an owner of generation in the province and as a potential investor in incremental generation in the province, be that gas-fired or renewables down the road. Robert Myles: And John, you're correct. They are 2 different things. The impact on generation versus the impact on electric transmission as we said earlier, we think there's some great opportunities in the province for electric transmission. On the generation side, it is being impacted and will be impacted by the long-term plan with the restructured energy market, as we've discussed previously. We're also having a lot of conversations with the government as we speak around the 0 congestion policy that was tied to the transmission regulation changes over the last couple of years. The conversation to the government are encouraging that they recognize the impacts that changing the 0 congestion policy has on generation. So we're continuing to work that. I am optimistic that we'll actually get something from the government to give us more confidence on where we're going with generation. But as a province and as an investor, we do need to get more confidence in the province as to what's going to happen with the rules uncertainty before much more generation is built in this province. Operator: Our next question comes from Ben Pham with BMO. Benjamin Pham: I had a couple of questions on the gas storage commentary you had. Maybe just to start in Alberta. Isn't it better to leave an open book into a rising contract price in Alberta, given what LNG export thematic is playing out? Robert Myles: Are you saying, Ben, just keep it all merchant. I'm trying to -- sorry, I'm trying to understand your question. Benjamin Pham: Yes. I was wondering your philosophy around you've locked in contracts is what you said and extensions in a rate that's probably about $1 or so. And why not just wait a while, a year or 2 and capitalize on potentially a rise in movement in the storage rates. So I'm not saying keep it all merchant, but just thinking about you philosophy between weighing those 2 differences. Robert Myles: Yes. Ben, I'm a huge believer in a balanced approach. So if you look at our gas storage, we have a balance of contracting out part of our storage to customers. So they have access to that storage based upon what they want to do. We also do a lot of seasonal deals with our customers, which is a different type of service. And then the third service is doing a lot of day-to-day service, which is probably more what you're talking about is looking at more of that merchant market. So we actually do some of that. But we do like to lock in our deals, and I think we've been very successful on that. So I do feel like we need to have a balanced approach, not all of just one scenario or the other. Benjamin Pham: Okay. Got it. And then you also mentioned looking at other regions, maybe acquisitions or development. Is there a particular region that looks very interesting to see you at this point of time, we've seen some announcements in the Gulf Coast today from another company. Robert Myles: I'm assuming you're still talking about gas storage, Ben? Benjamin Pham: Yes, that's right. Robert Myles: Yes. And I actually believe across North America, there's opportunities for gas storage. And so we are evaluating opportunities, again, across the North America gas storage environment. So I would agree with you on that. Benjamin Pham: Okay. So it's pretty broad to look out right now? . Robert Myles: Yes, yes. Benjamin Pham: Okay. And maybe lastly, I just wanted to check on Yellowhead with the CapEx. You had a couple of details there. A couple of years ago, you had an initial figure, you updated on scope. What stage are you at right now? I don't know if you use an engineering hat on it in terms of really your confidence in that CapEx numbers, just looking at past projects where they've hit the needs and then you go into the next phase. Robert Myles: Yes. We keep updating our capital forecast on that, and we're down to a Class 3 kind of plus or minus 20% estimate currently. As of today, we're looking at $2.9 billion is kind of what we're -- we've informed the Alberta Utilities Commission as to the cost of that. As we progress with long lead materials, we can lock in more of the supply chain side of it. And then in 2026, we'll be going to the market for contracting pricing. So we'll get better confidence as time moves on. Obviously, the risk with building that pipeline in addition to supply chain and contractors is always weather. And that's something that we have to do the best we can to manage that. . Operator: Since there are no more questions, this concludes the question-and-answer session. I would like to turn the conference back over to Mr. Colin Jackson for any closing remarks. Please go ahead. Colin Jackson: Thank you, and thank you all for participating today. We appreciate your interest in Canadian Utilities and we look forward to speaking with you again soon. Operator: This brings to a close today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
Operator: Good day, ladies and gentlemen, and welcome to the RioCan Real Estate Investment Trust Third Quarter 2025 Conference Call and Webcast. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Ms. Jennifer Suess, Senior Vice President, General Counsel, ESG and Corporate Secretary. Ms. Suess, you may begin. Jennifer Suess: Thank you, and good morning, everyone. I am Jennifer Suess, Senior Vice President, General Counsel, ESG and Corporate Secretary of RioCan. Before we begin, I am required to read the following cautionary statement. In talking about our financial and operating performance and in responding to your questions, we may make forward-looking statements, including statements concerning RioCan's objectives, its strategies to achieve those objectives as well as statements with respect to management's beliefs, plans, estimates and intentions and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. These statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from the conclusions in these forward-looking statements. In discussing our financial and operating performance, and in responding to your questions, we will also be referencing certain financial measures that are not generally accepted accounting principle measures, GAAP under IFRS. These measures do not have any standardized definition prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other reporting issuers. Non-GAAP measures should not be considered as alternatives to net earnings or comparable metrics determined in accordance with IFRS as indicators of RioCan's performance, liquidity, cash flows and profitability. RioCan's management uses these measures to aid in assessing the trust's underlying core performance and provides these additional measures so that investors may do the same. Additional information on the material risks that could impact our actual results and the estimates and assumptions we apply in making these forward-looking statements, together with details on our use of non-GAAP financial measures, can be found in the financial statements filed yesterday and management's discussion and analysis related thereto as applicable, together with RioCan's most recent annual information form that are all available on our website and at www.sedarplus.com. I will now turn the call over to RioCan's President and CEO, Jonathan Gitlin. Jonathan Gitlin: Thank you, Jennifer, and good morning to everyone joining us today. We're pleased to share our Q3 2025 results. RioCan's operating momentum accelerated this quarter. Our trio of high retention rates, strong leasing spreads and quality tenants represent the sustainable long-term outcome we've strategically built toward. Key performance indicators reflect consistent sustainable growth, underscoring the strength and resilience of our platform. Committed occupancy of 97.8%, retail occupancy of 98.4% and our Q3 retention ratio of 92.7% highlights the value tenants place on space in RioCan assets. This demand translated into strong performance with commercial same-property NOI, up 4.6%. RioCan is operating from a position of strength. Our performance is driven by a number of factors, but relies heavily on our focus on tenant quality and disciplined asset management. Premium retail space remains scarce and exceptionally high barriers to entry make meaningful new supply unlikely. At the same time, demand continues to be strong from top-tier necessity-based retailers. These retailers are not just getting by. They're focusing on growth. They're proving out their strength and ability to thrive in any economic backdrop. These tenants exemplify the caliber of retailers that comprise RioCan's portfolio. This supply-demand imbalance is most acute where RioCan's assets are concentrated. Our properties are in Canada's major markets with an average of 277,000 people and a $155,000 household income within 5 kilometers. Our strategy is straightforward. We optimize our portfolio by selling assets that don't align with our strategic vision. On the flip side, we invest in those that do. Over the past decade, we've diligently executed this approach and it's yielding measurable success. We are keeping our centers full and generating strong leasing spreads, and we're doing so with high-quality tenants. We're in a third quarter of operating under the current tariff environment, and we're pleased though not at all surprised to see our portfolio and tenants performing exceptionally well. This is the benefit of a tenant mix that features necessity-based retailers with strong balance sheets that provide everyday needs. Canada remains an attractive market for our tenants and our centers are ideally located to support their growth. RioCan's leasing spreads remain at record highs. We captured market rent growth across the portfolio, achieving blended leasing spreads of 20.8% this quarter, including 44.1% on new leases. Year-to-date, the average net rent for new leases was $29.58 per square foot, nearly 30% above the average for occupied space. Renewal spreads were also strong at 15.2%. This is especially noteworthy given that an outsized proportion, 48% were fixed at lower growth rates this quarter. Same-property NOI will continue to benefit from this mark-to-market gap. Specifically, there are 10.7 million square feet of leases coming up for renewal at a relatively consistent pace over the next 3 years. Combined with our success in embedding annual growth in new leases and unlocking fixed options in existing leases, this trajectory is sustainable. We are striking an extremely healthy balance between replacement and retention. We're enhancing tenant quality and rental rates by replacing certain transitional tenants. At the same time, we are retaining strong established tenants to reduce downtime and capital requirements. When opportunities emerge, we secure high-quality tenants for our properties. Alternatively, we also like to help our reliable established tenants expand their existing footprints within our assets. We put our platform to work and we help those tenants by seeking out opportunities in adjacent and surrounding space and help them execute on the enhancement and expansion of existing space. We're excited to share a number of examples to demonstrate this strategy at work later this month at our Investor Day. Our strong quarterly performance goes beyond the numbers. It reflects the quality of our portfolio and the discipline behind our strategy. We previously indicated our plan to repatriate $1.3 billion to $1.4 billion of capital which will be infused back into the business over 2025 and 2026, and we remain firmly on track. Progress continues on monetizing our residential rental portfolio. We've sold our interest in 6 RioCan Living properties, 5 of which closed in 2025. These 5 transactions have contributed to the almost $500 million of capital repatriated since the start of this year. Based on the quality and desirability of our RioCan Living assets, we're highly confident in our ability to continue to monetize these assets and to put the capital to work accretively in the numerous capital allocation opportunities we have at our disposal. Our business is rooted in a strong portfolio, a favorable retail environment and strong operators. This lends itself to the simplification of our business around our retail core, leveraging our decades of experience to deliver reliable, durable income and growth, focusing our resources, human and capital on this core is a logical conclusion that will serve our unitholders well into the future. I'll wrap up in a moment, but before I do, I'd be remiss if I didn't mention that our commitment to excellence was further validated by our impressive performance in the 2025 GRESB assessment. Among other recognitions, we maintain regional sector leader status in the Americas under the retail sector and the first rank among North American retail peers in the standing investment assessment. So as we look ahead, our outlook remains aligned with the guidance we provided in the first quarter. FFO per unit of $1.85 to $1.88. FFO payout ratio of approximately 62%, and commercial same-property NOI growth of approximately 3.5%. We continue to see strong demand for high-quality, necessity-based retail space in Canada's major markets. Our leasing strategies are fueling organic growth and our disciplined capital management is amplifying that growth now and for the future. We are excited to share more at our Investor Day on November 18. Our team is energized, our strategy is clear and our portfolio is positioned for continued success. Thank you for your time today. I look forward to your questions and to sharing more about our progress in the coming weeks. Dennis Blasutti: Thank you, Jonathan, and good morning to everyone on the call. Our core real estate portfolio continues to deliver strong results, and we continue to simplify our business to focus on this core. FFO excluding condo gains and excluding HPC-related income, was $0.39 per unit, compared with $0.38 in the prior year. This increase was driven by a 4.6% growth in same-property income in our core commercial portfolio and the benefit of unit buybacks, partially offset by higher interest expense. Total FFO was also impacted by the following items that are noncore to our business. FFO for the quarter contained $17.5 million of gains related to residential inventory, an increase of $4.8 million or approximately $0.02 per unit compared with Q3 2024. Lower fee and interest income due to residential inventory completions had an impact of $0.01, reduced NOI and fee income related to the former HPC locations had a combined FFO impact of $0.02 per unit when compared with Q3 2024. Net income for the quarter was impacted by valuation losses of $242.8 million, driven by factors that are not reflective of our core retail portfolio. This amount includes $148 million of net fair value losses on investment properties comprised predominantly of 3 categories. The largest component was $95 million related to excess density driven by properties that have been reprioritized. We have a significant amount of long-term density potential in our portfolio. However, given the stagnant land and development market, it is important to ensure that we are maximizing income from the existing retail on our properties. As such, we determined that the redevelopment of properties such as Colossus, Scarborough Center and RioCan Hall will not proceed for a number of years. This determination and commitment to focus on the core retail aspect of these properties removes any ambiguity related to these sites freeing up our leasing team to maximize retail rents by offering longer lease terms to our tenants. The second category totaling $25 million relates to assets that are high quality but with lower growth potential attributable to a significant proportion of fixed renewals associated with anchor tenants such as Walmart. These are similar to assets that we have sold over the last couple of years and represent a minimal proportion of our portfolio. The final category totaling $28 million relates to 3 large Toronto-based residential rental buildings. We have seen weakness in rent growth and occupancy in submarkets where there is high competition from condo delivery. So we have reduced the stabilized NOI assumption for these buildings. As noted, the valuation losses relate to 3 categories that are not reflective of our core commercial real estate portfolio. Our NAV per unit at the end of the quarter was $24.9 which is approximately 29% above the current unit price. Going forward, we will focus on compounding NAV by growing income from our core portfolio, along with the accretive allocation of the substantial capital we expect to repatriate over the next couple of years. We are rapidly advancing toward a conclusion for the forward HBC locations with asset plans for 12 of the 13 locations. As previously stated, we will only participate in assets where we would expect strong return on capital, and we will not participate in mixed-use redevelopments. The impairment in the quarter writes off our remaining equity in the HBC-JV. We have also taken provisions related to our loan and guarantee exposures. We have taken a conservative approach to the accounting of these assets while continuing to pursue all avenues to recover value. With the asset plans in place and the financial provisions recorded, this chapter is substantially behind us. As we focus on our core business, we are winding down our mixed-use construction. Year-to-date, the spending on mixed-use IPP construction was $40 million with 186,000 square feet delivered. With approximately $70 million remaining to be spent for the balance of the year and our committed capital for development construction in 2026 of only $15 million we will have significant flexibility going forward to invest capital where it's most accretive. In addition, we have delivered 61,000 square feet of retail infill development. This is an area where we invest in our core portfolio to drive attractive returns through growth in NOI and NAV growth and will be a continued area of focus. We are repatriating a significant amount of capital to our balance sheet. We expect approximately $1.3 billion to $1.4 billion of capital from the sales of residential rental buildings and pre-sold condos over the course of 2025 and 2026. So far this year, we have brought in nearly $500 million of capital. $314 million in total asset sales, of which $250 million has been from the sale of 5 residential assets sold so far this year, bringing the total sold to 6 buildings with the sale of a number of others in process. $163 million is from condo closings, resulting in a repayment of $128 million of construction loans and the removal of $323 million of guarantees. We expect the remaining condo units at the end of the year to be valued at approximately $130 million, which is an insignificant amount in the context of RioCan's balance sheet, putting this program materially behind us. As a result of this and other initiatives, our credit metrics have continued to improve. Our adjusted spot debt to adjusted EBITDA improved to 8.8x solidly within our target range of 8x to 9x. Our unencumbered asset pool grew to $9.3 billion. Our ratio of unsecured debt to total debt was 64%, and our liquidity was $1.1 billion. Our balance sheet provides us with financial flexibility to take advantage of opportunities as they arise. As I conclude my remarks, it is important to mention that our results are driven by our best-in-class platform. This includes our team of very talented and hard-working people. Our team has always utilized data that we collect from our vast portfolio to make decisions. Over the past few years, we have been upgrading our ability to leverage this data through the implementation of a new ERP system, migrating our systems to the cloud and employing analytical reporting and tools. This ensures that our teams have the best information and analysis available as they execute our strategy, whether it be negotiating a lease, investing in a retail infill project, or buying and selling assets, we ensure that the relevant data is available and the collective knowledge of our organization is brought to bear. We apply a continuous improvement mindset to ensure that we optimize the tools available to our people driving efficient processes and effective decision-making. With that, I will turn the call over to the moderator for questions. Operator: [Operator Instructions] Our first question comes from the line of Sam Damiani with TD Securities. Sam Damiani: Lots going on here at RioCan, and it's exciting to see in the next couple of years. I just wanted to start off. I think Jonathan or Dennis, one of you mentioned sort of numerous capital allocation opportunities in front of you right now. I wonder if you could be a little bit more specific in terms of what you're seeing and I guess, how much capital could be allocated? Jonathan Gitlin: Thanks, Sam. Good morning to you and thanks for joining the call. We are going to elaborate quite a bit more on that at our Investor Day. So I don't want to put too much emphasis on it today, just leaving something to talk about when we see you next -- in 2 weeks from now. But I'll give you the most obvious ones. Right now, the opportunities that are highly accretive and also beneficial, our infill development in our retail scope. So really looking at properties that we own where there is existing retail and we can make it better through the creation of additional retail pads and strips, and we're now in a position where the rents justify the expense of building out those additional square footage. And then the other is obviously NCIB, which we participated in the past. Given where our stock or where our units are trading relative to NAV and what we feel is an immediate FFO, return on FFO, we feel it's a pretty obvious place to place money. In addition, of course, there's paying down debt. Those are the 3 pillars, I'd say that we're focused on most, but there are many ancillary ones that we're also focused on, and we're going to elaborate on at the Investor Day. Dennis, do you have anything to add to that? Dennis Blasutti: No, I think that's right. And I think what's also important is to just note what Jonathan didn't mention, which is we're winding up our mixed-use development program. That's just not a priority for us right now in terms of any large construction at scale. So yes, I would agree, putting money back into our own portfolio, retail portfolio is a great use of capital right now, and it's hard to ignore the stock price. Sam Damiani: Okay. Great. And I look forward to November 18. Next -- my second question is on, I guess, the fair valuing -- the fair value changes you detailed on the quarter. I just want to be clear, the $90-odd million taken on the density assets, like what does that leave on the balance sheet for sort of excess density value recognized in your fair value? Dennis Blasutti: Yes. So I'm just trying to look at the number here. There is still value on a -- for some of the zoned square footage. I'm just kind of go into it here. We have -- our value in [indiscernible] is about $700 million, about $180 million of that is under construction site. So if I kind of do the math quick here, it's just, call it, a little over $500 million of total density value still on the balance sheet. When you kind of put that against almost 20 million square feet of zone density, it's a pretty low value on a per square foot basis. Operator: Our next question comes from the line of Brad Sturges with Raymond James. Bradley Sturges: Just focused on the core commercial portfolio, obviously, pretty strong results you continue to see there. Just curious, the renewal rent spreads continue to improve even with a higher proportion of fixed rate options. Do you think you've kind of hit a peak at that point? Or how do you expect your rent spreads to trend over the next few quarters? Jonathan Gitlin: We preached in the prepared remarks about the sustainability of the conditions. I can't predict precisely where our renewal spreads will be, but we do think it's going to be a strong market for landlords like RioCan, given the strength of our portfolio going forward. I don't see a catalyst to change these conditions in the near or medium term simply because there is no new supply, and we recognize that the tenancies that we're dealing with are typically very much in growth mode. So we really do see the ability to continue achieving solid rent spreads. We're not providing specific guidance at this point, but we have said in the past mid-teens, and that's, again, a pretty comfortable spot. And so I think it's -- if you look at also the opportunity set, as I mentioned in my prepared remarks, we've got over 10 million square feet that will be up for renewal over the next 3 years on a pretty consistent basis. And there's a significant mark-to-market. I mean if you look at the rents that we wrote in Q3, they were over $29 and that compares favorably to the average rents we have across our portfolio, which is in the $22.50 range. So that's about a 30% range that we feel very capable of bringing in through a strong renewal process. Bradley Sturges: Sounds good. And just a follow-up to that. Just with respect to next year's expiries, is there anything that stands out in terms of anomalous or would be unique or would be pretty similar to what you experienced in 2025 and you kind of see that consistent results going forward for next year? Jonathan Gitlin: Yes. I mean the beauty of scale, Brad, is that we really -- we have so many properties with so many tenancies. And even if there is 1 or 2 larger renewals coming up that might be like a Walmart renewal with a flat provision, it's offset by so many other renewals that don't have flat provisions or they go to market. So there might be 1 or 2 larger or 3 or 4 larger tenants that will come up for renewal that might be a little bit flat. But again, in the scheme of things, they won't change our guidance or outlook. I'll look to John Ballantyne just to see if I've missed anything there. John Ballantyne: No, you haven't, Jonathan. And I would also add, again, we're going to sound like a broken record, but we are going to unpack this a little more in our Investor Day in 2 weeks, namely where we think the market -- what the actual mark-to-market spread is in our existing leases and how that's going to unfold in the same-property revenue over the next 3 years. Operator: Our next question comes from the line of Mario Saric with Scotiabank. Mario Saric: Just a really quick one on HBC and specifically the Ottawa location. It seems like it's the one asset where plans are still forthcoming. Do you have a sense of the timing of clarity on that asset? Jonathan Gitlin: Thanks, Mario. There is no defined time line at this point. We've got a few different options that we are exploring, and we endeavor to keep everyone apprised of how those unfold. But again, as we've always committed, we're not going to put any significant capital into these assets unless there is a logical return that competes with our other capital allocation opportunities. Mario Saric: Okay. And then shifting gears just again, real quickly to RioCan Living. Any notable quarter-over-quarter change in terms of asset buyer sentiment? We've heard from some peers in terms of the beginning of some institutional interest coming into the multifamily space. So as it pertains to RioCan Living, are you sensing any incremental demand? And how does that change the time line in terms of selling off the asset? Jonathan Gitlin: Time line is still intact. I would say that the demand for our new builds, no rent control, limited CapEx residential portfolio has been consistent throughout. I don't think there's been significant ebbs and flows in the demand for them. In terms of the profile of buyers, again, we haven't really seen much of a change. We've had a pretty wide spectrum of buyers or interested parties thus far, and that hasn't changed. So the time line hasn't changed nor has the outlook, which is favorable and positive for the disposition of the remaining assets. Andrew, anything to add there? Andrew Duncan: No, John, I think you captured it. As you said, we've got bid depth in both institutional and private and we remain confident in our goal. Mario Saric: And just last question. As it pertains to the Investor Day, I'm not asking what you may disclose, but is the retail environment today and your confidence level in the portfolio today such that you feel comfortable disclosing 1-year, 3-year targets on some of the key metrics such as FFO, same-store NOI, et cetera? Jonathan Gitlin: Yes. We're going to give some pretty thorough outlooks. I think it would be a letdown at Investor Day if we didn't. So we will certainly leave you with a good outlook on the next few years. Operator: Our next question comes from the line of Michael Markidis with BMO. Michael Markidis: Congrats on the strong core portfolio results. Just wondering if you'd help us think about property management and other service fees and interest income have been a fairly significant contributor to your business on the earnings side over the last couple of years, and it is starting to moderate. How should we think about the trajectory of those 2 line items going forward? Will it continue to moderate as development winds down, the interest income, I imagine there's a bit of a rate component there, probably a little bit less capital invested. Just anything you can do to help us with those line items would be helpful. Jonathan Gitlin: Sure. I'll start, and I'll turn it over to maybe Dennis. . I think they will continue to moderate just in the sense that we have slowed down development and a large component of those fees came from development and management on behalf of others. In terms of property management fees, we have a set of properties that are co-owned and we are always the manager for those. Whether the number of co-owned properties increases or decreases, I think it will be a marginal component of those fees going up or down. So I don't think there will be much to add there. But we are an entrepreneurial organization. We are always looking at ways to continue to use the strength that we have one of those strengths is a very strong platform at RioCan. And so we look to -- at opportunities to utilize that to create fee income. But it's hard to predict at this point what exactly those will be and how much they will be for. So I think you would be appropriately suited just to keep things sort of on a level trajectory going forward. Dennis, I don't know if you have any further comments on that? Dennis Blasutti: Yes. No, I would agree with that. I think -- and I mentioned, I think, in my prepared remarks, there was a decline related to development management fees and interest income associated with some VTBs on condo properties. So I think that is going to moderate and sort of level out. The property management fee should be pretty level on that one. Michael Markidis: Okay. And one of the other fee components, I guess, has been a strong contributor over the past couple of years has been the financing arrangement fees. Like how do we think about that going forward? Is that similar to the development pipeline? Or is that related to other activities? Dennis Blasutti: I would say it would level off a little bit as well because it was related somewhat to development. We do occasionally do mortgages on behalf of properties that are co-owned, which will add a bit of fees here and there, but not -- I don't see that as a meaningful contributor going forward. Operator: Our next question comes from the line of Matt Kornack with National Bank of Canada. Matt Kornack: I was wondering if you could just help a little bit on bridging kind of the current quarter to future quarters in terms of HBC more in line with kind of any incremental capital deployment related to the, I guess, 3 assets that you own and the NOI generation. What would maybe be in this quarter versus what will be in future quarters considering more of those income-producing assets? Jonathan Gitlin: Dennis? Dennis Blasutti: Yes, sure. So on the 3 assets that we're backfilling, we had given a guidance range of about $100 to $125 per square foot, equates to approximately $25 million in total for capital outlay on those. So that's the number there. We had messaged that we would see -- we had about $0.08 of FFO coming in from HBC -- in total, that was going to go away. We'll claw back some of that with the acquisition of Georgian and Oakville and the backfills, probably about $0.01 in 2026 and then about $0.02 in 2027 as the tenancies ramp up. Matt Kornack: Okay. That's helpful. And then just on the nonrecoverable operating costs, they've been a little elevated this year starting in, I guess, Q4 of '24. Is that onetime in nature? Or is that a change in kind of the portfolio composition? Just trying to understand where those should head over the next year. Jonathan Gitlin: John, do you have a thought on that? John Ballantyne: Yes, I actually don't, Matt. We'll take a better look at that and get back to you with an answer. Operator: There are no questions registered at this time. [Operator Instructions] All right, I am showing no further questions at this time. I would now like to pass the conference back to President and CEO, Jonathan Gitlin. Jonathan Gitlin: Thank you, everyone, for dialing in. We will look forward to seeing you at our Investor Day coming up in 2 weeks. Operator: Thank you for your participation. You may now disconnect your lines.
Operator: Good day, and thank you for standing by. Welcome to the Brookfield Asset Management Third Quarter 2025 Conference Call and Webcast. [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, Jason Fooks, Managing Director, Investor Relations. Please go ahead. Jason Fooks: Thank you for joining us today for Brookfield Asset Management's earnings call for the third quarter of 2025. On the call today, we have Bruce Flatt, our Chief Executive Officer; Connor Teskey, our President; and Hadley Peer Marshall, our Chief Financial Officer. Before we begin, I'd like to remind you that in today's comments, including in responding to questions and in discussing new initiatives and our financial and operating performance, we may make forward-looking statements, including forward-looking statements within the meaning of applicable U.S. and Canadian securities laws. These statements reflect predictions of future events and trends, and do not relate to historic events. They're subject to known and unknown risks and future events and results may differ materially from these statements. For further information on these risks and their potential impact on our company, please see our filings with the securities regulators in the U.S. and Canada, and the information available on our website. Let me quickly run through the agenda for today's call. Bruce will begin with an overview of the quarter and the market environment. Connor will walk through key growth initiatives across each of our businesses. And finally, Hadley will discuss our financial results, operating results and balance sheet. After our formal remarks, we'll open the line for questions. [Operator Instructions] One last item to mention is that the shareholder letter, which this quarter will be a single letter covering the biggest themes across Brookfield will be published Thursday morning alongside Brookfield Corporation's earnings. And with that, I'll turn the call over to Bruce. Bruce Flatt: Thank you, Jason, and welcome everyone. We are pleased to report another strong quarter for our business, marked by record fundraising, earnings deployment and monetization. Quarterly fee-related earnings grew 17% over the past year to $754 million. Distributable earnings grew 7% to $661 million, and fee-bearing capital reached $581 billion, an 8% increase year-over-year, all driven by our strongest fundraising period ever. These results reflect the strength of our franchise and the benefits of our global scale diversification and long-term client partnerships. Our business continues to benefit from the major themes shaping the global economy. The acceleration of AI and data digital infrastructure, the accelerating demand for electricity and the improving strength in the real estate markets, each of these themes plays directly to our strength as an owner, operator and investor in real assets and together, they are fueling multiyear growth across the business. In the third quarter, we raised $30 billion, bringing total inflows over the past 12 months to more than $100 billion. This was our highest pace of organic fundraising ever. Our fundraising in the quarter came from strong closes for two of our flagship funds, and increasing capital from our comp to entry funds and partner manager strategies. Our flagship global transition fund, our venture-focused Pinegrove strategy and our music royalties-focused Primary Wave business, all had closed just recently and each exceeded its target. Turning to the broader market environment. Transaction conditions have improved steadily throughout the year. The global economy remains resilient despite trade and tariff uncertainty. Corporate earnings are healthy. Capital markets are liquid, and the Federal Reserve has begun lowering rates. This is giving the market more confidence and leading to transaction activity significantly increasing. Global M&A volumes are up nearly 25% year-over-year. The third quarter alone saw $1 trillion of announced deals, the highest level since 2021. This resurgence in large cap M&A and a record backlog of sponsor-owned assets are therefore fueling activity. This is creating a good environment for both deployment and also asset sales. We remained active in this environment, deploying large-scale capital at attractive entry points where operating expertise provides us a competitive edge, while also crystallizing value from our mature investments at attractive returns. Our ability to recycle capital efficiently, returning proceeds to clients while raising new funds for the next generation of opportunities is fundamental to how we compound value over time and continue to consistently grow our business. Another important milestone was our recently announced agreement to acquire the remaining 26% in Oaktree Capital Management. As you know, one of the most respected names in global credit investing. When we partnered with Oaktree 6 years ago, the goal was to combine our global scale and real asset expertise with Oaktree's deep credit experience and value-oriented culture. That partnership exceeded expectations, enabling the rapid expansion of our credit platform, supporting the launch of Brookfield Wealth Solutions, and driving a 75% increase in Oaktree's asset base. Bringing Oaktree fully into Brookfield is the next natural step. It combines the scale and reach of our nearly $350 billion credit platform, enables deeper collaboration across our businesses from origination and underwriting to distribution and analytics. Most importantly, it enhances our ability to deliver the full breadth of Brookfield's credit capabilities to clients. Turning briefly to overall credit markets. Liquidity remains ample, and spreads in both public and private markets are near historically tight levels. Certain pockets of private credit such as middle market, direct lending and sponsor-backed leverage have become more commoditized as large amounts of capital is raised for a small pool of attractive deals. We've been disciplined in avoiding these segments of the market and instead of focused on attractive risk-adjusted return opportunities where we have strong competitive advantage, such as infrastructure, renewable power, asset-based finance strategies and opportunistic credit. Across our business, our ability to raise large-scale capital deployed strategically across the megatrends and deliver risk-adjusted returns to trusted clients continues to drive record results. Our balance sheet is extremely solid. Our margins are expanding and double-digit growth trajectory is sustainable. With record fundraising momentum, deep deployment pipelines and healthy monetization activity across our platforms, the foundations we've built over the past years have set the stage for an even stronger 2026. With that, I'll turn the call over to Connor, and thank you for the results. Connor Teskey: Thank you, and good morning, everyone. As Bruce mentioned, this past year was the most active period in our history across fundraising, deployment and monetizations. Our infrastructure and renewable power franchise is one example of this momentum, as over the past 12 months, we've raised $30 billion, deployed $30 billion and monetized over $10 billion at approximately 20% returns, demonstrating strength, scale, and consistency of our platform. Our franchise is the largest and most established globally, serving as a cornerstone of our business and a key driver of long-term growth. Deployment is centered around sizable investments across all sectors, geographies and positions in the capital structure, including by utilities, from a controlling equity investment for an industrial gas business in South Korea, and a minority equity investment in the United States for Duke Energy Florida, across transportation, via structured equity investment in a Danish port, across data with a mezzanine financing for a European stabilized data center portfolio, and across renewables, by an equity investment in a South American hydro platform, and to take private of a global renewable developer concentrated in France and Australia. And finally, across our first AI infrastructure deal with Bloom Energy, which we committed to this past quarter. AI promises unprecedented improvements in productivity but it is simultaneously driving an unprecedented demand for infrastructure, from data centers and power generation to compute capacity and cooling technologies. We estimate that AI-related infrastructure investments will exceed $7 trillion over the next decade. Brookfield's unique position, owning and operating across the full energy and digital infrastructure value chain gives us a tremendous advantage in capturing this opportunity. On the back of this generational investment opportunity, we are launching our AI infrastructure fund. A first-of-its-kind strategy that pulls together our global relationships with hyperscalers, our expertise in real estate, and our leading position in infrastructure and energy into one strategy. With the goal of being the partner of choice to leading corporates, governments and other stakeholders looking for integrated solutions that combine development capability, operating expertise and large-scale capital. We are also preparing to launch our flagship infrastructure fund, which is our largest strategy at Brookfield early next year. Looking ahead, we expect to have all of our infrastructure strategies in the market in 2026, including our flagship infrastructure fund, our AI infrastructure fund, our mezzanine debt strategy, our open-ended super core and private wealth strategies. And in the back half of the year, we expect to launch the second vintage of our Infrastructure Structured Solutions Fund. As a result, despite raising $30 billion over the last 12 months, we expect next year will be even bigger. Within renewable power, this quarter, we also held the final close of the second vintage of our global transition flagship at $20 billion, making it $5 billion larger than its predecessor and the largest private fund ever dedicated to the global energy transition. The success of this fund raise also reinforces the scale, credibility and momentum of our energy franchise. Since launching our first ever transition strategy less than 5 years ago, our platform now produces over $400 million of annual fee revenues. More important, we are investing into an environment that is highly attractive and increasingly constructive for us. Global demand for electricity is increasing at an unprecedented rate. This is the result of the ongoing trend of electrification as large sectors like industrials and transportation are increasingly electrifying. And this growth has now been supercharged in recent years by the surge in electricity demand from data centers to support cloud and AI growth around the world. Data centers are becoming some of the largest single consumers of electricity and the scale of new generation required to support them is immense. Each of these forces is contributing to a structural shortage of generation capacity. To put it plainly, the world needs more power, and it needs it faster than ever before. Our business is uniquely designed to meet this challenge. We are positioned to provide that any and all power solutions that will be necessary to meet this need. Our leading renewable power business can provide the low-cost wind and solar solutions needed to meet this increasing demand. Renewables continued to see significant growth due to their low-cost position, but also their ability to win on speed of deployment and energy security, as they do not rely on imported fuels. And in a world where baseload power and grid stability are increasingly important, in addition to renewables, we have leading platforms in hydro, nuclear and energy storage, all of which play a critical and growing role for electricity grids, both independently and as complement alongside natural gas and renewables in the energy mix. In this regard, we are very pleased to announce, last week, a landmark partnership with the U.S. government to construct $80 billion of new nuclear power reactors using Westinghouse technology. The agreement reestablishes the United States as a global leader in nuclear energy and positions Brookfield at the center of a historic build-out of clean baseload power, creating one of the most compelling growth opportunities across our transition platform, and potentially one of the most successful investments in Brookfield's history. Within our private equity business, we recently launched the seventh vintage of our flagship private equity strategy, which focuses on essential service businesses that form the backbone of the global economy. These include industrial, business services and infrastructure adjacent companies where we can apply our operational expertise to drive efficiency, productivity and scale. Early investor feedback for this strategy reflects a growing recognition that value creation in the current environment is driven less by multiple expansion or financial engineering, and more by hands-on operational improvement, an approach that has long defined Brookfield's success. While many traditional buyout strategies are navigating slower fundraising cycles, we continue to be differentiated. We have consistently returned capital at strong returns from preceding vintages, and are seeing strong demand for our differentiated, operationally focused model. We expect this next vintage to be our largest private equity fund ever. We are also bringing our private equity strategy to the private wealth channel with the recent launch of a new fund structured for individuals. Similar to how we structured our successful private wealth infrastructure fund, this new private equities fund will be able to invest alongside all of our private equity strategies. This means that targeting individual investors in the retirement market does not require us to invest differently, but rather simply package our current investment activity in a different way to meet the growing demand from a new set of clients. Within real estate, we continue to see strong momentum across our property business. Market conditions have improved meaningfully. Transaction volumes are rising, capital markets are robust and valuations for high-quality assets are firming. We are actively monetizing stabilized assets, selling approximately $23 billion of properties, representing $10 billion of equity value over the past 12 months. At the same time, it is an excellent point in the cycle to be deploying capital into certain segments of the market, and we have significant dry powder to put to work following the successful close of our latest flagship real estate fund, our largest real estate strategy ever. The combination of limited new supply, recapitalization needs and improving sentiment is creating one of the most attractive investment environments we've seen in years. We are also taking advantage of the constructive financing backdrop to strengthen our long-term holdings, including the $1.3 billion refinancing of 660 Fifth Avenue in Manhattan, part of the over $35 billion of real estate financings we've closed year-to-date. And finally, on our credit business, we will make a few additional points. We continue to see a large opportunity set to invest in the areas that fit our core competencies. The themes driving our equity businesses will require significant debt capital investment and Brookfield is well suited with its expertise and capital to meet that need, whether it be in real asset, opportunistic or asset-backed finance. As we look ahead to the rest of the year and into 2026, we see the market continuing to be strong for our business. Capital markets remain healthy. Liquidity is abundant, and the opportunity set across our businesses continues to expand. The flagship strategies we are launching will continue to anchor our growth while our complementary products, including our AI infrastructure fund, and our rapidly scaling fundraising channels such as wealth and insurance, are diversifying our platform and driving our consistent high-teens growth rates. The secular forces shaping the global economy, digitalization, decarbonization and deglobalization are the same themes that have guided our strategy for many years. Today, they are accelerating. As these trends converge, Brookfield's global reach, operating depth and access to long-term capital position us well to continue leading the industry. With that, we'll turn the call over to Hadley to discuss our financial results, record quarterly fundraising and balance sheet positioning. Hadley Peer Marshall: Thank you, Connor. Today, I'll provide an overview of our third quarter financial results, including additional color around $30 billion of fundraising, our recent M&A activities, and the strategic positioning of our balance sheet. As previously mentioned, we delivered another record quarter of earnings, driven by strong fundraising, deployment and monetization. Fee-bearing capital increased to $581 billion, up 8% year-over-year. Over the last 12 months, fee-bearing capital inflows totaled $92 billion, of which $73 billion came from fundraising and $19 billion came from deployment of previously uncalled commitments. In the third quarter, fee-bearing capital grew $18 billion, driven in large part by the final close of the second vintage of our global transition flagship fund and continued strong capital raising and deployment across our complementary strategies. Fee-related earnings were up 17% to $754 million, or $0.46 per share, and distributable earnings were up 7% to $661 million, or $0.41 per share. Distributable earnings growth reflected higher fee-related earnings, partially offset by increased interest expense from the bonds we issued over the past year and lower interest and investment income. Overall, growth was driven by a record $106 billion raise over the last 12 months and record deployments of nearly $70 billion. This activity has been a major catalyst for our business and we will continue to be active on the deployment front given strong investment opportunities in front of us. The simplicity and consistency of our earnings anchored almost entirely in reoccurring fees, gives us a strong foundation to continue to build from, especially as we continue to further our capital base and launch new strategies. Lastly, our margin in the quarter was 58%, in line with the prior year quarter and 57% over the last 12 months, up 1% from the prior year period. This margin increase was driven by three offsetting dynamics. First, we continue to acquire a greater portion of our partner managers. These businesses have lower margins, and therefore, while these acquisitions are highly accretive acquisitions, they do weigh a bit on our consolidated margin. Second, Oaktree margins are temporarily lower than usual. At this point in the cycle, Oaktree is returning significant capital, but has not yet called capital for some of its deployment, leading to a natural reduction in fee-related earnings and margins. That trend will reverse as it has in the past given the strong growth in the business. Finally, our margins on our core business continued to increase as expected, more than offsetting these dynamics. Turning to fundraising. In total, we raised $30 billion of capital in the quarter, bringing our 12-month total to $106 billion. Over 75% of that capital came from complementary strategies, reflecting the breadth, strength and diversification of our offerings, which allows for sustained fundraising momentum in addition to our flagship cycle. As for our flagships, we also raised $4 billion for the final close of our second global transition flagship, bringing the strategy size to $20 billion. We continue to raise capital for the fifth vintage of our flagship real estate strategy, bringing in $1 billion from SMAs, regional sleeves and private wealth for the quarter with $17 billion being raised to date for the entire strategy. Within our Infrastructure business, we raised $3.5 billion, including $800 million for our private wealth infrastructure vehicle, bringing our year-to-date total for the fund to $2.2 billion. In our private equity business, we raised $2.1 billion, including a total of $1.4 billion for 2 inaugural complementary funds, our Middle East private equity fund and our financial infrastructure fund. Subsequent to quarter end, we held a final close for the inaugural Pinegrove opportunistic strategy for $2.5 billion, exceeding its initial target and ranking among the largest first-time venture growth, or secondary fund ever raised. And finally, on credit, we brought in $16 billion of capital across our funds, insurance and partner manager strategies. This included over $6 billion across our long-term private credit funds, including $800 million for the fourth vintage of our infrastructure mezz credit strategy, which has raised more than $4 billion for its first close. We also raised $5 billion from Brookfield Wealth Solutions, including an SMA agreement with a leading Japanese insurance company, marking its first entry into the Japanese insurance market, which should be the first of more to come. As we head towards the end of the year, we're confident this will be our best fundraising year ever, and we see that trend continuing with strong momentum for 2026. Broadening the scope to the next 5 years, we recently laid out our plan to double the business by 2030 at our Annual Investor Day hosted in New York. We outlined our plan to continue expanding our product offerings by scaling existing offerings and launching new ones, diversifying our investor base, including across Europe, Asia, middle market and family offices, and on the retail side by launching new private wealth related products. These drivers should enable us to double our business over the next 5 years with fee-related earnings reaching $5.8 billion, distributable earnings reaching $5.9 billion, and fee-bearing capital reaching $1.2 trillion. However, our business plan does not include certain additional growth opportunities such as product development, M&A associated with our partner managers, and opening up of the 401(k) market opportunity, which gives us multiple paths to outperform and to deliver over 20% annualized earnings growth. Turning now to our balance sheet. In September, we issued $750 million of new 30-year senior secured notes at a coupon of 6.08%, extending our maturity profile and diversifying our funding sources. We also increased the capacity of our revolver by $300 million to provide additional flexibility as our business continues to grow. At quarter end, we had $2.6 billion in liquidity, a strong liquidity position. We use our balance sheet selectively to seed new products and support strategic partnerships, such as closing the acquisition of a majority stake in Angel Oak and signing the acquisition of remaining 26% of Oaktree that we currently do not own, both of which occurred after the quarter. On Oaktree, we will invest approximately $1.6 billion to acquire their fee-related earnings, carried interest in certain funds and related partner manager interest. Upon close, it will create a fully integrated leading global credit platform with significant scale and capability. The transaction is expected to close in the first half of 2026 and is subject to customary closing conditions, including regulatory approval. Lastly, we declared a quarterly dividend of $0.4375 per share payable December 31 to shareholders of record as of November 28. In closing, we are confident in our trajectory towards achieving our long-term growth goals. The breadth of our platform, our operational expertise and our global scale continue to give us a clear advantage. Our strategy is aligned with the strong tailwinds of digitalization, decarbonization and deglobalization and we're expanding in areas where these trends intersect AI infrastructure, energy transition and essential real assets. Thank you for your continued support, and we're ready to take questions. Operator: [Operator Instructions] Our first question comes from the line of Alex Blostein with Goldman Sachs. Alexander Blostein: I was hoping we could start maybe with the commentary around fundraising momentum in the business you're seeing into 2026. A number of pretty robust verticals. But at the same time, it sounds like monetization outlook is also picking up. So maybe help us frame what that could mean for management fee growth as you look out into 2026? So maybe we could start there. Bruce Flatt: Thanks, Alex. We're very excited about 2026. Maybe if we can start with fundraising. For 2025, I think we guided that fundraising would exceed 2024's levels ex AEL of $85 billion to $90 billion. Through 3 quarters, we're at $77 billion and expect to meaningfully exceed that target. As we look forward to 2026 with our infrastructure and flagship -- infrastructure and private equity flagships in the market with a bumper year expected in infrastructure fundraising with the closing of Just Group, and the continued growth in our partner managers and complementary strategies, we very much expect 2026 to exceed the levels we'll achieve in 2025. And then when you turn that towards FRE growth, we expect to maintain our momentum and either reach or exceed what has been laid out in our 5-year plan. And this is really driven by two things. One, with the addition of Oaktree, Just Group, Angel Oak, those transactions will add almost $200 million to our FRE on a run rate basis going forward. And then when you add the run rating of the growth in 2025 rolling through our numbers in 2026, and the expected growth just laid out from new fundraising in 2026, we expect next year to be a very strong year. Operator: Our next question comes from the line of Sohrab Movahedi with BMO Capital Markets. Sohrab Movahedi: I just wanted to focus just a little bit on the credit business, if we can. Obviously, an important source of fee-bearing capital growth as part of the 5-year plan. This quarter, the fee rate, the blended fee rate, if I look at the fee revenues relative to the private credit, or the total credit I should say, funds was a bit higher than what we're used to seeing. Can you just talk a little bit about what was the driver of that, if that is a new rate we're looking at, if the fee rate is a little bit higher? Is that consistent? Or is that a one-off? And then there's just private credit has been a little bit more in the headlines. Just curious to kind of get a sense of how you think about it relative to your business and the growth aspirations that you have especially coming from credit? Bruce Flatt: Perhaps I'll start, and then I'll hand to Hadley. In terms of the slightly elevated fee rate this quarter in terms of private credit, it's really driven by two things. Our private credit business continues to evolve as the mix shift within our business adjusts through the transactions and the increasing ownership of our partner managers. And what we would say is on a blended basis, our fee rate is going up marginally. We will acknowledge that particularly within our Castlelake business that is performing very well, there was an outsized quarter with some one-off transaction fee revenue that is creating a little bit of upside in this quarter's numbers, but that shouldn't detract for a broader positive trend that we're seeing across our credit business. Hadley Peer Marshall: Yes. And I'll just talk a little bit about how we're seeing credit more holistically. I mean, there have been a few high-profile credit events in the market. And what we're seeing across our portfolio, and the broader credit trend, is that these events are very isolated and not a sign of a broader credit cycle. And if you actually look at our portfolio, we don't have any relevant exposure to these issues. But when we think about our portfolio, our area of focus has really been heavily around real assets, asset-backed finance, opportunistic. And these are where we have expertise around the structuring, the underwriting of the sectors, the sourcing capabilities and then, of course, our scale. And we've been less focused around the more commoditized part of the private credit market related, especially around direct lending. The one point I would probably also add though, is that if there was a broader credit cycle, that plays to our strength with our opportunistic credit strategies. So overall, we feel really good about our positioning. We have a large, diversified and differentiated platform around our credit business, and that's built for growth and resiliency across the market cycles. And we'll only benefit with the integration of Oaktree. Sohrab Movahedi: Hadley, if I can just ask one quick follow-up on that. Given the pleasant surprise, for example, this quarter, as minor as it was, came out of one of the partner managers that you own. Like is there a potential for negative surprises, I suppose, to come from the partner managers as well? And can you dimension what sort of risk management, I suppose, is in place to color that? Hadley Peer Marshall: No, we don't see that. And it goes back to the area of focus. If you think about our expertise around real assets and the areas within asset-backed finance that we focus on, that's critical because we're doing the due diligence. We've got collateral. We've got strong structures in place, and look, low default rates and high recovery rates. And so that puts us in a really good position. That's why we like that part of credit. Operator: Our next question comes from the line of Cherilyn Radbourne with TD Cowen. Cherilyn Radbourne: With regard to the pending buy-in of the Oaktree minority stake, can you talk about some of the things that you'll be able to do together as a combined company that you can't do today as a majority owner? Bruce Flatt: Thanks, Cherilyn. We're thrilled about the transaction that we've announced with Oaktree. And really what it allows us to do is accelerate the combination of the businesses and unlock the benefits of integrating two leading institutions. And maybe to simplify it, we would say the low-hanging fruit near-term upsides are really in three places. One will be almost instantaneously on closing. Oaktree had its own subsidiary balance sheet. We can immediately collapse that. That's much more efficient for us from a financing perspective. Even further within that balance sheet, there are a number of securities and investment positions, that under Brookfield Asset Management's asset-light model. We will actually monetize those positions and use them to fund a very large portion of our purchase price, making that transaction highly, highly accretive. The second opportunity is really just around operating leverage. When it comes to fund operations, administration and back office, there's tremendous synergies in operating leverage as both our businesses continue to grow from combining our combined capabilities, and that really is a scale business and putting the 2 institutions together will unlock a lot of value. And then the last one is absolutely the most important. And it's the ability to see upsides in our marketing, our client service and our product development. Our ability to combine the power of the 2 organizations in terms of the products and solutions and partnerships that we can offer to our clients, we think, is going to be unmatched. And this is particularly valuable for serving the growing portions of the market, whether it be insurance companies and individual investors going forward. Maybe just on a closing note, the team at Oaktree has been our partners for the last 6 years, and this just takes that partnership to a whole another level. Howard Marks is on the Board of BN. Bruce Karsh is going to go on the Board of Brookfield Asset Management. And it's early days, but our interactions with Armen, Bob, Todd and the fantastic team at Oaktree, we already expect this integration to be far better than we initially hoped. Operator: Our next question comes from the line of Bart Dziarski with RBC Capital Markets. Bart Dziarski: I wanted to touch on the retail theme. So you talked about the infrastructure wealth product and the momentum there and then the PE evergreen strategy, I think that's in the market now. So one theme, but two parter. Just can you give us a sense of the early indication that you're seeing these products and the momentum into next year? And then just a reminder of the distribution strategy as you build these products out into next year? Bruce Flatt: Thank you. I think it goes without saying that the momentum we're seeing in the individual market is very robust. And again, that we will highlight, we view this as a market, the broader individual market, that's your high net worth and your retail investor, that's your annuity and insurance policyholder, that's your 401(k) and your retiree market. We view this as a very significant market opportunity that will continue to grow incrementally for the years and candidly decades to come. In terms of where we're seeing growth opportunities in the near term, we are launching new products into this market. We just recently launched our private equity product for the retail channel. That launched just recently and started with an incredibly successful launch in Canada and is now launching in the U.S. And our expectation is that's really the equivalent to our infrastructure product for the retail market. We expect the private equity product to scale even faster than our infrastructure product has. And therefore, we continue to expect this to be an increasing portion of our growth in earnings going forward. Bart Dziarski: And sorry, just on the distribution strategy? Bruce Flatt: Certainly. So I think there's two key components there. In terms of distribution into the individual market more broadly, the winners in this market are largely going to be driven by who has the track record, the scale and the credibility. And as a result of that, we are seeing the significant opportunity to get our products placed onto the leading bank distribution platforms around the world for that near-term market opportunity in retail. As we think ahead more broadly to other components of the individual market, in particular, the 401(k) and the retiree market. At this point, we are preparing our business for that very significant opportunity, making sure we have the right relationships and the right partners with all the stakeholders in that space. That's the advisers, that's the plan administrators, that's the consultants, that's the record keepers. And there's a significant effort within Brookfield. And we feel, given our focus on real assets that lends itself well to that growing market, we feel we're very well positioned. Operator: Our next question comes from the line of Craig Siegenthaler with Bank of America. Craig Siegenthaler: So our question is on corporate direct lending, both IG and non-IG. From your prepared commentary, it sounds like you're less constructive on the investment opportunity today versus some of what your peers are saying due to intensifying competition. However, when you take a step back, it looks like aggregate LTVs are still pretty low and the spread to publics are still pretty rich. And with the cash yields declining now with Fed rate cuts, the relative attractiveness to retail insurers and institutions should still be there. So my question is, what am I missing here besides the gaining share of private credit versus BSL and high yield? Connor Teskey: So Craig, great question. And maybe just to put some context around this, let's come at it from a few different ways. On a more general basis, we believe private credit for various reasons has become, and will continue to be a very important component of global finance, and it's going to continue to grow beside bank credit and other liquid sources. And that growth is very robust, and it's not short term in nature. It's going to be enduring for the long term. In terms of today within the market, where are we seeing the most attractive returns on a risk-adjusted basis? Obviously, every investment is specific. But broad-based, we're seeing tremendous -- we're seeing a very strong premium in particular, in credit related to real assets, infrastructure and real estate credit and certain components of the asset-backed finance market. I think the comments that you are referring to is there have been a significant amount of capital poured into the direct and corporate lending market. And in some places, we are seeing spreads very compressed. And in other places, we're seeing a little bit of covenant degradation due to the competition to secure some of those lending mandates. Obviously, that is specific on a case-by-case basis. But in general, what we are trying to do is avoid the most commoditized components of the market and really focus to where we're getting that attractive spread premium, and where we can preserve our covenant positions the way we have in the past. But I appreciate the question because what we would not want you to interpret is that we think private credit is slowing down. It is a very large and growing and enduring part of the financial system going forward. Craig Siegenthaler: Thanks, Connor. I have a follow-up on the credit business, and I think you covered a little bit earlier, but I was bouncing around between two calls. But management fees in the credit business went up a lot faster than average fee-bearing AUM. And I know Castlelake went in there. So maybe that had some lumpiness in there. But we still have the fee rate up 10% on the average fee-bearing AUM base. So were there any lumpy items in the revenue side that we should back out? And also, I don't think you hit this part, but were there any lumpy items in the expense side of the credit business? Because sometimes a lumpy revenue item might correlate with an expense item. So we just want to make sure we get the P&L run rate correct as we walk into 4Q here. Connor Teskey: Sure. And it's pretty simple. Thank you again for the question. The outsized growth that we had in credit this quarter, I think the way to think about it is I think that business was up almost 15%. About half of that is just run rate organic growth, the continued momentum we're seeing in that business. And half of that was the full quarter of an acquisition that was made within our Castlelake business. So some of it was M&A related, and some of it was organic growth. Maybe you can think about that as roughly half and half. And then on the fee rate component, within Castlelake, which is a business -- a partner manager of ours that's performing very well. They did have some outsized transaction fees in this quarter. The blended broader fee rate is trending up, but it was somewhat enhanced this quarter by onetime transaction fees. Operator: Our next question comes from the line of Kenneth Worthington with JPMorgan. Kenneth Worthington: Great. Maybe for Hadley. You're operating at 58% operating margins right now. You highlighted on the call that Oaktree margins are depressed, but getting better. Core margins are rising, but that acquisitions are operating at lower margins. How do we put these pieces together, particularly since we've got some of the transactions just closed, or closing? And you mentioned sort of the transaction fees sort of helps in the current quarter. So how do we think about the right level, and then the trajectory once everything gets closed? Hadley Peer Marshall: Thanks for the question. First, I'd say that we are very disciplined when it comes to our cost. And we expect our margins to continue to improve over time as we presented at Investor Day. And that's on the backs of our growth initiatives that will play out and the operating levers that's built into our business, as well as we execute on ways to drive additional efficiencies, including the integration of Oaktree. And in this regard, we are on track and actually ahead of our margin improvement plan that we've laid out. It's also worth pointing out that the consolidated margin increase that we're seeing today is a blend of a few offsetting dynamics. The first being, we acquired a greater share of our partner managers and these businesses, while highly accretive to our earnings do have lower margins, and do mildly dilute our overall margin level. Second is Oaktree's margins are temporarily lower as we point out. As they've been returning more capital and haven't yet called capital for some of its deployment. That's a typical cycle for that business, and it will naturally reverse given the countercyclicality to the overall business. And the last point I'd make is that the margins across our core businesses continue to expand, which is more than offsetting the first two items I just mentioned. So while we focus on continuously improving our margins and are delivering in that regard, we run our business with a focus to grow FRE over the long term, and we don't manage the business to a specific absolute margin level, which obviously can be impacted by the mix. Operator: Our next question comes from the line of Dan Fannon with Jefferies. Daniel Fannon: So lots of momentum in fundraising, but I wanted to talk about private equity, in particular, it sounds like your outlook is quite optimistic around raising a larger fund. That seems different than what we've heard for that asset class from others. So just curious about what informs that optimism given the market backdrop? Bruce Flatt: Thanks, Dan. Our private equity business is a little bit unique, and it has been for 25 years. In that, it focuses on essential assets and services, and it -- and as a result, it produces very consistent results across the market cycle. And why that really plays out well today is, as mentioned, we've just launched BCP, the next vintage of BCP in the quarter, and we do expect it to be our largest private equity fund ever. We do feel that we are differentiated in the market because our focus on, one, high-quality assets that generate cash across the cycle has allowed us to return significant amounts of capital out of this strategy in recent years. So we're not facing the DPI issue that has driven a lot of headline noise in the sector. And then secondly, we, I think, all recognize that the next generation of growth and value creation in private equity, given the more normalized interest rate environment is not going to come from financial leverage and financial engineering. It's going to come from operational improvement. And given that over the 20-year history of our flagship private equity fund, we've delivered over 25% IRRs for 2 decades with over half that value creation coming from operational improvement. We are seeing tremendous market demand for our approach to private equity that we think is -- it works across the cycle, but it's perfectly suited for where we're at in the current economic environment. So it's early days. We've just launched the fund, but we do expect it to be our largest fund to date. Operator: [Operator Instructions] Our next question comes from the line of Jaeme Gloyn with National Bank. Jaeme Gloyn: Good job on the fundraising this quarter this year. One thing that was mentioned at the Investor Day was broadening, or deepening the client base, the institutional client base. So I'm just curious on what the source of fundraising looked like from a breadth of client standpoint? Bruce Flatt: In terms of broadening the fundraising base, I think we can answer this question quite specifically. The growth in our business over the last several years has really been driven by the scaling and increased penetration of large-scale institutions. And while we focus on other additional pockets of fundraising, it's important to remember that component, and that core foundation of our business continues to grow. But what we have done internally within Brookfield and what we've been investing in for the last 12 to 24 months is dedicated fundraising teams that can target a much broader base of investors. This is small or medium-sized institutions. This is a dedicated team focused on insurance institutions. This is a dedicated team focused on family offices. All of those initiatives, we would say, are still in the relatively early innings, and we're seeing tremendous growth across 3 verticals. One, a greater number of clients within each of those groups. Two, a greater number of products amongst those clients that we're bringing on board. And three, simply larger checks from those clients that we have. So we would expect this momentum to continue, but it's really driven by having dedicated teams focusing on all the different subcomponents of the institutional market going forward. Operator: And I'm currently showing no further questions at this time. I'd now like to turn the call back over to Jason Fooks for closing remarks. Jason Fooks: Okay. Great. If you should have any additional questions on today's release, please feel free to contact me directly, and thank you, everyone, for joining us. Operator: This concludes today's conference. Thank you for your participation. You may now disconnect.
Vincent Clerc: Welcome, everyone, and thank you for joining us on this earnings call today as we present our third quarter results for 2025. My name is Vincent Clerc. I'm the CEO of A.P. Møller - Maersk. And with me in the room today is our CFO, Patrick Jany. As usual, we start with the highlights of the quarter just passed. We are pleased with the strong execution shown during the quarter in all businesses. We improved our performance across the board and delivered on an EBITDA of $2.7 billion and an EBIT of $1.3 billion, up from the previous quarter. All segments showed strong sequential volume progression, while costs were kept under tight control. These efforts paved the way for the strong results, notwithstanding the external environment. Specifically, in Logistics & Services, we are staying the course, focusing on operational margin improvements on both prior year and quarter to maintain the streak of good progress in 2025. We also registered good underlying and seasonal volume growth, which more than offset the softening observed in North America. For Ocean, this third quarter was the first full and clean quarter of the Gemini cooperation. While we kept delivering reliability at 90-plus percent, we also generated cost benefits well above the target we had communicated. This excellent performance was supported by strong volumes and high asset utilization as well as asset turns. As expected, rates softened during the period as new capacity continued to be inflated ahead of demand. Finally, our Terminal business delivered again record high revenues and profitability, driven by strong volumes, not least the ones delivered as a consequence of the Gemini implementation and the highest ever utilization across our portfolio of gateway terminals. With another quarter of sustained high demand, especially out of China, we expect a market growth around 4% for the full year. This strong demand, combined with the successful implementation of Gemini and progress across all segments allows us to narrow the full year 2025 guidance to an underlying EBIT of between $3 billion and $3.5 billion. As usual, more details will follow on this later in the call. Now taking a closer look at each of our business segments. First, Logistics & Services continued to track positively. We achieved an EBIT margin of 5.5%, up from 5.1% last year and 4.8% last quarter. The key levers of progress remain asset utilization, productivity improvement and stringent cost management. Aside from these efforts, the top line also grew 2% year-on-year and 9% sequentially, the latter reflecting both seasonal strength and new win implementation, which offset the softening of demand in North America. In Ocean, as mentioned, we had our first full and clean quarter of Gemini -- after the Gemini implementation. From already the first month since the implementation in February, we have seen the network deliver reliability above 90% and show resilience against disruptions such as weather, which we have seen recently in the Far East with the worst typhoon season in 10 years. Meanwhile, we continue to deliver 90-plus percent reliability in the third quarter, and we also achieved significant cost savings even compared to the ambitious target we had communicated to you earlier this year. I will go into more details on this very shortly. What Gemini has allowed us to do with these savings is to use our fleet more efficiently and capture more volumes. Our volumes are up 7% year-on-year and 5% sequentially for this quarter, while the average loaded freight rate was more or less in line with the prior quarter. Good volume development has also driven high utilization of 94% for the quarter, up 0.5 percentage points sequentially. All of this happened against the backdrop of decreasing rates as expected. In Terminals, we delivered another excellent quarter, driven by record on volumes, revenue, EBITDA and EBIT. What we have not talked about so much until recently is the volume uplift in our gateway terminals from Gemini, which has been a key contributor to our performance this quarter. Return on invested capital has delivered a further uptick to 17.2%. Here, we note that with utilization close to 90%, we are approaching the full potential at which operations in some of our locations become less efficient and volume growth opportunities become more limited in the short term. We continue to invest to debottleneck our existing terminals as well as grow with new locations as exemplified by the inauguration of Rijeka Terminal in Croatia less than 2 weeks ago and several other projects in the pipeline. Turning to our midterm target. As you can see, we have shown almost full delivery on our 2021 commitment. As mentioned, we continue to stay the course of regular progress in Logistics & Services, which is tracking positively with EBIT margin up both year-on-year and sequentially, although more needs to be done on that field. We continue to make good operational progress with our challenged products of Air, Middle Mile and Last Mile, while seeing good revenue growth in our other products, more in line with our organic revenue growth targets. Our priority is to continue to improve in the fourth quarter as we round off the relevant period of these targets. Taking a step back from this quarter, I want to just take a couple of minutes to get into more detail as to what has been driving such a robust demand growth in Ocean and some of the consequences of this phenomenon, which we do not think are sufficiently well understood. Despite talks of deglobalization, nearshoring, trade wars, container demand has shown a remarkable resilience over the past few years that has confounded many observers and models. During this period, China's export growth into all regions of the world, except for North America, has not only been resilient, it had gathered pace. China's share of global export has increased significantly and never as fast as it has over the past 2 years. Specifically, its global export share has increased steadily from 33% only 2 years ago to about 37% this year. This growth is part of a longer trend as reflected from the chart to the left, but has accelerated recently. It affects all regions with the Far East, excluding China being the biggest market and growing at 12% per annum, and Europe the second biggest market and growing at 10% per annum. North America, which, in this case, is including Mexico, which is the third biggest market, has been weaker, but still has seen growth at 5% per annum despite the known trade tensions in 2025. Given the widely available production capacity in China and the very competitive products that are being exported, we do not expect this trend of accelerated export growth from China to stop. The momentum is strong. The consequence for us are not only the resilience of demand growth, which will contribute to absorbing some of the new capacity coming online, but also the increased trade imbalance that it is causing, which over time will lead to higher production cost and lower asset intensity for the industry. On both fronts, Gemini offered us a much needed flexibility so that we can capitalize on the growth opportunity while minimizing the cost impact. Moving back to Q3 and to Gemini specifically, this is the first quarter where we can see the full effect of the new network, and we are pleased that the savings are higher than our original guidance. To give you a sense of the benefits, we separate the Ocean cost savings, which were the ones we had communicated into 2 buckets, namely Bunker Savings and Asset Turn increase. Aside from these, we can also present an upside that we have seen in Terminal as a direct result of this new cooperation. Now taking each of this in turn and starting with Bunker. We can see that the advantages of Gemini stemming from a more efficient use of our vessels, for instance, through lower speed, shorter sailing distances and shorter dwell time are allowing us to reduce the bunker consumption. This quarter, we saw a 6% higher capacity, but about -- but about 3% lower total bunker consumption. And this translates in an approximately 8% bunker consumption reduction corrected for the changes in capacity. Then on our Asset Turn side. From the most efficient use of our vessels, Gemini allows us to transport more volumes at the same capacity. This quarter, we saw the capacity growth of about 6% against the volume growth of 7%. The delta of about 1% point represent the improvement in asset turns. Both these buckets are driven by improvements we have been able to do under Gemini. First, we have been able to deploy our largest vessels in most effective routes and on shorter loops. Secondly, the shorter loops have had fewer port calls and more efficient ones. Thirdly, locations outside the shorter main liner loops have been serviced by fit-for-purpose shuttles rather than underutilized mainliners. We can quantify the bunker consumptions improvement to about 8% at fixed bunker into cost benefits of about $135 million for the quarter, which annualized is about $450 million to $550 million based on the full year implementation and normal seasonality. Likewise, we can quantify the asset turn improvement of about 1 percentage point, which against our total network cost translates into about $50 million of cost benefit in the quarter, which annualized is about another $150 million to $200 million benefit. The cost benefits on the Ocean side alone, therefore, sum up to around $600 million to $750 million on an annualized basis. Another advantage of Gemini has been to increase volumes in some of our gateway terminals, allowing us to significantly increase the throughput. These additional moves have improved port moves per hour and expanded operating terminal capacity. The additional uplift has generated about $40 million in benefits, which annualized is about $120 million to $200 million based on full year implementation and seasonality. Overall, across Ocean and Terminal, therefore, we have generated about $225 million in cost benefits in the third quarter or $720 million to $950 million in annual savings compared to our previously announced targets of about $500 million. As mentioned earlier, we now expect container volume growth to be around 4% for 2025, given the strong demand that we continue to see outside of North America. There is no change to our assumptions on the Red Sea disruptions, which we still expect will not reopen in the near term, absorbing net supply in the industry as long as it remains closed. Against the backdrop of these factors as well as a strong year-to-date performance, we refine our financial guidance to the full year 2025 to an underlying EBITDA of $9 billion to $9.5 billion from previously $8 billion to $9.5 billion, and an EBIT of $3 billion to $3.5 billion, previously $2 billion to $3.5 billion. And finally, free cash flow of positive $1 billion or higher, previously negative $1 billion or higher. Our CapEx guidance for '24 and '25 combined is revised down to about $10 billion, down from $10 billion to $11 billion, while the guidance for '25 and '26 remains unchanged. And I will now hand out to Patrick, who will walk you through the detailed financials at segment level for our performance. Patrick Jany: Thank you, Vincent, and welcome to everyone on the call. Q3 '25 was a quarter with strong financial performance across the group, significantly up sequentially. Overall, we generated an EBITDA of $2.7 billion and an EBIT of $1.3 billion, implying a margin of 18.9% and 9%, respectively. As expected, the delta to the previous year is driven largely by the shift in rates we have seen in Ocean since the peak levels in mid-'24, which was at the height of the Red Sea disruption, while the progress on the previous quarter is driven by higher volumes and operational improvements across all 3 businesses. Net profit after tax was $1.1 billion, generating a solid return on invested capital of 9.6%, still at a good level, but decreasing as strong 2024 quarters progressively fall out of the yearly calculation. Solid free cash flow supported a strong balance sheet with cash and deposits standing at $20.9 billion at quarter's end. Our net cash position is down from $5.6 billion last year to $2.6 billion, driven mostly by the strong returns to shareholders, which totaled $4 billion in the first 9 months. Let's take a closer look at cash flow on Slide 12, where we see that cash flow from operations increased sequentially to $2.6 billion in the third quarter, driven by higher EBITDA of $2.7 billion, while the movements in net working capital was largely flat. Overall, we had a strong cash conversion of 97% up from 89% last year and 81% last quarter. Further, across the chart, gross CapEx for the quarter was $1.2 billion, in line with our multiyear CapEx guidance, driven by our Ocean fleet renewal program. Meanwhile, capitalized losses -- capitalized leases stood at $868 million, also in line with expectations and down from the previous quarter, which was impacted by the Port Elizabeth concession extension and free cash flow was therefore at $771 million. Capital return via share buyback was $578 million this quarter. And finally, most of the $850 million you see in movements in borrowings relates to our 9-year EUR 500 million green bond issuance in September, extending our maturity profile early in light of extending bonds maturing in March next year. Taking all together, cash generation was strong in the third quarter and supported an already strong balance sheet alongside the continuation of our share buyback. Turning to our Ocean segment on Slide 13. Ocean delivered a strong operational performance in the third quarter, which marked the first full quarter of Gemini implementation. From a financial standpoint, Ocean generated an EBIT of $567 million, implying a margin of 6.2%. This is down on last year, driven by the expected rate decline, but significantly up sequentially, driven by the strong volume growth of 7% in Gemini. Specifically on Gemini, as Vincent mentioned earlier, the new network generated cost benefits in the form of bunker savings and higher asset turns, without which we would have expected our third quarter Ocean costs and therefore, EBIT to be impacted negatively by about $185 million. Meanwhile, freight rates were significantly down year-on-year, driven by the ongoing market pressure on rates since 2024, but broadly in line sequentially. CapEx was in line with guidance and comprised mainly installments on vessel orders announced last year as well as a broader equipment renewal and vessel deliveries that are part of our Ocean fleet renewal program. As usual, the chart on Slide 14 illustrates the main elements of the year-on-year EBITDA development in our Ocean business. On the left, you can see the large impact on profitability from the 31% lower freight rates, cushioned by the tailwind of the 7% increase in volumes year-on-year. Ocean also saw a positive impact of $211 million from lower bunker prices compared to last year, while container handling and network costs increased driven by higher empty repositioning and terminal costs. Also note that EBITDA was further supported by higher detention and demurrage revenue and a positive delta in revenue recognition, the latter of which accounts for the vast majority of the net $551 million in the final bucket. All in all, these offsetting factors allowed EBITDA in the third quarter to settle at $1.8 billion, down from the previous year, but up on the previous quarter. Let's now have a look on the Ocean KPIs on Slide 15. Ocean's operational performance in the third quarter is highlighted in these metrics with strong volume performance and Gemini helping to offset headwinds in cost and rates. Loaded volumes increased by 7% year-on-year, reaching 3.4 million FFEs as demand was strong on key trade lanes. Sequentially, volumes grew by 5.2%. As mentioned earlier, our average loaded freight rates declined by 31% year-on-year, reflecting market fundamentals that we have seen since 2024 from growing excess capacity. Nevertheless, as reflected in the flat sequential development, the lower levels in the third quarter at quarter end were actually offset by the high levels at the start of the quarter, therefore, providing a fairly benign rate environment in the quarter. On the cost side, unit cost at fixed bunker decreased both year-on-year and sequentially by 0.8% and 2.2%, respectively, as strong volume performance, high utilization as well as cost benefits from Gemini offset the general cost pressure. Bunker costs were down 14% year-on-year due to both lower fuel prices by 13% and increased efficiency from Gemini, leading to lower bunker consumption of 3.2%. This is despite us carrying more volumes and managing a larger fleet. Specifically on the fleet, the average operating fleet grew 5.5% year-on-year, reaching 4.6 million TEUs, all while capacity utilisation remained high at 94%. Let's now turn to our Logistics & Services business on Slide 16. In the third quarter, Logistics & Services delivered revenue of $4 billion, up 2.3% year-on-year and 8.6% sequentially, the latter reflecting seasonal strength. The year-on-year growth was driven by growth across most products. On the bottom line, EBIT showed a significant increase to $218 million, which also implied a continued EBIT margin improvement of 0.4 percentage points year-on-year and 0.7 percentage points sequentially to 5.5%. The margin improvement is primarily driven by the continued operational progress that the team has made in fulfilled by Maersk, all while continuing to exercise stringent cost control across all service models. CapEx is down on last year, but remains at a stable level sequentially to support growth with particular focus on Depot and Warehousing this quarter. Now let's have a look at the breakdown by service model within Logistics & Services on Slide 17. Starting with our supply chain management offering. Revenue here decreased by 4.8% year-on-year to $594 million, with the EBITDA margin decreasing to 22.6%, down from 24.2% last year. This decline was driven by weakness in Lead Logistics, our 4PL business, volumes primarily from China to the U.S. on the back of the stop-and-go volatility we have seen in the external environment. In Fulfillment Services, operational progress in Middle Mile North America and Warehousing led to significant improvements in profitability with an EBIT margin of negative 0.9%, up from minus 4.5%. Revenue increased by 2.9%, reaching $1.5 billion. Finally, revenue increased in Transported Services to $1.9 billion, equal to a 4.3% increase year-on-year. This was supported by higher volumes in Landside Transportation in the peak season. However, the EBITDA margin was impacted by weakness in Air, landing lower on the previous quarter at 7.3%. We round off with our Terminals business on Slide 18. Terminals delivered another excellent quarter, continuing the positive trend. Revenue grew by 22% year-on-year to $1.4 billion, driven by 8.7% higher volumes supported by Gemini and improved rates. Specifically on the Gemini impact, volumes from Maersk Ocean increased 26% year-on-year. The higher volumes brought a further uptick in utilization, which stands at 89%. As mentioned earlier, while this is supportive of higher margins, it also highlights the necessity to invest in capacity extension in the coming years to cater for the long-term growth of our port operations. Revenue per move increased by 7.8%, reflecting improved rates and mix. Meanwhile, cost per move increased by 6.7%, largely due to labor inflation and higher SG&A costs, but mitigated by higher utilization. Overall, EBIT increased by 69% year-on-year to $571 million with a margin of 39.4%, up 11 percentage points from last year and 4.1% higher sequentially. This underlying good margin was supported by a net $139 million positive impact from one-offs, including the reversal of impairments due to the successful extension of a concession. ROIC rose to a record 17.2%, underlining the intrinsic strong return profile of this business, although levels will taper down progressively with increased renewals and investments. CapEx for the quarter came in at $154 million, more or less in line with previous year and reflect the continued investment in our gateways portfolio. Turning to the breakdown of Terminals EBITDA on Slide 19. Terminals delivered an increased EBITDA from $424 million last year to $501 million. The increase in cost per move of $56 million was more than offset by higher revenue per move and volume impact. Currency exits and other movements brought a further positive impact of $29 million, bringing the EBITDA to a record level for the quarter. And with that, we finished the review of our business segments and are ready for the Q&A. Operator, please go ahead. Operator: [Operator Instructions] Our first question comes from Patrick Creuset from Goldman Sachs. Patrick Creuset: Just 2 questions. First on the outlook. If we look at your Q4 EBITDA, you're implicitly guiding based on the full year range of somewhere between $1.3 billion and $1.8 billion. Can you provide a little bit of color on what sort of volume and rate assumptions are embedded or would be embedded at the top and the bottom? And also based on what you see so far going to Q4, do you see a skew more likely at the top or low end? And then just on the buyback, you've got a cash position of around $15 billion or so. In the past, you've sometimes given the market a sense on how comfortable you felt on buybacks in the year ahead. Can you again give us a bit of sense today, assuming, for instance, stable trading environment at these levels, would you see a reason to discontinue the buyback next year or keep it? Patrick Jany: Thanks very much, Patrick. So indeed, when you look at the guidance for Q4, it implies a continuity of the pace that we have currently. We have seen rates stabilize by September and early October. And that is, I would say, the pace that we have continued to forecast for the Q4. And the volume development actually seems still to be pretty strong as we can see it. So I would rather mentally see, let's say, the revision of the guidance towards indicating the higher end of the guidance, which is what we are doing by narrowing the range, and that's what we intend to signify here, which at group level is more or less a breakeven. It will depend on the last few weeks for the Q4. When you look at the cash position and balance sheet, it is strong. And as we have indicated as well when we restarted the share buyback back in February this year, the intent is to certainly see this as another 1-year event. And in your assumption of a stability of externalities, I think there's nothing that speaks against the continuation of the share buyback indeed. Operator: Our next question comes from Muneeba Kayani, Bank of America. Muneeba Kayani: Firstly, just on the logistics EBIT improving at the margin to 5.5%, can you remind us what seasonality in this business? And if there was any benefit on that and kind of how much of this is kind of the improvement which can continue? And then secondly, we've seen in container shipping, the order book-to-fleet ratio for the industry is around 32% now, which I believe is the highest since the global financial crisis. So what do you think is driving that? And how do you see it playing out? Vincent Clerc: Muneeba, so if I start with your first question on Logistics, I think most of the improvement that we're seeing are due to the cost containment and productivity improvement that we are putting in place. In general, the business will have a seasonality a bit tilted towards the second half year versus the first half year. But -- and mostly, I would say, towards the very end of the year, depending on your product exposure. But I think when we look at it, and you can see that in the volumes and the top line, we see some seasonal improvements that are helping. We also see some of the wins that we have taken in that are helping, but I think most of it is actually coming from the work that we're doing on margin. From the order book, I think you're correct that at 32%, the order book is quite high. I want you to -- I just need you to remember 2 things. I think the first one is that the time to order, so the number of years over which this is going to phase in is more than it was during the -- before the financial crisis. So if you -- we're going to -- there's a longer installment, if you will, that is being ordered. So that's one thing. And the second thing is the story that we had about China. The market is growing at about 4%. But on the head haul, it's growing at about 7% and what we're seeing is as long as it grows at 7% on the head haul, you need 7% more capacity to be able to carry this. So I think there is -- this dichotomy that there is between head haul growth and average growth is absorbing a lot more capacity. The longer order books is -- it means that it's not phasing as brutally as one would expect. And then the last point that there is, is not a single ship has been scrapped for the last 6 years, but the ships all got 6 years older in that period. So there is pent-up demand for that. And so I think over time, we will see that some of the levers that so far have come at us, whether it was higher demand from China or selling around the Cape of Good Hope or COVID, this will fade away, and we'll be back to having to use the tools that we normally use in the industry, which is scrapping, idling, slow steaming and so on. And there, there are still significant levers that we can lift to actually balance the outlook. Operator: The next question comes from Ulrik Bak, Danske Bank. Ulrik Bak: So on the volume side, Ocean volumes, you obviously have very strong growth, 7% in the quarter. I'm just curious to hear what if there is a split between the feeder legs and the main haul legs? And if there is any issue with double counting, anything because it just looks so extraordinary, your volume growth. And then if I can sneak in a second one. So this overperformance versus the market, how long do you expect this to be sustained? Vincent Clerc: All right. So I can guarantee you that there is no double counting of volume like we count the containers and the bills of ladings only once. It's much better. You would see it in the revenue development very different if we were double counting. So I think that we're pretty -- we can be quite categorical around. I think when I look at what we're able to do right now as a result of Gemini from a cost perspective, I think it's a pretty significant lever that we have unlocked here. And this has, I think, legs to continue into the coming quarters. I cannot give you how many quarters this advantage will last. I think it's going to last quite a while, but it depends also on what we do next and what competition does next. And I'm not in control of all of that. But I think that what we have shown on the slide with Gemini is there are a few levers where we have broken some efficiency frontier that we had under the previous deployment and that we have moved them now to being higher. And this is what allows us to actually lift the cost impact of Gemini quite significantly. Operator: The next question comes from Omar Nokta, Jefferies. Omar Nokta: Just wanted to follow up on the share buyback discussion. You mentioned last quarter, you continue to view that as a focal point of the capital allocation strategy. It sounds like that's going to continue for '26 as well. But just in terms of how you're thinking about the size, $2 billion this year, how can we think about how that looks for '26 as you set the budget? Does it become a portion or a function of how much free cash flow was generated this year? Or what's it based on? Is it based off of earnings next year? Any color you can give would be helpful. Patrick Jany: Yes. Thanks very much for your question, Omar. No, as we said, clearly, share buyback is a fundamental piece of our capital allocation and will continue to be as well for next year. I think when you look at the dimensioning, you know that we actually maxed out this year, right, just from the free float and the rules on the daily volumes. So I would expect this to be, say, a maximum amount. But then the exact dimensioning will be done, obviously, in February and when we come out with our guidance for full year. I think it will be premature now to guide. But I think certainly, the willingness to continue a sizable share buyback is certainly there. Operator: Our next question comes from Cedar Ekblom from Morgan Stanley. Cedar Ekblom: I have a question on the Gemini cost savings. I'm looking at that slide that you put together, and it looks like the bulk of the benefits come on the bunker side of things, which I think makes sense. What I am surprised about is why the asset turn benefit is not higher? Maybe you could just talk through like what I'm missing there. Maybe I've just thought that the asset turn would be better. You could optimize the network more, long voyage, big vessels, feeder vessels, et cetera. I'm just trying to understand that split that the bunker number and the asset turn number are not sort of closer to each other? Vincent Clerc: Yes. Thank you, Cedar. I think let me try to explain that I think the asset turn, it depends also on what is your base. We had an extremely high utilization last year. So we've been able to lift this with 0.5%. We're continuing to look at whether we can actually increase that number in the coming quarter. The bunker, we can very much control because that -- as soon as you're into the deployment, since we measure it against the capacity, we get the full saving calculated there. And we've tried to disaggregate that because we could have just done this in terms of total unit cost per container, and I would have mixed the bunker and the efficiency on the fleet or on the utilization. So I think the bunker, we see 100% of the saving right away. As long as we deliver on the reliability, this will be pretty steady. I think on the asset turns, this is where I think we have some opportunity to continue to fine-tune and improve the network. So this one, I would look at as still having a bit of leg that we need to exploit in the coming quarters. Cedar Ekblom: Okay. And then, yes, just a follow-up there. So obviously, container handling unit cost at a fixed banker hasn't really come down year-over-year. It obviously has come down sequentially, which is helpful. Could you give any sort of guide around how to think about that sort of container handling cost on a unit basis or maybe network costs on a unit basis? Like are we talking about a 5% decline from here unit-wise? Or I don't know if you could help us quantify how to think about that run rate into '26? Vincent Clerc: Yes. So the issue with container handling is the fact that, as I mentioned, with an average market growth at 4% and a head haul growth at 7%, trades become more imbalanced. And then under container handling, the amount of empty containers we're moving around increases because there is just more containers going one way and fewer containers going the other way. And that means more empty repositioning. And that's what I mentioned in the slide for China. I think as we see this imbalance continue to grow, it's important that we understand that we're going to need more and more capacity to cater for growth because it's more and more asymmetrical because between the head haul and the backhaul, but it will also increase our cost per FFE above that because of the increasing balance and more empty containers being moved around. Operator: Our next question comes from Kristian Godiksen, SEB. Kristian Godiksen: Yes. Also a couple of questions on the Gemini part. So just a house of question to start out with the improvement in Terminals, is that in the -- is that for the hubs and hence, included in the Ocean part of the business? Or is that for the Terminals business? And then if you could maybe comment a bit on the unit cost advantage you see compared to the peers that are not using the hub and spoke model? And then maybe just finally sneak in a question on whether you've had any preliminary discussions with the clients on a potential price premium for your higher schedule reliability? Vincent Clerc: Yes. Thank you, Kristian. So I think the -- what is important with Gemini from the gateway perspective is the fact that before when we were in 2M, we were paired with probably the other line that has the most comprehensive terminal portfolio. And it means that in a lot of locations, we have to split volumes between the different parties. Here, we are with a partner that has less -- much less of a terminal portfolio. And it means that net, we're getting more locations where 100% of the throughput is not split between 2 different facilities, but it's all going to our facilities. So for the gateways, this is very, very positive because they get the full 100% of the support from Gemini. And that is something that is an uplift for this, and it will last for as long as Gemini lasts. So it's quite positive. On the unit cost, I think we're going to need 1 or 2 quarters more of data from also the competition to know because we can see how much we have saved sequentially and how much we have saved year-on-year. Obviously, the world doesn't stand completely still. They will also do certain things. What we can see with the numbers that have been released so far is that we're making more progress on unit cost than what they're making, and we attribute this to Gemini, which is the big thing that we did to lower our unit costs. So we're quite positive on the fact that we are opening up a gap now with Gemini that is going to be -- that is going quite handy, especially in the current rate environment, and we will continue to work at making it as big as possible. Then finally, on customer discussion, I want to say that the customers' reaction is really very, very positive. Obviously, for the premium, this is a conversation that we have started, but it's a bit too early to talk because we need to be certain also that we have a long enough track record that it unlocks value for them that we -- where we can then capture some of that value for us. So for instance, concretely, today, every customer has a buffer stock and that reliability needs to unlock a reduction of that buffer stock. They need to trust that this has weathered sufficient ups and downs and be steady that they can take out some of that buffer stock. And if they do, they pocket that saving and then we can capture some of it in form of a premium. I think that process is starting. It's a long-haul process to take place, but certainly something that where we see some potential at least to capture some value, but we need to -- it's just a few months. It's the first quarter we're going with it today, where we have the full Gemini. Some of them have been in transition with -- not everything is yet fully in a place where value has been unlocked yet, but we're very positive with the discussion so far. Operator: Our next question comes from Jacob Lacks, Wolfe Research. Jacob Lacks: So you've discussed in the past maybe a bit of a shift in how quickly contracts get repriced when the market is tightening up. Have you seen customers actively work to reprice contracts again with rates moving lower now? And to that end, do you think the current rate environment will largely be reflected in Q4? Or could there be some incremental pressure in '26 when new contracts are signed? Vincent Clerc: So we've not -- thank you, Jacob. We've not seen any big movements on contract being open now, which since the contracts have been trending down during Q3, and it was not very timely for people to do it until they -- when they know they have the negotiation coming soon and as long as things are moving their way. So I think that from that perspective, that's one of the things that also holds the contract good. So those have not moved. You will have noticed that over the past few weeks, the rates have actually come up again a little bit. It's too early to call anything on the contracting season. I think we'll have certainly a discussion around this in February when we come with the full year guidance for 2026, and we have some of the early negotiations under wrap. But I think for now, what we have seen in terms of behavior from customers is that whatever the price did during Q3 did not lead to customers actually reopening contracts or wanting to have commercial discussions on price. And contract adherence has been quite strong as well. So it's not like the volumes just disappeared. I mean they were living up to their commitment. Operator: The next question comes from James Hollins, BNP Paribas. James Hollins: Obviously, you discussed buybacks a lot pretty important to the market. I was just wondering, I mean, clearly, another way you might not do buybacks is aggressively pursuing M&A. I was wondering how you're looking at M&A if we are indeed looking quite extensively and globally at potential deals? And secondly, a bit of a sort of generic question, but as I look at consensus for 2026 Ocean, Bloomberg consensus has a loss of $2.8 billion. I mean that would be a business scenario like 2009, you'll come to deposit [ $1.7 billion ], apart from showing how on that forecasting. Maybe just get sort of your view on how you would see, I guess, particularly that Bloomberg consensus against the reality of what you might see in this industry based on someone that's been in it a long time, your work on cost, your work on the alliance and basically whether that's way too pessimistic. Vincent Clerc: James, I think let me start with the 2026 and give you the standard answer that I look really forward to talking about it in February. But before that, I think we'll have to pause on giving any type of views. With respect to the M&A I think what we need to remember is that all 3 segments that we operate in are actually over time, segments with -- that are quite competitive and very low margin. So when I hear something like aggressive pursuit of M&A, I hear a premiums that will be difficult to justify through synergies afterwards and a lot of risk to destroy shareholder value. So whereas we've said it and we continue to say that M&A will be a part of the continued repositioning of Maersk. And whenever we see opportunities, we have both the wherewithal and the interest to pursue them, but maybe an aggressive thing right now, given some of the outlook is not necessarily something we will pursue. Operator: Our next question comes from Parash Jain, HSBC. Parash Jain: I mean just first with respect to Red Sea, I know nobody has a crystal ball, but given the recent developments, is it first half of next year looks more likely than ever before? And my second question is, we heard a lot about front-loading by the U.S. retailers, in particular, now that we are well into the peak season, are there any signs of front-loading, which has been reflected into the fourth quarter's volume run rate? Vincent Clerc: Yes. So for the Red Sea, let me start by saying that, obviously, the ceasefire in Gaza is a significant -- first, it's a great thing for people in Gaza and for the world in general. But it is also a significant step towards being able to reopen the Suez Canal since the -- the situation in Bab al-Mandab and in Gaza have been linked since the beginning. I think the way we think about this is that we need now to make sure that this moves into a process where it becomes clear that the ceasefire is entrenched and doesn't risk going backward at some point and then we fall back into a new phase of a conflict. And that's the situation we're monitoring quite closely. And we're also figuring out what is the posture of the Houthis specifically to see if we can start to have a safe passage. So I would whether it's more likely now to be early at some point or whatever, I think if the ceasefire holds, then I think we've crossed a gate and made a big step towards returning through the Red Sea. But I think we need to see that get entrenched, and we need to see the process move ahead. And once that happens, then we'll have a better view of what that means for a return to the Red Sea. Then in respect of front-loading, I think there was a lot of discussion on front loading, especially end of '24, beginning of '25 before the tariffs in April. We certainly saw following the implementation of tariff that things softened in North America. And we certainly still have seen this still into the third quarter and even, I would say, during the month of October, I will say that what we're seeing now is there is somewhat of a push also into the U.S. for some of the seasonal goods to get there. So I think from a demand perspective, very resilient demand across all geographies and the U.S. that is picking up a bit of pace following this month between April and October that have been a bit more soft. Operator: Our next question comes from Alexia Dogani, JPMorgan. Alexia Dogani: Just firstly, could you explain a little bit the unit revenue development because we're struggling to reconcile with the trade lane numbers you report on the group level. If you can just explain how it normally developed as per the 6-week lag, the spot versus the contract, has it performed versus expectations, whether it's underperformed or overperformed because, yes, struggling to reconcile a little bit the outcome. And secondly, on the unit cost, again on Ocean, I mean, clearly, you talked positively about the Gemini contributions. But overall, your unit cost at constant bunker is only down 1% despite you growing 7% capacity and 5.5% volumes -- sorry, the other way, 5.5% capacity, 7% volume. So when we look at into next year, what further cost savings can you deliver if there is less volume growth because I imagine the capacity benefits annualized. And then finally, obviously, the IMO has now delayed its kind of net zero initiatives. How should we think about the implications for industry capacity discipline? And I guess, more importantly, for yourselves that have invested in green CapEx, which comes at a higher cost. And so it kind of takes you in a relative disadvantage? Vincent Clerc: Yes. There's quite a few questions. So let me try to cover that to the best possible. I think, first of all, when you look at the cost, there is one element that we're missing. And it is that the net position that we have on our different VSAs, whether it's a plus or a minus is reported under other revenue. And the fact is that our position in 2M was balanced and our position in Gemini is that of a net seller of capacity. And that means that out of the 11% that you see in growth in the network cost, half of that is due to that net position. And once you take that out, then the growth of our network cost is actually 5.5% for 7% volume increase. So I think that's just important to position this. We see the unit cost being decreased. The biggest efficiency is because we've chose to slow steam and be reliable is going to be seen on bunker. So that was always -- it doesn't matter so much which line item it shows, but we've made choices. We could have gone a bit faster and save a few ships and also generate some cost savings that you would have seen more on the network cost. We've chosen to really focus on bunker. So I think for the unit cost, there is this -- when we look forward, I think we have 3 levers for cost savings, for further cost savings. One is the expansion of Gemini. Two is actually some of our other costs here under organizational cost that we're looking into. And then finally, I think as the rates soften, we will see also a softening in the time charter market, and that will generate further savings in the unit cost that we have by basically being able to lease ships at a cheaper price. So those are, I think, the 3 key things. I will say that we anticipate -- you mentioned like less volume growth. We don't expect necessarily less volume growth, but we'll talk about this in February. But I think that's not an assumption we should have. So that's both for the unit cost and the growth. The IMO, I would say, from a CapEx perspective, it's -- what happened at the IMO is a nonevent. Seen from that, that today, every single ship that is on order more or less is a -- has a dual fuel engine. It's either dual fuel LNG bunker or it's dual fuel methanol bunker. And I think everybody understands that it makes sense when you take a bet on the next 30 years by ordering a ship that you cannot just base yourself on what the IMO is doing now, but you need to understand what optionality you have for the next 30 years. And I don't expect that people will start to order only bunker ships because they will think that for the next 30 years, this is not -- green transition is not going to be an issue at all. So I think from that perspective, I don't think operationally, IMO is a problem. I don't think CapEx-wise, IMO is a problem. It's a problem to execute the energy transition because definitely, it's a loss of momentum. But from an operational perspective, we are not at disadvantage, and I don't think it's going to change order behaviors or supply and demand. Patrick Jany: And let me come back on your rate on your first part of your question. So what you have to consider is that we have increased the share of short-term rates in our mix, as you can see as well in our disclosure to 53% compared to 47% long term in the quarter, and which was positive during Q2, Q3. As short-term rates decreased during Q3, you see that our full year estimate for '25 sees an increase of the long term. So we are pushing the contract fulfillment and the long-term rates, which are more resilient to the erosion of the rates in the short term. So you have a progressive change of mix constantly to optimize the revenue there. Another factor when you try to reconcile is also the very different geographical evolution of the rates. So the North -- the East-West rates are the ones which we always follow very publicly and those ones came down. However, you do have much more resilient rates development in North-South and then the interregional rates as well. So that's a bit of a mix that you see always in our total figure. I hope that helps. Operator: Our next question comes from Marco Limite, Barclays. Marco Limite: So my first question is on demand because you are talking about a fairly strong demand, while some of your competitors in other subsectors are talking about soft demand. You have also mentioned that you expect U.S. demand being sort of strong over the next 6 months. And then also, you have mentioned that China outbound has grown 7% and expect a similar rate going forward. Do you -- what kind of visibility have you got on basically these assumptions? And especially the fact that China has been very strong this year is not that a risk for growth next year on a very high comps, is the first question? And the second on capital allocation. We have been discussing about potential for M&A and share buyback and so on. But when we think about terminal expansion, I mean, this week, you announced a $2 billion investment in the terminals. But first question is that on your balance sheet or off balance sheet as you have got a minority stake. But more in general, is it a problem for you to have, let's say, the terminal business in the overall Maersk umbrella, where, of course, you cannot take a lot of leverage, but terminal business needs big CapEx investments and also a larger balance sheet buffer? Vincent Clerc: Yes. So on -- let me start with the demand. First of all, the strength of the demand, if I look at year-to-date, both last year and year-to-date, I mean, this is -- I hope this is undisputed by anybody, at least when it comes to container traffic because you can verify it in the CTS statistics, [ GOC ] statistics and any other widely available port statistics that you can find. So is the fact that China makes up a large part of this and that this shows no signs of abating. So personally, I don't see any reasonable argument or data source that would go against the fact that demand has been above 5% last year and will be around 4% this year, which is actually quite significant. The demand from China and the growth from China, at least so far shows no sign of abating. And unless at some point, somebody can point to a reason for why this would abate, then I think it's a reasonable assumption to say that if there is no reason for it to slow down or stop, then why would it? And then you can discuss whether given -- as you mentioned, given the comps, whether it's going to continue to be 11% or that the base becomes so big that it becomes 10% or 9%. But the fact is that it's still quite significant. And at least so far, as we show in the graph, the last 2 years has been accelerating, not decelerating. So I think from a demand perspective, we feel quite confident that demand growth is very strong. There's a lot of cargo out there to move, and that has a lot to do with China. And I think that there is ample data to back that up. You want to? Patrick Jany: Yes. On your question on the capital allocation and terminals. I think -- so first of all, on the capital allocation, I think our first priority is organic growth, and we have always said that we would dedicate the sufficient funds to grow in Logistics, grow in Terminals and renew our fleet for Ocean. That is part of our guidance of the $10 billion to $11 billion CapEx over 2 years. So that's factored in. I think what you have to see is actually Terminals is a brilliant business that complements Ocean. We capture a lot of the value as we actually just showed on Gemini of the value of the Ocean leg into the port, right? And the margins there are actually higher than in Ocean. So it is good to have. It comes with, I would say, a high CapEx profile when you have new terminals, but a lot of the CapEx is actually expansion of existing, right? Of existing capacity where you can grow. And then you have a few new ones which are planned. We just announced the -- we just opened one recently and there are others in the pipeline, which, again, are absolutely included in our guidance and do make absolute good sense. Overall, I would say it is still an asset-lighter business than Ocean is. So it's absolutely fine with our balance sheet, and we have the balance sheet structure and financing to fund that development as well. Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Vincent Clerc for any closing remarks. Vincent Clerc: Thank you again for joining us today. And to summarize the discussions, we have demonstrated strong execution in this quarter in which uncertainties did persist in the external environment, but where we carried to deliver strong results across the whole business portfolio. We've made good progress across the portfolio and continue to see supportive demand, and this has allowed us to narrow the full year guidance. We look forward to seeing many of you on our upcoming roadshows and investor conference. Thank you for your attention again, and see you soon. Bye-bye.
Trip Taylor: Good afternoon, everyone, and welcome to our third quarter 2025 earnings conference call. Participating from the company today will be John Treace, Chief Executive Officer; and Mark Hair, Chief Financial Officer. John and Mark will discuss our third quarter financial results and updated 2025 outlook. We'll then host a question-and-answer session following our prepared remarks. Our press release can be found on the Investor Relations section of our website at investors.treace.com. This call is being recorded and will be archived in the Investors section of our website. Before we begin, we would like to remind you that it is our intent that all forward-looking statements made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. Any statements that relate to expectations or predictions of future events and market trends as well as our estimated results or performance are forward-looking statements. All forward-looking statements are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. All forward-looking statements are based upon currently available information, and Treace Medical assumes no obligation to update these statements. Accordingly, you should not place undue reliance on these statements. Please refer to our SEC filings, including our Form 10-Q for the third quarter of 2025 filed after the market close today, November 6, and can be found in the Investor Relations section of our website at investors.treace.com for a detailed presentation of risks. With that, I will now turn the call over to John. John Treace: Thank you, Trip. Good afternoon, everyone, and thank you for joining us on our third quarter 2025 earnings conference call. In our press release issued this afternoon, we reported third quarter revenues of $50.2 million, representing 11% growth over the third quarter of 2024 and a 49% improvement in adjusted EBITDA versus the prior year. We also provided some color on the market dynamics we have seen and are continuing to see and our revised outlook for the full year. Before I get into details on our results and outlook, market dynamics and the execution of our strategy, I wanted to take a moment to recognize one of our directors, Richard Mott, who has chosen to retire from our Board for personal reasons. Rich has made significant and valuable contributions to Treace Medical throughout his time as a director, and we appreciate the expertise, insights and guidance that he's provided to the Board and the company. We wish him all the best, and he will no doubt always be a friend here to Treace Medical. Turning to our performance. Throughout the year, we've discussed what a transformational time this is for Treace Medical as we continue to focus our strategy to evolve our business from a single technology Lapiplasty company to a comprehensive bunion solutions company. Building upon our flagship Lapiplasty and Adductoplasty systems, we have developed and commercialized 3 new bunion correction systems this year. We believe we're now positioned to address virtually 100% of surgeon preferences for bunion correction with 5 best-in-class instrumented systems spanning all 4 classes of bunion deformities. And these are further bolstered by expanded commercial availability of several other new technologies to broaden our footprint in the foot and ankle market. To support this expanded portfolio of products and extend our customer relationships, we brought on a Chief Commercial Officer earlier this year, and we recently appointed a new Senior Vice President of Sales and have added leading foot and ankle sales experts to our sales team. We expected our growth to accelerate each quarter through 2025 and particularly in the second half, given our new solutions and ability to target a broader base of surgeons. Successful execution of our strategy helped drive revenue growth in the third quarter. However, we also benefited from sales to a limited number of stocking distributors that we don't expect to recur at the same levels in future quarters. At the same time, we experienced pressure on Lapiplasty volumes as surgeon and patient preferences continue to shift towards minimally invasive osteotomies. In addition, we're seeing broader economic conditions and softer consumer sentiment leading to a greater number of deferrals of elective bunion procedures. These headwinds have continued early into the fourth quarter, which, as you know, has historically been our strongest period of the year. Given these market dynamics, we are revising our outlook for the full year. We now expect 2025 revenue to be in the range of $211 million to $213 million, representing growth of 1% to 2% compared to full year 2024. As the founder of this company and a large shareholder myself, I'm disappointed in our results and that we are not growing our top line the way we'd anticipated for the year. I would like to provide some additional color on the drivers of our updated outlook as well as our focus areas as we move forward. First, I'd like to talk to our product portfolio and what we are seeing in surgeon and patient preferences. With our broader portfolio of products, we have now become a one-stop shop for all bunion needs with customers who use Lapiplasty technology already and have established relationships with their Treace sales reps. Our new bunion technologies have also allowed us to attract a new audience of surgeons, those who currently prefer metatarsal osteotomy procedures for the majority of their bunion cases versus our Lapiplasty solution. With our 2 differentiated 3D MIS osteotomy solutions as well as our new SpeedMTP Great Toe Fusion system, we now have multiple opportunities to appeal to this surgeon audience. We are also seeing interest from some of these new surgeons adopting our flagship Lapiplasty and Adductoplasty solutions as well. During the third quarter, we experienced mid-single-digit case volume growth versus the prior year. However, case volume growth was still below what we originally anticipated, and it was largely driven by our 3 new bunion systems, which have lower ASPs relative to Lapiplasty. While we believe this volume growth demonstrates that we are capturing a larger relative share of available bunion procedures, our system sales mix is shifting away from Lapiplasty which as a higher ASP system impacts our overall revenue levels. Further, as we ramp up with our expanded portfolio of products, we are not yet seeing a level of adoption on Lapiplasty from new product surgeons that would offset other pressures on the Lapiplasty line. That said, we continue to believe we can achieve increased adoption over time. Second, we believe in addition to the change in mix, macroeconomic conditions and consumer sentiment are impacting our case volumes. In October, we conducted a survey with a cross-section of our surgeon customers and the responses to date have indicated that on average, their bunion surgical volumes year-to-date through October had decreased approximately 7% compared to the same period last year. This is consistent with what we are hearing from hospitals and surgical centers, which are reporting that outpatient elective surgeries are being deferred, particularly for commercially insured patients and the more elective the procedure, the more likely they are to be pushed out. Third, I'll touch on the timing-related impacts of our strategy to shift our contractual arrangements with a limited number of distributors. With a new commercial leader and a new product portfolio, we have evaluated our selling strategies and saw an opportunity to enter into stocking relationships with certain key distributors, which we believe better positions us competitively in those markets. In the third quarter, in particular, we had a greater-than-expected benefit from this change. We recorded approximately $6 million in stocking distributor sales within the quarter, with approximately half of this amount being above our plans as our distributor partners responded positively to the availability of our new products and build inventory ahead of Q4 bunion season. While we are already seeing replenishment orders from our distributor partners, this pull forward of approximately $3 million in sales creates a headwind for us in Q4 as we do not expect this benefit to recur at the same level. Looking forward, we plan to continue to execute our strategy with a focus on driving continued market share gains, accelerating our top line growth and delivering improved profitability in 2026. To do this, we'll continue to train more of our 3,100-plus current customers on our new systems while also focusing on adding new surgeon customers. In Q3, 1 quarter into launch, over 20% of our surgeon customers have already adopted one or more of our new bunion technologies. As a technology and innovation leader in the space, we expect we will drive increased adoption of our best-in-class portfolio, tapping into more cases and expanding our procedure volumes with our surgeons. We are already seeing encouraging traction on this front with continued enthusiasm around our new systems and high attendance at our surgeon training events. Next, with a focus on strengthening our sales team's presence and procedural opportunities with surgeons, we plan to continue to deliver a robust pipeline of new innovations expected to impact 2026. To highlight a few, our new Lapiplasty Lightning platform. This next-generation instrumentation is designed to further increase the precision and speed of the Lapiplasty 3D correction. As a reminder, Lapidus fusion, though lower volume than osteotomy, remains the largest dollar segment in the bunion market today. We have been the pioneers and leaders in this segment, and we are committed to advancing our technology leadership and bolstering our competitive position in this market. Next, our Percuplasty compression screw system, which incorporates the innovative design features of our MIS Percuplasty screw implants into a new line of compression screw implants. This provides our sales team a new core fixation technology, which complements our SpeedPlate platform. We believe the addition of this new system will further strengthen our sales team's ability to serve more reconstructive procedures throughout the foot and ankle. And we'll continue to offer new procedure-specific SpeedPlate implants and problem-solving sterile instrument designs, opening up incremental procedure opportunities, serving more procedures and helping our surgeon customers achieve better results. And with new commercial and sales leadership, we plan to continue to build upon the capabilities of our already strong sales team, adding experienced foot and ankle sales professionals with deep knowledge and credibility in the market to deliver increased productivity and impact in 2026 and beyond. Treace is known for innovation and helping surgeons deliver greater patient outcomes. As we move forward with our growing portfolio of offerings alongside of our Lapiplasty solution, we expect our sales team to be better positioned to more broadly service existing customers and onboard new surgeon customers. Finally, while we navigate this period, we are already taking action to control what we can control with respect to our organizational cost structure and plan to evaluate levers as we move forward. We have a scalable business model and are focused on improving profitability and adjusted EBITDA and reducing our cash burn in 2026. With that, let me now turn the call over to Mark to review our financial performance. Mark? Mark Hair: Thank you, John. Good afternoon, everyone. Revenue in the third quarter was $50.2 million, an increase of $5.1 million or 11% over the prior year period. Growth was mainly driven by an increase in bunion procedure kits sold compared to the prior year. Gross margin was 79.1% in the third quarter of 2025 compared to 80.1% in the third quarter of 2024. Total operating expenses were $55.4 million in the third quarter of 2025, an increase of 8% compared to total operating expenses of $51.3 million in the third quarter of 2024. These increases reflect increased medical education, surgeon training events on our new bunion systems, restructuring charges and increased litigation expense in the quarter compared to the prior year. Third quarter net loss was $16.3 million or $0.26 per share, an increase in our net loss of 6% compared to a net loss of $15.4 million or $0.25 per share in the third quarter of 2024. Year-to-date, net loss was $49.6 million, a decrease of 10% compared to a net loss of $55.2 million for the same period in 2024. Adjusted EBITDA loss for the third quarter was $2.6 million compared to $5.1 million in the third quarter 2024, a reduction of 49%. This represents significant progress towards our improved profitability goals. Year-to-date, adjusted EBITDA loss was $10.1 million, a decrease of 54% compared to a loss of $22.1 million in the same period last year. Total liquidity as of September 30, 2025, was $80.6 million, comprised of $57.4 million of cash, cash equivalents and marketable securities and $23.2 million of availability under the revolving loan facility as of September 30, 2025, compared to $90.7 million at the end of Q2. Compared to the prior year, cash usage decreased in the third quarter 2025 and year-to-date by 17% and 58%, respectively. Before concluding, let me turn to our outlook for full year 2025. As John mentioned, we are revising our full year guidance. We now expect full year 2025 revenue to be in the range of $211 million to $213 million, representing growth of 1% to 2% compared to full year 2024. In addition, we now expect a loss in adjusted EBITDA in the range of $6.5 million to $7.5 million for the full year 2025, reflecting a 32% to 41% improvement over the prior year. We also expect a reduction in cash use of 43% to 47% for the full year 2025 as compared to the full year 2024. Supported by a strong and flexible balance sheet, we believe we are well positioned to continue executing our strategic and growth initiatives for the foreseeable future. I'll now hand it back over to John for some closing remarks. John Treace: Thanks, Mark. As we close today, I would like to reiterate that we are not satisfied with our results and that we are not delivering the growth we had initially planned for the year. However, looking ahead, we believe we are strongly positioned to drive market share gains with our new products, innovation pipeline and ability to leverage our dedicated commercial organization. We remain a recognized leader in the market, and our team is focused on increasing our top line growth, improving profitability and delivering value to shareholders. With that, let me now turn the call over to the operator to open the line for your questions. Operator: [Operator Instructions] Our first question comes from the line of Lily Lozada with JPMorgan. Lilia-Celine Lozada: Can you talk a bit more about the softness in the core Lapiplasty business and how you're thinking about that trending from here? If there is a growing preference for MIS osteotomy, do you think this is something that can turn around eventually? What could get this to return to growth if doctor preferences have just been shifting elsewhere? John Treace: Lily, John here. Yes, it's a great question. There's definitely a trend towards popularity of minimally invasive osteotomies, yet there is a segment of the market that is the Lapiplasty or Lapidus domain where you have the more significant bunion deformities, where we started in that market and built our business around that. Now we're going to go capture share in the minimally invasive osteotomy market and the MTP fusion market. These are significant volume opportunities for us. And right now, we're getting good market share penetration. We're taking competitive share in that arena, but it's coming at a lower price point. So the success we're having on the ground and in the surgeons' practices is not translating to the top line. That said, the reason we are doing this is we believe we can capture more customers and bring them into Treace and get them wherever they relegate the Lapiplasty procedure to for the Lapidus segment. Every surgeon has to do Lapidus at some point. There are deformities that are really severe or they're unstable and they have to use a Lapidus product there. So it's always going to be there. We just have to get more surgeons on board, and we're doing it using our new product technology and then pulling through the Lapiplasty. But to date, the Lapiplasty gains we're getting from those new customers aren't enough to make up for the softness overall that's coming at the trade-off of minimally invasive osteotomies to Lapidus. Lilia-Celine Lozada: Got it. That's helpful. And then I know it's still early, but I'm hoping you can share some thoughts on what this all means for next year. By my math, the guide implies fourth quarter sales down 10% or so or 6% if you adjust for that pull forward that you called out. So is that how we should be thinking about at least the first few quarters of 2026? Mark Hair: Lily, this is Mark. I'll take that one. We're not providing guidance for 2026 at this time, and we plan to provide an update at our fourth quarter earnings call. But with that said, we're navigating a change, this transition that John talked about, and there are a lot of reasons why we are very optimistic. John talked about being the leader in the space, and we're growing case volumes. I think that's a really important point to focus on. Our case volumes increased in Q3 versus the prior year, and we fully anticipate for additional case volumes in Q4 as well. So we've really been encouraged by the reception of these 3 new bunion systems. And we've got more innovation coming that should impact 2026 as well, of course, our strong commercial organization. So we look forward to providing an update about the progress at our Q4 earnings call. Operator: Our next question comes from the line of Ryan Zimmerman with BTIG. Marie Thibault: This is Marie Thibault on for Ryan this evening. I wanted to sort of follow up a little bit on the shift in preferences. I would like to understand -- I know that this has been sort of an ongoing shift, but has there been some sort of acceleration that you've seen away from Lapiplasty? A little curious why this has sort of become a bigger issue here, I guess, in the second half of this year. And then as part of that, trying to understand sort of a good reaction to the 3 new bunion technologies, very encouraging to hear. Is that something that could be accelerated? Is that a focus for the sales team to sort of drive those products a little faster and partially offset some of the shift away from Lapiplasty? John Treace: Yes, Marie, John here. Definitely, there is a trend with the minimally invasive osteotomy and minimally invasive foot surgery. That's why we're here. And we're playing in that market with some really novel technologies, our Percuplasty System, our Nanoplasty System. And then there's another segment of the market that's the great toe fusion, and that can be about 20% of the overall 450,000 bunions. So these are -- osteotomies are 70% of the market procedure-wise, Lapidus is, call it, 30%. We're playing in all of these spaces now, and we're using the tools we have and extracting market share in our minimally invasive procedures while we work on next-generation Lapiplasty, and that will be there as a driver going forward for us as well. And what was the second part of the question that I missed? Mark Hair: Is the sales force focusing on these new products? John Treace: Yes, they are. Yes. Sorry about that, Marie. They absolutely are, and they're using it to drive greater penetration, greater engagement with their surgeons. We're seeing really solid uptick with the new products. And we think that opens the door to present Lapiplasty to more surgeons and our Adductoplasty solution. So they absolutely are, and we're doing really well on that front. And that's why we were talking about the procedure volume growth mid-single digits in Q3 that we expect to continue through Q4. And if we can accelerate that, you do reach that point where the top line starts to grow again, and we'll be back on track. Marie Thibault: Okay. Sure. That's really helpful. And then a follow-up here. You mentioned taking action to control what you can control. Any specifics that you can give around where you might be able to find some efficiencies on the P&L, things to kind of offset the little bit of a lower top line? Mark Hair: Yes, this is Mark. So we have been and will continue to take actions to control those things that you said, that we can control. If you look at the financials, we had reported a little somewhat of a restructuring charge already in Q3, where we've looked for opportunities to change -- make some changes in the organization and the cost structure, and we'll continue to evaluate levers as we move forward. Fortunately, for us, we have a very scalable business. We have high margins, and we're focused on driving the top line and improving profitability. So it's definitely going to be an area of focus for us. Operator: I'm showing no further questions at this time. This does conclude the question-and-answer session. Thank you for your participation in today's conference. This does conclude the call. John Treace: I think we've got somebody -- I think we have somebody in the queue. Operator: We have someone now? We are sorry about that. We have Jayna Francis with UBS. Jayna Renee Francis: Just wondering, how would you plan to recoup some of those deferred procedures when you're going into next year? And then the second one would be just the puts and takes to 2026 qualitatively since we appreciate you're not giving quantitative guidance? John Treace: Jayna, this is John. Yes, the deferred patients into next year, our approach is now we have a lot more ways to get at the patient population and whether that's a little lighter or a little heavier. But going into next year, if we will get a little bit of improvement in consumer sentiment, we continue to get our sales team more familiar and more engaged with these new products as well as Lapiplasty. I think we set ourselves up really nicely to capture a larger share of more patients coming back into the front and having surgery. Operator: [Operator Instructions] All right. I'm showing no further questions at this time. This does conclude the question-and-answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2025 Metallus Inc. Earnings Call. [Operator Instructions] I would now like to turn the call over to Jennifer Beeman. Jennifer, please go ahead. Jennifer Beeman: Good morning, and welcome to Metallus' Third Quarter 2025 Conference Call. I'm Jennifer Beeman, Director of Communications and Investor Relations for Metallus. Joining me today is Mike Williams, Chief Executive Officer; Kris Westbrooks, President and Chief Operating Officer; John Zanarec, Executive Vice President and Chief Financial Officer; and Kevin Raketich, Executive Vice President and Chief Commercial Officer. You all should have received a copy of our press release, which was issued last night. During today's conference call, we may make forward-looking statements as defined by the SEC. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in yesterday's release. Please refer to our SEC filings including our most recent Form 10-K and Form 10-Q and the list of factors included in our earnings release, all of which are available on the Metallus website. Where non-GAAP financial information is referenced, additional details and reconciliations to its GAAP equivalent are also included in the earnings release. With that, I'd like to turn the call over to Mike. Mike? Michael Williams: Good morning, and thank you for joining us today. I want to start with safety. Throughout the year, we've been dedicated to our mission of being recognized as having the safest specialty metals operation in the world. In line with this mission, we continue to make substantial investments in the safety of our people. We remain on track to spend $5 million to further enhance our safety management systems and critical equipment this year. To date, in 2025, we've had 0 serious injuries. These are events which are life-threatening or life altering. We have also had a 15% reduction in days away and restorative work cases and a 34% reduction in lost and restricted work days compared to the same period a year ago. In October, we successfully completed our planned annual maintenance shutdown at the Faircrest facility. These shutdowns are highly coordinated efforts involving collaboration between our teams and external contractors. Over the course of 9 days, we performed essential maintenance to ensure the 2026 reliability and performance of our melt shop assets. Most importantly, I'm proud that the Faircrest shutdown was completed without any serious safety incidents. As a reminder, we will see additional shutdown activities in our other facilities in the late fourth quarter. Customer feedback continues to reaffirm the strength of our service and quality. We recently wrapped up our annual customer survey. And I'm pleased that over 97% of respondents said they would recommend Metallus products to others, a testament to the exceptional work our teams deliver every day. As expected, the survey showed that most customers prefer buying steel made in the United States, and it's a key factor in their purchasing decision. We're seeing continued interest from both new and long-standing customers who are actively shifting toward domestic supply chain solutions. So far in 2025, we successfully sold to over 2 dozen new customers, which will contribute to the future business growth. In addition, we saw a substantial year-over-year increase in our overall order backlog. Specifically, aerospace and defense backlog is up approximately 80% compared to a year ago. As we enter the final quarter of the year, we've begun our annual commercial contract negotiations. Our goal remains to secure approximately 70% of our long products business through annual agreements. While we're in the midst of negotiations, customer conversations have been encouraging for 2026. Now turning to business results. for the third quarter. Despite shipments being down slightly from the second quarter, sales increased as a result of favorable product mix with continued expansion in the aerospace and defense end market. On a year-over-year basis, shipments in the third quarter improved by 36%, driven by broad-based improvements across all end markets. Our current lead times extend to late January for our SBQ bars and February for our seamless mechanical tubing products. Adjusted EBITDA rose sequentially to $29 million, driven by our growing participation in the aerospace and defense end market and stability across the other end markets. Additionally, higher levels of production during the quarter resulted in greater fixed cost leverage. Now let's cover some of the third quarter highlights of our specific end markets. Industrial shipments decreased slightly in the third quarter on a sequential basis. Distribution customer inventories have improved, but still remain lean and in line with demand. Several key customers have indicated plans to ramp up operations and are projecting stronger forecast for 2026, while others remain cautious, closely monitoring year-end inventory levels. Automotive shipments increased slightly on a sequential basis. Key automotive customer demand was solid throughout the quarter, and we have not yet experienced any disruption due to global supply chain challenges. Energy shipments remain at reduced volumes on a sequential basis. With import levels declining and tightened enforcement of tariffs, we are beginning to capture greater customer share for 2026. However, overall energy market conditions still remain subdued. Finally, higher shipments in aerospace and defense contributed to a favorable product mix this quarter. We continue to gain traction across both new and existing programs., ,all supporting our targeted annual A&D sales run rate of $250 million by mid-2026. In the quarter, we added several new customer opportunities for our specialty bar and tubing products for applications, including new munitions programs, gun barrels and aerospace bearings. We also recently secured prototype orders with multiple customers that once fully commercialized, will utilize Metallus' carbon and specialty alloys and newer warheads and in rocket motor casings. These are applications where strength, efficiency, quality and shorter lead times are critical. Today, Metallus supports several dozen defense programs with growth coming from both traditional prime contractors and emerging industry producers. We are on track with the construction of bloom reheat and roller furnaces, both assets will increase our capability and optimize our throughput. We remain optimistic about the future in the growing aerospace and defense market. Turning to another bright spot. We are focused on growing our participation in the vacuum arc remelt or VAR steel product line. We recently executed a long-term supply agreement with a trusted partner for VAR Steel, strengthening our strategic position and securing a reliable high-quality material stores to support ongoing sales and profit growth. Before I turn it over to John, I'd like to provide a brief update regarding our labor negotiations. As we announced on October 30, members of our local USW have voted not to ratify the tentative labor agreement we had reached with the union Negotiating Committee. While we're disappointed by the outcome, we remain committed to securing a fair agreement that supports our employees and aligns with Metallus' long-term strategic goals. The current contract has been extended by 90 days to January 29, 2026, and we expect our operations to continue without disruption. We appreciate the support of our shareholders, the trust of our customers and the dedication of our employees as we look forward to a stronger 2026. Now I'd like to turn the call over to John. John Zaranec: Thanks, Mike. Good morning, and thank you for joining our third quarter earnings call. During the quarter, our team delivered sequential increases in net sales, melt utilization and profitability consistent with our earnings guidance. We also advanced our capital investment safely, on budget and on schedule. As it relates to our top line, third quarter net sales totaled $305.9 million, a sequential increase of $1.3 million, primarily driven by higher shipments in aerospace and defense and steady volume across auto and industrial end markets. Net income was $8.1 million in the third quarter or $0.19 per diluted share. On an adjusted basis, net income was $12 million or $0.28 per diluted share. Adjusted EBITDA was $29 million in the third quarter, a sequential increase of 9% primarily driven by improved product mix and continued improvement in melt utilization, driving better fixed cost leverage. This marks the fourth consecutive quarter of sequential growth in both net sales and adjusted EBITDA, underscoring the consistency of our commercial execution, improving operations, sustained demand in our core markets and our focus on growing in aerospace and defense. During the third quarter, operating cash flow was $22 million, primarily driven by profitability, partially offset by a slight increase in working capital needs to support the growing business. At the end of the third quarter, the company's cash and cash equivalents balance was $191.5 million, inclusive of approximately $21 million of government-funded cash on hand for future outlays as we finalize our capital projects funded by the U.S. government. In the third quarter, capital expenditures totaled $28.4 million, including approximately $22 million of third quarter CapEx and supported by previous government funding. Planned capital expenditures for the full year 2025 are approximately $120 million, slightly lower than previous guidance due to timing of cash payments. The full year CapEx guidance includes approximately $90 million of spending, which was funded by the U.S. government, consistent with our previous guidance and the continued successful execution of the projects. As it relates to government funding, during the third quarter, the company received $10 million of cash from the government as part of the previously announced nearly $100 million funding agreement in support of the U.S. Army's mission of increasing munitions production. To date, through the end of September, the company has received approximately $82 million of government funding with an additional $4.1 million received in October. Receipt of the remaining committed government funding is expected in early 2026, as mutually agreed upon milestones are achieved. As a reminder, this funding will substantially pay for both the new bloom reheat furnace at the company's Faircrest facility and the new roller furnace at the Gambrinus facility. In terms of shareholder return activities, in the third quarter, the company repurchased 178,000 shares of common stock for $3 million. At the end of September, a balance of $90.9 million remained under our share repurchase authorization. Since the inception of common share repurchases in early 2022, combined with the convertible note repurchase activities, we've reduced diluted shares outstanding by a significant 25% or 13.5 million shares compared to the fourth quarter of 2021. These actions reflect the strength of the company's balance sheet and the confidence in through-cycle cash flow generation. As it relates to liquidity, total liquidity remained strong at $437 million and no outstanding borrowings as of September 30, 2025. Turning to our near-term business outlook. Commercially, fourth quarter shipments are expected to be 5% to 10% lower than the third quarter, primarily due to normal year-end seasonality and customers' potential global supply chain challenges. Base price per ton is anticipated to increase slightly as we realized the previously announced bar and 2 price increases of 5% that will take effect through the fourth quarter. Product mix is expected to be less favorable than the third quarter due to the mix of sales within the industrial and aerospace and defense markets, which is primarily timing related. In summary, commercially, we expect lower shipments and slightly weaker product mix compared to Q3, slightly offset by increased base price per ton but the net impact is expected to be a $2 million to $3 million adjusted EBITDA sequential headwind. From an operational perspective, annual shutdown maintenance in the fourth quarter will be approximately $11 million, a sequential increase of approximately $8 million from the third quarter. The planned annual shutdown maintenance timing and the normal fourth quarter commercial seasonality will result in a decrease in melt utilization from the 72% achieved in the third quarter and is anticipated to result in a sequential decrease in fixed cost leverage of approximately $3 million. And finally, depending on the status and timing of a new labor agreement, we could also face additional labor and benefit costs that could result in a sequential fourth quarter cost increase. Given these elements, the company expects the fourth quarter adjusted EBITDA to be lower than the third quarter, primarily driven by our normal year-end seasonality, planned annual shutdown maintenance costs and timing and a few potential customer global supply chain challenges. As compared to the fourth quarter of 2024, we expect adjusted EBITDA to improve slightly. To wrap up, thank you to all of our employees, customers and suppliers for their support. We're well positioned for a successful 2026 and beyond as a high-quality U.S.-based specialty metals producer supporting critical markets. We remain committed to delivering value to our shareholders by driving profitable growth and executing our capital allocation strategy. As always, thank you for your interest in Metallus. We would now like to open the call for questions. Operator: [Operator Instructions] Your first question comes from the line of John Franzreb with Sidoti & Company. John Franzreb: I'd like to start with the automotive business. It was up nicely on a year-over-year basis. And last quarter, you talked about regaining share domestically. I'm curious if that's the case. And I have a follow-up to that when you answer it. Michael Williams: Sure, John. Thanks for asking the question. Yes, I mean if you look at the platforms, that we're on, those are the typically the SUVs, trucks, et cetera, that continue to sell at a decent rate. And they actually -- the auto companies were giving us a forecast that they thought the quarter would be lower, but that didn't materialize. So people are still buying vehicles. They're still having to build transmissions and motors, et cetera, to supply those vehicles, and that's our sweet spot. So we'll see how the fourth quarter develops. We do expect seasonality from them. And then there are some risks of some supply chains in the fourth quarter, their supply chains disrupting potentially vehicle production at the level that we saw in Q3. Does that answer your question? John Franzreb: Yes. And when you referenced supply chains, you actually said global. So I'm curious, are you referencing specifically the Ford problems? Or is there something more to it? Michael Williams: Well, there's concern or at least there's been public voice concern over chip supply and other issues with their supply chain. So -- but yes, Ford is the one that stands out because we've seen a lot of that in the public press reporting. John Franzreb: Okay. And regarding the $3 million to $5 million that you expected to incur with the labor negotiations, how much did you incur in the third quarter relative to your expectations? Michael Williams: Barely nothing except for our cost to negotiate. A lot of those -- that $3 million to $5 million is tied on the final negotiations. So more to come yet on that. John Franzreb: Fair enough. And have you seen any impact from the tariffs? We talked a little bit about last quarter that there was kind of a wait-and-see status. I wonder if you've seen customers gravitate more to reacting to the tariff environment. And maybe another thought on that is, does the government shutdown impact maybe the A&D business at all? Michael Williams: No, we've seen no A&D impact. This is the #1 priority is national security, and they need the volumes of munitions and weapons programs supplied. So no, we've not seen any impact on that. What was the first part of your question? John Franzreb: Any impact from tariffs on customers? Last quarter, you kind of said there was a wait and see... Michael Williams: Actually, I mean, the tariffs environment has been favorable to us. We are taking new customers. We've seen new customers come in. And we've seen a tremendous amount of inquiry activity for 2026, where more people are trying to position the domestic supply chain as you heard us in our comments. So from a commercial sales perspective, it's been fairly -- pretty positive. It's just the rate of speed in which that domestic awards are made. But there is a negative in the fact that we are seeing some tariff impacts on certain materials that we purchase offshore for our operating supplies and manufacturing. Operator: Your next question comes from the line of Phil Gibbs with KeyBanc Capital Markets. Philip Gibbs: Mike, the -- and I know you talked a little bit about that with the last question, but what are exactly the global supply chain challenges you're mentioning? Is that more so -- is that more so with automotive and Ford? Or is there more to it? Just wanted some context? Michael Williams: No. I mean there's been information out there that we've been told that there is concern over, again, some chip supply. Of course, you know the impact to the Ford F-150 with the aluminum supply domestically. So those are kind of things that we're aware of. We haven't seen that impact yet, but that's a potential going forward. So we just want to put it out there. Honestly, it's just a timing issue. So whatever they don't produce, they will produce because they want to meet sales targets, et cetera, for 2026. Philip Gibbs: Got it. And with your commentary of improved year-over-year EBITDA in the fourth quarter, does this contemplate any of the potential employee contract negotiations? Or would that be separate to that commentary? Michael Williams: Well, I'm not quite clear what your question is. We've identified if we do get a contract settlement -- in the fourth quarter, we're going to see those outlined costs that John referenced in his comments. . John Zaranec: And we didn't quantify it yet, but I think there would be potentially some additional costs. It really depends on the timing. Michael Williams: Yes. It's all about timing. I mean right now, we have an extension until January 29. We just -- we're going to work hard to negotiate a fair and equitable contract and align with our longer-term strategic objectives. Operator: Your next question comes from the line of Dave Storms with Stonegate. David Storms: I want to start with the energy end market here. What do you see as a potential for volumes to rebound over 2026? Michael Williams: Well, I mean a lot of it's driven by the price of oil and overall global demand, right? I think there are some other influencing factors like what sanctions and how effective sanctions against Russian oil are. And would that increase domestic production in North America? And then we would -- we most likely would benefit from that increased production, higher oil prices tend to drive increased production too. Other areas where as these LNG plants come on over the next couple of years that they're building, that will drive gas consumption, pipelines, et cetera, or natural gas production et cetera, to feed the global markets that they're targeting, that's all positive stuff for, but that takes time. We are seeing where we're -- actually probably where we're seeing potential increases in 2026 is that energy end market has historically procured a lot of SBQ into offshore and those tariffs are starting to affect their thinking and their buying strategy. So we've seen a tremendous amount of inquiries for 2026 for our energy end markets and customers. David Storms: Understood. That's very helpful. Turning to your order book. Just curious as to how you feel it's tracking relative to this point last year? I know you mentioned you want to be about 70% booked going into the year. Do you feel like you're on pace to meet that goal relative to last year? Or just maybe were do things stand there? Michael Williams: Yes. We're pretty strong believers that we're going to get to that 70%. It could be a little bit higher depending on the pricing landscape. We are seeing customers telling us, not every customer, but some key customers telling us their internal production forecast for next year are going up, and we see them asking for more volume for 2026. So we're very happy about that, and we look forward to delivering an even better 2026. David Storms: Understood. That's very helpful. And then just maybe one more for me. I know last quarter, we talked about energy input prices and that you were working on a new negotiation there. Would just love to hear where that stands going into the new year. Michael Williams: I think the biggest one is electrical energy. And we had a long-term contract that expired in May of this year, and we had to go to market. I can tell you that prices -- market prices change significantly for the time of that really nice electrical energy contract we had. So yes, and we've been transparent that we're seeing cost increases on our electrical energy purchases. We currently have a 2-year agreement for a large portion of our requirements, but there is a small portion that's exposed to market pricing, and we'll watch that very closely. We have many projects in the pipeline to work on reducing our electrical energy consumption and let alone also increase our efficiency of production with how much electrical or kilowatt per ton we use. And on the natural gas side, we're purchased forward for 70% to 80% of our needs for next year. And we actually probably are out 5 years at various supply requirements, but we're an active buyer in the market, and we're very opportunistic. So we looked for the best competitive prices we get and position ourselves for the best cost in those unit prices for both electricity and natural gas. John Zaranec: Yes. And Dave, real quick, one thing to add to that, what Mike was saying on electricity is we -- if you recall at the end of Q2, we said $2 million to $3 million of sequential cost increase, that's what we experienced. So we kind of guided that, and that's what we saw. And that's aligned with the contracts that we've lined up for the next 2 years. Operator: [Operator Instructions] Your next question is a follow-up from John Franzreb with Sidoti & Company. John Franzreb: I'm just curious about the CapEx spend. You dropped it down a little bit this year. What does next year look like? Michael Williams: Well, we're in the planning phases of that right now. The reason why we dropped down the forecast is it's all about timing. It's tied to completion of work as well as payment terms tied to after that completion and how long before we have to pay them. So it's all a timing issue. On the -- for 2026, we're in the planning phases right now, John. So we'll talk more to that early next year. John Franzreb: Okay. And if I recall, you brought in a third party to help you maybe with your floor operations. Any kind of progress you can report about that and how that's going? Michael Williams: Yes. We're very pleased with the progress, and you're going to start to see those results throughout the remainder of this year. The project is not over, but we're very pleased with the outcomes of the findings, the improvements that they're assisting with and helping my team implement them. This project goes on until late March. So a lot of those benefits will be realized in 2026. John Franzreb: Actually helpful. And I guess lastly, on the new A&D awards, maybe any additional color you want to provide and maybe the timing of revenue recognition or material revenue recognition from those jobs? Michael Williams: Yes. We're starting to actually see some of that now, particularly in the VAR VIM sales that continues to grow, which is just value creation for this company. And that's only going to continue to grow in 2026. We expect the munitions to continue to build demand build as some of the downstream supply chain issues get resolved throughout the end of this year and early next year. And then we're getting awarded as we commented earlier, a number of new programs, weapons programs, gun barrel programs, aircraft bearings, et cetera, that demand and the realization of that value growth is really going to materialize in 2026, in my view, as a notable rate. And like we said, our objective overall was to achieve or exceed a run rate of $250 million a year of revenue, and we're very confident that we'll hit at least that in 2020 -- by mid-2026. Operator: That concludes our question-and-answer session. I will now turn the call back over to Jennifer Beeman for closing remarks. Jennifer Beeman: Thank you all for joining today, and that concludes our call. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Thank you for standing by. This is the conference operator. Welcome to the Source Energy Services Third Quarter 2025 Results Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Scott Melbourn, CEO, Mr. Melbourn, please proceed. [Technical Difficulty] Thank you for standing by. This is the conference operator. Welcome to the Source Energy Services Third Quarter 2025 Results Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Scott Melbourn, CEO, Mr. Melbourn, please proceed. Scott Melbourn: Thank you, operator. Good morning, and welcome to Source Energy Services Third Quarter 2025 Conference Call. My name is Scott Melbourn. I'm the CEO of Source. I'm joined today by Derren Newell, our CFO. This morning, we'll provide a brief overview of the quarter, which will be immediately followed by a question-and-answer period. Before I get started, I'd like to refer everyone to the financial statements and the MD&A that were posted to SEDAR and the company's website last night and remind you of the advisory on forward-looking information found in our MD&A and press release. On this call, Source's numbers are in Canadian dollars and metric tons, and we will refer to adjusted gross margin, adjusted EBITDA and free cash flow, which are non-IFRS measures as described in our MD&A. Except for the items just mentioned, our financial information is prepared in accordance with IFRS. After a couple of record quarters this year and as anticipated, we experienced a slowdown in completions activity in Q3 as weaker commodity prices in both oil and natural gas, along with some economic uncertainty caused our customers to defer some of their completions to the fourth quarter and into 2026. During the quarter, natural gas prices were hit particularly hard due to pipeline maintenance and LNG Canada not ramping up as fast as markets had expected, resulting in depressed AECO pricing. This work has not been lost. It has just been delayed. And as a result, we are expecting a much stronger Q4 than we had last year. And for the second half of 2025, we expect similar volumes as the second half of 2024. During the third quarter, we continued to build our infrastructure to support the development of the Montney play. The expansion of the Peace River mine to 1 million tonnes of processing capacity is nearing completion as is the construction of the Taylor terminal, which became fully operational during the quarter. Source also seized on a unique opportunity to acquire sand processing assets at a very attractive price. These assets, once disassembled and moved will be used for the future expansion of the Peace River facility. The purchase comprises substantially all of the processing assets required to expand the production at the Peace River facility to a total capacity of 3 million tonnes per year. While we have made the decision to purchase these assets in order to move quickly when the time is right, the time line for bringing these assets into operation will be dependent on the next phase of LNG export capacity and how quickly the overall proppant market in the Western Canadian Sedimentary Basin grows. With lower activity levels in Q3, we realized the following results: Sand sales volumes of 665,000 tonnes, a 31% decrease from last year. Sand revenue and well site revenues, which include trucking and Sahara results in Canada were impacted proportionately by the lower sales volume, while realized pricing actually improved. Total gross margin were down due to lower sales volume. Adjusted gross margin per ton of $45.57 is in line with prior years and year-to-date results. Adjusted EBITDA was $20.3 million, a $15.1 million decrease from the third quarter of 2024. On the capital management front, we remain committed to disciplined balance sheet management, reducing outstanding debt by $11.7 million this quarter and a total of $19.9 million for the year. Building on that progress, we move beyond debt reduction and are now allocating a portion of free cash flow to share repurchases through the normal course issuer bid. Since launching the program in May, we have repurchased 392,000 shares, including 167,500 in Q3, further enhancing shareholder value and reinforcing our capital structure. With that, I will now turn it over to Darren. Derren Newell: Thanks, Scott. As Scott mentioned, Source sold 665,000 metric tons of sand in Q3 '25 from which we generated $100.3 million in sand revenue. Sand volumes were 31% lower for the reasons Scott explained, while sand revenue decreased by $42 million. The decrease in revenue was volume driven as the average realized price per metric ton actually increased by $3.15 compared to the prior year. The increase in the realized price was primarily due to a shift in terminal mix, partly offset by an increase in lower-priced finer sand sales. Wellsite Solutions revenue for Q3 '25 was $23.9 million, a decrease of $16 million compared to Q3 '24. Lower sand sales volumes impacted the volumes hauled to and handled at the well site. In Canada, this resulted in lower trucking revenue and Sahara utilization, which came in at 47% for the quarter. The U.S. Sahara fleet, however, was 100% utilized as it is fully contracted. Terminal services revenue was $1.1 million, an increase of $0.2 million compared to Q3 '24 due to higher revenue from chemical elevation volumes realized in the period, including the impact of the addition of hydrochloric transloading at the Chetwynd terminal. Cost of sales, excluding depreciation, decreased by $44.8 million for the quarter compared to the same period in '24 due to the decreased sand volumes sold and lower truck volumes. On a per ton basis, cost of sales was increased by a shift in terminal mix and decreased by fewer third-party sand purchases. The movement of foreign exchange rates on the U.S. dollar-denominated components of cost of sales caused an increase of $0.72 per metric ton compared to the third quarter of last year. Total adjusted gross margins were lower due to lower sales volumes and lower volumes trucked to the well site. On a per ton basis, excluding gross margin from mine gate volumes, adjusted gross margin was $46.56 compared to $45.89 for the third quarter of '24. During the quarter, adjusted gross margin was favorably impacted by a customer performance bonus that was partially offset by the impact of additional costs attributed to the expansion of operations at the Peace River facility compared to third quarter of last year. For the 3 months ended September 30, the weakening of the Canadian dollar favorably impacted adjusted gross margin by approximately $0.52 per metric ton. Operating expenses in Q3 increased by $0.7 million due to higher royalty-related fees, insurance premiums and rail expenses for Source's fleet as well as the incremental costs incurred with the Taylor facility beginning operations. These increases were partially offset by lower people costs, reflecting reduced incentive compensation. General and admin expenses decreased by $0.3 million for Q3 '25, primarily due to lower variable incentive compensation costs. This reduction was partly offset by the amortization of Source's computing system, which we implemented last year. Finance expense for the Q3 was lower by $1.6 million compared to Q3 '24. The decrease was due to $0.9 million in lower interest expense for long-term debt outstanding, including an adjustment to capitalize nonutilization fees on delayed draw facility incurred during this year as well as lower accretion expense. Partly offsetting these was an increase in interest expense for outstanding lease obligations driven by the addition of heavy equipment leases and interest income earned. Interest income realized is attributed to the commencement of the subleases for Sahara units deployed last year as well as cash balances on hand. At quarter end, Source had available liquidity of $65.7 million. Capital expenditures for Q3 net of proceeds on disposals and excluding expenditures related to Taylor were $18.5 million, an increase of $15.3 million compared to Q3 '24. Growth capital expenditures, excluding the construction of Taylor increased by $12.5 million, substantially attributed to the assets acquired for the future expansion of Peace River facility, as Scott discussed. We also acquired some trailers for Source's trucking operations. Maintenance and sustaining capital increased by $2.8 million for Q3 '25, largely due to higher amounts for overburden removal from the mining operations. Lease obligations increased from the prior quarter, largely due to the timing of the addition of heavy equipment for Peace River done in the latter half of '24 and yellow iron leases for the Wisconsin mining operations, which were replaced late in '24 at higher rates. Source is now in a cash taxable position in its U.S. operations and expects it will be cash taxable next year in Canada. And with that, I'll turn it back to you, Scott. Scott Melbourn: Thanks, Derren. As a result of the delays in completion activity experienced in the third quarter, Source anticipates increased activity levels for the remainder of the year, which will result in a solid rebound for the fourth quarter and the full year 2025 proppant demand similar or slightly ahead of 2024. We expect 2026 to be a strong year for Western Canadian Sedimentary Basin completion activity, driven by additional export capability via LNG Canada as it ramps up its production. We are pleased to note positive developments regarding all the proposed and under construction West Coast LNG projects, which will ultimately further expand export capability from the WCSB. Over the long term, we continue to believe increased demand for natural gas driven by LNG exports, increased natural gas pipeline export capabilities and power generation will drive incremental demand for Source's services. Source continues to focus on enhancing our industry-leading frac sand logistics chain, and we have and will continue to execute on a number of opportunities to grow the company and to further our competitive advantage. Thank you for your time this morning. That concludes the formal portion of our call. We'll now ask the operator to open the lines for questions. Operator: The first question comes from Nick Corcoran with Acumen Capital. Nick Corcoran: Just the first question for me. You mentioned that completion activity slowed in the quarter. Can you maybe talk to what you've seen month-to-month through the quarter and maybe into Q4 as well? Scott Melbourn: Yes. We saw sort of the beginning of Q3 as really status quo. And then we start -- we -- as we progressed in Q3, the activity level started to slow. We're kind of seeing the reverse of that as we move into Q4, we've seen activity levels starting to ramp. We expect to continue to ramp throughout the balance of Q4 and then slow down with our normal seasonal slowdown in December for -- as everyone kind of pauses for the holiday period. Scott Morrison: That's helpful. And you mentioned sand volumes expect to be flat to slightly up in 2025. Any indication what you're expecting in 2026 and 2027 based on initial discussions with customers? Scott Melbourn: I think our initial view of 2026 is we will likely see some growth over where we ultimately end in 2025. I would caution, we're really early days with our customers' budget and the budgeting process. So there's certainly going to be some ins and outs. However, we do believe that we're going to see some growth '25 to '26. And as we cycle into '27 and beyond, I would expect that we're going to see additional growth in those years as well. Nick Corcoran: Great. And maybe a question for Darren. Any guidance on what -- where CapEx will land for '25 and '26? Derren Newell: You've seen our capital move up. We're sort of in the 45 to 50-ish range right now with capital for '25. '26 is early days. As we work through kind of where we are with our Peace River expansion and the timing of it, not quite ready to tell the world what the plan is. Nick Corcoran: That's fair. And then maybe a related question. There's been some recent news of another mine expansion in Alberta. I'm just wondering how you expect these to impact the overall market going forward? Derren Newell: Sorry, Nick, I missed the first part of that question. Nick Corcoran: Yes. Just recent news of other mine expansions in Alberta. Scott Melbourn: Yes. Maybe I'll take that one, Nick. I think we're not surprised by other domestic players in Alberta expanding their production capability. I think we've seen a movement in the market generally to a little more domestic in their program. We're very confident in our Peace River asset, and we're very confident in our Northern White offering, especially as it relates to the Montney and the location advantage we have at Peace River and our network throughout the Montney. So we don't anticipate those expansions or those announced expansions to have really much of an impact on our business and our core areas at all. Obviously, we'll be keeping a close eye on it, but I think our location advantage and our network advantage is substantial, and we won't see much of an impact at all. Operator: This concludes the question-and-answer session. I would like to turn the conference back over to Scott Melbourn for any closing remarks. Scott Melbourn: Thank you, everyone, for joining our call today. If you have any follow-on questions, please feel free to reach out to myself or Darren. Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
Operator: Greetings, and welcome to the TruBridge Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dru Anderson. Thank you. You may begin. Dru Anderson: Thank you. Good morning, and welcome to the TruBridge Third Quarter 2025 Earnings Conference Call. Leading today's call are Chris Fowler, President and Chief Executive Officer; and Vinay Bassi, Chief Financial Officer. This call may include statements regarding future operating plans, expectations and performance that constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The company cautions you that any such forward-looking statements only reflect management expectations and predictions based upon currently available information and are not guarantees of future results or performance. Actual results might differ materially from those expressed or implied by such forward-looking statements as a result of known and unknown risks, uncertainties and other factors, including those described in public releases and reports filed with the Securities and Exchange Commission, including, but not limited to, the most recent annual report on Form 10-K. The company also cautions investors that the forward-looking information provided in this call represents their outlook only as of this date, and they undertake no obligation to update or revise any forward-looking statements to reflect events or developments after the date of this call. At this time, I will turn the call over to Mr. Chris Fowler, President and Chief Executive Officer. Please go ahead, sir. Christopher Fowler: Thank you, Dru, and thank you to everyone for joining us today to discuss our Q3 results. To start the discussion, I want to take a moment to reflect on the meaningful progress we've made to improve the quality of our earnings and our financial performance over the past 7 quarters through our continuous focus on streamlining and improving our operations. Specifically, we have expanded margins, accelerated free cash flow generation and delevered the balance sheet, all while continuing to support our customers with mission-critical solutions that improved financial and operational performance across rural and community hospitals. Vinay will provide a much deeper dive into the details of the success these initiatives have yielded, but I'm very proud of the work we've done and believe we can replicate these efforts in other areas of the business. Turning to the specifics of the quarter. Our bookings came in at $15.5 million on a TCV basis compared to $25.6 million sequentially and $21 million year-over-year. While light from an absolute dollar basis, our focus is on continually improving the quality of bookings, which is more evident when you look at the numbers on a year-to-date basis. As we've mentioned in the past, investments we've made to improve our products, specifically within our Encoder business, have allowed us to win higher-margin deals. Along with positive traction within Encoder, we've seen our percentage of financial health bookings in the 100- to 400-bed space increase from less than 20% in 2024 to more than 30% in 2025. As we continue to succeed in RCM tech and in the 100- to 400-bed space, we create more paths to improve bookings performance quarter-over-quarter and year-over-year. While the bookings performance of Q3 was underwhelming, our fourth quarter sales efforts are off to a strong start. Historically, bookings have been weighted towards the end of the quarter, but October meaningfully outpaced what we typically expect to book in the first month of a given quarter. Broadly speaking, our bookings still remain chunky, so we're not claiming victory just yet, but we are pleased with the signs that whatever was restricting pipeline conversion in Q3 seems to have alleviated. In today's operating environment, not all factors are within our control, so we continue to focus on addressing the challenges that are within our control, like ensuring that we have the highest quality talent on board. In early October, we officially welcomed Mike Daughton to the TruBridge team as our Chief Business Officer. In this role, Mike will be leading sales and marketing and our client success teams. He is focused on building high-performing teams, holding key team members accountable for exceptional client management and consistently delivering enterprise value and measurable impact. Our expectation of Mike is that he will raise our sales efforts to the next level in terms of order and efficiency, providing more visibility into tracking bookings and revenue growth and focusing on those high-quality opportunities I spoke about earlier. He brings a skill set that will empower our team to go after the larger market, which we know is obtainable with the right discipline and focus. To further enhance our performance initiatives, I'm pleased to report that our offshore transition is progressing as we start to operationalize the strategic plan we spoke about last quarter. We continue to fill out our leadership team, including a Head of India to ensure we have the right leaders in place to execute on the plan. The team has made the foundational improvements necessary to ensure success and put in place a thorough metrics-driven approach we believe was imperative to allow us to turn the transition machine back on. As of October 1, we have begun at a measured pace. Currently, we have 2 transitions in the works with more coming in the fourth quarter. As we restart our transitions, we are working in close coordination with each customer to provide a clear understanding of the expectations of how the process will unfold. We have also put in place structural support to ensure continuity of staff from our domestic workforce on each transition to guarantee a stable handoff. As we look ahead to 2026, we plan for transitions to accelerate gradually, but we'll only do so when we are confident it will not cause disruption. As we move carefully through the customers to be transitioned, we will track performance metrics with a hyper focus on stability, communication and each customer's comfort with the process. We stated all along that this process is key to continued margin expansion in 2026 and beyond, but we will not sacrifice the quality of our service to get there. Our commitment to the strategic transition process would not receive a great grade if improved client retention wasn't an intended outcome. While the absolute number of client losses increased a little in Q3, our net retention -- our net revenue retention for our core CBO business has shown a couple of points of improvement from the first half of the year. Renewals were stronger in Q3 than in Q2, and that trend continues into October. As we've shared previously, we initiated a multi-quarter process earlier this year to enhance client success quality, drive operational efficiency and strengthen the capabilities of our India team. I believe this, along with the careful and strategic approach we've taken to restart our transition process will give us the opportunity to improve our long-term client retention. Looking ahead to the end of 2025 and into 2026, the keys to sustainable and durable performance for TruBridge are clear. First, implementing the rigor that has led to success in improving our financial health into more areas of the business; two, deliver higher-quality bookings; and three, carefully and thoughtfully executing on our strategic transition process and in turn, improving customer satisfaction with the goal of increasing our retention. During the third quarter, we made strategic and effective changes to drive sustainable long-term performance. We know we have the right foundation in place to progress in these areas and look forward to providing updates in the coming quarters. With that, I'll turn the call over to Vinay to review the financials. Vinay? Vinay Bassi: Thanks, Chris, and good morning, everyone. Let me take a few minutes to highlight some of our financial achievements over the past 2 years, review our third quarter results and then provide additional color on our outlook for the remainder of the year. We have come a long way since I joined in January 2024 with significant improvement on adjusted EBITDA margins, free cash flow and leverage. Specifically, adjusted EBITDA margins are expected to expand approximately 600 basis points from 2023 to year-end. Year-to-date, free cash flow has improved dramatically by $20 million, and we have paid down debt by approximately $35 million, reducing our net leverage position by more than 2 turns, all amidst a complex operational backdrop. As Chris mentioned, since the end of 2023, we have meaningfully improved the quality of our earnings, and we believe we are in significantly better positioned today than just 2 years ago. One of our top priorities was to drive efficiency and cost optimization across the organization. We put in place many process improvements, including an ROI-driven assessment of our spend, clear accountability to the business units and the monthly forecast reviews of the business. Throughout 2024, we implemented cost optimization decisions along with the change in mindset throughout the organization, resulting in an adjusted EBITDA margin of 16.5% for the year, a 340 basis point improvement compared to 13.1% in 2023. In 2025, based on the midpoint of our guidance, we are on track to reach 19% margin for the full year, yielding another 260 basis points increase. Continuing with the same mindset, we have identified and are in process of actioning additional cost optimization opportunities in combination with incremental net savings expected from the global workforce transition. I'm confident that as these actions compound, we will be able to deliver continued improvement in our margin profile in 2026 and beyond. Further, disciplined ROI-driven cost management and investment decisions have significantly optimized our product development spend. As a result, capitalized software spend has decreased by 30% from approximately $18 million in the first 3 quarters of 2023 to approximately $12.5 million in the first 3 quarters of this year. Additionally, year-to-date capitalized software spending as a percent of revenue has come down to 4.8% from 7.2% in the corresponding period. These efforts, along with the working capital improvement have resulted in growth in our cash balance from $3.8 million at the end of 2023 to approximately $20 million today. In addition, free cash flow, which we define as operating cash flow less CapEx, was $15 million year-to-date in 2025 compared to a cash outflow of $5 million in the corresponding period in 2023. Further, we have also continued to strengthen our balance sheet through disciplined debt reduction, paying down debt by approximately $35 million since January 2024 and improving our net leverage ratio from 4.4x in Q4 2023 to approximately 2.2x by Q3 2025. This also marks the third consecutive quarter with net leverage below 2.5x, highlighting our consistent focus on balance sheet improvement and capital efficiency. As cash generation continues to accelerate, we are well positioned to conclude the year with a meaningfully stronger financial foundation. Turning now to our Q3 2025 financial performance. Total revenue for the third quarter was $86.1 million, an increase of approximately 2% compared to a year ago. However, I'd like to point out the year-over-year growth included approximately $1 million impact from the sunset of our Centriq product in the Patient Care unit. Normalizing for this, revenue would have been up 2.8% versus the prior year. Further, recurring revenue continued to be high around 94% of our total revenue. Financial Health revenue of $54.5 million in the quarter represented approximately 63% of the total company revenue and was essentially flat year-over-year. Mid-single-digit growth in our CBO business and strong growth in Encoder revenue were offset by slower performance in other products. Financial Health gross margin of 46.2% were almost flat compared to the prior year as labor efficiencies were offset by incremental investments in the stabilization of CBO business. Patient Care revenue was $31.6 million, reflecting 5.3% year-over-year growth, primarily driven by growth in SaaS and some nonrecurring revenues offset by the sun setting of Centriq. Excluding Centriq, growth in Patient Care revenue would have been 8.9% in the third quarter. Patient Care gross margin expanded meaningfully to approximately 60%, an increase of nearly 370 basis points versus last year, driven by continued operational efficiencies in vendor spend and labor costs. Operating expenses of $40 million represented 46% of revenue and were roughly flat to the prior year as a slight increase in investments in product development for Encoder and Financial Health and in support functions were offset by lower nonrecurring costs. All of this resulted in third quarter adjusted EBITDA of $16.3 million with an 18.9% margin, representing a 155 basis point improvement compared to 17.3% in the third quarter of 2024. This margin expansion is primarily driven by gross profit improvement and our disciplined approach to cost management. We ended the quarter with $19.9 million in cash, an increase of $11.3 million, 132% year-over-year and an increase of $7.6 million sequentially, primarily driven by improved profitability, lower interest expense and disciplined working capital management. Net debt was approximately $144 million, and our net leverage ratio improved to 2.2x, marking our strongest leverage position in several years. In Q3, we repaid approximately $2 million on our debt, including normal amortization payments, bringing our total payments to approximately $35 million since January 2024. Finally, turning to guidance for the fourth quarter and the rest of the year. For the fourth quarter of 2025, we expect revenue of $86 million to $89 million and adjusted EBITDA of $16.5 million to $19.5 million. And for the full year 2025, we expect revenue of $345 million to $348 million and adjusted EBITDA of $65 million to $68 million. Once again, we will be increasing the adjusted EBITDA guidance for the full year despite lowering the midpoint of revenue. At the revised midpoint, margins expand approximately 260 basis points compared to the prior year, driven by a continued focus on prudent cost management and ROI-driven cost rationalization. As communicated in the past quarters, we expect the adjusted EBITDA margin in Q4 2025 to be around 20% at the guidance midpoint. While we will not provide formal 2026 guidance until early next year as usual, we do want to take this opportunity to share that we believe we will deliver further adjusted EBITDA expansion -- margin expansion of around 200 basis points from the midpoint of our full year 2025 guidance. This is primarily driven by the next level of cost optimization actions we have identified and are in process of realizing along with the net savings from the next phase of global offshore transitions. Through the first 3 quarters of the year, I'm pleased with the meaningful progress in improving the quality of our earnings and looking forward to end the year on a strong financial footing. There is still more work to be done and will continue to be laser focused on continuous improvement. Thank you. And I will now turn the call over to Christine for questions. Operator: [Operator Instructions] Thank you. Our first question comes from the line of Sarah James with Cantor Fitzgerald. Gabrielle Ingoglia: This is Gabie on for Sarah. I had a quick question about bookings coming in at $15.5 million, and I appreciate the fact that they're higher quality bookings. But can you talk about where this landed in terms of your internal initial expectations for bookings in the quarter? And if we should expect the cadence of bookings to be with higher EBITDA margin from here? Christopher Fowler: Yes. So first of all, Gabie, and please share our congratulations to Sarah as well. Obviously, not the number that we were looking for. I would say we're probably 20% off the number of what we were expecting for the quarter. And again, it wasn't like we saw a negative decision influence on this. It was more of a delayed decision. And I think that, that's showing through in the early success of Q4 and what we're seeing in October. I will say we are being very intentional on the bookings that we're going after on the Patient Care side focused on our conversion to the SaaS model, which is a larger overall booking and does have some more complexity. So it has expanded the buying decision at the customer level. On the Financial Health side, we continue to be optimistic about the opportunity that's out there. We've just got to continue to get these hospitals to see the value and the need for the additional services to come in. As the regulatory landscape settles down a little bit, I do think that the focus on improvement for the RCM side of the house for the hospitals will continue to be a priority and will lead to increased bookings efforts going forward. Vinay Bassi: And on the margin question that you asked on -- sorry, on the bookings, Gabie, we are seeing an improved quality from a margin also like for example, bookings for our Encoder business, which is like a very high 70%, 80% margin. Year-to-date 2025, the bookings percent for Encoder in the last year to this year has almost doubled. The more we get, the better margin we have. But obviously, the mix of the bookings, obviously, have a bearing, but I think we have seen a trend to be positive. Gabrielle Ingoglia: Okay. Great. And then just one more follow-up on that, if I could. In the conversations where the hospitals are choosing to delay implementation, are you seeing that any commonality and if it's referenced to Medicaid funding cuts coming through One Big Beautiful Bill? Or is the $50 billion rural hospital fund and net benefit coming up at all in your conversations? And could that be a tailwind in '26? Christopher Fowler: Yes. I think it will be a tailwind. Again, I think the uncertainty is, again, not changing people's decision. It's just delaying them for just a beat. We are seeing that pickup. I think there's also the impact of the vast majority of our hospitals are on a calendar year budget cycle. So you take the impact of the budget process and what they're doing or what they're trying to figure out relative to what the OBBB may have an impact on their next year is creating some delay. But again, as they're shoring up what their spending needs are for '26, we're starting to see those decisions accelerate. Operator: [Operator Instructions] Our next question comes from the line of Jeff Garro with Stephens. Jeffrey Garro: Maybe we'll follow up a little bit on the bookings front and great to hear the mention of October bookings success. It sounds like that kind of reflects timing, maybe some decisions pushing out of Q3. So with that, I was hoping you could discuss kind of the broader pipeline, the state of the pipeline. And then kind of help us level set bookings growth expectations for the year. Just more specifically, if some decisions pushed out from Q3 into Q4, is there enough in the pipeline that kind of pro forma back half of the year could deliver in line with maybe what you were intending or could compare to last year as well if there should be an expectation for overall growth or not? Christopher Fowler: Yes. First of all, Jeff, thanks for being on the call. Yes. The short answer is I would say, I wouldn't draw a straight line to the second half of the year based on the early success of October kind of covering up the shortfall in Q3 at the very top of it. With that being said, obviously, we are focused on driving as much performance from a bookings perspective into this year as we can. Obviously, Mike has stepped in with guns blazing at the first of October. And while a leadership change can also lead to a little bit of disruption, we're pleased with the continuity and the smooth transition that we've seen from Dawn to Mike and how the team has rallied behind him. So with that said, we're off to a good start. We've got the bookings. We've got the pipeline coverage to cover what we expect for Q4. However, what we could see is a very similar outcome to Q3, which is those bookings continue or those pipeline decisions continue to delay. We try to balance the optimism that we're seeing with making sure that we're setting the right expectations, obviously. So with that said, we're very focused on making sure that we convert on those opportunities to close this year. I think the balance of the rest of this year will also set up how we're looking into going into next year. What is positive as we see the pipeline build is that there is coverage on a lot of fronts. You heard Vinay talk about the Encoder and the success we're seeing there. We're seeing that same optimism build on the Patient Care side with the SaaS bundled opportunities and again, in the Financial Health, both from a cross-sell standpoint and into that net new space. So now it's just a matter of seeing that pipeline convert to those bookings opportunities. Jeffrey Garro: Excellent. I appreciate that. And I want to follow-up on one thing there. On the new sales leadership, just kind of hoping to get a little bit more detail on kind of what's needed. What's the path from here? What's the process for improvement? I want to recognize there have been efforts over the last couple of years to increase quality and consistency of bookings. And I think for the most part, you've had positive returns there. So curious how -- or whether new leadership will need to bring in new tenants and rebuild from the ground up? Or is there a case to be made that Mike can just be an immediate difference maker as you try to convert more of that pipeline to close bookings? Christopher Fowler: Yes. That's a very fair question. I would say it's probably a mix of both, right? I mean if you look at how we've gone through the other areas where we brought new leadership, I think we want to make sure that we're taking advantage of the talent and the continuity that we have, but also make sure that we're finding the resources and the talent that have been down the road that we're trying to go down. I think the Financial Health organization is a great example of that, where we brought in additional talent and leadership under Merideth that have been a part of a transition to India or operating a successful global environment. So I think that Mike will do the same thing. I think that we're going to make sure that we have the right infrastructure in place for him. I'm excited about also tying together the sales, marketing and the client success function together under him so that we do have that holistic view of a customer, both in the pipeline and all the way through as we onboard them and that we've got single ownership there and accountability to deliver on the fronts that are most important to us, which is the retention and the growth. So a long-winded way of saying. I think that we're going to give Mike the latitude to bring in the team and support him to make sure that we're able to achieve the bookings goals that we've got set for ourselves over the coming years. Jeffrey Garro: Excellent. That helps. One more for me. I want to make sure to hit the retention front. And I'll ask it in part as a housekeeping question, whether you have the recurring backlog number that usually shows up in the 10-Q on hand. And then from a fundamental perspective, I wanted to recognize that that's a bit of a legacy metric, but given the focus on renewals and retention and recurring revenue, I think there's a case to be made that it's as important as ever. So I would appreciate any color on whether you guys are managing to that backlog, I guess, most specifically the recurring backlog metric internally. Vinay Bassi: Yes. So we do look at the backlog because we run it this way. And that number, obviously, will be in the 10-Q coming up in the next few hours. So on how we do it, just to give you a little color more is on backlog for that number is contracted and noncontracted. Contracted revenue is at a client level, monitored with ins and out to it. And like we said, in like in Financial Health, it's like 95%, 96% is generally how we start the year. Like if you look at our recurring numbers that I see right now, it's 94%, Financial Health is like 95%, 96%. So we have a huge contracted revenue there. But obviously, the ins and out of that is attrition that happens and how the bookings fill in, that gives the impact on the growth rate. But I think the backlog number should be coming out in the 10-Q in the next few hours. Operator: Our next question comes from the line of Gene Mannheimer with Freedom Capital. Eugene Mannheimer: Let's see. I just had 2 quick ones. The Patient Care revenue was the best growth we've seen in some time. You called out a combination of SaaS build and nonrecurring. I mean, since that SaaS build is pretty gradual, I'm thinking you recognize some good nonrecurring business in the quarter. Can you tell us what specifically customers are buying in those cases? Vinay Bassi: Yes. So you're right. There are 2 parts to that. Obviously, SaaS based on a few wins of the past shows up as a double-digit growth. But the nonrecurring part -- and nonrecurring part is the mix of implementation revenues when it gets recognized because sometimes it gets recognized at the time. Then there are other nonrecurring revenues for some regulatory related consulting work and regularly related stuff that we do. So we do see an uptick and some of compared to last year, we saw in this quarter a little bit more. But if you see that swings happen by Q4 of '24 was a much higher number because of these. So the swings on -- other than SaaS continued build on our partner ecosystem that we see on products like Multiview and all implementation, sometimes we do have some hardware sales requested by the customers and some ancillary products. Eugene Mannheimer: Okay. Great. That's helpful, Vinay. And my follow-up would be, your comment earlier was encouraging to hear, if I heard it right, 200 bps of EBITDA margin expansion expected next year. I'm thinking that, that's going to be due primarily to continued cost efficiencies? Or should we infer that there could be an acceleration of revenue growth next year? Vinay Bassi: That's a great question. That's a great question, and I think you guys know me well by now. For me, 200 bps is primarily from the cost optimization first. And that's not just a hope part of it. As you saw last year, it's a continued effort, and it will continue. We did the lowest level last year, which was all that Chris and I and the leadership team could see. And then over the years, we built our next level of optimization with help from internal teams and our adviser, external advisers. And this momentum that we started more in the second half of this year is targeting a little more complex solutions like Patient Care support, tech support, cloud ops and ROI driven on some other products. So that line of sight and the potential that I see next year and at least that DNA, I can say, we have built in there, we are maniacally going to make sure it falls to the bottom line. So that's one of the big drivers for that number along with the benefits that we would see from the global workforce optimization should be there. Now obviously, some implicit scenarios on revenue growth has been built. But as Chris said, it's a little early for us to give that guidance. But from a various scenario analysis we did, we felt getting that 200 bps from our midpoint of our guidance was very achievable. And that is what we felt to share with you because 4 quarters back, we shared that we will be touching 20% in Q4 '25, and that was a good goal for us. So it helped us be laser focused. So at this point, we felt 200 bps over and above was -- we could see a few paths to get there. Christopher Fowler: Yes. And I think, Gene, I think there's also a trend that we're trying to create here. So if you go back 2 years ago, as Vinay came in, and you're seeing the stability and the financial improvement in the company, that's the first layer of the cake. The second layer is Merideth and her team coming in and stabilizing the Financial Health business and accelerating and delivering on that opportunity for the global transitions, which is going to be the big driver in the margin expansion next year. And then now we brought in Mike to really kind of focus on that upsized opportunity from a sales growth and quality of bookings going forward. So it's the 3 layers of the cake that we've built. We've shown that we can bring that right talent and deliver on the financial excellence. We're delivering on the performance from the financial health and the stabilization of that business. And now we look forward to success on the sales front going forward. So just continuing to replicate a model that seems to work in each of the areas to put it all together to extract the value we think is still ready to unlock in the organization. Operator: Mr. Fowler, we have no further questions at this time. I'd like to turn the floor back over to you for closing comments. Christopher Fowler: Thank you, and thank you to all for your continued interest in TruBridge, and thanks to all of our team members for their continued efforts at the company and all that they do. And lastly, a very early Happy Veterans Day. We express our gratitude to all those that have served our great country, and hope everyone has a wonderful weekend, and thanks again. Goodbye. Operator: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
Operator: Ladies and gentlemen, thank you for standing by. Hello. My name is Dustin, and I will be your conference operator today. At this time, I would like to welcome you to Riley Exploration Permian Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to our CFO, Philip Riley. Please go ahead, sir. Philip Riley: Good morning. Welcome to our conference call covering our third quarter 2025 results. I'm Philip Riley, CFO. Joining me today are Bobby Riley, Chairman and CEO; and John Suter, COO. Yesterday, we published a variety of materials, which can be found on our website under the Investors section. These materials in today's conference call contain certain projections and other forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements. We'll also reference certain non-GAAP measures. The reconciliations to the appropriate GAAP measures can be found in our supplemental disclosure on our website. I'll now turn the call over to Bobby. Bobby Riley: Thank you, Philip. Riley Permian delivered another solid quarter marked by disciplined execution and strategic progress on multiple fronts. In July, we closed the Silverback acquisition and began integrating the asset where we are already realizing synergies. In just a few months, we have reduced costs and increased production. For September and October, combined production on the acquired asset exceeded our underwriting case by more than 50%. We executed our development and capital plan during the third quarter, which contributed to significant free cash flow generation. Over the last 9 months, we have generated $100 million of upstream free cash flow, approximately flat compared to the same period a year ago despite a 14% lower realized oil price. We continue to progress our midstream and power generation projects, securing equipment and advancing build-outs. These critical infrastructure projects should enable Riley Permian to scale operations in 2026 and beyond. Today, we are paying our 19th consecutive quarterly dividend as a public company. In October, we increased the dividend to $0.40 per share, up 5% from the previous quarter. Maintaining a consistent and growing dividend underscores our commitment to capital discipline and focus on sustainable free cash flow. With that overview, I'll turn the call over to John Suter, our COO, for operational highlights, followed by Philip Riley, our CFO, who will review financial performance and forward-looking guidance. John Suter: Thank you, Bobby, and good morning. Riley Permian has once again shown its commitment to safe operations, achieving a total recordable incident rate of 0 in the third quarter. We achieved 93% safe days, a metric requiring no recordable incidents, vehicle accidents or spills over 10 barrels. As for activity, in the third quarter of 2025, we completed 5 and turned in line 10 gross operated wells. 5 of those wells turned in line were completed at the end of the second quarter. Average daily net production was 18,400 barrels of oils per day and 32,300 barrels of oil equivalent per day for the third quarter of 2025. Oil volumes increased by 3,200 barrels per day during the quarter, benefiting from the addition of acquired Silverback volumes, incremental production gains from Silverback workovers, along with strong performance from several new wells on legacy acreage. Total net oil production increased from 1.38 million to 1.69 million barrels of oil quarter-over-quarter in Q3. This is an increase of 22% quarter-over-quarter and an increase of 19% compared to the same quarter last year. Total equivalent production is up 34% quarter-over-quarter from 2.22 million to 2.98 million barrels of oil equivalent and up 38% compared to the same quarter last year. Total equivalent volumes grew faster than oil last quarter for 2 reasons: First, because our Texas midstream partner completed some upgrades, which led to materially more gas sold; and second, with the contribution of the Silverback asset, which has a gassier mix currently. This will become more oily as we bring on new horizontal wells. At Riley Permian, we pride ourselves on being a low-cost operator. We nearly doubled our operated well count in New Mexico through the Silverback acquisition. Many of the acquired wells are lower volume vertical wells with a higher cost per barrel. However, we maintained LOE per BOE near $9 per BOE, which is only a 6% increase over Q2 and a 5% increase over the same quarter last year. We believe we can reduce costs further as a result of synergies we're realizing through the Silverback acquisition that we'll discuss shortly as well as increasing the mix of horizontal wells as we continue to develop. Riley Permian picked up a drilling rig in October, getting a head start on our development for 2026. We are drilling 8 to 10 gross wells in Q4, which will set us up for some early completions in Q1 of 2026. In addition to the drilling program, 3 to 5 gross operated wells will be completed in Q4, cementing a solid exit rate for 2025 and base production for the year to come. Our initial look at D&C pricing for the upcoming wells in our Red Lake asset is down nearly 10% over our last campaign in New Mexico. This is the result of softening of prices in both rigs and frac spreads as well as lower steel prices than realized earlier in 2025. Moving to midstream. Our gathering and compression project in New Mexico continues to add value in the form of increased flow assurance by reducing downtime and allowing us to bypass some of the legacy low-pressure systems in the area that struggle with reliability. In the fourth quarter, we plan to upgrade the initial compression facility we installed earlier this year with an incremental 40 million cubic feet per day nameplate compression capacity. This will allow us to utilize 15 million cubic feet per day in addition to what we're currently delivering to our existing provider, and we'll be able to utilize all remaining high-pressure capacity when our transmission line is in service in mid-2026. Low-pressure gathering lines are currently being installed to expand the input capacity to the compressor facility, allowing us to utilize the additional capacity that we will have by year-end. The high-pressure transmission line we're planning to install continues to progress. Permitting is submitted and underway and secured pipe is scheduled to arrive late in the fourth quarter or during the first quarter of 2026. Shifting to power. Our joint venture, RPC's project in Texas continues to grow in scope and improve in reliability. In the third quarter, we added 5% more of our total load to the generation in Texas with 100% uptime in September. In New Mexico, RPC is progressing on the plans for another behind-the-meter generation project. We've begun permitting, designating a location and securing long-term lead items, including 10 megawatts of generators. The pilot generation station as well as the distribution system will begin construction in 2026. We continue discussions to advance both water and oil infrastructure projects that will maximize our ability to control development pace. We also look forward to better realized pricing on our oil barrels as we consider moving away from trucking where opportunities exist. The Silverback acquisition is already realizing value through synergies and cost-saving opportunities since closing. We've been able to drive down fixed costs in the field through things like combining multiple field offices and managing headcount. We expect that those fixed costs will come down 10% to 20% following those and other changes. We mentioned last quarter that we intended to leverage our expertise in water handling to drive down costs in both Silverback and legacy Red Lake assets. In a few short months, we've seen a $70,000 per month decrease in costs due to our integration efforts. We're nearing completion of low-pressure gathering lines that will tie back some of the gas in the Silverback acreage to our compressor station we've built, allowing for better reliability, maximizing production from the area. Significant progress has been made in maximizing production from the asset. Without bringing on any new wells, the Riley Permian operating team has increased production over the purchase case forecast by over 50% for the months of September and October combined. This was achieved primarily through strategic workovers, returning wells to production as well as artificial lift optimization. We're pushing forward with several RFQ processes, attempting to leverage the larger economy of scale achieved through acquisition. We anticipate notable savings on frequently used materials such as steel tubulars and production chemicals as a result. Overall, it's been a very successful quarter for the operations team. We're progressing our efforts on both our midstream and power endeavors. We're already seeing costs come down on our latest drilling program. We're maintaining disciplined operating costs and all of this while achieving record levels of production. Congratulations to the team on a job well done. Philip, I'll now turn the call back to you. Philip Riley: Thank you, John. Third quarter results reflect the Silverback acquisition given the deal closed on the first day of the quarter. The transaction was accounted for as a business combination. Cash paid at closing was $120 million, 15% lower than the $142 million unadjusted purchase price upon announcement, benefiting from cash flow from the January 1 effective date through closing as well as other favorable adjustments. Overall, company third quarter results were either within or favorable to guidance levels. Prices after hedges were roughly flat quarter-over-quarter and oil represented all of our revenue last quarter as we experienced negative natural gas and NGL revenues after fees. As discussed by other operators reporting recently, the industry experienced an especially weak September and October gas market in the Permian with select operators voluntarily shutting in an estimated 1.5 to 2 Bcf a day of gas production. LOE was higher quarter-over-quarter, driven by 2 primary factors. First, from the contribution of higher cost Silverback vertical wells that John discussed earlier and as I previewed on the second quarter call; and second, from increased workover activity associated with the positive results John described earlier, which drove higher corresponding workover expense. A quick clarification is in order here. Investors often associate most dollars spent supporting new production volumes in the form of capital expenditures, while we often opportunistically pursue workovers like these, which get expensed and are embedded in LOE on the income statement. Production taxes were higher as a percentage of revenue as more volume shifted to New Mexico, which has a higher tax rate than Texas. Third quarter administrative costs included transition costs associated with the acquisition and other nonrecurring items, which should normalize over time. On a per BOE basis, costs were squarely within the guidance ranges for LOE and administrative costs. We had nearly $5 million of favorable income tax benefits in the third quarter resulting from the new federal legislation, allowing for increased bonus depreciation, which we realized across our legacy assets, the acquisition and from our midstream project. Third quarter cash flow from operations before changes in working capital was $54 million, higher by 17% quarter-over-quarter, primarily from higher volumes and from slightly higher oil prices before hedges. Adjusted EBITDAX margin was 59%, down from 66% last quarter, primarily as a result of the cost items noted above. On costs and margin, consider that we've just closed the Silverback acquisition. Our team has made good initial progress and is excited by the potential to drive synergies and develop the asset. We're optimistic to lower our cost structure and improve margins over time. We take confidence in this potential given our track record in this area. Since the Pecos acquisition 2 years ago, we've reduced LOE per barrel for that specific asset by more than 30%. During the third quarter, we reinvested only 27% of cash flow from operations before working capital and upstream CapEx or only 36% for the 9 months year-to-date. Third quarter upstream accrual-based CapEx was nearly 40% below midpoint guidance as a result of some delayed non-op activity and infrastructure spending. Some of this will be shifted to the fourth quarter. We generated a very robust $39.4 million of upstream free cash flow in the third quarter, representing 73% conversion of operating cash flow before working capital. Year-to-date, we've generated $100 million of upstream free cash flow or 64% of free cash flow from operations, an amount equal to the same 9-month period for 2024 despite 14% lower realized oil prices. On our other projects, we invested $14 million in our New Mexico midstream project. And in power, we invested $8.5 million with the latter -- into the JV, with the latter being slightly over guidance as we simply accelerated most of the fourth quarter spend to secure some equipment. Year-to-date, we've allocated 31% of total free cash flow to dividends. Debt was $375 million at quarter end, corresponding to 1.3x leverage based on pro forma adjusted EBITDAX, including Silverback. Now I'll move to guidance. We're raising oil production guidance for the fourth quarter by 4% at the midpoint to 19,200 barrels a day. This fourth quarter oil production rate at the midpoint corresponds with 5% quarter-over-quarter growth and 21% year-over-year growth from the fourth quarter of 2024. This leads to a 2% increase in guidance at the midpoint for full year oil production to 17,100 barrels a day, corresponding to 13% year-over-year volume growth. We're maintaining guidance for full year total CapEx and investments at the midpoint at $92 million of accrual CapEx with some shift in spending from third quarter to the fourth quarter. The combination of increased production with flat CapEx evidences doing more with less. Fourth quarter drilling and completion activity will primarily drive 2026 results with only modest impact on fourth quarter volumes. D&C cost savings in New Mexico and some schedule flexibility allowed us to accelerate 2 completions from 2026 into the current quarter. These wells will support 2026 production with no impact to fourth quarter 2025 volumes. Looking to next year, we're striving to balance excitement around development potential in our asset base with capital allocation discipline in the face of softer oil markets. While some longer-term planning commitments are required, we'll watch the markets and aim to maintain flexibility with shorter-term commitments. We believe the current state of the oilfield service market affords such flexibility. Fortunately, we're in a situation that allows for resiliency and confidence across a range of prices. I'll offer the following examples based on preliminary forecasts. We believe we could maintain our third quarter 2025 oil volume level of 18,400 barrels a day over the full year in 2026, which would equate to 8% year-over-year growth while reducing 2026 upstream CapEx by approximately 15%. This scenario partially benefits from the fourth quarter 2025 forecasted volume tailwind of 19,200 barrels a day at the midpoint. Next, if we focused instead on maintaining upstream CapEx and not volumes, then we believe we could keep our 2025 upstream CapEx level generally flat while growing full year oil volumes year-over-year by approximately 12% to 15%. If oil markets improve, we can grow beyond these levels with increases in capital spending supported by our deep inventory of development locations. Finally, we forecast the dividend being well covered across these 2026 activity and oil price scenarios, benefiting from this capital efficiency and hedges in place. We have over 60% of 2026 oil volumes hedged at a weighted average downside price of $60 with upside optionality as 44% of hedges are in the form of collars. I'll turn it back to Bobby for closing. Thank you. Bobby Riley: Thank you, Philip. Once again, we appreciate your time and interest in Riley Permian. While we're pleased with our Q3 2025 results, our focus remains firmly on the future. We are committed to creating long-term value through disciplined capital allocation, strategic infrastructure investments and operational excellence. We believe these initiatives will position us for sustainable growth and shareholder value. We appreciate your ongoing support and confidence in Riley Permian. Operator, you may now turn the call over for questions. Operator: [Operator Instructions] And we will take our first question from Derrick Whitfield from Texas Capital. Derrick Whitfield: Congrats on a solid overall print. Wanted to start with a bigger picture question on capital efficiency and capital allocation. As we think about Slides 5 and 7 and Philip's ending commentary, it's clear your business has differential capital efficiency and can accomplish an all-of-the-above funding strategy while continuing to grow in a relatively low to mid-cycle pricing environment. As you think about your cash flow priorities in a below $60 per barrel environment, how would you prioritize capital allocation in that environment? And are there pathways where you can continue to fund all 3 segments of your business while maintaining control of each? Philip Riley: Yes. Fair question. Thank you, Derrick. In a $55 scenario, that starts to get to the point where on a corporate level, full cycle, we're mindful of spending too much. I think our half cycle economics, as evidenced there on that slide you referenced, can work down below $40, but there's no pressing need to develop that sooner. So I think in a $55 scenario, you're going to see us in that lower potentially volume maintenance scenario where we're spending sub-$100 million, maybe it's in the $85 million range. We can maintain volumes that way. We've got the dividend well covered. I think we are funding CapEx for the midstream find that way, and I can talk more about that in a bit, if you like. But that's probably a fair inflection point. I think there's also probably some psychology bias there at that inflection point of $55. Things below it start to get tougher for our industry. That said, it's never just a single variable equation. We'll see how the oilfield services market reacts. Some believe that their costs won't go lower, but you never know. Should those continue to decrease, then that can change some of the economics as well. Derrick Whitfield: Terrific. Yes, that makes sense. And maybe for my follow-up, I wanted to shift over to the New Mexico Midstream project. While the ability to control pace of development and flow assurance are the primary drivers, could you offer some color on the potential improvement you'd expect in netbacks for the upstream business and the amount of third-party volumes that could accrete value for the midstream business? Philip Riley: Yes, I can start and then maybe, John, if he wants to fill in on some of the volumes. Look, on netbacks, this is never a binary clear impact. I think the way that works is, first and foremost, we start with the flow assurance. We're getting into good systems there, newer generation gathering compression pipe and their facilities. We think we're going to get some economic improvement based on more efficient, best-in-class type of processing and treating facilities. So we've got some of that modeled that we hope to realize. And then the netbacks themselves, sometimes what that involves is making an additional commitment to get to capacity basically by your way into some capacity that reaches the Gulf Coast. You see some companies -- I think there's a company hosting a call at this exact time that's done that, where you make a commitment to the midstream counterparty for that capacity, and they can offer you a bit closer to the ship channel pricing. Now there's a negotiation involved. And not everybody can do that because clearly, most of the Permian would like to have the ship channel versus the Waha pricing. But I think it represents a spectrum. We hope to get some of our gas closer to that, but it will be something that takes place over time. John Suter: Yes. Derrick, I'd like to add from an operational perspective, I think this midstream project is just a must-have for our company to be able to grow the New Mexico asset. I think not only are we going to get a little bit better processing outcome from the new provider, once we put about $15 million more into the -- as I said in our initial discussion, that will be all that current provider can handle. And so there will be -- without gas decline, there will be no more room. So this really allows us with $150 million to $200 million more capacity within this new line I mean it's going to let us do what we're -- our main objective to drill oil and gas wells. We'll have a home for our product. So it really is a must-have. Again, we can -- right now, our pace is very limited in New Mexico just because of that. So given that new capacity opportunity, then we can make the choice as commodity price swings, as our value from making more oil and gas is enhanced, we can step it up and fill that need quickly. Operator: Our next question comes from the line of Jeff Robertson from Water Tower Research. Jeffrey Robertson: Bobby, maybe to follow up on your last comment is essentially the midstream project, once it's completed, will allow Riley to produce more oil because you can more -- you can pace the development of your field however you see fit with commodity prices since that's where the -- at least currently, that's where the real value is. Is that the right way to think about it? Bobby Riley: Absolutely. I think that was John that was talking there, but he's right on point. I mean, our objective is to get unconstrained takeaway capacity for both gas, oil and water so that we have full flexibility in our pace of development to develop the asset. I mean we've been drilling some pad locations with anywhere from 3 to 5 wells coming on at the same time. So it's a substantial bump in all of those -- that commodity mix all at one time. So the track we're on is just to get us in a position to have all options on the table. Jeffrey Robertson: Philip, can you talk about the capital spend for the midstream project completed in the first half of 2026 and then how that impacts your free cash flow flexibility in the back half of the year with that burden behind you? Philip Riley: Yes, sir. So I think this weaves into how I -- in my prepared remarks, talking about some of those maintenance scenarios and the level of spending there. If you look at what we've disclosed in the very beginning of 2025, we saw spending roughly $130 million on this midstream project to get it completed with the pipe and through initial areas in our kind of core development area. Since buying Silverback, we could expand that, but we don't have to do that right away. So we're considering a number of options, Jeff, if we bump along in this kind of $60 level or even a little bit low, we're going to be watching the prices and watching our cash flow. We could maintain the status quo and keep this on the balance sheet. I think based on the scenarios I described, we can be roughly free cash flow positive even after combined upstream and midstream CapEx. So maybe that's somewhere in the $170 million to $180 million range or possibly just short after the dividend at kind of $60 WTI, in which case, you've got a slight deficit there, but you've got plenty of capacity because you are creating value. So we take comfort there because we've created real asset value. We've got an implied $120 million, $130 million of spend there into the midstream at that point. And so because of that, I guess I could segue, we're also considering some financing options at the project level. We've considered using a credit facility. Our existing credit facility is an RBL, reserve-based loan. It allocates 0 value to the midstream assets right now because it's all about the upstream reserves. But there very much is material hard asset value there. As I just described, it could be a cumulative basis, $120 million, $130 million of book value by the end of next year if we proceeded with that. We've also considered bringing on an investor partner, which could take different forms. And so we've had those and other options that we're working through. We take confidence that we have a number of alternatives. Nothing has been definitively decided at this stage. Jeffrey Robertson: So if you went some sort of project route and any economic benefit from third-party volumes would flow through that type of entity. Is that right? Philip Riley: Yes. And just to be clear, I'm talking more capital partners, Jeff. We can -- we could have third-party operators that could come through the pipe, and we could sell them some capacity, in which case we're collecting more fees. That's something that's possible, too, and that's something that helps with -- that's something that would help with revenue and cash flow over time, but not with the upfront capital to build the project. That has its pros and cons. Pros is you got true third-party incremental revenue there. The balance is with Silverback and the size of our footprint now, I mean, we see potential to fill up the entire capacity by ourselves. Now that takes time to do it, maybe it's 7 or 8 years. And so the question then is, do you sell some of that capacity for a shorter-term basis? Do you sell it for a longer-term basis at a higher price? Do you expand this and so forth. So it's kind of an organic thing that we're working through. But going back to the capital, we'd be looking at some capital type partners that could come in different forms, whether it's an equity or credit. Jeffrey Robertson: And lastly, on production on the Silverback assets, John or Bobby, is there more to do on those assets to continue the solid performance that you had in September, October in terms of workovers and lift optimization and those types of projects? Or have you done the most obvious projects to this point? John Suter: Yes. This is John. No, I would just say we've barely touched it. We've just gotten some obvious things where wells were offline when we took it over. They had gone through this divestiture process a while. So missing a little TLC that we have found just some easy things to do, but we've also tried bringing over some of the more technology based, the way we do our cleanouts that we think are different from what other people do and have had some really nice success on a couple of those. We obviously have several hundred wells that we can work on. I think there's probably like 30 horizontals and upper 200s of vertical wells. So there's quite a bit of playground there. We're frankly just very excited about it. Operator: Our next question comes from the line of Nicholas Pope from ROTH Capital. Nicholas Pope: I was hoping you could expand a little bit on that last question. Just kind of looking at the workover, John mentioned that, that was a part of operating expenses being a little up for the quarter, just a lot of opportunity. Just trying to quantify a little bit how much, I guess, workovers were as a percentage of like total operating expenses for the quarter and like how you anticipate that split of OpEx kind of over the next year or so? Philip Riley: Nick, I'll take a first stab at this. I think this quarter, it was a few like probably $3 million -- $2 million to $3 million higher than normal. The reality is this is always in there. Sometimes it's a nature of our wells versus a shale, but we're always doing workovers. Last quarter was relatively light. And this quarter, we did more. You only see that on the line called lease operating expenses. But I think we had something like $8 million to $9 million total here of workovers. And so on an incremental basis, that was probably $2 million to $3 million higher than the prior quarter. John Suter: Yes. For instance, workover was 59% of total LOE this quarter versus last quarter, 27%. And I think it tends to range more in the 45%, 50%. So really, there was, I think, $5 million. Silverback came in at around a $13 per barrel cost versus our 2 assets typically average more in the $8.50 range. And so that kind of tells you how that blended up to a little bit over $9 per BOE total LOE with, again, workovers being typically 40% to 50%. Philip Riley: And just to add a final point there, just how we manage the groups is that this is a mix of reactive and proactive work. Reactive is something shut is down, and it's a big miss. But proactive to go out and do these exciting projects, the groups are given a budget and we can monitor with real-time analytics and stuff, how our costs are coming in for the month, and so they have certain budgets to work with. And that's a way we can have that vacillate from quarter-to-quarter, but then come out smooth on the overall cost per BOE. Nicholas Pope: That was very precise. I appreciate it. Looking at the activity, no drilling this quarter, bringing the rig back, I guess where is the focus of kind of that near-term drilling with the rig coming back to start drilling right now? John Suter: Yes. So we're over in champions in Texas. Like I said, we've got 8 to 10 wells coming by year-end. This will kind of refill our inventory of DUCs that we will use to complete -- gives us a great bit of flexibility with this whole commodity price challenge. So we'll be able to frac these things as we need them, kind of move that throughout the year depending when the markets are in our favor. So we have that. And around the turn of the year, we will shift our focus to New Mexico, and we will plan to start drilling a program there. I think we've only drilled 12 wells in New Mexico in the last 1.5 years that I've been here, and we've had some great results there so far. So I'm excited to get back and prove out some more territory there. Philip Riley: And then on the turn-in lines, Nick, the first half of the year next year will generally be Texas. The second half then would be New Mexico contingent on our pipe coming online around midyear. Again, we've got that flexibility with the DUCs, as John described, to throttle those more or less based on price or if things are faster -- if the project is faster or slower around the midyear. Operator: [Operator Instructions] Our next question comes from the line of Noel Parks from Tuohy Brothers. Noel Parks: I was interested to hear your thoughts earlier about some external financing possibly being in sight. And we're in such a sort of unusual uncertain macro environment and interest rate environment. And I was just wondering, as you consider that project level financing, are you talking to pretty much usual suspects, the names we would kind of all be familiar with? Or I was wondering if you're seeing interest or capital coming in from more unexpected players or new players? Philip Riley: Sure. Let me take and respond to the first half of the question, which I think was a comment about the uncertain macro and economic situation. I admit and agree that the upstream energy industry is out of favor at the moment. It's a tougher situation on the equity markets. Credit markets, whether for upstream or the wider market are very, very healthy right now. This is on the upstream, just real quick. We've had a lot of consolidation. So a lot of paper has come off from the banks. They are really wide open lending. High-yield markets, bond markets are wide open again, generally and upstream, we've got some very, very low spreads. That's not exactly what we're looking at here, but it just gives some context. What I'd also say is, aside from just pure upstream, there is a tremendous amount of appetite for capital for interesting new projects, infrastructure projects. If I go to the extreme, we look at what's happening with the hyperscalers, AI and data centers, and you see the tremendous amount of capital being thrown at that. Well, that's -- we're on the spectrum there of an infrastructure asset midstream being much easily -- more easily financed than upstream typically. We've got some real hard asset value here. We're going to have some contracted volumes and values, and that's something that you can lend against. Like I said, the credit facility currently has 0 allocated value for that. And so there's some debt capacity there. So just one example to start is just a plain vanilla bank is happy to do some lending there. Down, we don't talk about it because it's not in our financials directly, but our JV partner or our JV, RPC Power, has a plain vanilla credit facility with a regular way bank for financing some of that. And that's 7%, 8% cost of capital. Something like that could be available for midstream or if we wanted more capital, we could bring in a type of private capital investor who could be investing in some kind of common or preferred if we structured it that way at the midstream level. You can go look at case studies of different groups that have done this at those midstream projects. Private capital providers are excited to do this. I'm probably going to get a lot of calls after this is done just for saying this. But yes, they're excited to do that, and that represents something between credit and equity. And then you've got just pure common equity if you wanted someone to be really investing all of it. I hope that helps. Noel Parks: Very much though. Sort of staying on that topic of where there's a lot of interest these days. I'm just curious, compared with a few years ago when you decided to go forward with the power JV, mainly with an eye to your internal needs, first and foremost. And today, when it seems now that the sky is the limit for any sort of gas-fired generation any place, anytime, anywhere these days. Just wondering if any conversations you're having on the power side, maybe around local generation or regional generation for possible data center projects and so forth. Just wondering how the environment and the conversation is different now compared to when you were first going forward with the project. Philip Riley: Right. So we're very grateful that we got in, feel fortunate that we started this over 2 years ago, nearly 3 years ago at this point. So clearly early there. And clearly, the environment is very, very different now, both nationally and in West Texas. And so some of that, we feel happy to have the thesis validated, but ultimately, that doesn't matter, and we just want to make money. On new projects, look, we're -- I think we're taking a balanced approach. We've got a relatively full plate at the moment, but we're always looking for new places to invest our time and capital if we think we can earn a good return. Just to be a little cautious with so many people coming into the data center space, we want to be mindful of what incremental value can we add there. And then on a return of capital and cost of capital, typically, the more people you have to come into something, it gets crowded, it pushes down returns. We just have to be sufficiently comfortable and confident that we can earn a return of capital there. That competes with our core business and such. And then finally, if it's something that we did want to do, do we do it as a developer and so that you're getting this up to a certain critical stage and then effectively sell it versus if you decided to keep it on the balance sheet in perpetuity, we would have to believe that we get re-rated and that analysts like you suggest that we should be rerated to trade at a higher valuation because that would be embedded in our -- what's typically a lower valuation type multiple for, say, an upstream company versus an infrastructure or an IPP, which are trading at 12 to 15x EBITDA. Noel Parks: Right. Okay. That makes a lot of sense. Operator: There are no further questions. That concludes our question-and-answer session, and that concludes the call for today. Thank you all for joining. You may now disconnect.
Operator: Welcome to the IBEX First Quarter FY 2026 Earnings Conference Call. [Operator Instructions] To note, there is an accompanying earnings presentation available on the ibex Investor Relations website at investors.ibex.co. I will now turn this conference over to Mr. Michael Darwal, Head of Investor Relations for ibex. Michael Darwal: Good afternoon, and thank you for joining us today. Before we begin, I want to remind you that matters discussed on today's call may include forward-looking statements related to our operating performance, financial goals and business outlook, which are based on management's current beliefs and assumptions. Please note that these forward-looking statements reflect our opinion as of the date of this call, and we undertake no obligation to revise this information as a result of new developments, which may occur. Forward-looking statements are subject to various risks, uncertainties and other factors, which could cause our actual results to differ materially from those expected and described today. For a more detailed description of our risk factors, please review our annual report on Form 10-K filed with the U.S. Securities and Exchange Commission on September 11, 2025, and any other risk factors we include in subsequent filings with the SEC. With that, I will now turn the call over to IBEX CEO, Bob Dechant. Robert Dechant: Thanks, Mike. Good afternoon, and thank you all for joining us today as we share our first quarter fiscal year 2026 results. Before I speak to our first quarter results, I want to start by saying that our thoughts and prayers are with the people of Jamaica who are dealing with the devastation left behind by Hurricane Melissa. I would also like to say how proud I am of our ibex Jamaica team who has shown enormous courage and resilience through this tragedy and have worked tirelessly to care for our employees while getting us operational within 24 hours of the hurricane in our Portmore and Kingston sites and as of Monday this week in our Ocho Rios site. I would also like to highlight the great support we have received from our clients who have offered assistance alongside our ibex Cares initiatives to help those who are significantly impacted. Lastly, the BPO community in Jamaica is a tight knit community, and our thoughts and prayers go out to our Jamaican BPO peers and their people. I am pleased to report that ibex carried the momentum we built throughout fiscal 2025 into 2026, delivering an outstanding first quarter with revenue growth of 16.5% and adjusted EPS growth of 74% as we continue to separate ourselves from the pack in the BPO market. Our sustained double-digit revenue growth highlights our competitive differentiation in the CX space. We continue to drive exceptional operational delivery for our existing clients, enabling us to win significant market share from our competition. I am equally proud of our new logo engine that continues to win trophy clients, positioning us well for continued growth and margin expansion. And I'm excited on the progress we have made in our AI automate and translation deployments for our clients. Collectively, this continues to validate our position as a leader in the CX space. Q1 was a very strong quarter. Even more impressive is the performance we continue to stack quarter-over-quarter, leading to powerful momentum into the balance of FY '26. Over the last 12 months, our results have shown explosive double-digit organic revenue growth, which is well above market growth, consistent margin expansion and significant growth in EPS and free cash flow. For the last 12 months, we delivered organic revenue growth of 13% fueled in large part by revenue growth approaching 20% in our high-margin offshore regions and digital-first services. We delivered record adjusted EBITDA of nearly $76 million for the trailing 12 months, up more than 13% from the prior 12-month period, while making key investments for future growth and differentiation. We achieved record [Audio Gap] adjusted EPS of $3.17 on $31 million, up from $25 million in the prior 12 months while investing meaningful CapEx in support of our growth. These results are an output of our sizable and distinct competitive differentiation that we have built and the strength of this leadership team to consistently execute quarter-over-quarter. Paramount to this differentiation is our best-in-class blend of culture, engagement and branding. Our purpose-built Wave iX technology and integrated AI solution suite, connecting seamlessly AI to human agents. And our deep analytics and business insights capabilities. The ibex’ leadership team is able to consistently execute against these points, outperforming the competition, setting ibex’ apart, trusted partner. This playbook was key to us delivering one of the most impressive starts to a fiscal year in our history and has us well positioned to perform throughout FY '26. The ibex’ brand is stronger than it has ever been. Highlighting this is our most recent employee Net Promoter Score of 77, an all-time high and our client Net Promoter Score of 71, up impressively from 68. It is important to note that anything above 70 is considered world-class. These metrics play a critical part in our outstanding client revenue retention of over 98% and validate that our competitive moat is deep and wide. These metrics are also viewed by prospective clients as best-in-class, giving them confidence in choosing ibex as their go-forward partner during the RFP process. We are very excited with the wins we have had in the last 2 quarters, where over this time frame, we have won seven high-profile new opportunities, facing off against our much larger multibillion-dollar competitors. At the core of ibex is our new logo engine that continues to win trophy new clients and our ability to land and expand with these clients. As compared to 2 years ago, our number of clients making up more than $1 million per annum in revenue is up nearly 24%. Clients representing $1 million to $10 million per annum are up over 21% during the same time frame. And the number of clients generating $10 million to $20 million per annum is up nearly 67%. And the average revenue generated by clients with annual spend over $20 million during these periods is up approximately 14%. This powerful combination of winning blue-chip trophy clients and growing significant market share with them, parlayed with our outstanding client retention rates has us on an amazing trajectory of double-digit growth. Q4 of fiscal 2025 marked the shift from proof of concept for our AI solutions to full-scale deployments for several of our key clients. We continue to invest in bolstering our team supporting this critical vector for growth, most recently with the addition of Michael Ringman as CTO. We are in an exciting time in the industry with the intersection of AI and CX. Mike brings an enormous amount of experience in both areas and will help accelerate our leadership position. I am confident that under Mike's direction, our AI technology road map will help further separate ibex from the pack. Coming off a statement year in fiscal 2025, I am proud of our start to fiscal 2026, and I am confident that ibex is very well positioned for success this year and beyond. With that, I will now turn the call over to Taylor to go into more details on our first quarter results and FY '26 guidance. Taylor? Taylor Greenwald: Thank you, Bob, and good afternoon, everyone. Thank you for joining the call today. In my discussions of our first quarter fiscal year 2026 financial results, references to revenue, net income and net cash generated from operations are on a U.S. GAAP basis, while adjusted net income, adjusted earnings per share, adjusted EBITDA and free cash flow are on a non-GAAP basis. Reconciliations of our U.S. GAAP to non-GAAP measures are included in the tables attached to our earnings press release. Turning to our results. Our first quarter results marked our strongest start to a fiscal year. We achieved record first quarter revenue, adjusted EBITDA, EPS, adjusted EPS and free cash flow. First quarter revenue was $151.2 million, an increase of 16.5% from $129.7 million in the prior year quarter. Revenue growth was driven by vertical growth in retail and e-commerce of 25%, HealthTech of 19.5% and travel, transportation and logistics of 15.4% and was partially offset by an expected decline in telecommunications, our smallest vertical of 22.5%. Importantly, our fintech vertical reached an inflection point in the first quarter and grew 3.4%. And with recent wins, we are confident in the positive trajectory of fintech going forward. Our focused efforts to grow our higher-margin delivery locations and services continues to have a favorable impact on bottom line results. We are really excited that we're winning in all markets and as a result, growing revenue in all geographies. Our highest margin offshore revenues grew 20% in the quarter. Our nearshore locations grew 7% and our onshore region grew 21%, driven by growth of our high-margin digital acquisition services. Revenue mix in our higher-margin digital and omnichannel services continues to strengthen, growing 25% to 82% of our total revenue versus prior year quarter. We expect that we will continue to be successful driving growth in these higher-margin services and regions as we continue to land and expand new clients from our strong pipeline as well as win further share with our embedded base clients. First quarter net income increased to $12 million compared to $7.5 million in the prior year quarter. The increase was primarily driven by the meaningful growth of work in higher-margin offshore regions of 19.5% and operating leverage gained from SG&A expenses as they went from 20.2% to 17.5% of revenue. Fully diluted EPS was $0.82, up from $0.43 in the prior year quarter. Contributing to the EPS growth was the impact from fewer diluted shares outstanding as a result of our ongoing share repurchase program and a lower tax rate. Diluted shares for the quarter were $14.6 million versus $17.5 million 1 year ago. Our tax rate was 11% versus 21% in the prior year due to a discrete tax benefit related to stock-based compensation. We expect our effective tax rate before discrete items to remain consistent at 20% to 22% for the remaining quarters. Moving to non-GAAP measures. Adjusted EBITDA increased 24.9% to $19.5 million or 12.9% of revenue from $15.6 million or 12.0% of revenue for the same period last year. The 90 basis point improvement in adjusted EBITDA margin was primarily driven by growth in our higher-margin offshore locations during recent years and stronger operating results. Adjusted net income increased to $13.1 million from $9 million in the prior year quarter. Non-GAAP fully diluted adjusted earnings per share increased 74.1% to $0.90 from $0.52 in the prior year quarter. As a company, we are pleased with the client diversification we have established over the last several years. For the first quarter of fiscal year 2026, our largest client accounted for 10% of revenue and our top 5, top 10 and top 25 client concentrations represented 37%, 55% and 79% of overall revenue, respectively, as compared to 36%, 51% and 77% of overall revenue in the prior year, representative of a well-diversified client portfolio. Switching to our verticals. Retail & E-commerce increased to 26.3% versus 24.5% in the prior year quarter. HealthTech increased to 14.5% of first quarter revenue versus 14.1% in the prior year quarter, and travel, transportation and logistics remained relatively flat at 14.1% in the quarter. These results were driven by continued growth in multiple offshore geographies and our continued ability to win significant new clients in these verticals. Conversely, our exposure to the telecommunications vertical decreased to 10.2% of revenue for the quarter versus 15.4% in the prior year quarter as we see lower volume from legacy carriers. Revenues from the fintech vertical represented 11% versus 12.4% of the prior year quarter, though, as I mentioned earlier, grew 3.4% year-over-year and 6.8% sequentially, marking a return to growth and the lapping of prior impacts we had noted at fiscal year-end. Moving to cash flow. Net cash generated from operating activities increased to $15.7 million for the first quarter of fiscal 2026 compared to $7.8 million for the prior year quarter. The increase in net cash inflow from operating activities was primarily due to higher revenues, which drove increased profitability as well as a lower use of working capital. We have seen a notable improvement in our days sales outstanding with DSOs for the quarter at 71 days, down from 75 days a year ago and 72 days as of June 30. We expect our DSOs to remain relatively stable on a go-forward basis. Capital expenditures were $7.6 million or 5.1% of revenue for the first quarter of fiscal year 2026 versus $3.6 million or 2.8% of revenue in the prior year quarter. This increase was primarily driven by expansion in our offshore regions to support growth in these higher-margin geographies. Free cash flow was a first quarter record of $8 million compared to $4.1 million in the prior year quarter. The increase was driven by increased revenues during the current quarter and the aforementioned shorter DSOs. During the quarter, we repurchased 92,000 shares for $2.7 million. We have $10.6 million remaining on our current share repurchase program. We ended the first quarter with cash and net cash balances of $22.7 million and $21.1 million, respectively, an increase from $15.3 million and $13.7 million as of June 30, 2025. To summarize our first quarter of fiscal 2026, we achieved outstanding revenue growth and profitability and once again, allowing us to build on our existing momentum entering the fiscal year. Our revenue growth drove increased operating leverage and positioned us to post record first quarter adjusted EBITDA margin of 12.9%, adjusted EPS of $0.90 and free cash flow of $8 million. Our continued strong financial results and healthy balance sheet are enabling strategic investments in our growing AI capabilities and sales resources as well as further expansion in strategic markets and in our top-performing geographies. Importantly, with our outstanding start to the fiscal year, we have the confidence in our business to raise our revenue and adjusted EBITDA guidance for fiscal year 2026. For fiscal year 2026, revenue is expected to be in the range of $605 million to $620 million, up from $590 million to $610 million. Adjusted EBITDA is expected to be in the range of $78 million to $81 million, up from $75 million to $79 million, and capital expenditures are expected to be in the range of $20 million to $25 million. Our business is well positioned for today and the years ahead, and we are excited about the future ibex as we head into the second quarter of fiscal year 2026 and beyond. With that, Bob and I will now take questions. Operator, please open the line. Operator: [Operator Instructions] Our first question comes from David Koning with Baird. David Koning: Great job again, and you're doing exactly what you said, winning share with some of the new offerings. So congrats on all that. Robert Dechant: Thanks, Dave. Yes, we're really proud of the quarter, proud of the role we're on. David Koning: Yes. Yes. Great. Well, maybe first off, what have you seen -- we've had this Gen AI kind of swirling around for really a few years now. And is it becoming a catalyst both for the industry and for you guys or more for you than the industry? Or maybe talk a little bit -- maybe also just add in how much of revenue is it now? And maybe where is it going in a few years? Robert Dechant: Sure. So let me kind of break those up into two parts, Dave, if that's okay. When I look at through the ibex lens, the whole AI, the excitement and also the risks that people have talked about this relative to this industry. I think for ibex, it's been all positive. And let me explain on that a little bit. We have leaned in harder, faster, I believe, than anybody in the industry on AI. And that's -- I would say, there's two dimensions to that. One where we are deploying AI internally to help us execute better, to provide tools and capabilities for our agents to deliver better for our teams to run the business more effectively, efficiently and drive better performance on our client KPIs. We're further along than anybody. And that's why I think one of the reasons we continue to outperform and then take significant market share. So that is a boom for ibex because of what we are doing above and beyond anybody else. On the other side, the second dimension I look is the -- more around using AI for customer experiences, right, where you automate experiences, AI for language translation, et cetera. Again, I think that we have leaned further into that than anybody else. We're not afraid of what that might do to our business. I feel like much of the market is very cautious and hesitant about leaning in. We're leaning in and our clients are seeing that we have a unique end-to-end model that really goes from AI all the way through to a human agent to provide an integrated and seamless solution for them. To me, I think that puts us in a really ideal position. And when clients are making decisions, they look at that and they say, this is the type of partner that we want because not only can they execute today on the BPO side, but they're looking forward and they're future-proofed basically in their model. They can -- we can grow and evolve with them as AI gets deployed more. So it's a real competitive advantage for us, Dave. And I believe that, that's something that is when you look at what our results are, when you look at the growth rates that we're doing, the margin expansion, et cetera, I think that's an output of that. Now to your question about how much of that is? We're still real early in the game. So it's not moving the needle on a whole lot of revenue and margin expansion yet, but we're positioned well. And we expect probably by the end of fourth quarter of this year and into FY '27, you'll start seeing that being another vector of growth and margin expansion that will move the needle for us. David Koning: Yes. Got you. And maybe just a follow-up. Gross margins were a little down in Q1, and I think you're holding full year margin about intact. You're raising revenue, raising EBITDA, but margin about intact. Is that -- is some of this a function of just all the investment going into AI? And I know your benefits from offshoring and AI ultimately is better margin, but maybe right now, it's a little lower as you invest? Robert Dechant: Yes, Taylor, I'll throw that over to you. Taylor Greenwald: Yes. No, absolutely. So you're right. Our margins are -- for the year, we're projecting our EBITDA margin to be about 13%. So that's up a bit from the prior year. And what you're seeing and what we're seeing is we're getting a lot of operating leverage out of our SG&A costs because we're able to hold our SG&A costs relatively flat while our revenue is growing at a much faster pace. So seeing good leverage on the SG&A line. Gross margins are down a bit, particularly in Q1 and a bit in Q2, and you saw it in Q1. And really, a couple of impacts there. One, where as you know, we're ramping in India, so still making investments and aren't at the long-term margins we anticipate that we'll get to in India. And then probably more impactful in Q1 and Q2, it's a good problem to have. We have more wins, which mean more training revenue. And as you know, we defer the train revenue, but experience the costs upfront. So we are seeing a little bit of headwind on the gross margin line on that as well. But long term, we feel very good about gross margin, as Bob said, the vectors of growth in terms of the offshore geographies and then once we start getting a more meaningful impact from AI should certainly have a positive long-term trend on gross margins. Operator: I would now like to turn the call back over to Bob Dechant for any closing remarks. Robert Dechant: Josh, thanks. And everybody, I appreciate you listening. I'm really proud of this team, proud of the consistent performance quarter-over-quarter that we continue to deliver as we separate ourselves from this industry, from our competitors. I'm also proud of what they've been doing in responding to emergencies and issues like we incurred in Jamaica with Hurricane Melissa. And even in markets like the Philippines, there's been a whole lot going on there with typhoons as well as earthquakes, and that team has -- my team has delivered and kept us amazingly resilient for that. I want to thank them all for that because they are the best in the industry. And with that, thank you all for listening, and we look forward to talking to you next quarter. Good night. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
Operator: Good day, and welcome to the Fidus Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jody Burfening. Please, go ahead. Jody Burfening: Thank you, Bailey, and good morning, everyone, and thank you for joining us for Fidus Investment Corporation's Third Quarter 2025 Earnings Conference Call. With me this morning are Ed Ross, Fidus Investment Corporation's Chairman and Chief Executive Officer; and Shelby Sherard, Chief Financial Officer. Fidus Investment Corporation issued a press release yesterday afternoon with the details of the company's quarterly financial results. A copy of the press release is available on the Investor Relations page of the company's website at fdus.com. I'd also like to call your attention to the customary safe harbor disclosure regarding forward-looking information included on today's call. Conference call today will contain forward-looking statements, including statements regarding the goals, strategies, beliefs, future potential, operating results and cash flows of Fidus Investment Corporation. Although management believes these statements are reasonable based on estimates, assumptions and projections as of today, November 7, 2025. These statements are not guarantees of future performance. time-sensitive information may no longer be accurate at the time of any telephonic or webcast replay. Actual results may differ materially as a result of risks, uncertainties and other factors, including, but not limited to, the factors set forth in the company's filings with the Securities and Exchange Commission. Fidus undertakes no obligation to update or revise any of these forward-looking statements. With that, I would now like to turn the call over to Ed. Good morning, ed. Edward Ross: Good morning, Jody. And good morning, everyone. Welcome to our third quarter 2025 earnings conference call. In today's call, I'll start with a review of our third quarter performance and our portfolio at quarter end and then share with you our outlook for the last quarter of 2025. Shelby will cover the third quarter financial results and our liquidity position. After we have completed our prepared remarks, we'll be happy to take your questions. . For the third quarter, Fidus' debt portfolio continued to perform well, and we extended our track record of generating adjusted NII well in excess of the base dividend. Overall, the portfolio remains healthy from a credit quality perspective reflecting our strategy of investing in high-quality, lower middle market companies with resilient business models that generate recurring revenue and cash flow and have attractive prospects for growth. Our portfolio also remains well diversified by industry and structure to produce both high levels of recurring income and capital gains from monetizing equity investments. In terms of market conditions, M&A activity did pick up in the third quarter relative to the first half of the year as expected. Although deal closings were back-end loaded, and some deals were pushed into October, we continued to build our portfolio primarily by supporting our portfolio companies with growth capital, leveraging our long-standing relationships with deal sponsors. On a per share basis, adjusted NII was $0.50 compared to $0.61 for Q3 2024, covering our base dividend of $0.43 with ample cushion. Total dividends paid for the quarter amounted to $0.57 per share, including a supplemental dividend of $0.14 per share. For the fourth quarter of 2025, the Board of Directors declared a total dividend of $0.50 per share, which consists of a base dividend of $0.43 per share and a supplemental dividend of $0.07 per share, equal to 100% of the surplus in adjusted NII over the base dividend from the prior quarter which will be payable on December 29, 2025, to stockholders of record as of December 19, 2025. Net asset value grew 2.7% to $711 million at quarter end compared to $692.3 million as of June 30, 2025. Reflecting modest portfolio appreciation and accretive share issuances under the ATM program. On a per share basis, net asset value was $19.56 per share as of September 30, 2025 compared to $19.57 per share as of June 30, 2025. Originations consisted of $69.7 million in first lien securities and $4.7 million in equity investments for a total of $74.5 million for the third quarter. Investments were heavily weighted toward add-on investments, primarily in support of M&A transactions, we also invested $12.8 million in 1 new portfolio company. Subsequent to quarter end, we have invested an additional $40.2 million in 2 new portfolio companies plus numerous add-on investments in existing companies. Proceeds from repayments and realizations totaled $36.7 million for the third quarter resulting from a mix of M&A and refinancing activity. With net originations of $37.8 million, our portfolio grew to $1.2 billion on a fair value basis as of September 30, 2025, equal to 102% of cost. First lien investments comprised 82% of our debt portfolio as the migration of our debt portfolio toward first lien securities continued, and our equity portfolio stood at $143.4 million or 12% of the total portfolio at quarter end. Portfolio credit quality remains sound with companies on nonaccrual, unchanged and less than 1% of the total portfolio on a fair value basis and 2.8% of the total portfolio on a cost basis. As we enter the home stretch for 2025, market activity is shaping up to be relatively decent in the fourth quarter, and we are working hard to convert opportunities from our pipeline of potential investments in both new and existing portfolio companies, while continuing to add to our overall investment pipeline. As Shelby will detail, we have enhanced our flexibility from a capitalization and liquidity perspective, continuing to position Fidus for the future as we execute our proven investment strategy, methodically building the portfolio and growing net asset value over time. In doing so, we will stay focused on our goals of preserving capital and generating attractive risk-adjusted returns for our shareholders. Now I'll turn the call over to Shelby to provide some details on our financial and operating results. Shelby? Shelby Sherard: Thank you, Ed, and good morning, everyone. I'll review our third quarter results in more detail and close with comments on our liquidity position. Please note, I will be providing comparative commentary versus the prior quarter, Q2 2025. Total investment income was $37.3 million for the 3 months ended September 30, a $2.7 million decrease from Q2 driven by a $0.7 million decrease in interest income primarily due to approximately $0.6 million of accelerated income from unamortized fees on debt repayments in Q2, a $2.6 million decrease in fee income given a $1.3 million decrease in prepayment fees, a $0.8 million decrease in origination fees and a $0.5 million decrease in amendment and management fees. Dividend income from equity investments increased by $0.4 million in Q3. Total expenses, including income tax provision, were $19.9 million for the third quarter, a $1.5 million decrease over Q2 driven primarily by a $1 million decrease in capital gains incentive fee accrual, a $0.4 million decrease in base management and income incentive fees, a $0.3 million decrease in professional and other G&A fees primarily related to proxy solicitation expenses for the 2025 Annual Shareholder Meeting held in Q2, partially offset by increased legal fees in Q3, a $0.3 million increase in taxes related to distributions from our equity investments in Medsurant Holdings. Net investment income or NII for the 3 months ended September 30 was $0.49 per share in Q3 versus $0.53 per share in Q2. Adjusted NII, which excludes any capital gains, incentive fee accruals or reversals attributable to realized and unrealized gains and losses on investments, was $0.50 per share in Q3 versus $0.57 per share in Q2. We ended Q3 with $543.8 million of debt outstanding, comprised of $191 million of SBA debentures, $325 million of unsecured notes, $15 million outstanding on the line of credit and $12.8 million of secured borrowings. Our net debt-to-equity ratio as of September 30 was 0.7x. Our statutory leverage, excluding exempt SBA debentures, was 0.5x. The weighted average interest rate on our outstanding debt was 4.9% as of September 30. Turning now to portfolio statistics. As of September 30, our total investment portfolio had a fair value $1.2 billion. Our average portfolio company investment on a cost basis was $12.6 million, which excludes investments in 6 portfolio companies that sold their operations and are in the process of winding down. We have equity investments in approximately 87.8% of our portfolio companies with an average fully diluted equity ownership of 2%. Weighted average effective yield on debt investments was 13% as of September 30 versus 13.1% at the end of Q2. The weighted average yield is computed using effective interest rates for debt investments at cost, including the accretion of original issue discount and loan origination fees, but excluding investments on nonaccrual, if any. Now I'd like to briefly discuss our available liquidity. Subsequent to quarter end, we completed a $100 million debt add-on to our 6.75% notes due in March 2030. The net proceeds were used to fully deem the 4.75% notes due in January 2026. In addition, we refinanced our line of credit, which included an upsize to $175 million of availability and a new maturity date of October 16, 2030. As of September 30, our liquidity and capital resources included cash of $62.3 million, $125 million of availability on our line of credit, and $16.5 million of available SBA debentures, resulting in total liquidity of approximately $203.8 million. Taking into account our subsequent events, our liquidity remains approximately $204 million. Now I will turn the call back to Ed for concluding comments. Edward Ross: Thanks, Shelby. As always, I'd like to thank our team and the Board of Directors at Fidus for their dedication and hard work and our shareholders for their continued support. I will now turn the call over to Bailey for Q&A. Bailey? Operator: [Operator Instructions] Our first question comes from Robert Dodd with Raymond James. Robert Dodd: Congratulations on another good quarter. I was going to ask about your coming about market activity outlook for 4Q. I think you call it -- it looks relatively decent. I think it was the first time you used those words. I mean, the earlier comments have been the deal activity picking up, you've already done $40 million in October. I mean, can you give us any more -- do you think it's going to slow any? Or do you think it's just going to continue to ramp? And is there -- given some of the Q3 ramp slipped into October, like you said, is there a risk that there's a lot of activity, but some of it ends up in January? Edward Ross: It's a great question, Robert. I think from a deal flow perspective, things starting to pick up a little in Q2, latter half. That trend continued, which isn't always the case in the summertime. But in Q3, fair number of things pushed out. We lost a couple of -- didn't lose deals, a couple of deals fell apart at the end, things like that, which accounted for a little slower quarter than we were expecting, but from an investment perspective. But having said that, deal flow was pretty good. And deal flow continues to be pretty good as we sit here today and this week. And so I think that bodes well for the overall current environment. I wouldn't call it robust, but it's healthy. And so that's a good thing. So what does that mean for us? I think originations in Q4, it's our belief it will be pronged, both from an incremental new investment perspective and from add-on investment perspective. And we've also had several add-on investments so far this quarter as well. So it's a busy quarter at the moment. And our expectation as we sit here today is for that kind of trend to continue. Hopefully, that's helpful. Robert Dodd: Yes, that is very helpful. And just kind of following on from that. I mean, how are you seeing deal terms and pricing stack up? Obviously, the terms are good enough or you wouldn't be doing them. But has there been any evolution in terms of how structures are being proposed as you go into this build of pipeline? Edward Ross: Good question. In the lower middle market, I think things are pretty stable from my perspective. Clearly, pricing has come down over the last couple of years. I think that -- and I'm talking about spreads there. But that trend has kind of stabilized over the last 6 to 9 months. So we're not really seeing changes from a pricing standpoint. Obviously, we're pricing risk. And so some deals may be in the spreads in the low 5s, and some may be actually in the 6s. So it's -- you can't normalized, if you will. But pricing has stabilized, which is a good thing. And I think one of the other positives of the lower middle market is structures. I mean we have 2 covenants in almost all of our deals, typically a leverage covenant and a fixed charge covenant. And so the structures are the same. I think leverage levels have stayed pretty close to the same. So there haven't been increased risk, if you will, that we're taking to generate the yields that we're getting. So I think all of that's positive and gives us the ability to generate attractive risk-adjusted returns. Robert Dodd: Congrats again on the quarter. Edward Ross: Thank you. Good talking to you, Robert. Operator: Our next question comes from Mickey Schleien with Clear Street. Mickey Schleien: Ed, this quarter, we've seen in the space, more impact from tariff policy, particularly in relation to China. We've been talking about this for a while, but these things develop slowly. Can you remind us, do you have companies that are relatively exposed to importation from China? And is pressure developing on those companies? Edward Ross: Great question, Mickey. We have exposure, but what I would say is quite limited. Really, we have 2 portfolio companies that have meaningful direct exposure from an import perspective. We have others that I'd put it in the moderate category. And the moderate ones, to be honest, the moderate ones and the -- obviously, the high-risk ones and so we call them -- we have 2 that are in the high-risk category. Both of those companies are performing well as we sit here today and are managing the risk. And so we -- from just an overall magnitude perspective, I think it's quite limited. It's between 5% and 6% of our total portfolio. And then what I would say is it's not meaningfully impacting the profitability of the businesses as we sit here today. Obviously, there's been a various actions taken by these portfolio companies, whether it's price increases, whether it's negotiations, what have you. But we feel good about kind of the outlook of both of those companies and quite frankly, the rest of the portfolio. Mickey Schleien: And a follow-up question. It may be transient, but the government shutdown is now longer than we would like. Is that going to impact any of your portfolio companies? I know it may be a short-term sort of event, but it could take a while to get things back to normal as the government reopens. Edward Ross: No, good point and great question. And from our -- we do have a couple of companies that have some, what I would call, limited direct exposure to government contracts but in both those cases, we are not experiencing or seeing problems with regard to those contracts or at those portfolio companies. So I think our exposure is quite limited there. And at the moment, we're not seeing concerns or problems. Clearly, obviously, things can change, but it's not expected in either one of those cases. Operator: [Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Ed Ross for any closing remarks. Edward Ross: Thank you, Bailey, and thank you, everyone, for joining us this morning. We look forward to speaking with you on our fourth quarter call in early March 2026. Have a great day and a great weekend. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Welcome to TTEC's Third Quarter 2021 Earnings Conference Call. [Operator Instructions] This call is being recorded at the request of TTEC. I would now like to turn the call over to Bob Belknapp, TTEC's Group Vice President, Corporate Finance. Thank you, sir, and you may begin. Bob Belknapp: Good morning, and thank you for joining us today. TTEC is hosting this call to discuss its third quarter results for the period ended September 30, 2025. Participating on today's call are Ken Tuchman, Chairman and Chief Executive Officer of TTEC; and Kenny Wagers, Chief Financial Officer of TTEC. Yesterday, TTEC issued a press release announcing its financial results. While this call will reflect items discussed in that document. For complete information about our financial performance, we also encourage you to read our quarterly report on Form 10-Q for the period ended on September 30, 2025. Before we begin, I want to remind you that matters discussed on today's call may include forward-looking statements related to our operating performance, financial goals and business outlook, which are based on management's current beliefs and assumptions. Please note that these forward-looking statements reflect our opinions as of the dates call and we undertake no obligation to update this information as a result of new developments that may occur. Forward-looking statements are subject to various risks, uncertainties and other factors that could cause our actual results to differ materially from those expected and described today. For a more detailed description of our risk factors, please review our 2024 annual report on Form 10-K. A replay of this conference call will be available on our website under the Investor Relations section. I will now turn the call over to Ken. Kenneth Tuchman: Thanks, Bob. Good morning, and thank you for joining us today. This quarter, we continued to strengthen our foundation while also making investments to seed our future growth. In the third quarter of 2025, revenue was $519 million. Adjusted EBITDA was $43 million, and we reduced our net debt by $119 million from the prior year period. . Across both business segments, we continue to expand our AI-enabled CX Solutions with a hybrid strategy that blends the best of technology and human cognition and empathy while also attracting new clients in new industries where seamless and personalized CX is driving brand differentiation and growth. We also nurtured our relationships with our existing clients with vertical-specific solutions enabled by data analytics and AI. And lastly, we deepened our unique collaborative relationships with the leading hyperscalers who partner with us to drive innovation forward with their massive investments in AI and the related infrastructure. Clearly, a significant transformation is underway in the CX industry, fueled by the remarkable conversational ability of Gen AI, new use cases are emerging every day that have the potential to revolutionize the quality and efficiency of customer interactions. As a company dedicated to simplifying the complex world of CX and AI by providing every capability of business needs to transform we couldn't be more excited. However, if you open any major business publication today, it's hard to avoid the news stories about early adopters. We're seeing a significant gap between our AI investments and measurable CX business outcomes. In addition to delivering disappointing returns, these initiatives are creating customer experiences that are clumsy, inflexible and impersonal. In many cases, it feels like Groundhog Day, recreating the decades agony inflicted by the static interactive voice response systems of the past, also known as voice jail. Recent data validates this discouraging and costly trend. According to the CX Industry Trade Association, CTW, currently 82% of consumers feel CX experiences are inconvenient and inconsistent. 60% of them report that the quality of interactions has deteriorated, and almost 75% believe AI is making it worse. It goes without saying that these negative experiences are costing businesses, customer loyalty and hurting their bottom line. Our decades of frontline CX experience and fluency across all hyperscalers and CX technology platforms reveal a simple truth. While technology mastery is table stakes, AI's toughest challenges aren't technical succeeding in the AI age requires an agile, consultative mindset, a willingness to take thoughtful risk and the ability to embrace change. Here's why. To start, AI isn't simply a new technology to plug into an old stack, it's a fundamental pivot in how organizations operate. Companies that don't shift their mindset will struggle to build AI native workflows and teams. To achieve sustainable and scalable results, companies must have a solid foundation in place, and most are just getting started. Change of this magnitude is a heavy lift and requires a modern data state, processes to clean and curate data reengineered processes and documented best practices, seamless front to back office technology integration and an inspired and rigorous change management protocol. While this shift won't happen overnight, every initiative needs to be part of a thoughtful, flexible and interconnected strategy. This comprehensive approach mirrors the successful client-focused engagements we're currently implementing with some of our clients. In addition, to make this dramatic pivot and avoid costly mistakes, companies need to work with partners who have deep CX domain expertise, partners like us who have been operating in the CX trenches for decades and know how to limit risk. While generalists may be proficient in installing features and functions, they don't have the specialized knowledge of how the entire CX ecosystem works together. Without big picture and practical understanding of all the specific value levers, they aren't able to optimize associate workflows efficiently or architect seamless journeys that support customers where, when and how they want to interact. Everyday, we're enabling clients to work and think differently. We're helping them use data, AI and integrated systems to create journeys that effortlessly harmonize automation and human interaction. Is this hybrid balance that underpins every piece of software we write, every journey we orchestrate, every associate we train and most importantly, every client we serve? While early days, let me share how this philosophy beginning to play out across our business. We'll start with TTEC Engage. This quarter, we continued to attract new clients, grow our business with our embedded base and introduce new AI-enabled solutions. Year-to-date, we've added 11 new significant clients to our roster, including 4 this quarter, with an encouraging pipeline moving forward. We continue to expand our vertical expertise, attracting premium customer-focused brands across all our verticals. Over the last 7 quarters, we've signed 19 new large enterprise clients that are expected to add over $50 million of in-year revenue with substantial growth potential into 2026 and beyond. Our embedded base growth continues to accelerate as many of our key accounts begin to take advantage of the full range of our capabilities, including revenue generation, tech support, back office, trust and safety, to name a few. Year-to-date, contracted revenues in these areas exceed 150% of what was awarded all of last year. This growth is a result of healthy strategic relationships better performance, innovation, industry thought leadership and reduced client churn. Across TTEC Engage, we continue to evolve using AI tools across every business function. For our associates, this focus translates into desktop automation, knowledge retrieval, simulated learning and AI-assisted coaching to name a few. We've deployed AI in over 110 programs, with more than 65 clients and almost 100% of our new client pitches include our core AI associate augmentation tools. We're seeing impressive results on the front line with scalable performance improvements and we expect to see even more upside in the future. As expected, our engaged third quarter profitability was down compared to the prior year. This short-term dip was the result of significant investment this quarter to continue to set ourselves up for success in 2026. In addition to investing ahead of our fourth quarter seasonal ramp, we've made meaningful investments expanding our executive leadership team, growing our prioritized offshore delivery locations and boosting funding for several key innovations and technology initiatives. When we combine these investments, with our ongoing operational improvement programs, we're confident that we'll deliver year-over-year growth in the fourth quarter and for the year overall. Now let's turn to TTEC Digital, where we continue to remix our professional and managed services to meet the evolving needs and priorities of our clients. Our deep collaborative partnerships with the hyperscalers continue to position us squarely on the front lines of innovation. These industry giants are partnering with us to codevelop the essential features for a modern contact center, turning our shared vision into tomorrow's market reality. While I mentioned before that AI's toughest challenges aren't technical, an agile, integrated technology stack is nonnegotiable requirement. To that end, this quarter, the TTEC Digital team signed 20 new meaningful clients and expanded our portfolio of services with many of our existing clients. Clients are tapping into our expertise to help them optimize their current technology infrastructure and design their road map for the future. Instead of replacing core systems, we're helping clients optimize what they have by layering AI capabilities onto existing environments to drive targeted outcomes. Although these initial engagements in some cases are often smaller at the beginning than our traditional CCaaS implementations, they're highly strategic and play to our strengths in consulting, journey orchestration, analytics and systems integration. These programs frequently expand into multiphase engagements and generate recurring managed service opportunities. Now let me highlight some of the exciting deals from the quarter. For an existing client, a leading multinational bank, we're using AI to optimize both their front and back office operations. We completed their CCaaS migration last year. We're now layering in AI capabilities to transform voice and chat experiences into conversational agents with targeted handoffs to live associates for more complex interactions. This hybrid AI-powered solution improves the experience for both the customer and the associate with real-time transcription and analytics, allowing for direct customer interaction without a traditional IDR. In addition, the platform provides seamless automation of back-office tasks such as client research, fraud analysis and data entry, thus proving efficiency and accuracy. Our next example, is one of the world's largest airlines. We were selected to partner with their chosen hyperscaler to improve CX and reduce our case handle time by almost 1/3. When complete, we will have redesigned client's customer interaction platform and activated the full suite of AI capabilities. The result will be a dramatically improved customer and associate experience that will also drive increased profitability and operational efficiency for this world-class airline. . Now I'd like to turn to our progress implementing outcome-based solutions for our clients. For more than a decade, CX technology and service firms have been seeking ways to redefine the commercial delivery model away from FTE and production hours to outcome-based metrics like containment, handle time, first contact resolution and customer satisfaction to name a few. This approach has been appealing to visionary clients who understand the true value of total costs delivered and are willing to build a strategic partnership required to bring it to life. This quarter, through a unified methodology that knits fstrategy, technology, implementation and frontline operations together, we've come closer than ever before to an approach that can deliver guaranteed outcomes for certain qualified clients. For example, we're currently working with a financial services client who is seeking an end-to-end customer experience platform that combines technology and highly trained CX professionals. The holistic solution will blend AI agents and human associates with an integrated management and support model. Because we'll be teaming with the client on all facets of the solution, we're able to model improvements in operating efficiency and customer engagement metrics. The team is actively calling the plan based on initial data, and we're confident that working closely with our clients, we will achieve dependable, mutually beneficial results. In closing, I'd like to take a moment to reflect on our journey over the past few years. Our company has been going through a transition. Over the past 18 months, we've brought in several experienced leaders to help us rebuild our foundation and executed course corrections to set up and take advantage of all that AI has to offer today and into the future. Some might say that it's been a messy process. But today, we're in a materially better position than we were back in early 2024. While the numbers don't reflect the growing momentum in the business, we're confident that we're well on our way to returning to our historic growth rates and margins. We've developed a valuable portfolio of digital first CX capabilities, pioneered enviable collaborative relationships with the leading CX technology players, nurtured trusted partnerships with marquee brands across the globe and built a workforce made up of some of the most talented and passionate CX technologists, strategists and operators in the world. With a strategic approach that is purpose-built for each individual client, we're putting all these assets to work with a clear focus on delivering the outcomes our clients need most. Every organization today faces an immediate mandate to transform and we're well positioned and ready to provide the expertise necessary to lead our clients towards their goals. On behalf of the Board of Directors and our dedicated and talented teams across the globe, thank you for your continued support. And now I'll hand the call over to Kenny. Kenneth Wagers: Thank you, Ken, and good morning. I will start with a review of our third quarter 2025 financial results before discussing our full year 2025 financial outlook. In my discussion of the third quarter financial results, reference to revenue is on a GAAP basis, while EBITDA, operating income and earnings per share are on a non-GAAP adjusted basis. A full reconciliation of our GAAP to non-GAAP results is included in the tables attached to our earnings press release. Turning to our results. On a consolidated basis for the third quarter of 2025 compared to the prior year period, revenue was $519 million compared to $529 million, a decrease of 1.9%. Adjusted EBITDA was $43 million or 8.4% of revenue compared to $50 million or 9.5%. Operating income was $29 million or 5.6% of revenue compared to $34 million or 6.4%, and EPS was $0.12 compared to $0.11. Foreign exchange had a positive $2 million impact on revenue in the third quarter over the prior year period, primarily in our Engage segment, while having a nominal impact on adjusted EBITDA and operating income. Turning to our third quarter 2025 segment results. In our Engage segment, third quarter revenue decreased 4% over the prior year period to $397 million. Operating income was $17 million or 4.3% of revenue compared to $20 million or 4.8% of revenue in the prior year. The Engage segment's third quarter financial results were in line with our expectations. As discussed in my second quarter earnings comments, we forecasted lower third quarter Engage profitability compared to the prior year due to upfront expenses related to ramping certain key clients and fourth quarter seasonal health care volumes. These expenses included recruiting and training costs, license fees and technology that are delivering higher revenue and profitability in the fourth quarter and into the first quarter of next year. Overall, the 2025 Engage revenue continues to track to the high end of our full year guidance due to further expansion into new lines of business within our embedded base and the extension of a large public sector program through the first 3 quarters of 2025. We also continue to focus on profit optimization, including actions taken to further align our cost structure and improved operating efficiencies, driving increased profitability despite the year-over-year revenue decline. Although this quarter was impacted by the incremental spend that I mentioned, we are confident that the fourth quarter will reflect EBITDA and operating income growth for both the quarter and second half of 2025 compared to the prior year. Over the past year, we have meaningfully repositioned our Engage segment to better serve our new and existing global clientele, while also advancing our operational effectiveness. We have enhanced our AI and analytics capabilities, expanded our geographic delivery footprint and improved our leadership talent. Our embedded base is growing well above the prior year, as Ken mentioned. And our enterprise new logo signings continue to expand with material revenue contributions this year, both of which are anticipated to return the segment to top line growth in 2026. As a result, we remain confident in our ability to further improve our profitability in both absolute and relative terms. We will prudently continue to focus on our strategic initiatives and investments in the areas mentioned to return the company to its historical revenue growth and margins. The Engage backlog is $1.66 billion or 102% of our 2025 revenue guidance at the midpoint of the range, up from 99% for the same period of 2024. The Engage last 12-month revenue retention rate is 89%, flat to prior year but reflects a 95% retention rate when adjusted for the revenue related to the financial services and public sector clients discussed in our quarters. While the last 12-month retention rate continues to improve, the third quarter on a stand-alone basis reflects an adjusted revenue retention rate of 98% on top of the 97% for the second quarter, further supporting the return to historical levels of Engage top line growth. Moving on to our Digital segment. Third quarter revenue was $122 million, an increase of 5.4% over the prior year. Operating income was $12 million or 9.5% of revenue compared to $14 million or 12.5% of revenue for the same period last year. Digital's third quarter 2025 revenue benefited from a $15 million year-over-year increase in product resales related to on-premise clients. This revenue, while generally decreasing as clients migrate to the cloud, delivers lower margins accounting for a portion of the decline in operating income. Excluding the resales, revenue was $103 million, representing a decrease of 7.9% over the prior year with operating income at 9.9% of revenue. Recurring revenue declined 9.8% in the quarter compared to the prior year, primarily due to the reduction in managed services related to a premise contact center solution that moved to end-of-life status in July of this year. As Ken stated, our business is rapidly evolving and shifting from point solutions related to contact center technology to fully optimizing existing environments through AI-led consulting, journey orchestration and data and analytics services. With this shift, our recurring revenue that is reliant on CenterPoint solutions is decreasing while our diversified partnerships with hyperscalers and our other practices reflect revenue growth. The timing of this remix, however, is putting temporary pressure on revenue. Excluding product resales, recurring managed services represented approximately 67% of Digital's third quarter revenue, which is slightly lower than 68% for the same period last year. The market shift is also impacting professional services as front-end consulting engagements related to migrations of contact center solutions to the cloud have declined. As a result, professional services revenue decreased 4% in the quarter compared to the prior year. Despite the lower revenue, we proactively manage resource capacity by increasing utilization by approximately 10 basis points over the prior year. This resulted in a 7.6% increase in professional services operating income dollars, representing a 330 basis point margin improvement. Excluding our 2 legacy CCaaS partners, Professional Services grew 23.3% in the quarter compared to prior year, reflecting the momentum we are seeing with our expanded CX technology partner network. Furthermore, these AI-enabled offerings and solutions that drive enterprise-wide digital transformations are at higher margins with operating income increasing 88% year-over-year, far outpacing the revenue growth. Although we need to navigate through this market change and scale these dynamic partnerships, we believe the engagements will drive higher client retention and profitability in the long term. Our digital backlog is $444 million or 95% of our 2025 revenue guidance at the midpoint of the range, up from 92% of the same period last year. Before I discuss other financial metrics, I want to address the term extension of our credit facility. Our improved profitability and cash flow generation over the past year, along with significant year-over-year debt reduction drove this outcome. TTEC's executive leadership team and Board of Directors value the support from our long-standing banking partners. I will now share other third quarter 2025 metrics before discussing our outlook. Free cash flow was a negative $10 million in the third quarter of 2025 compared to a negative $100 million in the prior year, which as previously stated was impacted by the discontinuation of the accounts receivable factoring facility. If excluded, normalized free cash flow was a negative $18 million. The year-over-year improvement of $8 million after normalizing the prior year is due to an additional $13 million of cash flow from operations less an increase in capital expenditures of $5 million. Year-to-date, our deliberate actions to improve profitability and working capital management are evident in our cash flow from operations and free cash flow of $119 million and $92 million, respectively. In the third quarter 2025, capital expenditures were $14 million or 2.7% of revenue, compared to $9 million or 1.7% in the prior year. The higher end quarter spend was primarily due to the timing of real estate expansion and facility maintenance, along with IT spend related to health care seasonal ramps. On a year-to-date basis, capital expenditures totaled $26 million or 1.7% of revenue compared to $36 million or 2.2% of revenue for the prior year. As of September 30, 2025, cash was $73 million with $886 million of debt, primarily representing borrowings under our recently amended $1.05 billion revolving credit facility. The net debt position of $813 million represents a year-over-year decrease of $119 million as we continue to focus on cash flow generation and deleveraging. We ended the third quarter 2025 with a net leverage ratio as defined under the credit facility of 3.46x compared to 4.49x at the end of the same period last year. Our normalized tax rate was 53.7% in the third quarter of 2025 compared to 58.5% in the prior year. The tax rate is primarily due to the jurisdictional mix of pretax income where foreign taxable income cannot be offset by U.S. tax losses. The impact of the U.S. valuation allowance recorded against the U.S. pretax losses will continue to impact the normalized tax rate in future quarters. I will now provide some context with regards to our full year 2025 financial outlook. As discussed, Engage revenue continues to track towards the high end of the guidance range. This is driven by the strong continued growth in our embedded base and our enterprise new logos, which are contributing meaningful revenue this year. Revenue was also positively impacted by foreign exchange movement versus our original 2025 guidance at the beginning of the year. Relating to the Engage adjusted EBITDA and operating income, we are maintaining our full year guidance but are forecasting results to come in towards the lower end of the guidance range. Contrary to the revenue impact, the foreign exchange movements negatively impacted our profitability, increasing non-U.S. cost when converting them to U.S. dollars, accounting for more than the spread between our mid- and low-end range. Despite this headwind, I want to reiterate that we expect Engage to deliver solid bottom line growth sequentially and year-over-year in the fourth quarter and overall for the second half of the year. This is driven by the ongoing profit improvements we have demonstrated throughout the first half of the year as well as higher fourth quarter health care business and growth in key clients. In our Digital segment, we are navigating the market dynamics and have positioned ourselves to deliver continued transformational CX technology and service solutions. We have the partner network, the experienced talent, the in-depth knowledge and the AI-enabled solutions to be the partner of choice in this new demand environment. We are maintaining our full year guidance, however, at the lower end of guidance range due to remix factors discussed. Please reference our commentary in the Business Outlook section of our third quarter 2025 earnings press release to obtain our expectations for our reiterated 2025 full year guidance at the consolidated and segment levels. In closing, our third quarter and year-to-date results demonstrate our commitment to improve our operating and financial performance. Although we are proud of what we have accomplished over the past year, as Ken stated, we still have more work to do to return to our historical growth rates and profitability metrics. We will not be satisfied until we get there, but we believe we have set the necessary foundation and are on the right path to achieve this in the near term. We will not waver in our commitment and every action we take is with this goal in mind. I will now turn the call back to Bob. Bob Belknapp: Thanks, Kenny. [Operator Instructions] Operator, you may open the line. . Operator: [Operator Instructions] Our first question comes from George Sutton of Craig-Hallum. George Sutton: I wanted to better understand the front-loaded expenses you discussed relative to the health care opportunity. We're obviously in the midst of a very disruptive Medicare Advantage AEP and ACA, OEP. Can you just walk through the significance of your role there? And what these investments bring you? . Kenneth Wagers: George. Look, for us, I can't talk to the larger picture of health care. Maybe Ken can. I'll let him comment after me. I would just tell you that John Abou and the team and Engage this year has really done a good job with our Healthcare segment, and has really done a good job shoring up that business and growing that business and putting us in a really good position so that we can have this strong fourth quarter that we've alluded to all intents and purposes, the investments that we made in Q3 that I highlighted in my comments are about seeing double-digit growth in our health care seasonal business year-over-year. And so we're happy with those investments. And the key to those investments is, they shouldn't just last in Q4, right? When we take care of the client in Q4 and when we take care of the health care customers in their peak seasons, it really gives a very good business relationship going forward. And so not only do we see these investments paying off in Q4, but we see that with more steady work and growth from them into Q1 and into the balance of 2026. So that's what it means for TTEC specifically. Ken, I don't know if you want to comment on George's general question in the market. Kenneth Tuchman: I would second everything that Kenny just said. The bottom line is, is that not only are we growing the fourth quarter health care business, but more importantly, where we focused is on adding more what we would call long-term recurring business within the health care sector. So in other words, historically, we've had very significant seasonal ramps and then they start to fall off towards the end of first quarter. We will continue to have those peak ramps, but the difference is that we've negotiated multiple health care contracts where there'll be continuing revenue throughout the year, maintaining the base level of employees to service both front and back office requirements of these large health care payer organizations. I hope that helps to your question. George Sutton: No, that's great. So Ken, you also mentioned the AI experiences can be pretty negative if they're done just sort of as a sideline. And you mentioned the integration and sort of the broader inclusion of AI into the experiences with clients. Can you talk about what is the net economic scenario look like for you when someone is looking more holistic and adding in AI. Is that a positive net economic outcome for you as that evolves? Kenneth Tuchman: We believe that AI overall is going to be a very positive economic impact on multiple fronts. Number one, our digital business, I would say the majority of projects that they're now winning all include AI development. So from a digital standpoint, we absolutely see growth in that area. From an Engage standpoint, where we see the real opportunity is that by coupling AI with the human factor, we believe that what that allows us to do is to get to much more of a total value delivered solution. What we mean by that is instead of just simply pricing on a time and materials basis, it gives us the opportunity to actually price on an overall basis. And in doing so, we believe that we will be able to drive significantly better margin over the long term. And the reason for that is because if we can focus on continuing to reduce our labor component and labor cost and couple that with AI, that gives us certainly more margin impact by outcome-based pricing. So we already are starting to enter into some of those contracts as we speak, where we're happy to price on a per transaction basis as well as on a total where we're looking at the clients' total budget and making commitments to the impact that we can have on their budget. So for us, we're not run away from AI. We're incorporating it with into everything we're doing, whether it be how we operate internally or how we face the customer. The whole point that we -- that I was trying to make in my script and that I can't impress upon enough, is that the technology of AI right now where people have tried to over-rotate and basically replace entirely a customer service associate. It's just flat out not working for the average customer. Customers when they're dealing with complex medical issues, complex finance issues, they need to speak to a human being. Now where AI comes in is on all the more transactional types of issues, where human being really isn't adding a ton of value. And instead of AI is simply answering questions that are not dealing with the problems that they might be incurring with their mortgage or with their checking account, et cetera. And the last point is -- I'm sorry for waxing on this point, but I just really want to make a point about this is, we're using AI throughout our operations to make us significantly more efficient. And we believe that in 2026 that we will begin to see far better efficiencies in our quality assurance, in all of our learning and development and how we're using AI to build all of our learnings as well as all other aspects of our operations. So the goal is not only to streamline our operations and continue to reduce our cost to deliver, but it's also to be able to enhance the agent and the associates' capabilities as far as our ability to be able to make them smarter, to be able to make them deliver more accurate answers and to make them more efficient. So sorry for waxing on for so long. But we really are very excited by all the various different applications that we've been able to turn on. And our plan in 2026 with our clients' permission is to continue to keep adding more and more of these types of capabilities to become that much more efficacious on each and every interaction that we have. Operator: Our next question will be from Maggie Nolan of William Blair. Margaret Nolan: Given the shift that you talked about into AI consulting, can you talk about whether you have the sales and delivery head count that you need to make the pivot? Or how are you going to balance the investments that is potentially on the horizon? Kenneth Tuchman: Yes. It's Ken. So today, right now, we have approximately -- don't hold me to this exact number post call, we can get you the exact number, but close to 1,700 full-time engineers, all of which are background now in AI, all of which are involved in some aspect of AI within the company. So to answer your question, we feel very confident that we have the skill sets to do so. And that's proven by the fact of how deep our relationships are with our hyperscalers and the work that they're bringing us into and asking us to perform on their clients' behalf as well as joint selling with them, et cetera. We probably have right now, I feel very confident somewhere in the neighborhood of about 125 AI projects -- paid for projects that are underway as we speak by clients in our digital group. And that does not even count the amount of AI projects that are taking place on the Engage side. So we're -- AI is definitely in our blood. And I think we've really mastered at this stage of the game with AI, where we can be using it and where it can be reliable and where there's danger in using it and where there is risk of it actually creating a poor experience. And I think that's one of the main reasons why clients are looking to us because not only do we have the ability to integrate into all their CCaaS systems, which is extremely important, and we believe we have more expertise across the CCaaS channel of all the different various different CCaaS partners that are out there than virtually any other company out there. And to -- in order for AI to work properly, at minimum, you have to be able to integrate with all of these different CCaaS systems. Obviously, where it gets more complicated than what we really are specializing in is how to then integrate it with all the different client subsystems. We have clients that have anywhere between 85 and 200 systems. And that's what creates long-term opportunity for us is our ability to integrate into all those various different subsystems. So that AI can actually access the data and be able to either assist the agent or assist the customer. There was 2 parts to your question, and that was the first part. Could you repeat the second part? I'm sorry. Margaret Nolan: Yes. You've covered a good portion of it. So it was about the shift, how that impacts sales and delivery? And then how you'll be able to balance the investment on the horizon? But it feels as though maybe a lot of that investment has been made. Do you feel like you have the capabilities already intact? Kenneth Tuchman: No. Absolutely, 100%, we have the capabilities intact. And any time, Maggie offline, we would be thrilled to actually get into real-life client examples of the types of work that we're being brought into. We're doing right now complex projects in the genomics area, where we're building out modern data states with genomic so that we can create presentation layers to doctors as well as the patients that they can actually understand after doing the genomics test we're doing a myriad of very complex projects in the area of taking advantage of AI. And like I said, we would be happy to not only take you through some of the projects, but even give you the client names, which I can't do in a public setting like this. Margaret Nolan: Okay. Maybe one follow-up, one different topic. Can you just expand upon or you or Kenny, the ability to further improve free cash flow, particularly given some of the revenue dynamics you're experiencing? Kenneth Tuchman: Sure, Kenny, do you want to start with that? . Kenneth Wagers: Yes, Maggie, look, as we talked about over the last couple of quarters, our number one -- One of our number one objective, obviously, on the financial side is debt reduction. And as we look at our free cash flow conversion, and as we look at the use of that cash, that's what we've been doing and that's what we've been executing on. As a matter of fact, that was one of the big impetuses of us getting the extension that we just announced as well. And so as we look at free cash flow generation into the future, it's a balance of all those things, right? It's a balance of improvement in the net working capital that you've seen over the last couple of quarters. It's managing our CapEx. And it's also looking at and improving the ultimate gross margins that fall down to the EBITDA dollars that really are the genesis of your free cash flow. And so we've got that outlook. But again, we're balancing especially in this quarter as we alluded to, we're balancing that with investments as well, right? We -- Ken alluded to, there's always this push and pull about build versus buy in AI. We've got a ton of engineers like Ken talked about on the digital side specifically, but also in the Engage business as we build AI tooling for the BPO customer, right? Some we're building in-house, some were acquiring in a pay-as-you-go right now. And so we've got to balance that because the market is dynamic right now, and we need to continue to be a leader on the AI side, not just in digital, but also in Engage because every single client, every single interaction is about the ability to leverage AI next to the humans that we have. And so we'll continue to balance the investments going forward, but we're happy with where the free cash flow generation has gotten over the last couple of quarters. And we'll really get into that a little more when we do our 2026 planning that we'll discuss the outcome of in the next quarter. Kenneth Tuchman: And Maggie, just one other point I want to add on to Kenny's thought. As we said in our script, in 2025, we made significant investments in building a myriad of AI capabilities and tools, they're built, they're operational. So I want to just stress to you. For example, we have a real-time translation product. That's our product that we built the code set for overlaid on top of -- that takes advantage of all the language models that are out there, which means that we can compete in language translation at a fraction of the cost of other people that are having to purchase third-party language translation capabilities, which are just now coming to market. And not to sound like a salesperson, but one of the larger health care companies in the world just did a bake-off of 25 different language translation products, and they scored our #1 in capability over the other products that were available. We've built agent assist tools that listen to interactions, whether they be chat or voice, and instantly are assisting the agent with the next best action. We've built a myriad of analytics tools that give our clients real-time information on exactly what's taking place day-to-day of what are the top inquiries that are taking place about a product offering or about a recall, et cetera. I could go on and on and on. But that's part of the investments that we've been making and that we'll continue to make, but we feel like we've got a really good head start on the base level of AI capabilities that we can implement immediately on behalf of any of our existing or new clients that are coming on board. Operator: Our next question comes from Vincent Colicchio of Barrington Research. . Vincent Colicchio: Yes, Ken, what verticals aside from at Engage aside from health care, do you feel most optimistic about in the coming quarters? Kenneth Tuchman: Well, financial services, we feel really good about a lot of stuff happening in the fintech area. So that certainly is one area. Government or public sector, et cetera, as you can imagine, with the administration and everything that's going on. What I would say is that they are more pro, let's just say, outsourcing than probably they ever have been as they continue to cut people on the payroll. So we feel good about that. In the automotive sector, especially on the digital side, we're seeing really exciting opportunity in that area as well. Our travel business is growing extremely well right now, which we're excited about. And that's growing on a not just North American basis, but global basis. And then retail, which is an area that, frankly, we have underinvested in from a sales and marketing standpoint, and now we've stepped up that investment and we're seeing some really good results and really strong pipeline in that area as well. So I'd say those are the primary areas that we're focused on and that we're winning deals and that we see a long-term opportunity. Vincent Colicchio: And are you seeing an increase in prospects that have not outsourced in the past, which would suggest an expanding TAM? Kenneth Tuchman: It's a good question. And I want to give you an accurate answer. There's no question that we have recently -- for example, we just won, a deal, I can't really be very specific that has very significant opportunity with a company that's 100% captive in, let's call it, the health care space and in the testing space. And they are now -- this is their first entree into outsourcing. And if all goes well, there is a very deep well of additional opportunity. So -- but I don't think that anecdotally is enough for me to give you a definitive answer. I think that all companies are under intense cost pressure due to tariffs, et cetera. And so I think that, as I've said on previous calls, there is a slow leak of business coming from captives. And I know that there's this wall of worry about how AI is going to replace every human, et cetera. A, we don't buy it; and b, I can't stress enough, there's $300 billion of internal captive spend that has not yet been outsourced. So regardless of the impact that AI may or may not have, there is still so much business out there that has not yet been outsourced that we feel very confident as does Gartner and as to the other third-party analysts that have recently put out reports saying that over the next 36 months, there will be 1.7 million customer service associates added to the payrolls of whether it be companies or outsourcers due to the demand and the need. I can't stress enough, as we go more digital, and as more and more people take advantage of digital, that just simply creates more and more customer interactions of interactions that are not taking place in a retail type environment -- a physical retail environment. And instead of that physical retail environment shifts to a digital environment, there is more need for support to be able to resolve issues and how people assisting them with their large capital expenditures, or financial issues, or medical issues, et cetera. Operator: Our last question will be from Jonathan Lee of Guggenheim Securities. Yu Lee: I want to focus on resale here. Is that revenue went off in nature? Or rather -- and if so, does that set up for a sequential decline 4Q for digital revenue? Or do you expect that third-party resale revenue to lead to larger, more profitable engagements near term? . Kenneth Wagers: Yes, Jonathan. Look, our resale volumes are -- those product sales are tough to forecast because by definition, they're one-off. But we always with the customer breadth that we have in digital and with so many engagements on that side, we end up counting on them. They happen every quarter. They'll continue to happen. We've got a couple teed up for Q4. So specifically, we've not -- we don't count on them in the forecasting process as we move forward, but they are a product of the digital business that we have based on our managed services engagements and professional services engagements. And so we take them when they come. But by definition, they aren't recurring. Kenneth Tuchman: Yes. And I would just add, Kenny, to that, and that is that the Digital has 1,000 clients, and they have a significant amount of clients that are in the public sector, many states, as an example, as well as federal clients. These clients tend to be slower or let's just say, more behind on the technology curve of fully shifting to the cloud. And that's the part that's so complicated because they'll reach out to us and say 2025 is the year that we're going to move all of this to the cloud and we need your help with that. And then we'll say, "You know what, our budget just got cut. So we're going to delay moving to the cloud. But now what we need to do is add XYZ of software and hardware to their bare metal solution, et cetera. And that's Kenny's point, it's just hard for us to predict the folks that are kicking the can, so to speak, on shifting to the cloud, which obviously is a different type of revenue. And so as much as we do not depend upon these sales, the fact of the matter is, I think that they're going to continue to sporadically come in, and they're going to always be chunky. There's just no way around it. The last point that I would make, which is also very difficult for us to predict is, we're starting to see a little bit of -- it's early days, but a little bit of a trend on clients who actually over-rotated to the cloud and have experienced some significant outages. They've all been in the general public. So I'm not going to name the names of the outages that we're talking about, but I'm sure everyone on this call knows exactly what I'm talking about in 2025. And so now some of them are questioning whether or not they need to be not only diversified, meaning multi-cloud. But in addition to that, do they also need to maintain x amount of infrastructure internally so that they're not 100% reliant on something that they don't have control over. . And because we do business with so many Fortune 500 companies, I'm sure you can imagine that there is a wall of worry in this area, whether it be cyber worry, whether it be just flat out outage worry technical, et cetera, that are causing these various different outages. Some of which I'm sure you're aware of, took place just in the last couple of weeks. So I'm sorry that I'm not giving you a precise answer, but there isn't really a way for us to give you a precise answer. I think what matters the most is the following. We are 100% focused on the cloud, on AI and on analytics. And therefore, all of our energy from a sales standpoint is not in the product area and is in this shift to the cloud. That said, we have a very large embedded base. And when they call us up and say, we're delaying x part of our move to the cloud, and therefore, we have to renew all these licenses or whatever, we're not going to say no to them. I hope that's helpful. Yu Lee: Got it. So then how do you think about the path to Digital ex third-party pivoting to growth? Kenneth Tuchman: I'm sorry -- I'm not sure maybe you could phrase your question differently. I'm not sure I fully understand the question. I'm sorry. Yu Lee: Is there a path to the digital business ex the third-party resale revenue actually growing year-on-year organically from here? Kenneth Tuchman: Oh, 100%. Yes. It's all about our remix. It's all about the remix that we're doing right now in professional services. It's all about the types of business that we're winning right now. And our goal is that in the second half of 2026, we are -- our goal is to get the digital business back to a net positive growth because of the remix. But the part that's been hard for us to predict is really just the percentage of decline of what I'll just call the legacy old versus all the new and the projects that are ramping up on the actual remix. So yes, there is -- I can't stress enough with this AI revolution that's out there, there is going to be no exaggeration, a 10-year tailwind of opportunity with clients. And I also can't stress enough that there is way too much type of people believing that all you have to do is add water and AI, you can turn on AI. This is not like mixing a cup of cocoa with boiling water, this requires a lot of groundwork before you can get to the supposed AI Nirvana. And I'd say that a high percentage of the Fortune 1000, and I don't think this is even a slight exaggeration, their systems are nowhere near ready to be able to take advantage of what AI can actually do. They don't have a modern data state. They need help there that unto itself is a very significant lift and a big project. In many cases, most of their applications are not yet in the cloud. And if they are, they're still integrated, that requires a heavy lift and a lot of work. And so the AI part in many ways is the easy part. It's all of their current infrastructure and legacy software, et cetera, that is just not ready for AI to be able to seamlessly integrate with, et cetera. And so I think what you're going to see is, exactly what we're seeing is that clients are dipping their toe in the water with AI. They're not dipping their leg or their whole body into the water. And they're basically starting to experiment with different pieces of it to see what impact it can have on helping them drive more efficiency, et cetera. And so this is a process that we're confident that we can capitalize off of. Operator: Thank you for your questions. That is all the time we have today. This concludes TTEC's Third Quarter 2025 Earnings Conference Call. You may disconnect at this time.
Operator: Good day, and welcome to The GEO Group's Third Quarter 2025 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Pablo Paez, Executive Vice President of Corporate Relations. Please go ahead. Pablo Paez: Thank you, operator. Good morning, everyone, and thank you for joining us for today's discussion of The GEO Group's Third Quarter 2025 Earnings Results. With us today are George Zoley, Executive Chairman of the Board; Dave Donahue, Chief Executive Officer; and Mark Suchinski, Chief Financial Officer. This morning, we will discuss our third quarter results as well as our outlook. We will conclude the call with a question-and-answer session. This conference call is also being webcast live on our investor website at investors.geogroup.com. Today, we will discuss non-GAAP basis information. A reconciliation from non-GAAP basis information to GAAP basis results is included in the press release and the supplemental disclosure we issued this morning. Additionally, much of the information we will discuss today, including the answers we give in response to your questions, may include forward-looking statements regarding our beliefs and current expectations with respect to various matters. These forward-looking statements are intended to fall within the safe harbor provisions of the securities laws. Our actual results may differ materially from those in the forward-looking statements as a result of various factors contained in our Securities and Exchange Commission filings, including the Form 10-K, 10-Q and 8-K reports. With that, please allow me to turn this call over to our Executive Chairman, George Zoley. George? George Zoley: Thank you, Pablo, and good morning to everyone. Thank you for joining us on our third quarter earnings call. During the first 3 quarters of the year, we believe we've made significant progress towards meeting our financial and strategic objectives. Since the beginning of 2025, we've entered into new or expanded contracts that represent over $460 million in new incremental annualized revenues that are already under contract and are expected to normalize next year. This represents the largest amount of new business that we have won in a single year in our company's history. We've entered into new contracts to house ICE detainees at four facilities totaling approximately 6,000 beds, which include three company-owned facilities where we announced in the first half of 2025, the 1,000-bed Delaney Hall, New Jersey facility, the 1,800-bed North Lake Facility in Michigan, and the 1,868-bed D. Ray James Facility in Georgia. And more recently, the 1,310-bed North Florida Detention Facility, which is a state-owned facility where we are providing management services under a joint venture agreement that we announced in early October. The Florida contract arrangement demonstrates GEO's ability to provide management services through alternative solutions like the State of Florida's partnership with the federal government. Additionally, during the third quarter, we reactivated our 1,940-bed Adelanto ICE Facility in California, which was previously underutilized due to COVID-related court cases. On a combined basis, these five facilities are expected to generate more than $300 million in incremental annualized revenues at full occupancy as they normalize their financial contributions next year. These facility activations have increased our total ICE capacity to over 26,000 beds, and our current census is over 22,000, which is the highest ICE population we've ever had. In addition to these facility activations, we are reviewing the physical plant at 20 of our ICE facilities to determine our capacity to expand the office space for additional ICE staff and their expanding mission. Our Delaney Hall and D. Ray James facilities will have added ICE office space as part of our new contracts, and we have submitted similar proposal for Moshannon Valley in response to a request from the agency. This effort is representative of our long-standing partnership with ICE and our company's flexibility in adjusting to and addressing the ever-changing needs of ICE. With respect to our secure transportation, we have significantly expanded our footprint for ICE and the U.S. Marshals over the course of 2025. Earlier this year, we signed a 5 -- new 5-year contract with the U.S. Marshals for the provision of secure transportation services covering 26 federal judicial districts spanning 14 states. Throughout the year, we've executed new or amended contracts to expand secure ground transportation services at four existing ICE facilities and at our three new recently activated ICE facilities. Additionally, the services we provide under our ICE air support contract have steadily increased throughout this year. On a combined basis, this new transportation business represents approximately $60 million in expected incremental annualized revenues. We are encouraged by the growth opportunities at the state level as evidenced by the three recently managed-only contract awards from the Florida Department of Corrections, including two facilities we do not currently manage, which are expected to generate approximately $100 million in incremental annualized revenues beginning in July of 2026. Of particular importance, we are very honored to have been awarded a new 2-year contract for the ISAP 5 program at the end of September. We believe this significant contract award is a testament to the high-quality electronic monitoring and case management services, our wholly-owned subsidiary, BI has consistently delivered for over 20 years. There are presently approximately 7.6 million immigrants on the non-detained docket with approximately 182,000 enrolled in the ISAP program at this time. As part of the ICE's alternative to detention or ATD system, many immigrants are placed in the Intensive Supervision Appearance Program, ISAP, as a subprogram within ATD. It's mainly used for people ICE considers a higher flight risk or who have been pending a silent or removal cases but are still allowed to live in the community. The program relies on several forms of surveillance. Some are required to wear GPS ankle or risk monitors that track their movements in real time. Others are enrolled in SmartLINK Mobile App, which relies on facial recognition, voice ID and GPS to confirm a person's location during check-ins. Under the previous 5-year ISAP contract, the participant count started at 91,000 individuals and thereafter doubled ending at 183,000 individuals. The present ISAP 5 participant count is more than 182,000, but the new contract includes pricing for 361,000 participants in year 1 and 465,000 participants in year 2. In order to further assure our success in the rebid competition and provide lower unit cost for further ISAP growth, we've reduced our pricing as in the past on a variety of services, which has resulted in a new financial baseline, which will later be discussed by Mark. We are able to implement this strategy by identifying staffing efficiencies through the program services, along with the continued development of less costly new generation monitoring devices, which also required margin compression. We are optimistic that ISAP ramp-up could begin early next year. GEO has the capability in monitoring devices and case management services to achieve those significantly increased participation levels and far beyond if desired by ICE. But of course, we cannot provide definitive assurance of future ISAP participation levels, which are determined by ICE management. And as I said on our previous call, the focus of ICE at this time has been toward the increase in detention capacity in which we are participating. But what we have seen is a steady increase in more intensive and higher-priced monitoring devices such as ankle monitors and a steady decrease in the less intensive and lower-priced use of phones or phone apps. This new policy seems to be consistent with the objective of more aggressive supervision of the 7.6 million immigrants on the non-detained docket. As the world's largest service provider of electronic monitoring devices, we remain optimistic in the importance and growth potential of the ISAP 5 contract. Going forward, we expect to be able to capture additional growth opportunities. We believe the federal government's objective continues to be to scale up immigration detention to approximately 100,000 beds or more from the approximately 60,000 beds ICE is currently utilizing. This objective of scaling up to 100,000 detention beds is a 270% increase from the 2024 average of 37,000 beds. However, the pace of new detention contracts has been slower than anticipated, which we believe is possibly due to three factors. First, as has been reported in the media, the Department of Homeland Security has implemented a policy that requires Homeland Security Services Secretary to review and approve all contracts above $100,000, which is time and staff intensive. We have been intensely cooperating in this financial and staffing review process toward providing assurance that the government is receiving best value at GEO facilities and services. Second and more recently, the government shutdown has likely delayed the award of new contracts. During the government shutdown triggered by a lapse in appropriations, federal agencies are generally careful about making new contract awards unless the award is related to an accepted activity or is funded by a source other than the regular appropriations. Third is the need for ICE to have more staff to carry out its enforcement efforts, which is indicated by ICE's new recruitment program to double its employees from approximately 10,000 to 20,000, which is also time and staff intensive. Following the resolution of the current government shutdown, we believe ICE will have ample funding to support its priorities. Not only will ICE receive annual appropriations baseline of approximately $8.7 billion, but the agency also has access to $45 billion in incremental funding for detention services, which is available through September 30, 2029. While the exact timing of government actions, including our new contract awards is difficult to estimate, we believe that our remaining idle facilities are likely to play an important role in supporting the objective of increasing overall detention capacity. We have approximately 6,000 idle beds at six company-owned facilities, which remain available. Most of these facilities are formally contracted -- were formally contracted to the U.S. Bureau of Prisons and are of high security, which makes them ideally suited for the current needs of the federal government. On a combined basis, these 6,000 beds could generate more than $300 million in additional incremental annualized revenues. We also believe that increasing detention capacity to 100,000 beds or more will likely require ICE to seek alternative solutions in addition to traditional hard-sided facilities. Based on our best estimate, the current beds available by the private sector at traditional hard-sided facilities would likely provide ICE capacity for approximately 80,000 beds. Thus scaling up to 100,000 detention beds or more will likely require additional partnerships with states or additional temporary soft-sided facilities on a military basis or other sites. We will be exploring opportunities to participate in these new government sites, whether state-sponsored or procured by the military. Meanwhile, our focus is also on the activation on our remaining idle facilities. As evidenced by our recent joint venture agreement in Florida, we believe GEO is well positioned to pursue other state partnership opportunities that increase detention capacity for ICE. Finally, we have and will continue to evaluate the potential acquisition or leasing of third-party-owned facilities, and we have identified approximately 5,000 combined beds that could be added using several options of temporary and permanent facilities at several of our existing ICE sites. We are also pursuing additional diversified opportunities in the field of mental health services, which we exited approximately 13 years ago when we became a REIT and subsequently de-REITed. We are currently participating in a procurement in the state of Florida for the management contract at the South Florida Evaluation & Treatment Center, which we expect to be awarded in Q1 of next year. Our goal with all these efforts is to place GEO in the best competitive position to pursue available growth opportunities. In addition to the steps we have taken to capture quality growth opportunities, we have made significant progress towards strengthening our capital structure by reducing outstanding debt, deleveraging our balance sheet and enhancing shareholder value through capital returns. In 2025, we reduced our total net debt by approximately $275 million, closing the third quarter with approximately $1.4 billion in total net debt with a total net leverage of approximately 3.2x adjusted EBITDA at this time. Our debt reduction efforts were boosted by the successful sale of the Lawton, Oklahoma facility for $312 million or $130,000 per bed, which was a transformative event for our company, allowing us to significantly deleverage our balance sheet and launch a stock buyback program ahead of our prior expectations. Approximately $60 million of the Lawton Facility sale gain was used to purchase the 770-bed downtown San Diego, California facility that we've been operating for 25 years for the U.S. Marshals Service. During the third quarter, we repurchased approximately 2 million shares for approximately $42 million under our newly launched buyback program, bringing our total shares outstanding to approximately 140 million at the end of the third quarter. Given the intrinsic value of our assets and already captured, expected future growth, we believe that our current equity valuation offers a very attractive opportunity. To this end, our Board of Directors has increased our stock buyback program authorization by $200 million, increasing the total authorization to $500 million and extending expiration date to December 31, 2029. We plan to execute our stock buyback program opportunistically, balancing it with our growth, capital needs and our objective to reduce debt and deleverage our balance sheet. At this time, I will turn the call over to our CFO, Mark Suchinski, to review our financial highlights and guidance. Mark Suchinski: Thank you, George. Good morning, everyone. I am happy to report that we had a very solid third quarter. For the third quarter of 2025, we reported net income attributable to GEO of approximately $174 million or $1.24 per diluted share on quarterly revenues of approximately $682 million. This compares to net income attributable to GEO of approximately $26 million or $0.19 per diluted share in the third quarter of 2024 on revenues of approximately $603 million. During the third quarter of 2025, we completed the sale of the Lawton, Oklahoma facility for $312 million and the Hector Garza, Texas facility for $10 million. These two transactions resulted in a $232 million gain on asset sales during the third quarter. Approximately $60 million of the Lawton Facility sale was used to purchase the 770-bed Downtown San Diego, California facility that we have been operating for 25 years for the U.S. Marshals Service. Additionally, during the third quarter of 2025, we incurred a noncash contingent litigation reserve of approximately $38 million in connection with a legal case in the State of Washington involving claims of individuals who participate in the voluntary work program while in ICE detention. The Ninth Circuit Court of Appeals has ruled that the ICE volunteer detainees are entitled to state minimum wage payments, but stayed their ruling pending GEO's appeal to the U.S. Supreme Court. The Ninth Circuit of Appeals ruling is in stark conflict with other federal court rulings on individuals providing work while in confinement. No company has ever paid state minimum wages to individuals working in confinement facilities. While we are appealing the case to the U.S. Supreme Court, due to accounting rules, we recorded this noncash contingent litigation reserve during the recent -- our most recent third quarter. Excluding this noncash contingent litigation reserve, the gain on asset sales and other items, adjusted net income for the third quarter of 2025 was approximately $35 million or $0.25 per diluted share compared to $29 million or $0.21 per diluted share for the prior year's third quarter. Adjusted EBITDA for the third quarter of 2025 was approximately $120 million, up from the approximately $119 million reported for the prior year third quarter. Beginning with revenues. Quarterly revenues in our owned and leased secure service facilities increased by approximately 22% year-over-year, driven by the activation of our new ICE contracts, which drove the census across our contracted ICE processing centers to an all-time high. Revenues for our nonresidential contracts increased by approximately 10% from the prior year third quarter. Revenues for our managed-only contracts increased by approximately 8% from the prior third quarter. Revenues of our electronic monitoring and supervision services and for our reentry centers were largely unchanged from the prior year third quarter. Now let's turn to our expenses. During the third quarter of 2025, our operating expenses increased by approximately 15% due to the start-up of new contract awards and increased occupancies compared to the prior year quarter. Our G&A expense for the third quarter of 2025 increased from the prior third quarter, in part due to the reorganization of the senior management team at the end of last year, higher employee-related benefit costs and support for the revenue growth from our new contract awards. Our third quarter 2025 results reflect a year-over-year decrease in net interest expense of approximately $7 million as a result of the reduction in our net debt. Our effective tax rate for the third quarter of 2025 was approximately 25%. Now let's move to our outlook. We have updated our financial guidance for the fourth quarter and full year 2025. Our updated guidance for the fourth quarter incorporates a new reduced contract pricing for ISAP 5, which, as George mentioned, is being favorably impacted by a steady shift in technology mix as well as higher intensity of case management services and the potential for higher volumes, all of which should improve the economics of the new contract. Based on these variables, the federal government assigned an estimated value to the 2-year contract of over $1 billion. Because the exact scope and timing of the government actions are difficult to estimate and are outside of our control, we have not included any assumptions with respect to favorable mix shift or census growth in the ISAP contracts in our 2025 guidance. Additionally, we are in the process of implementing several cost mitigation measures for the ISAP contract by the end of this year, which we expect to result in cost savings of approximately $2 million to $3 million per quarter beginning in 2026. The fourth quarter was also impacted by additional start-up costs at the Adelanto, California facility, which has required the hiring of 179 additional staff due to its reopening and the increase of overtime costs due to new staff awaiting their final ICE clearance before being allowed to perform their responsibilities. We expect both issues to normalize in 2026. As a result, we expect fourth quarter 2025 GAAP net income to be in the range of $0.23 to $0.27 per diluted share on quarterly revenues of $651 million to $676 million. We expect fourth quarter '25 adjusted EBITDA to be between $117 million and $127 million. Taking into account our updated fourth quarter guidance, we expect full year 2025 GAAP net income to be in the range of $1.81 to $1.85 per diluted share, including the $232 million gain on the sale of the Lawton, Oklahoma and Hector Garza, Texas facilities. We expect full year 2025 adjusted net income to be in the range of $0.84 to $0.87 per diluted share on increased annual revenues of approximately $2.6 billion and based on an effective tax rate of approximately 25%, inclusive of known discrete items. We expect full year 2025 adjusted EBITDA to be in the range of $455 million to $465 million. We expect total capital expenditures for the full year of 2025 to be between $200 million and $205 million, which includes our previous announced $100 million investment to enhance our ICE facilities and services and the approximate $60 million for the purchase of the Western Region Detention Facility. With the already announced contracts that are expected to normalize next year and new opportunities that are in discussions, we could see a path to approximately $3 billion in annual revenues in 2026. Now let's move to our balance sheet. We closed the third quarter of 2025 with approximately $184 million in cash on hand and approximately $143 million in available capacity under our revolving credit facility. We believe we have ample liquidity to support our working capital needs during the current government shutdown. We have received verbal support from several of our banks to provide additional liquidity should the government shutdown continue for a prolonged period of time. We also believe we've made significant progress towards deleveraging our balance sheet. Year-to-date, we've reduced our net debt by approximately $275 million, closing the third quarter with total net debt of approximately $1.4 billion and total net leverage of 3.2x adjusted EBITDA. As a result, we've achieved an annualized reduction in interest expense of over $25 million. Our debt reduction efforts were bolstered by the successful sale of the Lawton, Oklahoma facility for $312 million during the third quarter. We believe this important transaction is representative of the intrinsic value of our real estate assets, totaling 50,000 owned beds, and it allowed us to significantly deleverage our balance sheet and begin to return capital to our shareholders. During the third quarter, we repurchased approximately 2 million shares for approximately $42 million under our recently launched stock buyback program, which our Board has increased by $200 million, bringing the total authorization to $500 million. We expect to continue to execute our buyback program opportunistically within the covenant requirements of our debt agreements. We remain focused on disciplined allocation of capital to enhance long-term value for our shareholders, and we believe that our strong cash flows will allow us to support all of our capital allocation priorities. At this time, I will return the call back to George for some closing comments. George Zoley: Thank you, Mark. In closing, we believe we've made significant progress towards meeting our strategic objectives. So far in 2025, we've announced new or expanded contracts that are expected to generate more than $460 million in new incremental annualized revenues, which will normalize next year and likely achieve approximately $3 billion in total company revenues for 2026. The amount of new contracted revenues is the largest in our history of our company. Going forward, we expect to be able to capture additional growth opportunities. We have approximately 6,000 idle high-security beds that remain available, which could generate in excess of $300 million in annualized revenues if fully activated. With the award of the new 2-year ISAP contract and the investments we've made to stock up on the inventory of GPS tracking devices and development of new generation devices, BI is well positioned to respond to the future demands under the ISAP 5 contract. We are also well positioned to continue to expand our delivery of secure transportation services for ICE and the U.S. Marshals. While the exact timing of government actions, including new contract awards is difficult to estimate, as a management team, we are focused on maintaining a level of readiness to successfully pursue and capture future growth and continuing to allocate capital to enhance value for our shareholders. That completes our remarks, and we would be glad to take questions. Thank you. Operator: [Operator Instructions] Our first question comes from Joe Gomes with NOBLE Capital. Joseph Gomes: I wanted to start off here. I think there's a big question hanging out there with the government shutdown, with the ICE focus on hiring the extra 10,000 people that the rate of ICE population detentions has not been as robust here as originally anticipated. Just was wondering what you guys are seeing out there. Is it flowing at what your expectations were? Or has it come in a little less than what you may have been previously expecting given the current status there with the federal government? George Zoley: No. It's obviously gone slower than we previously expected. And our existing facilities are at almost full capacity, and they're churning out deportations almost at the rate of approximately 100% of their capacity per month. So we've never seen anything like this before. So our existing facilities are on full throttle. We were expecting additional contract awards, but there is a need for additional ICE staff to support additional facilities. That's why they're trying to recruit 10,000 staff. Well, as I said in my remarks, it takes a lot of time and staff-intensive activities to recruit, hire, train and bring on board that ICE staff to support new facilities around the country. We think our idle facilities totaling 6,000 beds are ideal high-security facilities that are available. But just looking at a combination of factors of the government shutdown, the need for additional ICE staff, there have -- those factors have caused the delays that we hope will be concluded by the end of the year, if not the end of this month. Joseph Gomes: Okay. Really appreciate the color there. On the ISAP, congrats on the contract win. I understand there's going to be some puts and takes there, some changes. But historically, if you look at that contract, it's run roughly about a 50% NOI margin. Do you think even with all these puts and takes that stays at least at that level? Or do you think there'll be contraction in that NOI margin? George Zoley: Well, we really don't discuss our margins by business unit to that level of granularity. We made a pricing cut to be competitive in this last rebid as we have done, I think, in two or three times previously. So every time there's a rebid of the ICE contract, there's a lot of competition, and we've reduced our unit pricing, and there's 40 different units in that pricing. So we took a hard look and we identified cost savings opportunities at the corporate level, regarding staffing field level, cost savings on devices, the identification of new generation devices on a less costly basis. So all of that was combined to present the government with the best value in winning the contract. Now the count, as I've said, has been fairly stable which is a little disappointing, obviously. But the mix of monitoring devices is leading towards more intensive devices that cost a bit more and more intensive supervision of case management services with regarding the existing population that will be applied to the increasing population as priced in years 1 and year 2. Remember, year 1 is priced to double the existing capacity and year 2 is almost tripling. So that remains to be seen. It's up to the government as to how do they get to those levels. But right now, I think we've been fairly consistent in saying the focus has been on increasing detention capacity. And that's where the activity has been and the actual participation levels increase. Mark Suchinski: Joe, it's Mark. I would just add that our electronic monitoring business has been and will continue to be our highest margin business. We publish that quarterly. It's -- we're fully transparent about that. And we -- as George indicated, we've made some adjustments, but we're working on the cost side of things, and we expect those actions to be complete by the end of the year and reap those benefits in 2026. Joseph Gomes: Okay. And then one more, if I may. Staffing has always been challenged especially when you're opening so many idle facilities at one time. I'm just wondering how are you guys looking at or seeing the ability to staff up the facilities that you're opening? George Zoley: Great question. I think we've been targeting hiring 1,000 or 1,500 additional staff this year, which is an enormous amount comparatively speaking. And that's been a very costly feature that has impacted our earnings this year, which I don't think a lot of new shareholders are aware of the impact. When you hire people, you have to put them into -- you have to recruit them, you have to do background checks, you have to put them in training. All of that is a cost that's predominantly borne by us and not the client until the facility opens and normalizes. So almost all of that -- those staff are paid according to Department of Labor determined wages. And so I think we're having a good shot at finding the people, but it takes a long time to get them through the ICE clearance process. And that's a costly wait for us. Operator: The next question comes from Jason Weaver with JonesTrading. Matthew Erdner: This is Matthew Erdner on for Jason. So going back to the ISAP, I just kind of want two clarification questions. First, the $1 billion, that is over the 2-year term period. And then I just want to make sure I get the numbers right on the scale up. It was, I believe, $361 million you said in the first year and then $465 million for year 2? George Zoley: Yes. Matthew Erdner: Okay. And then as it relates to that, should we kind of expect that 1/3 of that revenue trickles through over '27 with the remainder kind of coming through in 2027 as that program continues to scale? Mark Suchinski: Well, as we indicated, that's -- we responded to the government's request. And the government had in the RFP, identified those counts for us to respond to. And so we -- today, the counts are at 182,000. We really -- we don't know exactly the exact timing of the change in ISAP participants over time. But I think as George has articulated, their focus right now is on detention. And once we get to 100,000 beds, the pivot will be to ATD. So I think it's hard for us to predict the exact timing of that. But what we do know is that the RFP had allocated significantly higher funding and participant counts than -- as compared to where we are today. And so I think that's what we know. George Zoley: The contract term will go into 2027, obviously. That's part of the answer to your question. The exact counts, we are beyond our control. They are identified in the pricing procurement document that everybody had to bid on. So the counts are as we've discussed, and it remains to be seen if we achieve or exceed those counts. Because as I said in my comments previously, that the count on the previous ISAP 4 awards started at 91,000 and ended at 183,000. If that's any indication of the future, then I think we're going to be on solid ground. Matthew Erdner: Got it. That's helpful. And then touching on the additional growth opportunities and alternative solutions that you guys are still on the table. It's nice to see you guys working with the state of Florida. How big is that opportunity set? And how many states are looking for these kind of management services as ICE continues to try to look for additional beds? George Zoley: There are several, which we can't name at this time. But they're generally beds that would be part of their correctional system, idle beds or refurbished beds and that number typically in the hundreds, possibly getting up to 1,000 beds per location that we're aware of. But we're not fully privy to what DHS is doing or who they're talking to, obviously. Matthew Erdner: Got it. And then looking at that from kind of a margin perspective, would that kind of fit in with the historical managed services margins? George Zoley: It's actually a bit better than that because the staffing levels for this kind of population is different than what we typically seen at our state facilities that were managed only. This is a higher security population requiring more staffing, and we make a margin on the staffing. Operator: The next question comes from Greg Gibas with Northland Securities. Gregory Gibas: I wanted to ask, I guess, regarding your commentary on the mix shift within the ISAP program. Can you confirm that, that mix shift toward more intensive uses is currently happening, but not included in your Q4 guidance? I guess what assumptions with mix are implied by guidance? Mark Suchinski: It's Mark. Let me address that. As George said, we are seeing a shift of a movement towards less usage of an app or a phone and higher participant counts using our ankle bracelets. And so what we've seen to date has been a slow and steady growth on the ankle bracelets, which are higher cost and more intensive as it relates to the case management services. And to a certain degree, we've built that in. What we're saying is we only have a couple of months left in the year. We've factored that into our overall assumptions. But over the coming next 2 years, we're expecting the continued shift towards the higher intensive supervision, which is the higher cost services from a technology device standpoint as well as a case management. So the point we're making is we think there's some opportunities as we've rebid that contract, both on the mix shift and some of the cost actions that we're taking to mitigate things. Obviously, the new pricing went into effect on October 1. It's going to take us a little while to implement the actions that we have, and that had an impact on the fourth quarter. But we're working hard to push through that and potentially take advantage of the shift towards the more intense services. And we think that would continue into 2026, and we'll know better when we provide guidance in February of next year. Gregory Gibas: Got it. That's helpful. And nice to see the increased share repurchase authorization. With where the stock is trading now, could you maybe discuss your thoughts on leaning into it more or considerations of an acceleration of repurchase activity? Mark Suchinski: Well, we're aligned. We think our share price is way undervalued, right? George talked about our business. When we look at our profitability and our cash flows and the growth that we've achieved here, we think our stock price is significantly undervalued. That's why we launched our share purchase program with George's support and the Board's. With where the stock price is, we had another dialogue with our Board at our Board meeting, and we increased the size of that. And we're confident about our cash flows over time here, and we're leaning into this. I think earlier in the year, we talked about shareholder returns. We talked about doing that once we got less than 3x levered. We're over 3x levered, but we're leaning into it, and our banks are supportive of that. So we're going to lean into it. We're going to, as George said, be opportunistic about it and balanced. But where our stock price is, we're going to continue to pursue the buybacks and take advantage of the lower stock price and our cash flows and our ability to go do that. Gregory Gibas: Got it. Makes sense. And I know timing, like you said, is difficult to predict. Just I guess, referring to your prepared remarks, you mentioned being optimistic on ISAP ramping up early next year. I guess I would just ask like what leads you to expect that or support that expectation? Is there anything new you've heard since maybe last quarter? George Zoley: Well, there's millions of people that are on the non-detained docket. And there's going to be a desire to provide more clarity as to where they are, what stage they are in with respect to their hearing process, and making sure they get to their hearing and if they're not qualified to be in the country to deport them. So I think those are all publicly identified objectives of this administration. And I think the ISAP contract will be an important tool toward that -- towards those objectives. Mark Suchinski: And as we've mentioned in the past, once the detention continues to grow, the government has talked about targeting 100,000 beds at that point in time. Once they max out that capacity, and they continue the enforcement efforts that they have, the next logical tool to use is the ISAP program. Operator: The next question comes from Raj Sharma with Texas Capital. Raj Sharma: Quite a few of my questions have been answered. But can I go back to the question on margin and the ISAP program. I guess -- and I know you're not providing that much detail, but could the margins match or exceed your existing or earlier margins at a certain volume of monitored and supervised accounts? How do we sort of model that out? George Zoley: Well, I think it will have to be over time as both Mark and I have said that we have to implement some cost savings with regard to staffing efficiencies and service efficiencies as well as cost of devices. That will -- all of that will take place over the next succeeding months. And if the numbers materialize as they're identified in the pricing that was required of all the bidders, our margins and revenues will exceed what we had previously, I believe. Raj Sharma: Got it. And then on the guide, the fiscal '25 guide, the margins of about 23%, 24%, historical had been 26%. Is this -- should we consider this to be sort of a new base of EBITDA margins? George Zoley: Are you speaking regarding ISAP or? Raj Sharma: No, I'm talking about the overall -- sorry. Yes, talking about the overall margins. This quarter was flat to last year on higher revenues. Anything that explains the EBITDA margins not picking up as much, and should we consider that as the base EBITDA margin going forward? Mark Suchinski: No, I think we tried to articulate it. We talked about the fact that as we're starting up these contracts, there's a cost investment that takes place. We talked about the Adelanto Facility and the rapid increase in the participants and us working hard to hire those folks. So both in the third quarter and the fourth quarter are going to have -- are going to be impacted to a certain degree by those costs, and we're working hard to get those normalized, those operations normalized like our existing facility. So I wouldn't necessarily say that the third quarter is the new baseline. It has been impacted by some puts and takes. And so I would just say you're just going to -- we're going to continue to work hard to satisfy our clients and work hard to manage our business and continue to do the best job that we can here, but there was some -- a few anomalies that took place in the quarter. Raj Sharma: Great. That's really helpful. And then just lastly, on the activated facilities normalizing in 2026. What revenue and EBITDA step-up should we expect for '26? George Zoley: I don't think we've given guidance for '26 as yet. Mark Suchinski: No. We'll -- we want to wrap up the quarter, and I think we'll be able to provide you further details when we see you guys or when we chat with you guys early next year. Raj Sharma: Got it. I guess the activated facilities would have normalized by Q1 or by Q2 next year? George Zoley: Well, the ones that have been activated this year, that would be correct, but we assume that will be activated the middle of next year. Operator: The next question comes from Brendan McCarthy with Sidoti. Brendan Michael McCarthy: I wanted to start off in electronic monitoring. I think you mentioned you're continuing to invest to stock up on some of the higher-intensity wearables. Can you quantify what your ultimate capacity is for some of the higher-intensity wearables? Perhaps what number of population counts could you monitor under that kind of segment of your products? George Zoley: I don't know how high is high. We are capable of monitoring, obviously, several hundreds of thousands in concurrence with our pricing model, but we can go far beyond that and have -- we're the largest monitoring company in the world, and we've streamlined our operations over the course of this year, and we are developing new generation products for every one of our products that will be rolling out sometime next year. And we have the largest capacity of any monitoring company in the world to roll out new devices each and every week. Brendan Michael McCarthy: Great. That makes sense. And then last question for me, just amid the government shutdown, are you still having active negotiations for the remaining idle beds that you have available? Or have those negotiations paused? I'm just curious if anything has really changed as it relates to your discussions with reactivations. George Zoley: I would characterize them as discussions. I don't think they fall in the formal negotiation stage. But our discussions with ICE really take place almost on a continuous basis. Operator: The next question comes from Kirk Ludtke with Imperial Capital. Kirk Ludtke: With respect to ISAP, if I remember correctly, ISAP 4 was a 5-year deal. And I'm -- this is now a 2-year inclusive of the option period. What is the -- what is it exclusive of the option periods? George Zoley: The option period, it would be a 1-year contract. Kirk Ludtke: It's a 1-year deal with a 1-year option. George Zoley: A lot of our contracts are 1 year with four 1-year extensions, and we call them 5-year contracts because they almost always take all options of the contract. Kirk Ludtke: Okay. Got it. And so it's a shorter deal. What do you -- what is the -- what's the takeaway there? George Zoley: There's been no formal policy announcement of the change that I'm aware of, but it is a technology-driven kind of service and technology changes fairly rapidly. So it may make sense to make it a 2-year contract. And that's one of the reasons that we are doing new generation devices. Kirk Ludtke: So just given the, I guess, uncertainty about how they want to proceed, they decided to pursue a shorter deal? George Zoley: It's the large population base that you're grappling with. It's almost 7 million people. And it's -- the service is in two forms, as I said, technology and case management services. And there may be a better way of doing that 2 years from now. That's possible. And we have the flexibility to respond to whatever the policy change may or may not be 2 years from now. Kirk Ludtke: Got it. Okay. And you've committed to be prepared to monitor 361,000 people next year at some point? George Zoley: For next year, and we could monitor far beyond that. Kirk Ludtke: Yes. Is there a -- will that mean significant CapEx next year? George Zoley: It will be some CapEx, yes, but we've been stocking up on our devices this year, as we've said. We've made significant investments. And I think we have more devices than any other company in the world. Kirk Ludtke: Got it. Okay. I appreciate it. And how much -- you mentioned increasing the authorization to $500 million, and you've got some limitations under the credit documents. How much stock could you buy back under your covenants today? George Zoley: I think we've said that we would be buying back approximately $100 million of stock per year. And I think we're -- at this present time, we're sticking to that. We've done $42 million so far this year. That would leave the balance for the balance of the year. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to George Zoley, Executive Chairman of The GEO Group for any closing remarks. George Zoley: Well, thank you for listening and giving us your questions, and we hope to address you at the next conference call. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Globalstar Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your first speaker today, Rebecca Clary, CFO. Please go ahead. Rebecca Clary: Thank you, operator, and good afternoon, everyone. Before we begin, please note that today's call contains forward-looking statements intended to fall within the safe harbor provided under the securities laws. Factors that could cause the results to differ materially are described in the Risk Factors section of Globalstar's SEC filings, including its annual report on Form 10-K for the financial year ending 2024 and its other SEC filings as well as today's earnings release. Also note that management may reference EBITDA, adjusted EBITDA, free cash flow or adjusted free cash flow on this call, which are financial measures not recognized under U.S. GAAP. As required by SEC rules and regulations, these non-GAAP financial measures are reconciled to their most comparable GAAP financial measures in the earnings release, which is available on our website. Today, I will walk you through our third quarter and year-to-date financial results, discuss our liquidity position and touch briefly on outlook. We delivered solid top line performance in the third quarter with total revenue of $73.8 million. This represents growth over the prior year's third quarter, reaching a record quarterly amount. This improvement was driven by two key areas: wholesale capacity services, and continued strength in Commercial IoT. Our wholesale capacity services revenue increased primarily due to the timing of service fees associated with the reimbursement of network-related costs as we continue to expand and upgrade our global ground infrastructure. Commercial IoT also continues to be a growth driver for us. IoT service revenue increased on the back of subscriber growth with average subscribers reaching 543,000, a 6% increase from the prior year's third quarter. This growth was again propelled by a record number of gross activations over the last 12 months. We also saw particularly strong equipment sales performance. Equipment revenue from Commercial IoT device sales was up 60% compared to the prior year's third quarter. We expect this momentum to continue, particularly with the recent commercial availability of our two-way module, which we believe will drive additional demand. Income from operations was $10.2 million in the quarter, up from $9.4 million in the prior year's third quarter. This improvement came despite higher operating expenses during the quarter due to planned increased investments in our business. Net income was lower than the prior year's third quarter, driven primarily by noncash items. Specifically, we recognized higher interest expense from noncash imputed interest related to the 2024 prepayment agreement. We also recorded net foreign currency losses from the remeasurement of intercompany balances. These items were partially offset by a noncash gain on the quarterly mark-to-market adjustment of our derivative assets. Adjusted EBITDA for the third quarter reflects our strategic investment in growth opportunities, particularly XCOM. We continue to enhance and develop our XCOM RAN product and service offerings. And as we've discussed previously, we're incurring costs, primarily personnel related in advance of significant revenue contribution from this business. We believe this is a solid investment for the company, and we remain confident in the strategic value of this initiative, particularly based on recent developments towards commercialization. Importantly, we continue to maintain healthy adjusted EBITDA margins, 51% in the third quarter and 52% year-to-date, even while making substantial investments in XCOM and next-generation products. This demonstrates the profitability of our core business and gives us confidence that as these new revenue streams scale, we'll see meaningful margin expansion. For the year-to-date period, total revenue was $201 million, representing 6% growth compared to the same period last year. Service revenue was also up 6%, while equipment revenue increased 21%. The revenue and operating income story for the 9-month period largely mirrors what we saw in Q3. Now let me turn to our balance sheet and cash flow. We ended the third quarter with cash and cash equivalents of $346.3 million. During the first 9 months of 2025, we generated operating cash flow of $445.8 million, a strong result that reflects $299.6 million received in connection with the Infrastructure Prepayment and also demonstrates the cash-generating capabilities of our business. Capital expenditures were $485.9 million during the period, reflecting our commitments under our Updated Services Agreements for network expansion and upgrades, including ground infrastructure as well as satellite construction and launch costs. These investments are fundamental to our ability to deliver enhanced services and support our long-term growth. Financing activities used $6.1 million in cash, primarily for debt recoupment under the 2021 Funding Agreement and preferred stock dividend payments, offset partially by $27.1 million in proceeds under the 2023 Funding Agreement, which will be used to fund CapEx for our replacement satellites. Adjusted free cash flow for the 9-month period was $133.3 million, up significantly from $74.5 million in the prior year period. This increase reflects primarily higher customer payments, including $37.5 million in accelerated service payments received during 2025. Total debt principal outstanding was $418.7 million at September 30, 2025, largely in line with the prior year-end and reflecting the financing activities previously discussed. Our financial position remains strong with solid cash generation, ample liquidity and strategic investments that position us for long-term growth. We're making deliberate investments in XCOM and next-generation products, and we're executing on our infrastructure commitments to support our wholesale services agreement. The fundamentals of our business are sound. We're growing revenue in strategic areas, generating strong operating cash flow and managing our cost structure while investing for the future. Given our results to date and expectations for the balance of the year, we are reiterating our full year 2025 outlook and continue to expect revenue in the range of $260 million to $285 million and an adjusted EBITDA margin of approximately 50%. With that, I'd like to turn the call over to Paul. Paul Jacobs: Thanks, Rebecca, and good afternoon, everyone. I'm pleased to be with you today and to discuss what has been a robust quarter for Globalstar. Across every major part of our business, we're executing our strategy and delivering measurable progress that strengthens our position in the market. It's really never been a more exciting time to be in the connectivity industry and for Globalstar in particular. My team and I have spent our careers driving many of the hottest trends in mobile communications and computing. And well, here we are again. On the satellite side, we couldn't be more proud to have helped pioneer direct-to-device services and witnessed the life-saving impact of our network. There are now over 0.5 billion devices capable of utilizing our network, and we continue to invest and innovate to maintain our leading position. And on the mobile wireless network side, our XCOM RAN technology is proving its benefits both in performance for mission-critical applications and its cost effectiveness and ease of deployment. As I've said previously, what drew us to Globalstar is the strength and differentiation of our globally harmonized spectrum, 3 decades of LEO constellation operations and deep engineering capability to deliver secure, reliable connectivity worldwide with the quality of service demanded by some of the world's most innovative technology leaders, something few others, if anyone, can claim. Recent activity in the market underscores that value as a wide variety of players now better understand the need for dedicated mobile satellite service or MSS spectrum. Other participants in the direct-to-device solution space have spent tens of billions to acquire L- and S-band assets that, while useful, lack the global coverage, priority rights and harmonization with an established hardware ecosystem that defines our portfolio, one that has been deployed for decades by our Globalstar customers. We believe this validates the global orientation of our strategy from inception, building the company around globally harmonized and licensed spectrum assets and a global LEO platform. We see extraordinary potential for disruptive innovation around our spectrum bands and are confident we are playing a defining role now and for some time to come. For many reasons, Globalstar holds the critical jigsaw pieces that complete the broader D2D puzzle. This moment is a strategic inflection point that could shape or reshape the future of a rapidly converging communications industry. Before I turn to the other parts of our business, let me acknowledge that you may have seen recent media reports regarding a potential strategic transaction involving Globalstar. As a matter of policy, we do not comment on press articles, rumors or market speculation. And therefore, we will not be addressing this topic during today's call or the Q&A following our remarks. Now let's turn to the business, and let me start with our infrastructure expansion and satellite road map for our C-3 constellation. We continue to make significant progress in the construction of our extended MSS network. In addition to development of our third-generation C-3 satellite system, this effort includes the build-out of our global ground network with new infrastructure across multiple continents, including Europe, Asia and North America. This global ground expansion is continuing, including up to 90 new tracking antennas supporting Globalstar's C-3 satellite system, representing a significant investment in the functionality, capacity and future-proofing of our network. This significantly underscores our mission and strategy to support resilient and robust connectivity that not only serves the needs of today, but also prepares for those of tomorrow. And to that end, our HIBLEO XL-1 filing is designed to expand operational frequency, which is a foundational step towards our planned next satellite era. This system will introduce new satellites, orbital shells and frequency bands to enable greater capacity and throughput. It's an important step forward that aligns with the other network investments we are making today. And while we are not currently planning significant investment in our own mega constellation, this filing gives us the future option to work with partners supporting our constellation -- sorry, our spectrum on a mega constellation that is coordinated with our existing and planned constellations. Let's turn to the government sector. We continue to see strong traction following our wins earlier this year. We've made meaningful progress with Parsons Corporation, transitioning from proof of concept to commercial engagement that leverages our satellite network within their advanced software-defined communications architecture. This partnership highlights Globalstar's ability to deliver resilient, low latency and mission-critical connectivity for defense and public safety applications. We continue to expect government-related opportunities to represent an expanding source of revenue in 2026 and beyond. Our Commercial IoT subscriber growth is strong and accelerating with strong MSS device sales supported by growing adoption in safety, logistics and infrastructure markets. Gross activations are up 40% over the same quarter last year, and total units are up 100% on a quarterly basis compared to the prior year. That doesn't even include the new two-way module, which is now being integrated into our customers' finished products. These sales, combined with increased enterprise demand are contributing to a balanced and diversified revenue profile. Another milestone this quarter is the global availability of our two-way Commercial IoT module, the RM200M. Already receiving certifications in key regions, the RM200M is now officially available for worldwide deployment. Leveraging Globalstar's licensed L&S band spectrum and second-generation satellites, the module delivers reliable two-way connectivity, reducing friction when deploying across numerous geographic regions. On the private wireless side, momentum continues to build for XCOM RAN. During the quarter, we received an initial order from a new XCOM RAN customer, advancing their next-generation robotics application and a significant expansion of this program. XCOM RAN is positioned to play a critical part in ensuring quality of service in warehouse and factory automation, where reliable and secure connectivity is at the core of a robotic future in these environments. We believe we can demonstrate not only significantly differentiated performance of our 5G-based systems over industrial Wi-Fi, but also improved economics for large area applications. And we are addressing new applications outside of warehouse automation, which we will believe -- which we believe will grow our addressable market significantly. Stepping back, this has been a year of meaningful acceleration for Globalstar. We've expanded our infrastructure, strengthened our product lineup, deepened our government relationships and enhanced the commercial viability and visibility of our technology portfolio. These accomplishments have not gone unnoticed. Increased partner engagement and growing investor confidence reflect a renewed understanding of Globalstar's strong market position, combining spectrum ownership, global infrastructure, product lineup and operational expertise that few others can match. Overall, this has contributed to positioning the company in the market as a high-value strategic asset in the rapidly converging satellite and terrestrial communications ecosystem. While we remain focused on executing our plan, this recognition underscores the scalability and relevance of what we've built and what's still ahead. As we look to the close of the year, our focus remains on execution, including completing key infrastructure milestones, expanding enterprise and government deployments and continuing to drive adoption of our new technologies across both satellite and terrestrial domains. We're proud of what our team has accomplished and energized by the growing momentum we see across all segments of our business. Thank you for your continued support. I look forward to sharing more about our progress in the quarters to come. With that, I will turn the call back to the operator. Operator: [Operator Instructions] Our first call comes from the line of Mike Crawford at B. Riley Securities. Michael Crawford: Regarding your C-3 constellation, correct me if I'm wrong, if this is not completely synonymous with your extended MSS network. But can the ground segment improvements that you're putting in at these gateways be used by your existing constellation that's being refreshed? Paul Jacobs: Yes. So we put in antennas that are specific for the [indiscernible] system -- or sorry, the C-3 system. And yes, so we have the existing satellite antennas for the existing constellation already. Michael Crawford: Okay. And I believe it's going to be two batch launches for -- to replenish that constellation. Is there any update on when the first of those might occur? Paul Jacobs: We have not given any new indications on when the launches are going to occur. Rebecca Clary: And just to add to that, Mike, for the Extended MSS network, as you know, we haven't provided timing. For the replacement satellites, which you might be referring to that are being launched in two batches, we're working with SpaceX to confirm an updated launch window in the first half of 2026. Michael Crawford: Okay. And then maybe just stepping back, Paul, to Globalstar's global harmonized spectrum holdings. Can you just maybe define those again in terms of megahertz POPs or some related measurements or what you have in the U.S. as well as where you have landing rights internationally? Paul Jacobs: I mean it's essentially global coverage. So on the S-band, we have 16.5 megahertz. On the L-band, we have almost 9. On the C-band, we have over 300 megahertz. So let's see there are 7 billion people on earth. So... Michael Crawford: Okay. I can do that math. And then on the C-band, I believe there remains 59 megahertz slot that might not necessarily be required to operate your satellite networks given improvements in technology over the past 20 years? Paul Jacobs: No. It's -- there's actually -- so if you look at the C-band spectrum, it's a large percentage of it is covered by Wi-Fi, so unlicensed band use. And then there's a chunk at the lower end that is not covered by that. And all of the spectrum is being used as feeder link because the way the existing satellites work is that chunks of the feeder spectrum are allocated to reproducing the entire spectrum band on the L&S band side. per beam on the satellite. So it is actually all used for the satellite system. It's a question of if we look at it for terrestrial use, there's a chunk that hasn't been allocated for Wi-Fi use. Now with that said, even in Wi-Fi bands, the team that came along from XCOM Labs is the same team that built the unlicensed band cellular technologies. And so it is possible that we can look at those bands for hosting unlicensed band NR, for example, 5G. Michael Crawford: Okay. And then final question for me just goes back to XCOM RAN. So in the test applications that you've been doing for quite some time now. What is the latest data that you're seeing in terms of increased performance and reliability versus industrial Wi-Fi? Paul Jacobs: Yes. So it works much better than industrial Wi-Fi because we don't have handoff regions and Wi-Fi wasn't really built for handoffs anyways. We also have ease of deployment. We have this clustering where if the robots cluster under one of the radios, you don't just depend on the capacity of that radio, actually depend -- you actually get the capacity of the entire system. So in terms of performance benefits, it's dramatically better. It's more reliable, more mission-critical. But what we've also been finding is that in these large area deployments, we're also economically better. So the economics of rolling out our system relative to an industrial Wi-Fi is much better. And part of that comes from the fact that we have now built our own radio units and significantly cost reduce those as well as being able to provide more frequency bands on a faster basis when those are requested by our customers. Operator: Our next call comes from the line of Greg Pendy at Clear Street. Gregory R. Pendy: Just on the accelerating IoT, can you just add any color on what the acceleration is? Do you think you're gaining share in the space? Or do you think the market was just seeing outsized healthy growth? And how should we think about pricing with the two-way capabilities on a forward basis? Paul Jacobs: Okay. So we -- there are definitely new applications that we're able to address. I think that there is also the fact that when we look at some of the competitors in the area who have been in this area for a long time, there's definitely interest of our customer base to have diversity of supply or change suppliers. So that's definitely driving part of it. So some of it's taking share, some of it's new, it's growing the pie. And then the other -- on the two-way pricing, yes, I mean, it's a new set of capabilities, and there is market pricing out there for two-way systems. Of course, we expect to be aggressive and take share with the two-way system. And the growth so far, though -- if I just want to reiterate, the growth so far is not on the two-way system yet. The two-way system is still -- we brought out the module. We betted it with people. They then started building it into their products, and that takes a little bit of time for them to get up to speed and get their products rolled out. So the growth that you're seeing is actually the existing -- of the existing systems, which is really quite impressive. Gregory R. Pendy: Got it. That's very helpful. And then just wholesale looks pretty strong relative to what we were thinking. Just wondering, you mentioned there's 0.5 billion devices. So just trying to understand the underlying growth. Is it just a growing number of enabled devices? Are you seeing usage? Is it -- can you just kind of -- higher usage from those who are already enabled? Just trying to understand why that... Paul Jacobs: Right. So I can't really comment on the customers of our customer. So let me not do that. But it's -- the number of devices that are out there is just talking about the growth of the number of devices that actually have the satellite modem and radio capabilities in it. So that -- those set of devices continues to grow quite rapidly. Operator: [Operator Instructions] Our next question comes from the line of George Sutton of Craig-Hallum Capital Group. Logan W Lillehaug: This is Logan on for George. You guys have been kind of talking about the XCOM RAN investment throughout the year, and I think you've been expanding the sales force a bit. And it certainly feels like you have a lot of opportunities in front of that asset. I was wondering if you could just talk a little bit about sort of how should investors think about the return profile or even the profitability of those assets over the next few years? Paul Jacobs: Okay. So I mean, the margins are good in that business. We're right at the beginning of the sort of the commercial adoption cycle. And so we expect to see growth not just from the existing customer that we had been focused on in the past, but from a new set of customers and also into a new set of areas. And we've put up various numbers on sort of total addressable market. And so there's a significant addressable market going forward. And what we're seeing also is that companies that have been in the 5G private network space that didn't have any differentiated technology are starting to feel a lot of pressure. We've seen layoffs and things like that. And we have not just differentiated technology, we have better economics. And of course, we have the dedicated spectrum for mission-critical applications, which, by the way, that hasn't even really started to come into play yet because we were focused on CBRS. So a lot of areas of growth. We don't expect to see a lot of revenue in this fiscal year. But as we look forward into the next year, we expect to see growth there. And then like I said, the margins are good. So we should be in a good place to build both revenues and profitability off of that business. Logan W Lillehaug: Got it. And then next one for me. I was kind of hoping you could talk a little bit about early traction with the two-way module, just sort of the feedback you're getting, any use cases that you want to call out that are kind of standing out and just sort of maybe your sense on adoption here over the next few years. Paul Jacobs: Yes. I can't really give you a lot on the customers because they're all in the process of building their products and want to make their own announcements. But it is a lot of the similar industries that we've been in the past, but with new applications and new sets of customers. And there was a set of customers that weren't very interested in talking to us when we were only one way, and now we are able to -- I think we'll take share in a number of markets with the two-way system. And then as we look forward to making the system also multimode with cellular capability as well, that will also satisfy demands of a certain customer base. So yes, it's not like there is some brand-new area that I'd say, okay, this we can address now that we didn't, but we certainly have a set of customers that are talking to us that wouldn't have talked to us in the past with a one-way-only system. Operator: [Operator Instructions] Our next call comes from the line of Michael Ridgeway. Michael Ridgeway: Paul, a question first on the XCOM RAN warehouse implementation. Is this related to the early work that you have been doing and has been ongoing since you alluded to a large retail testing implementation? Paul Jacobs: Yes. So we are now in a position where I think we can address a larger customer set and also not just the original application that we were looking at of the sort of micro fulfillment concept, but larger scale operations as well. And then we're going beyond just the warehouse automation space. We're talking to companies that do things like build out high-density environments, convention centers, airports, stadiums, that kind of hotspots, that kind of stuff. And so as time has gone on and we've been able to invest in the system, it's got a more horizontal feature set as opposed to just super focused on the warehouse automation space. So all these things provide us with growth opportunities. Michael Ridgeway: So is that to say then that ultimately, there's more of a unified connectivity outside the warehouse as well using that as an example? Paul Jacobs: Yes, for sure. Yes, that's where we're... Michael Ridgeway: And then can you help us understand the revenue model behind this? Obviously, you've got an equipment side and then there's the spectrum side of this. Is there any ongoing service associated with those implementations? And how should we think about the profitability over time as clients grow, as new customers grow in that space? Paul Jacobs: Yes. So there is those things that you said, but also there is an annuity component of software license because the main computation is done on commercial off-the-shelf servers. And so we license the software into those servers as well. And then the other thing that's happened is that over time, we've been able to build out the entire stack. So we look forward to the ability to provide Network as a Service. And that obviously is very much a nice annuity kind of business. So that hasn't happened yet. That's the thing that we're sort of looking to in the medium term, but we get the idea that we don't want to just sell something and then walk away. Michael Ridgeway: All right. So from a margin perspective, we could expect a delay on margin accretion as installs happen over the last several quarters? Paul Jacobs: Margin accretion to the overall company? Michael Ridgeway: To the overall business. From that business... Paul Jacobs: Yes, yes. Well, this business right now is still in an investment phase, so for sure. But on a gross margin basis, gross margins are solid here, and we have differentiated technology, and we put the effort into driving the cost -- driving down the cost curve. So yes, so margins should be good. And then to the extent that you get an embedded base, I think this might be where you were going, embedded base of kind of annuity revenue, then obviously, that's very high margin. Michael Ridgeway: That's super helpful. Just last question, talking about this. We've come through 10 years where we haven't seen any market transactions in MSS and now we've gotten a few and another one announced this morning. Can you maybe spend a little bit more time, you did at the beginning of the call, but just differentiate what Globalstar has and the utility and the global harmonization from a relative value perspective from what we've seen in the market, if you could? Paul Jacobs: Yes. So I don't want to talk about transactions or speculation, but I will talk about our competitive positioning, which is we have spectrum, which is globally harmonized, meaning that it is not just for a small number of markets. You don't have to worry as a satellite operator, whether you're crossing boundaries, whether there are country boundaries or just inter system, interoperator boundaries. The spectrum covers the entire earth. And yes, there might be a few countries here and there, we didn't get landing rights. But for the most part, the world is covered by our spectrum and system. So that is differentiated. Some of the transactions that have been seen in the market have been focused on particular geographies. And in some cases, I would say there's questions about whether some of the spectrum that -- whether it will continue to be available post license reauthorization processes of some of the spectrum that's transacted. So that -- we're watching that. We've put our hat in the ring for some of these spectrum assets in case they are reallocated, and we certainly can put them to good use, and they are also covered by our HIBLEO XL-1 filing. Michael Ridgeway: Great. That's helpful. One last question on the C-3 ground station build-out. You've mentioned 90 new tracking antennas. Does that -- where does that put you in terms of the total build-out plan in percentage terms? Paul Jacobs: That's the build-out. I mean the 90-plus is the new set of antennas for the... Michael Ridgeway: Okay. And how many of those are actually deployed... Paul Jacobs: Some not -- I mean, we're in the process of rolling out. I don't think we've given an exact number to date. But you Rebecca, if we have said anything more precise than that, please speak up. Rebecca Clary: No, we haven't. We've talked about the sites where we're currently in construction, which is around now close to 30. So making really good progress and definitely on track with those milestone dates in the various agreements, both regulatory ground infrastructure build-out and satellite construction. Operator: At this time, I'm showing no further questions. I would like to turn the call back over to Paul Jacobs for closing remarks. Paul Jacobs: Well, I think it has been a great quarter, and we're really firing on all cylinders, and we're excited by, as I said, the fact that we focused on building a global company and a global spectrum position, global set of customers, global infrastructure from the very beginning. And that is showing to be a particularly valuable place to be in this change in the industry. And I do, as I said earlier, see this as a strategic inflection point. And so being in that part of the industry again and with the ability to play in a new inflection point, it's extremely exciting and should be -- we expect it should be good for all of us and our supporters and investors. So thank you very much for being there for us, and we look forward to updating you more into the future. Operator: Thank you very much. This concludes today's conference. You may now disconnect.