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Operator: Good day, ladies and gentlemen, and welcome to the Block Third Quarter 2025 Earnings Conference Call. Today's call will be 45 minutes. I would now like to turn the call over to your host, Matt Ross, Head of Investor Relations. Please go ahead. Matthew Ross: Hi, everyone. Thanks for joining our third quarter 2025 earnings call. We have Jack and Amrita with us along with Owen Jennings, our business lead; and Nick Molnar, sales and marketing lead for Block. . We will begin this call with some short remarks before opening the call directly to your questions. During Q&A, we will take questions from conference call participants. We would also like to remind everyone that we will be making forward-looking statements on this call. All statements other than statements of historical facts could be considered to be forward looking. These forward-looking statements include discussions of our outlook strategy and guidance as well as our long-term targets and goals. These statements are subject to risks and uncertainties, including changes in macroeconomic conditions. Actual results could differ materially from those contemplated by our forward-looking statements. Reported results should not be considered an indication of future performance. Please take a look at our filings with the SEC for a discussion of the factors that could cause our results to differ. Also, note that the forward-looking statements, including earnings guidance for 2025, discussed on this call are based on information available to us and assumptions we believe are reasonable as of today's date. We disclaim any obligation to update any forward-looking statements, except as required by law. Further, any discussion during this call of our lending and banking products refer to products that are offered through Square Financial Services or our bank partners. Within these remarks, we will also discuss metrics related to our investment framework, including Rule of 40. With Rule of 40, we are evaluating the sum of our gross profit growth and adjusted operating income margin. Also, we will discuss certain non-GAAP financial measures during this call. Reconciliations to the most directly comparable GAAP financial measures are provided in the shareholder letter, and our historical financial information spreadsheet on our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. Finally, this call in its entirety is being audio webcast on our Investor Relations website. An audio replay of this call and the transcript for Jack and Amrita's opening remarks will be available on our website shortly. With that, I'd like to turn the call over to Jack. Jack Dorsey: Thank you all for joining. My intention for these calls going forward is to bring in more voices from across the company to share more perspectives on what we're building and why. This quarter, you'll hear from Owen and Nick, who are joining us for the Q&A today. Owen is our business lead and he'll be able to share more on our product velocity and what's coming next on our roadmap and Nick leads sales and marketing across the company. He and his team are responsible for the momentum we've seen in our go-to-market motions and he'll be able to share more on what's ahead. . I hope you all read our letter on where Square is headed and how we're delivering for our sellers. And with that, I'll turn it over to Amrita. Amrita Ahuja: Thanks, Jack. We had another strong quarter, delivering for our customers and exceeding expectations across gross profit and adjusted operating income. Gross profit grew 18% year-over-year to $2.66 billion, accelerating from 14% growth last quarter, driven by Cash App. Each of our profitability metrics grew on a year-over-year basis. Adjusted operating income was $480 million, showing strong profitability even in a quarter where we leaned into investments to drive long-term growth. Cash App's 24% year-over-year gross profit growth in the third quarter accelerated from 16% in the second quarter. Our focus on reaccelerating active growth and increasing network density is working as we reached 58 million monthly actives in September. This growth was driven by improvements in experiences across the app, including onboarding, referrals, and core payment flows, reducing friction while boosting engagement and retention. We've also seen success in our go-to-market campaigns focused on increasing brand awareness and reengaging actives who use Cash App infrequently. Our strategies to deepen engagement continue to show up in our numbers. Cash App's gross profit per monthly transacting active grew 25% year-over-year to $94. Primary banking actives grew 18% year-over-year to 8.3 million, up from 8 million in the second quarter. And new products like post-purchase Buy Now Pay Later on Cash App Card are continuing to scale, reaching $3 billion in annualized originations in early October. Last quarter, we shifted the origination of the majority of Borrow loans over to our bank, SFS. This quarter, we expanded Cash App Borrow to eligible actives in new states and expanded in existing states through underwriting improvements, growing originations 134% year-over-year while delivering stable risk loss and strong annualized net margins of 24%. We are bringing the successful Square Releases format to Cash App with our first Cash App Releases on November 13, set to showcase our roadmap and share more about the future of AI in Cash App and how we're driving growth across our banking products. Turning to Square. Gross profit grew 9% year-over-year in the third quarter and GPV grew 12% with an acceleration of growth in both the U.S. and internationally. Our product and go-to-market strategies are working as we continue to gain profitable market share in our target verticals like food and beverage, with larger sellers and outside the U.S. In Jack's shareholder letter this quarter, we outlined our strategy to power the neighborhood by being the best platform for sellers to grow and run their business. We're focused on 3 key opportunities. The first is connecting sellers and consumers at scale in a way that we believe only Block can. At Square Releases, we introduced Neighborhoods on Cash App to connect our sellers with Cash App's massive network of 58 million monthly actives, Neighborhoods provides sellers the power of an enterprise-grade mobile app and the ability to offer customizable local rewards, tied to free marketing and discovery tools, all with a 1% processing rate for all in-app orders. Second, we are delivering world-class AI tools to sellers so they can put more of their operations and finances on autopilot. We've launched Square AI, a business partner built right into the tools sellers use everyday, which is empowering our sellers to get insights about their business in minutes that would have previously taken hours. At Square Releases, we announced AI-driven Order Guide to help sellers better manage procurement, and Voice Ordering to automate incoming phone orders during peak demand times. Third, we're focused on making selling easier with software solutions and commerce tools for our sellers. We believe we're the only company that designs the hardware, operating systems, software, commerce capabilities and financial tools for sellers. This vertical integration is an advantage for us, letting us move faster and serve more customers in a differentiated way. At Square Releases, we announced a number of new products, including multichannel menu management, unified third-party delivery app management and improved kiosks, enabling 30% faster order times for our sellers. These product strategies are positioning us well as we scale our go-to-market efforts to serve every seller that wants to work with us. We've seen an inflection in new volume added or NVA, our proxy for volume growth from new customers. Sales-driven NVA is up 28% year-to-date as our field sales and partnerships continue to expand. We've also seen accelerated growth in NVA from self-onboard marketing channels. Marketing drives the significant majority of our self-onboard volume, and we are seeing strong NVA growth and very healthy 4- to 5-quarter payback periods. We expect to deliver our strongest NVA performance ever in 2025 through expanding field sales, partner programs and targeted marketing. In the third quarter, we saw notable strength upmarket, with GPV from sellers above $0.5 million in volume, growing 20% year-over-year, reflecting our strongest growth rate for these sellers since the first quarter of 2023. In our international markets, GPV grew 26% year-over-year as we're seeing particular strength in our telesales channel. As we mentioned last quarter, our decision to increase operational flexibility at a processing partner modestly increased processing costs. This was an approximately 2.6 percentage point headwind to Square gross profit in the third quarter, which we expect to lap in the second quarter of 2026. In Proto, our Bitcoin mining business, we generated our first revenue, seeding what has the potential to become our next major ecosystem. We monetize Proto's innovation in hardware and software through hardware sales across ASICs, mining hashboards and full mining rigs that provide many of the key advanced components to mine Bitcoin. In the third quarter, we sold our first rigs to our first customer. And while it's only a modest contributor to the second half of this year, we are actively pursuing a robust pipeline for 2026 and beyond. From a profitability standpoint, adjusted EBITDA was $833 million, and adjusted operating income was $480 million in the third quarter. Adjusted operating income margins were 18% in the quarter. Product development costs remained flat year-over-year, while our growth initiatives across sales and marketing spend directly contributed to our growth in both Cash App and Square. Transaction, loan and risk loss expense grew 89% year-over-year as we invested in scaling our lending products, most notably Borrow and the recent launch of post-purchase BNPL. We continue to see healthy trends as we scaled post-purchase BNPL and Borrow losses continue to trend below our 3% target. So far this year to the end of September, we have repurchased approximately $1.5 billion of stock, and we intend to continue returning capital to shareholders as we generate cash. We're excited to share more about our capital allocation priorities at our upcoming Investor Day. Turning to guidance. We are increasing our full year guidance for both the Q3 beat and our raised Q4 expectations. For the fourth quarter of 2025, we expect to accelerate gross profit growth again with gross profit growing over 19% year-over-year to $2.755 billion. We expect to expand adjusted operating income margins year-over-year to 20% and deliver $560 million in adjusted operating income. Taken together, we expect to be approaching Rule of 40 as we head into 2026. Our full year guidance reflects our Q3 outperformance and our increased expectations for the fourth quarter. We expect to deliver $10.243 billion in gross profit for the full year, reflecting more than 15% year-over-year growth, consistent with the initial outlook for 2025 that we provided a year ago. We expect adjusted operating income of $2.056 billion, growing nearly 28% year-over-year despite meaningful investments in sales and marketing and scaling Borrow and other lending products. Finally, to help in your modeling for Q4 and the upcoming years, we want to provide some details on tax rate and interest expense. We expect our 2025 and long-term tax rate to be in the mid-20% range, relatively consistent with where we've landed in the first 3 quarters of the year. We expect net interest expense of $45 million in the fourth quarter, reflecting our recent debt raise and the latest benchmark rates. These figures are also good representations of our long-term expectations across both line items. We typically provide preliminary forward year guidance during this earnings call. But with Investor Day coming up, we're excited to go much deeper on our outlook for both 2026 and our long-term financial performance in a few weeks. Throughout 2025, our gross profit growth has accelerated, and we've expanded our margins. Most importantly, we've improved our velocity to deliver more for our customers faster. Ultimately, these strong results reflect our focus on building for our customers, and we're incredibly excited to welcome you in person and virtually to our Investor Day on November 19, where we'll share so much more. With that, I'll turn the call back to the operator for Q&A. Operator: [Operator Instructions] And our first question comes from the line of Tien-Tsin Huang with JPMorgan. Tien-Tsin Huang: Appreciate it. It's nice to have Nick and Owen on the call. So I'll ask, Owen, the question, if that's okay. I've heard Owen you talk about Cash App actives growth and [indiscernible] on that topic, I know Jack's been pushing towards network density overall. So can you just give us a progress report on that now? When might we see an inflection in network growth, given some of the investments you're making? Owen Jennings: Sure. Thanks so much for the question. We're really happy with where we landed in September. We've made some pretty massive progress here over the past few months. And of course, we still have a lot of work to do, and we see a lot of opportunity ahead. So we reported the 58 million number for September. But the underlying trends are strong as well. So what we've seen is an acceleration in year-over-year growth for monthly actives since we declared this a top priority at Block and at Cash App. And we actually saw that acceleration in year-over-year growth for monthly actives again in October, which is great. I guess stepping back, how we think about growing monthly actives overall is there's really 2 pieces. First, there's net new acquisition for new customers who haven't used Cash App before and then also engagement is a key piece of the equation as we can increase engagement and drive quarterly actives or annual actives to increasingly become monthly active, weekly active, daily active. And so that's really how we've been approaching it. Some of the key focus areas on the development side have been, first, what we call network enhancements, which is basically just looking at our core flows and making sure that it's simple and easy for customers to successfully use our app and complete transactions. On the multiplayer money side, this has been 1 of our key focuses. I know you all saw the launch of pools. We saw 1 million pools created through the end of September and then now 1.5 million pools created through the end of October. And we're really continuing to invest here, not just in pools, but just how we think about social primitives and what we can build to allow our customers to connect with one another and that drives meaningful engagement. And then third is probably on the teens and family side. We continue to invest here. We've achieved massive scale on the teens and family side, we have 5 million monthly active teen accounts that are using Cash App, and we continue to invest to serve them. A couple of weeks ago, we've launched high-yield savings for our teen customers, and we're going to continue building, both for teens and for parents. And then I would say more broadly, we just continue to focus on high quality, high velocity. And that goes for the marketing development side as well as the product velocity side. On the marketing side, we're focused across the funnel, across channels. We're really leveraging incentives to drive customer behavior, and we've seen really strong ROI there. From a product perspective, I think it's not just the network expansion work. It's really everything that we're building on Cash App. I see as contributing to network expansion and monthly actives growth, either on a first order basis or on a second order basis. If we're building useful, simple things for our customers, that's going to reliably compound and drive active growth. So overall, I think we have a lot of room and a lot of opportunity on the active side. We also have massive opportunity on the engagement side. We reported inflows per active grew 10% year-over-year, that's a pretty good -- that's a pretty good signal of just engagement on the platform. Also gross profit per active was up 25% year-over-year in September. And so all of our investments across Cash App Borrow, Cash App Afterpay, post purchase, our banking suite, our Bitcoin products, that's going to continue to drive healthy engagement as well. So that's a bit of a snapshot just in terms of how we're approaching it. I think pretty happy with 58 million, but so much more work to do and a lot of opportunity ahead. Operator: And our next question comes from the line of Tim Chiodo with UBS. Timothy Chiodo: I think this is probably a good one for Nick giving Nick's on the call. So I want to talk a little bit about the field sales teams and their productivity and then a little bit around the GPV and the gross profit contributions that those teams will be bringing, so on the field sales teams, I gather, and if you could put some color around this, that there are certain things that you're doing to help make these sales people as productive as possible, whether it's other tools or systems you have in place, technology you're using? I'm hoping you could shed a little bit of light on that to bring it to life. Gather the paybacks are quite healthy. I think you've talked about the field sales teams being in roughly the 5 to 6 quarter range. And then as a related follow-on, it's very logical to think that these salespeople and the ISO channel, they're going to be bringing on a larger merchant with probably a longer L in the LTV equation. So we'll be around with you for much longer. It's also logical to think that they'll be paying slightly less in terms of their monetization rate per unit of volume. But the absolute GPV and the absolute gross profit growth that they'll be bringing will be at much higher levels. And I was hoping you could shed some light on both of those topics again, the field sales productivity and then the contributions that they'll bring. Nicholas Molnar: Yes, of course. Thanks so much, Tim. Our go-to-market motions in general and field more specifically have been performing really well. As you mentioned, we're seeing really strong paybacks and the marginal ROI on our incremental head count that we bring on to the team continues to scale in a really nice way. But to be honest, we actually have some meaningful room to continue to invest as we focus on that marginal ROI sustaining and growing into the future. Amrita mentioned in her opening remarks, our sales-led NVA was up 28% year-to-date through September and we expect to grow last quarter to over 40%. So I feel like we're going to exit the year with Q4 in a nice way that takes us into 2026. A lot of that has been as a result of how we've shown up culturally through the right tactics, the right sales motions, really gearing our reps up to hit the ground running and be able to close the deal in the least possible time. But we've already significantly scaled our team over the course of the year. If I think about from the start of the year, we had next to no field sales ramped reps, we're now over 100 field reps scaling fast. And so I understand your point from a gross profit per -- gross profit relative to GPV. But while we have scaled our team, it's still pretty early from a field sales perspective. And of our U.S. NVA is coming from field in '25. But as that team continues to ramp, we believe they'll continue to compound. And we're seeing pretty stable margins as we're scaling our team, ISO does have a longer L as you referenced, but I don't think field is in the same category. Certainly, as we move up market, that can mean a different gross profit to GPV profile. But candidly, it's not really how I think about our economics. I think about how do we maximize our variable profit dollar growth head count that we have in the team. And if we can continue investing into our cohort curves and seeing that NVA grow per quarter, I believe that will translate to faster GPV over time, which will ultimately mean really strong gross profit growth. And I know you didn't specifically ask about our self onboarding motion. But while we have seen sales strength, it [Audio Gap] self onboarding. We're seeing Square hold a really strong organic motion, still with 70% of our NVA coming from sellers who self onboard, which is a result of a combination of flow optimization, really leaning in on the AI front. We're now the #1 -- we show up #1 for F&B-related keywords on AI-related search and feeling really good about our self onboarding is continuing to grow and scale some of the best growth rates that we've seen in web and app since 2017, and a lot of that is a function of how marketing has continued to scale, driving really strong lead flow and really strong return on investment. Amrita Ahuja: Now I'll just add a couple of perspectives as well, Tim. Ultimately, our focus and belief is that compounding growth in GPV will drive gross profit, which will drive incremental variable profit dollars, which is our core focus across the business. What we see, as Nick has talked through, ultimately, are indicators of underlying health across that growth algorithm and across the platform from new seller acquisition trends to ROIs to opening up new distribution channels to be able to reach incremental sellers. And I think you see that coming through, whether it's outsized growth in food and beverage at 17%, or with mid-market sellers or larger sellers at 20% or in markets outside the U.S. at 26%. So we're seeing that strategy play out and work. As you know, there's some idiosyncratic things that I mentioned in the interim remarks in last quarter as well around a decision that we made for operational flexibility that hit Q3 by about 2.6 percentage points from a gross profit perspective, ex that operational flexibility point, which we expect to lap in the second quarter of next year, gross profit growth and GPV growth are relatively equivalent to each other in the third quarter, and we'd expect that they would be as well in the fourth quarter ex that change from an operational flexibility standpoint. So our focus again is on driving incremental sellers into our platform through the distribution channels that Nick has talked about, where we're seeing strong execution take hold. Operator: And our next question comes from the line of Andrew Jeffrey with William Blair. Andrew Jeffrey: My question is around the Borrow product and maybe to a lesser extent, BNPL. I think there's been a lot of investor concern about the credit quality of these products and the long-term profitability of these products and the 24% Cash App gross profit growth is awesome. I wonder if you could touch on why you think as we do, that these are superior products for consumers, short-term liquidity products that address really pressing needs that traditional financial institutions have not been able to bring to market. And so maybe touch on the value proposition as you see it and also on some of the distinctive Block brings to market, Cash App brings to market in terms of underwriting, be that data-driven or AI to give investors a sense of why you think that's such a good business as do we. Amrita Ahuja: Awesome. Thanks for the question. Yes. I'll start us off on Borrow. First, Andrew, as you called out the broader purpose of the product and why it's resonated so strongly with our customers. And then secondly, go into some of the metrics where we see it as a good business for us. First of all, these credit products are a really important part of our business in how we expand credit access, especially frankly, the segments of consumers who are often overlooked by the traditional financial system. These products provide financial mobility, cash flow flexibility and growth for our customers. As a result, we've seen incredibly strong product market fit and growth in our system on the back of really healthy unit economics. We're able to do this responsibly fundamentally because of the deep capabilities that we bring to bear from an AI and ML-based underwriting perspective. So zooming into what we're seeing in real time in these metrics, Borrow performance was incredibly strong in the third quarter with origination volume up 134% year-over-year, reaching nearly $22 billion on an annualized basis in the third quarter and even higher growth from a gross profit perspective. This is on the back of a couple of different initiatives. First, just core underwriting model improvements which we were able to deploy across both existing states and new states as well as expansion nationwide on the back of the migration to our bank, SFS, which enabled us to unlock more states, in which we can steadily ramp the Borrow eligibility offering. And then third, providing Borrow eligibility and getting more nuanced with limits for our existing customers who are highly engaged in the platform, whether those are primary banking actives or direct deposit customers. So those 3 strategies at play have helped us expand Borrow, but maintain very healthy risk loss rates, below our 3% target despite this triple-digit originations growth. And see, therefore, annualized net margins at the 24% range in the quarter above our internal targets. Very importantly, we also see that these borrow actives have meaningful lifts in engagement metrics that carry through the entire Cash App ecosystem relative to non-borrow actives. We looked at this from the 12 months ending in August. And what we saw was that borrow actives have 3x higher inflows per active, 2x higher Cash App Card spend. Now 3x higher retention rates relative to non-borrow actives, so it's a key piece of the broad engagement story for us around banking within Cash App. And we think more experimentation and more product innovation here around Borrow can help us drive growth in other parts of our business. So finally, I guess, what I would say is what powers all of this, whether it's Borrow or other lending products like post-purchase BNPL where we've also seen -- earlier in its life but also seen very strong growth is fundamentally our Cash App credit score, which is an internal score that we use that's truly a core asset that we have that we can deploy across the range of our lending products. And we think, ultimately, the model that underpins that is advantageous in that it has data that covers a wide range of financial activity across our entire platform, near real-time insights based on that activity and then advanced modeling using AI, ML and data science over a decade-plus of experience of serving lending products to our customers which ultimately then results in being able to expand access while still maintaining the strong loss rates and unit economics that we've been able to maintain here. So we're incredibly excited about the metrics that we see here with Borrow. We'll obviously be very watchful on a real-time basis on how they trend, but what we've seen so far has been extremely strong momentum. Operator: And our next question comes from the line of Darrin Peller with Wolfe Research. Darrin Peller: I think this is a good follow-up to Amrita, what you were just talking about to some degree. I mean, because even when we back out the growth contribution from Cash App Borrow, I mean, we're calculating an acceleration of Cash App gross profit without the Borrow benefit from what was, I think, around high single digits last quarter to double digits, low double digits this quarter. So it sounds like MAUs, but also the flywheel effect of more Cash App inflows -- Cash App Borrow inflows is driving a lot of it. So maybe just talk through the different levers, putting aside purely the year-over-year comp on Cash App Borrow itself of what you see really driving that and sustain that growth well into the double digits. And if you think it's sustainable now if you're going to have MAU growth continuing to drive that or if there's other variables we should think about too. Owen Jennings: Sure. Thanks, Darrin. I appreciate the question. I'm happy to offer a bit more color here. I think fundamentally, it's important just to think about Cash App as an ecosystem. So we kind of think about the 4 key parts as our network products, inclusive of peer-to-peer, our banking products inclusive of direct deposit, our commerce products and then our Bitcoin products. We've made meaningful progress from a product development perspective and on the marketing side across all 4 pieces. And so all of this is coming together to drive that acceleration in growth that you're talking about. I touched on some of the items on the network expansion and the active side before, and we expect to continue to see that pay dividends. On the banking side, things like direct deposit attach and really seeing that primary banking activity. We've launched some recent experiments and architectural changes that are helping there. I mean on the commerce side, we're operating at tremendous scale, and we're also seeing really healthy growth. And so card GPV is growing at 19% year-over-year. Cash App Pay GPV growing at 70% year-over-year. I think Amrita mentioned the acceleration on the Cash App Afterpay side, going from $2 billion in annualized originations to $3 billion in annualized originations now in early October. And so we're going to continue to invest across the entirety of the ecosystem. And I think what you get there is just a portfolio of diverse products and diverse business lines that come together and are able to deliver that durable growth over and above, something of a steep acceleration on the Borrow side. But I would also, if I may, like we don't really see the world in this, like gross profit ex Borrow sort of way. Amrita touched on this to some extent, but Cash App Borrow and our ability to extend liquidity to our customers is just -- it's a fundamental part of the Cash App ecosystem. On a first order basis, it just has an incredible return profile. We have like -- we have a 30% return on invested capital for Borrow. I've looked all over the place. I haven't been able to find a lending product that has a return profile that looks like that. So on a first order basis, it's fantastic. But then also when we think about the strength of market fit, it's really the second order effects that got me the most excited. When we offer a Borrow loan, a large share of those funds actually move through the Cash App ecosystem. So you get kind of that double hit. And then this is one of the products, such a large share of the U.S. population is living paycheck to paycheck and has to smooth through their pay period that we see tremendous market fit for this offering. And then I think, increasingly, we're going to be able to leverage that as a carrot to incentivize certain behaviors. So we've been doing some experiments in terms of eligibility and limits and fees for our Borrow product and how we can kind of tune that to drive let's say, primary banking activity. And I'm really excited for what that can mean going forward. We'll have some announcements next week at Cash App Releases. And then I'm excited to talk about the durable growth profile for Cash App in depth at Investor Day in a couple of weeks. Thanks. Operator: And our next question comes from the line of Adam Frisch with Evercore ISI. Adam Frisch: Great to have Nick and Owen on the call and I hope that continues. I think a big issue for the right now is the macro versus the company specific. And given the significant and accelerating momentum on both sides of the business, plus a pretty tricky macro backdrop that I think some companies may be using as a crutch for subpar performance, can you speak, Amrita, to your visibility and how all of that is translating into your calculus around the 4Q guide and provide some color maybe on consumer spend. And then, Nick, on the company-specific stuff, if you could speak to your go-to-market strategy and what you're doing to drive such terrific growth acceleration on the Square side. Amrita Ahuja: Yes, Adam, thanks for the question. I'll get us started here on the 4Q guide and macro. Obviously, it's a dynamic environment. We're paying close attention to the range of potential outcomes here. What we used to inform our guidance is what we see most recently in both our third quarter performance as well as in October. What we've seen so far has been strong. Obviously, third quarter performance had acceleration across a number of key input metrics or operating KPIs that indicate the health of our underlying ecosystems, whether it's Square GPV or its inflows per active on the Cash App side, we saw acceleration from 2Q into 3Q. We continue to see really healthy returns on our investment in our go-to-market spend and then obviously strong underwriting outcomes as well across each of the different pieces of our lending portfolio. We saw only isolated impacts from tariffs and sort of the de minimis tax exemption changes that appeared in our Buy Now Pay Later business. But even with that, GMV growth remained strong at 17% or 18% on a constant currency basis in the third quarter. Based on what we saw in October was relative consistency across a number of different metrics that we track, whether it's average transaction sizes, Borrow origination volumes, loss rates, we're not seeing meaningful changes that indicate a change in the macro environment yet. Cash App performance was strong in October. I think you heard Owen speak to some of this earlier. We've seen strong active growth inflows per active and monetization in Cash App. In Square, we did observe slightly slower GPV growth towards the end of October that we believe was primarily weather related, but we're also seeing some of the strongest new volume added NVA that we've seen in a long time across self onboard and sales, obviously off a very large base. So look, ultimately, what we've seen has been healthy, but we're going to be data-driven and read our metrics on a daily basis as ever. And our philosophy here is that we have the ability to shift, whether it's on marketing or underwriting or how we run our business as needed. And those are kind of the key elements that underpin the guide that we put forward, which we think is a strong guide based on the momentum that we've got heading into the fourth quarter. Nicholas Molnar: Thanks, Amrita. And maybe I can just give a little bit more color on the go-to-market side. I spoke a little bit earlier about the strength of self-onboarding growth that we've seen. And more specifically, some of the flow [Audio Gap] AI work, the contribution that marketing has had and similarly, I spoke about scaling our sales headcount, particularly in the field sales team as we're seeing really strong marginal ROI. Just to be clear, I believe we have a huge amount of room to continue to scale our headcount. Our field sales team to date is only effective in our U.S. market, and we have a lot of room to keep growing. We know we have a lot of room as a function of proprietary data that we have available and more specifically, being able to leverage and look at the Cash App Card data to understand our penetration in local geographies and local neighborhoods and local markets, really gives us line of sight of how far we believe we can push our headcount envelope and then begin to scale internationally. We've seen some really strong wins up market, whether it's Katz's Deli or Purdys Chocolatier. We're proving [Audio Gap] just for small businesses and coffee shops that we're able to win large and complex sellers. And we have a massive TAM that we're excited and we continue to execute against, we've seen incredibly strong partnership momentum, 2 specific examples are Grubhub, which saw our ability to bring more of the Block assets to the partnership, but we can look at these as not just a feature exchange or an individual deal, but how do we think about this across Square and Cash App combined. And then similarly, from a Cisco perspective, we're seeing a strong feeling of new sellers joining the platform as a result of the strength of that partnership. So all in all, I feel like just given our ability to articulate a very considered and consistent strategy, we've been able to [Audio Gap] execution across our development teams, product engineering designs through our marketing campaigns, through how we shop from a sales perspective, and it's that coordination that's leading to us winning more against competitions, leading to delivery of features that we've been waiting for, for quite a while that are now coming to fold and seeing real strength in outcomes like multi-location, menu management, food delivery services, just features that we didn't have before that were table stakes for some of these upmarket sellers. So I'm really excited about what's to come, and I believe we'll exit Q4 in a really strong position going into 2026. Operator: And our next question comes from the line of Dan Dolev with Mizuho. Dan Dolev: Great results here. I wanted to ask about Square Bitcoin was announced earlier this quarter, fully integrated payments. I know it's going to be launched later this month, but I wanted to see maybe if you've done any testing or anything that could give us an indication because if it works, it could be huge in our view. So wanted to get your views on that. Jack Dorsey: Yes. So we're really excited to launch this to all of our sellers next week, actually and it's going to be available to everyone, and they just have to make a simple switch in their settings and they'll be able to start accepting Bitcoin. We do have beta merchants that have been on for quite some time and have found it really easy, and it's something that they want to promote heavily because there's no fees associated with accepting Bitcoin. So we've offered kind of placards and just the stickers in ways to show that like this business does now accept Bitcoin. We have a lot of hope for this. I think the challenge is going to be making the payment side and getting people comfortable with paying with Bitcoin. But that's just a matter of making the interface more accessible and more usable. We do a lot there within Cash App and also within BitKey and our Spiral debt team works constantly on payment adoption and making sure that we can see Bitcoin as everyday money. And it's something we're super excited about. And we're going to look for every opportunity to both educate all of our sellers on why accepting Bitcoin is the best option and why buyers would want to use it as well. Operator: And our next question comes from the line of Jason Kupferberg with Wells Fargo. Jason Kupferberg: So you've made it really clear that you feel pretty good about the competitive momentum on the Square side of the business. And I wanted to get a sense, you talked about all that new volume coming in. Is it coming more from sellers, who haven't made the move to a cloud solution yet? Or is it coming more from other cloud-based providers? And then I'm just wondering if there's been any changes in the Square pricing environment, either in terms of seller sensitivity to price or pricing posture that you're seeing exhibited by your competitors? Owen Jennings: Yes, why don't I take this? So let me just start with the pricing point. I don't believe there's been any major significant payment pricing moves that we've made as a result of focusing on our go-to-market and as I scale the team. From my perspective, it's been pretty business as usual. And more specifically, I think a lot of what we've seen is [Audio Gap] we're showing up in a lot more conversations as a result of getting out in the field. The field sales team going from basically 0 to over 100 today, and it will be meaningfully larger by the end of the year. That, from my point of view is a major contributor of our ability to have greater consideration and put us in more conversations to have the chance to win. We're also seeing our telesales growth rate improving and pretty meaningfully internationally, we've seen a significant acceleration of NVA growth. And so very excited, yes, about the U.S. and how we're showing up, but our telesales performance in all our global markets is seeing a highly accretive NVA growth curve. We're also seeing some of the lowest churn rates that we've seen since Q2 2023. And I think a lot of that is a function of the investments that we have made [Audio Gap] talked about earlier, our account management team and how we're showing up and supporting our partners. And just to wrap up the question, a lot of the wins that we're having, yes, some of them are kind of the legacy point-of-sale systems. But we, in recent times, have had like pretty meaningful win backs of those that have gone to direct competitors. And so we're seeing really strong win rates across all aspects of our competitor base -- and many -- once they had left are seemingly coming back as we're continuing to show up and have those conversations. So I'm really proud of the team and proud of what's been delivered this quarter. Unknown Executive: And then just to touch on pricing a little bit. We did update our pricing on the Square side for our software products earlier this year. I think we went through it at Square Releases a few weeks ago. . The reason for that from a customer perspective, a seller perspective, it was really all about simplicity. On the business side, it's really about ARPU expansion and SaaS attach rates. So we used to have more than a dozen individual software products that sellers could attach to. We combine this into a really simple 3-tier system where we have a free tier, we have a plus tier and then we have a premium tier for more complex sellers. It's just a massive improvement in terms of how we've simplified and streamlined the Square ecosystem. When we look at that relative to the competitive set, it's just clearly a lower cost of ownership when you go with Square versus some of our direct peers, we are actually including a lot of things that our competitors are charging separately for. So think like loyalty or marketing tools or team management tools or so on and so forth. And Nick and the sales team are able to kind of show that breakdown when we're having a conversation, and we're trying to win a deal. So when I talk to people on Nick's team, account executives are saying, yes, we're seeing stronger close rates in these deals. When I talk, they're loving the simpler structure. So overall, I think that's a great tailwind. But also I would say there's definitely some deals where we're up against the direct competitor and a cloud-based point of sale, but also we have to remind ourselves, this is a massive TAM. This is trillions and trillions of dollars. I think it's like $1 trillion in TAM just for food and bev and so just secularly, there's tremendous tailwinds here over and above kind of specific pricing dynamics. Operator: We will take our next question from Bryan Keane with Citi. Bryan Keane: Congrats on the results. Nick, I wanted to ask you about your baby Afterpay, maybe you could talk about some of the unique opportunities you see ahead with the asset that might differentiate you from the competition. I think volumes were up 18% on a constant currency basis. But obviously, there's probably a lot of growth to come, especially with the post purchase on BNPL and some of the other initiatives, but I'd love to get your thoughts there. Nicholas Molnar: Yes. Of course, thank you so much for the question. Yes, as you mentioned, GMV was up 18% on a constant currency basis, and gross profit was up 23% year-on-year, the significant driver of growth was post-purchase Afterpay and the Cash App Card, which was key driver of growth in the third quarter. Adoption and our conversion is trending ahead of our expectations. As Owen said before, we crossed $3 billion in origination run rate in early October, and we expect to continue to expand eligibility and increase attach rates and when we compare post-purchase Afterpay to Borrow's early trajectory, we're seeing the Afterpay and the Cash App Card scale in a meaningful way that pace is well ahead of the early trajectory of Borrow, which is really encouraging for us to see. And as we scale, we've had a resolute focus on our loss profile and our loss rates on consumer receivables in Q3 remained in line with our expectations. So healthy loss rates and strong growth rates. We have been very focused on rolling Afterpay out into Cash App, and we begin to turn our attention to the core Afterpay business across the world. We've signed a number of new partners over the last few months, including Uber and Amazon in Australia, Hibbett and Jenni Kayne in the U.S., and we're expanding our commerce network and our advertising business. So yes, I feel like we're focused on the right things as to how Afterpay is showing up both within Block and in partnership with Cash App and with Square, but also as it's core network and really investing in the growth of reacceleration of the core Afterpay business. Operator: And our next question comes from the line of Mihir Bhatia with Bank of America. Mihir Bhatia: I was wondering if you could just spend a few minutes on AI here? Amrita touched on some of the AI tools that you are enabling for sellers. But I was wondering more just bigger picture at Block, Jack. What kind of impact do you see AI having at Block? Just touch on how you are currently -- what you're currently doing with AI? What are some of the use cases that might be interesting here in the short term, like, let's call it, a year or two, and then I guess like really, at the end of the day, is AI going to be more of a cost side benefit for Block? Or is it more of a growth driver? Jack Dorsey: Just to answer that question right away, I would see it as both. I think it will allow us to grow a lot faster, monetize our capabilities even more. Just as one way to envision that is right now on the Square side, for instance, and even within Cash App, people have to navigate our interface to find features and products that we offer. We'll be able to surface them immediately as they need them based on the understanding and the data we have around how they run their business or how they run their financial portfolio on Cash App. So it's definitely something we're looking at for growth. But also, we imagine it really reduces our costs as well, especially at the company level. Our goal, ultimately, like I believe that AI will be transformational for our company. Our goal is to automate our company as much as possible and really take away a bunch of the mundane tasks that we have to do to serve our customers, so that we can focus on more creativity, and we can ship features and products much faster. That has been proving out. We started about 2 years ago with Goose, which is very small projects to help automate engineering tasks. And now it's grounded into something that nearly every single person in the company uses, not just engineering roles, but nearly every single role in the company has touched it and benefited from it and saved some time from their day-to-day so they can focus on more important tasks. And that has contributed a lot more to our overall velocity over the past -- over this year, actually. And we expect that only to increase as we continue to build on this platform. The most interesting thing is Goose allowed us to put a lot of this functionality directly into Square, with Square AI, and we're going to be doing the same thing with Cash App as well. And you'll see some of that next week in Cash App Releases. But more importantly, you'll see it at the Investor Day, where we'll go pretty deep on how we're touching every one of our product services with AI and what to expect from it. On the seller side, we want to build a virtual COO or manager for our customers, our sellers such that it can be very proactive because we have this deep understanding of their business. And on the Cash App side, effectively a virtual CFO so that people can really make the most of their money. And our goal is to help people to even build wealth as well. And AI is going to be instrumental in doing this. And I think we have something really unique in that we have all this real-time living data that comes in every single second of every day and we can tune these models not to be trained off the Internet, but actually to be trained off real human data as it happens. And it can be a whole lot more proactive. So you don't need to come to Square or to Cash App and know which question to ask. It can actually be proactive about things you might want to consider, products you might want to try out, features that you want to turn on and do so in a very friendly and human way that makes sense. And both of these are in testing right now, and we're getting really good feedback from our sellers and individuals. Operator: And our next question comes from the line of Harshita Rawat with Bernstein. Harshita Rawat: I want to ask about Cash App banking users. Good to see kind of the 8.3 million number user growing nicely. You talked about ways to deepen engagement here. You've had marketing campaigns recently, the product velocity appears to be improving. My question is, what do you think you need in terms of brand perception of product or otherwise to attract more inflows into the app, which I know accelerated a little bit this quarter and drive more commerce spend per user, which I think can get a lot higher. Unknown Executive: Thanks for the question. I love this question. It's actually 1 of the key things that I'm going to be focusing on next week at the Cash App Releases event. I think fundamentally, what we need is a platform that supports our understanding of primary banking behavior and what a customer, who is a primary banking active actually is. And so that's really where we've been focused. On the 8.3 million number, that primary banking actives were up 18% year-over-year in September, it's actually accelerated pretty meaningfully in October. So for October, we actually saw 8.7 million primary banking actives, so 400,000 net adds there. And then we saw the year-over-year growth rate accelerated from 18% to 20%. I think the key perspective here is that we don't want to be too narrowly focused on just paycheck deposit actives. It's not actually reflective of the modern earner and how the next generation is actually participating in the economy. And so we've been running a lot of tests and rolling out new products and new platforms that support this world view. And I think we love systems like that because then we're able to really optimize flows to twist knobs and turn dials and we have a track record of doing that across a number of these programs that we've run, like our referrals and notifications program, our instant discounts program Boost. And really, this is connected back to one of the conversations we're having about Cash App Borrow. There are ways that we have within the app to incentivize a certain amount of behavior and bring Cash App Card to the top of wallet. One of the advantages that we have versus some of the other neo banks is we have that base of 58 million monthly actives. And so -- and we have 26 million Cash App Card actives on a monthly basis right now. And so we're able to play this like cross-sell, upsell, attach rate game as well. And so a big part is just driving engagement. In terms of the why and why we're so focused on this, it's just the ARPU and the LTV for primary banking actives is just so much greater than it is for the average customer. So every time that we convert your average Cash App customer or your average Cash App Card customer to a primary banking active, there's a huge ARPU uplift. And so we're going to be pulling a lot of levers here. We're going to be looking at everything we can offer from limits to overdraft coverage, to rewards, to Borrow eligibility to Cash App Afterpay and so on and so forth to build a really, really, really compelling banking suite. And we think that when we go to market with that, and we have campaigns about that, it's going to lead to some of the outcomes that you mentioned. Operator: And we will now take our final question from James Faucette with Morgan Stanley. James Faucette: I want to go back to the work that you're doing on Square and the product and distribution enhancement to us seems like it really could expand the appeal to a broader range of merchants. You made that pretty clear in talking about the responses you're looking to go upmarket, how should we think about, though, the impact to things like pricing and profitability? And I guess 1 of the other questions I have in terms of market fit is, what segments of the market are really responding or what enhancements or the segments where you're seeing traction? What are they really responding to thus far in features, et cetera, on that you can lean into. Owen Jennings: Yes. I'm happy to take this. So why don't I just start at like the Block level, and then I can talk about the Square specific components. From a Block perspective, I think this is 1 of the really strong benefit [indiscernible] to where we're able to go to market leveraging the combined value of Block for our partners and our consumers. So when we're showing up and we're speaking to a partner, we're speaking to them about Cash App's network of 58 million actives, we're speaking to them about the scale of the Cash App Card that already exists on their platform. We're able to illustrate the value of Square, where we have millions of sellers across a very broad set of industries, and we have both Pay Now and Pay Later that is a global network, not just a U.S. specific network. So that means that we can have very strategic conversations with our partners. And that's where I think these like distribution opportunities truly start to unfold because we're having conversations at a different altitude that's looking at what are the benefits that Block could bring as a whole that does create sometimes a more complexity in the partnership motion. But I do think that if we can be a little bit patient, knowing what [Audio Gap] I feel really good about what's to come and how do we think about these things global that are more all-encompassing across our platform. And then when I think about just the overall competitive advantage of Square, number one, we're addressing a very significant TAM. We're addressing a very broad set of verticals. I mentioned earlier around some of the more recent product features like menu management, delivery platform integrations and others from an F&B perspective, which has been our focus. But we are showing up across a broad subset of verticals, and we are starting to bring Cash App into that conversation as well, where we can talk to our Square partners, not just about the features that we can provide them, but we can talk to them about our ability to drive growth, the great work that Brian and team are doing from a Neighborhoods' perspective and how do we start to bring those 58 million in Cash App into the Square sellers and illustrate, we can drive foot traffic into store. Like we can be a growth partner for our sellers, not just a point of sale. And I think that is our fundamental competitive advantage over the long term. I don't think this is about price and profitability. I think it's about scaling the team with the right marginal ROI profile and the incremental headcount and having a team that is appropriately represented for the TAM that we're servicing, and showing up with the right tactics, the right framework, the right ability for an account executive to do a deal when they're standing in front of the seller. And that's all we're seeing today. We're seeing really strong NVA growth, and I believe that it will continue to accelerate into Q4. So thank you for the question. Operator: And ladies and gentlemen, that concludes today's call, and we thank you for your participation. You may now disconnect.
Operator: Good morning, and welcome to the Air France-KLM Third Quarter 2025 Results Presentation. Today's conference is being recorded. At this time, I would like to turn the conference over to Benjamin Smith, CEO; and Steven Zaat, CFO. Please go ahead, sir. Benjamin Smith: Okay. Thank you. Good morning, everyone, and thank you for joining us today for the presentation of Air France-KLM's third-quarter results. As usual, I'll start by sharing the key highlights of the quarter, and then I'll hand it over to our CFO, Steven Zaat, who will walk you through the financial results in more detail. I'll return at the end with a few concluding remarks before we open the floor for any questions you might have. This quarter once again demonstrates the resilience of our business model in a challenging environment. In the third quarter, Air France-KLM delivered a stable operating margin of 13.1%, with revenues increasing by 3% year-over-year to EUR 9.2 billion, supported by a 5% increase in passenger traffic, which reached 29.2 million passengers. The passenger network unit revenue was up 0.5% at constant currency, driven by continued strong demand for premium cabins, which I will elaborate on later. Meanwhile, our maintenance business also made a solid contribution. We managed to limit our unit cost increase to 1.3% despite higher airport and air traffic control charges. As a result, operating income improved by EUR 23 million year-over-year to EUR 1.2 billion. Our balance sheet remains robust with leverage at 1.6x. Year-to-date recurring adjusted operating free cash flow reached EUR 700 million, confirming our ability to combine financial discipline with continued investment in our future. Finally, fleet renewal continues to advance with new generation aircraft now representing nearly 1/3 of the fleet, up 8 points compared to a year ago. Now moving to Slide 5. For those of you who are following the deck here. One of this quarter's key highlights is the continued success of our loyalty program, Flying Blue, which has been named the world's best airline loyalty program by point.me for the second year in a row. This distinction reflects the trust of over 30 million members and underscores Flying Blue's growing role in strengthening our connection with customers. Flying Blue remains a powerful driver of loyalty and commercial performance, and its global recognition is a testament to the value and quality of the experience that we deliver. Let's turn now to Slide 5. We're pursuing the implementation of our premiumization road map across the group with concrete improvement throughout the customer journey. On board, we're rolling out our latest long-haul business cabins at both Air France-KLM and KLM's premium comfort class is now featured on more routes. Starting in September, Air France has been introducing high-speed Starlink WiFi on board, available free of charge in every cabin, a first for any major European airline. Almost 30 aircraft have already been equipped, and we expect 30% of the Air France fleet to feature this service by the end of 2025. In addition, we are continuing to enhance the customer experience across multiple touch points. This includes upgraded premium lounges with recent improvements in Chicago and Boston, and an enriched dining offer featuring new signature dishes from Michelin star chefs on U.S. departures and a simplified customer journey from check-in to boarding. A new exclusive ground experience has also been introduced at Los Angeles, for La Prem customers, and I'm also particularly proud to highlight that our fully redesigned La Premal cabin will be available on the Paris City G2 Miami route starting November 10, after following a very, very successful launch on our flights to New York JFK, Singapore, and Los Angeles. Altogether, these initiatives elevate the quality of our product, reinforce our positioning in the premium travel segment, and support our path to higher value revenues. Moving to Slide 6. As you can see from this slide, the mix of our long-haul cabins is gradually shifting toward higher value premium segments. At Air France, the share of La Première and business seats set to increase from 12% in 2022 to 13% by 2028, while premium economy, now rebranded as premium, will rise from 8% to 10%. At KLM, the trend is even more pronounced. Premium comfort introduced in 2022 is expected to expand to 10% of seats by 2028, while the business cabin segment will grow from 10% to 12%. In other words, by 2028, almost 1 in 4 seats across our long-haul fleet will be in premium cabins. This structural shift aligns with our longer-term strategy to strengthen our brand positioning, reflecting evolving customer demand, improving revenue quality, and enhancing the value proposition for long-haul travelers. Turning to our network. We are continuing to expand connectivity across all key markets. This winter, the group will operate a broad network across all regions with balanced capacity growth. In Asia and the Middle East, Air France will serve Phuket, Thailand, while KLM will add Hyderabad, India, to its network. In the Caribbean, Air France will launch services to Punta Cana in the Dominican Republic and KLM will introduce flights to Barbados. Across Europe, KLM is opening Kittilä in Northern Finland, while Transavia is launching new services from Deauville (Normandy) and Madinah Saudi Arabia, and Marsa Alam, Egypt will also be added. And Transavia will increase flights to Morocco, Egypt, and Finland's Lapland region as well. Looking ahead, Air France will launch flights to Las Vegas in summer 2026, further strengthening our North American offering. Altogether, these additions illustrate how Air France-KLM continues to grow strategically, improving connectivity, reinforcing its position in key markets, and maintaining a well-balanced portfolio of routes. With that, I'll now hand it over to Steven, who will walk you through the detailed financial results. Steven Zaat: Yes. Good morning, everybody, and thanks for taking the time to listen to us. I think we can say it was a tough quarter in the third quarter, especially from a revenue perspective. The impact of the situation in the U.S. regarding FISA and immigration rules starts to hurt our lower-yield segment in the long haul. And I think also the warm summer didn't help our European network and Transavia. And then on top, we had ATC strikes in July, we had ground strikes at KLM, and then all the impact from the taxes and charges which we get in France from the TSBA, and at Schiphol, the charges of the lending fees and the increase of our security charges. I think we had last year, we had, let's say, the Olympics. So I think if you look at the tailwinds, which we should have from the Olympics, a big part has been absorbed by these headwinds in this quarter. If we look at the margin, you see a stable margin of around 13%, which is the same as we had last year. On the unit revenue, if you're excluding currency, we are at minus 0.5%. And the unit cost, we had quite well under control. I guided you already that we will be at the lower end of the 1% to 3%. So we are very close now to the 1%. And if you include also the fuel benefit, you will see that actually our unit cost is coming down with 0.2%. So let's say, unit revenues and unit costs are stabilizing each other in this quarter. If you look at the left and you look at the net result, you see that it looks down year-over-year, but it comes that we had an unrealized foreign exchange result last year of more than EUR 100 million. So if you take that out on the net result, we actually improved, and we are now at an equity level above EUR 2 billion. If you go business by business, and I will come back on the 0.5% unit revenue on passenger business on the next slide, you have to see at the cargo that we see a minus 5% in unit revenues. This is related to the fact that we had more freighters in maintenance. So we plan more maintenance for our freighters at Schiphol, and it extended also more than what we expected. So this is quite a big impact on our unit revenue. If you look at the cargo contribution to our P&L, it's more or less flattish. So it's also, let's say, benefiting from a unit cost perspective over there, absorbing actually the unit revenue decline in the cargo. On Transavia, we grew capacity 13.8%, 15% in France, and 12.5% in the Netherlands. In France by taking over the slots of Air France in Orly, and in the Netherlands by upgauging our fleet. That had an impact on our unit revenue, which is down minus 2.8%. And I think also that the warm weather didn't help our local business due to the fact that the appetite to travel probably when it's hot, it's less when it is raining dogs and cats outside. So we have a stable result of Transavia of around EUR 217 million. The maintenance business performed quite well, an increase of 13% of our revenues despite the lower USD, especially on engines and components, we start growing the business. We are now at an order book of EUR 10.4 billion. We increased our order book by EUR 1.7 billion compared to the beginning of the last year. So we are strengthening this business segment. And you see also that the results are improving quarter-over-quarter now with an operating margin of 6.3%. So a very good performance on the maintenance business, where we also start to recover at the components business to drive up our margin. If we then go to Page 11, let's start with Air France. Of course, there was the Olympics last year, but we also had the DSBA impact and the ATC strikes. And all in all, Air France improved the result by EUR 67 million, having now an operating margin of 14%. KLM is especially impacted by the lower yield demand, and this lower yield, especially on the long haul impacts the unit revenues of KLM. And on top of it, we have the increase of the triple tariffs, which is really hurting KLM, including also the security charges, which are going up. So I think these 2 impacts actually explains all the KLM decline despite the fact that we continue with our back on track. And you see later that on the productivity side, the unit costs are getting better under control. And also, we see that we are getting very close to, let's say, the low limit of our guidance, and especially a big contribution coming from the productivity. On Flying Blue, a stable result of around EUR 54 million. We had last year, we -- first of all, Flying Blue is impacted by the dollar because we sell miles in the U.S. And on top of it, we had very cheap seats available for flying routes during the Olympics. So that has a positive impact, let's say, on the miles cost and which we don't have this quarter, but I think it was a very strong quarter. We grew the business again with 10.5% and the business operating margin of 24% is contributing as we expected to our business model. If we then go to Page 12, then you see the big difference, and we took out now also the premium economy. You see that there's a big difference between the premium traffic and the lower-yield economy traffic. So in the first business, we increased our load factor. We increased our capacity. We increased our yield. On the premium economy, we even increased our capacity with 10%, while at the same time, increasing the ticket prices by 5.4%. And then on the economy, there, you see it's starting to hurt. It is minus 1.5% in terms of yield and also a lower load factor. Although the load factor is still 91%, you see that it is more difficult to fill the seats. If you look, for instance, on our traffic on the North Atlantic to the U.S., there is minus 10% lower passengers from India, for instance, which is all related to the immigration rules in the U.S. If you go over the world, you see still that North America on itself is not doing that bad. We have a 2.7% increase in yield, especially driven again by the first and business class and the premium economy and also by the very strong point of sale in the U.S. Latin America is still strong, 2.8% up in yield. And we see also that in the Caribbean and Indian Ocean, we could increase our yields year-over-year. And on the long or the outlayer is a bit Africa, where we see that we have a gap on the load factor, which is especially again related to the, let's say, the political situation in Africa. but also the connecting traffic to the U.S. where there is less traffic from Africa to the U.S. due to all the immigration rules. And on the right, you see a quite positive trend on Asia, up 4.4% in yield. So we are doing quite well in that segment with a limited growth of 1.7%. On the right, you see again Transavia, which I already explained. So this is minus 2.7%. And you see this hot summer had an impact on our short and medium-haul, which was more or less flattish year-over-year. If we then go to Page 10, you see we guided you that we would be at the lower end of the 1 to 3. So we are very close to the 1 now. That will also be the case in the next quarter. We see that the unit costs are coming down as productivity is kicking in. But of course, the premiumization, which contributes 0. 6% to our unit cost, and also this increased ATC charges and the significant increase of the airport charges, especially in Amsterdam that drives actually the cost here still. But our own unit cost, which we can directly influence, you see that the labor price is compensated by 1.3% on unit cost on productivity. And then on the operations, it's still going up 0.8%, mainly driven also that we have expensive ground, and also on the maintenance side, is still quite a difficult environment. So -- but all in all, good to see that the unit cost, excluding the ATC charges and the premiumization are more or less flattish, and we see also a positive trend towards Q4. On Page 14, you see the cash flow. So a big jump positively in terms of operating free cash flow. We had a EUR 1.5 billion, where we were last year at EUR 28 million. Then we still have there in there around EUR 400 million of deferred social charges and Wax. And if you take these exceptionals and you take also the payment of the lease debt, you see that we are now at a recurring adjusted operating free cash flow of more than EUR 700 million, where last year, we were at EUR 23 million. And if you look at the right, you see that the net debt is coming up. Of course, these exceptionals of EUR 400 million are added actually at the end of the day to our net debt. And we had -- let's say, we signed a lease contract on the 787-9, where we extended the leases till the period 2033 and 2035, which had a EUR 300 million impact on our modified lease debt. But of course, that has not an impact in the coming period on our free cash flow because we continue to operate these profitable planes. If we then go to Page 15, you see that the leverage is down now at 1.6. We have EUR 9.5 billion of cash at hand, which is very stable over the year, which is well above the EUR 6 billion to EUR 8 billion target. We launched very successfully a bond of EUR 500 million vanilla for 5 years with a coupon of 3.75%. We had the lowest credit spread ever in our history of Air France-KLM. So we are extremely proud of that. And we continue to simplify our balance sheet. So we redeemed Apollo for EUR 500 million in July. We issued a new hybrid into the market, but we will also pay back the EUR 300 million of our hybrid convertible bond in the market. So in total, we are reducing this hybrid stock with EUR 300 million this year. And that with a net result generation, we see that we have continued to strengthen our balance sheet where we're now above the EUR 2 billion of equity. Let's then go to the outlook, and let's start with the forward bookings. We see that there is a gap of 3% in the long haul, 2% in the medium haul, and 4% at Transact. We have seen this every quarter. At the end of the day, we were always able to almost close completely this gap. So that is also, let's say, that is a little bit the trend that we see now in our industry. To give you a bit of an indication, if we look at the first 28 days of October, we see a unit revenue increase of 2%, excluding currency impact, with a load factor gap of 1%. And we see again a difference between premium traffic, including premium economy and the low-yielding classes in the overall long-haul network, giving confidence on our premiumization strategy. Then also, I will, for one time, also guide you on the cargo because usually, I not do that because I think we don't have a lot of bookings in -- but we had a very exceptional situation last year where we had a positive impact of the front-loading, especially related to the U.S. elections in the fourth quarter. I already indicated in our last call that the Q4 cargo unit revenues would be negative. And for the first 4 weeks of October, we see a decrease in unit revenue of 11%. Although cargo has a very short booking window than the passenger business, and it's difficult to predict the unit revenues. But in our internal forecast, we expect a double-digit decline in unit revenues compared to last year for the fourth quarter. If we then go to Page 18 on the hedge, so you see that we have hedged now 70% of '25 and 50% of '26. We are quite stable in our fuel bill. I think we last time indicated $6.9 billion, and we are now at $6.9 billion. So a very stable fuel price, if you look at it over quarter to quarter. It can go up and down during the weeks, but I think we are now reaching a kind of normal plateau for the fuel price. If we then go to Page 19 on the capacity. So we still aim at a capacity of 3% to 5% on the long haul, 3% to 5% on the short and medium haul and Transavia, especially because we had a very strong operations in the third quarter. We expect to be above 10% for the full year. But overall, we still guide at 4% to 5% versus 2024. On Page 20, you see the outlook, and it is every quarter the same. It becomes a bit boring maybe. So group capacity, 4% to 5%. Unit cost, I'm very confident in the low single-digit increase where we will see in the fourth quarter that we had a very low side of this guidance. So we are comfortable for the full year on this low single-digit increase in unit cost. Net CapEx between EUR 3.2 billion to EUR 3.4 billion, also probably more at the low end of the bandwidth and net debt current EBITDA, we will keep that between 1.5 and [indiscernible]. Then we strengthened further our position in Canada. We have a very strong cooperation with WestJet, which is the second largest airline with a leading market position in Western Canada. We already have since 2009, a codeshare and a loyalty program with them. And it's interesting to see that they are the #6 partner of our Air France-KLM-enabled revenues. So next time when we do all to Chris, I will invite you to tell me who are the #2, 3, 4 and 5. Number one, you can easily guess, but it's interesting to see that they drive really up our revenue. So we were happy that together with Delta and Korean Air, we could lock them in for our business, and we took a stake of 2.3%, solidifying our, let's say, integrated way of working with Delta and securing our position in Canada. With that, I hand over to Ben for the final remarks. Benjamin Smith: Thanks, Steven. And just to summarize and conclude the comments that we just made. So Q3, again, was a mixed quarter, softer leisure demand and operational headwinds, but we're pleased that revenue -- there was revenue growth and a stable margin, which clearly shows that we've got a resilient, well-balanced network, strong cash generation, and the outlook is reconfirmed. So altogether, these results demonstrate Air France-KLM's ability to navigate challenges resiliently while building a stronger position for the future. So thank you for your time and attention. We're now available to answer any of your questions. Operator: [Operator Instructions] Our first question today comes from the line of Jarrod Castle from UBS. Jarrod Castle: I'll ask 3, please. Just quite interested to get any thoughts that you might have at the moment on at least the direction of ex-fuel costs going into 2026. Secondly, any impact from the U.S. shutdown on your North Atlantic? I see they're going to reduce the amount of capacity flying in the U.S. Is this more domestic in your view? Or will it have an impact on international? And then lastly, just the current French economic/political backdrop. If you could just go through some of your thoughts in terms of what these budgetary pressures might mean for your business. Steven Zaat: I will take the first question, and I will take the second and the third question. Yes. So we are currently busy with our budget for 2026. But we -- of course, we -- you know we are back on track. We have the same actually measures also at Air France. So we are driving our productivity further. So let's see where that will end when I come back with the guidance for 2026, but we are, of course, aiming if you look at the full year to be lower than where we were this year. You see every quarter, the unit cost development is coming down, which has strengthened our position also for the next year. But we have to define our full year budget before I will guide you on any number. Benjamin Smith: Jared, so the U.S. shutdown from the information we received this morning, it's only going to impact domestic flights and that international flights as of today should be business as usual. On the political side in the Netherlands and in France, the main focuses for us are will there be any additional taxes or charges imposed on customers, passengers, or us directly or airports. So far, we don't see anything different or new from what we've been -- what we've seen already and what we've been lobbying to change or get rid of. Again, one of the big negatives that impact us in France are the air traffic controller strikes. So far, we don't have any visibility for the rest of the year. So we're hoping that things will stay stable. We have a new head of the government body, which oversees the air traffic controllers. He is quite close to the file. It's the #1 file today. So we're hopeful there will be some improvement because it cost us a lot of money this quarter and a lot of money this year. And the operating -- the operational impact that we're experiencing is much worse. This is in France, much worse than any other country in Europe. And so far in the Netherlands, it's a bit too early to tell whether there will be any change in policy towards aviation. Operator: The next question comes from the line of Stephen Furlong from Davy. Stephen Furlong: Maybe, Steven, you can just talk about what's going on in cargo. Sometimes historically, it's been a leading indicator, but I just like to understand because I haven't seen that level of decline from other airlines. And then Ben, maybe can you talk about Orly how the work is going there? And obviously, as you build up an entirely largely Transavia business there, I'd be interested in that. Steven Zaat: Yes, let's say, the booking window of cargo is very short. So that is always difficult to predict. as I gave you the numbers for October because I think I want to be totally transparent where we are currently. I think we will be in that range also, let's say, for the coming months. But it's very difficult to exactly explain. But we saw last year that there was a lot of upfront loading towards the U.S. in expectations for what would be the outcome of the election. So that has first already before the elections, it started. And then, of course, when Trump came into the White House or at least he was elected to be in the White House. In January, there was a lot of front-loading in that quarter. So Q4, if you still remember, we had a very good unit revenue on the cargo level, and that is going to normalize. So on itself, the demand is not weak. I think it is normal, and it's, of course, better than in the other quarters. But I think the year-over-year difference is quite difficult due to the fact that we have this positive situation in the fourth quarter last year. Benjamin Smith: Stephen, regarding Orly, if you look at the overall Air France Group, so Air France and Transavia and Hub, which is the regional carrier. So excluding the rest of the business units in Air France-KLM. So just Air France Group, we're extremely pleased with the performance of the Air France Group despite all the challenges we're having with the air traffic controllers and the rest of the operations and taxes that are being imposed specifically in France. So with respect to Transavia at Orly, it has to be taken in context with the entire Air France Group performance because we have been progressively shifting slots from Air France to Transavia. So we have half of the capacity, 50% of the slots at Orly, which is about 150 departures. And we operate about 1/3 of those in 2018 were operated by Transavia, and the rest by Air France, our regional operator, Air France Hop. Those slots there are being transferred to Transavia, and the totality of those slots will have been transferred to Transavia by April of next year. On many of those flights, it's a significant upgauge. If you take a hop aircraft, as an example, of 70 seats, and you're going to a 737 or an A320neo above 180 seats, it's a big jump. And we're cutting our domestic capacity by double digits. And so those slots are being redirected to new routes in Europe. And to start up a new route takes some time, but we do have a very, very strong position at Orly, and we do have our loyalty program, and we do have a cost structure that's similar to the competitors that we are going up against at Orly Airport. So the strategy we're quite pleased with. What is difficult to measure or to at least report out on is how the benefits flow between Transavia and Air France. So Air France has been able to shed the bulk of its domestic operation to date, and it will be the entire domestic operation in April. And that, of course, will be transferred to a lower operating unit, which is Transavia, and we will significantly reduce capacity. This being done in a very complex -- this is a project that should have been done 30 years ago. It was very, very difficult to put this into place. It impacts a lot of employees, a lot of unions are involved with this. And to be able to balance this out by saying, okay, Transavia is going to be profitable or not. I think for me, if we can get the overall Air France group along the path that we've committed to the market to get it to an 8% margin, we're on the path. Is it being divided correctly between Transavia and Air France with this transfer? I'll give you an example, whenever there is an air traffic controller strike to protect the long-haul flying, which is our #1 moneymaker, we try to shift the impact of the strikes to or the airport to impact Transavia as an example. So they take that of an example of a negative like a strike. So I think it's unfortunately, we're not able to put all that into our disclosure into our press releases. But I think that that kind of level of detail, I think if we were able to share that or we have the time to share that, it would be -- I think it would be acceptably well understood that the strategy is the right one. But it has to be looked at in context with the rest of the Air France group performance, which, as you know, over the last 2 years, we've been hitting record COI results. Operator: Our next question comes from the line of Harry Gowers from JPMorgan. Harry Gowers: A couple of questions from me. First one, Steven, I think you gave the plus 2% unit revenue remarks for October, which was for the passenger network. So maybe -- the network business, sorry. So maybe you could give us what you saw in Transavia specifically? Second question, I mean, just in terms of the French ticket tax increase, the Schiphol tariff increases, clearly, these are external headwinds, which are impacting passenger demand to a certain extent for Air France specifically. So anything you can do at all to try and offset or minimize those impacts on demand? And then third question, just on the costs. Do we have any idea yet, or any visibility on where like airport tariff increases could go in 2026? Steven Zaat: Harry, let me come back on your questions and maybe Beck will follow up on it. So let's first start on the unit revenues in -- on Transavia, I don't have any number, to be honest, on Transavia yet. So we always wait for the full closing, which we are going to do, and on the passenger business because it's the main part of our business. I get the daily report. So I have those figures actually always up to date. But I didn't hear any negative news for the moment. And probably as we see bigger demand in October, probably related also due to holidays, I expect that also to come from Transavia. On the Schiphol tariff, yes, it is a very terrible situation, what we are seeing there. We know that Sriol was the #9 in terms of cost in Europe. We could develop very strongly our connecting traffic. And of course, the fact that they increased so much the tariff, and we are a connecting airline. So we need to have lower cost than our competition. So we are working on that. So first, we are working on it in what we call back on track. And you see the productivity measures are kicking in now in our unit cost to get that down also to compensate all those increased charges, which we get at Schiphol. But -- and we have to review also what we are going to do with KLM, what is the right model, and we are working on that also close with, let's say, the Schiphol management because we cannot go on like this. The first indication, which you asked what is the airport tariffs are going to do. So at least the good news is that they are not going up, but they went already with more than 40%, but they are not going up in '26. For Schiphol, I don't have the indication for ADP yet, but usually, they are much more modest in the last years. Operator: The next question comes from the line of James Goodall from Rothschild & Co Redburn. James Goodall: So 3 for me, please, as well. So just coming back to the 2% unit revenue increase in October. Is there any color that you can give us in terms of how that's trending by region? Secondly, coming back to that chart on Page 6 on the increasing premium mix, assuming that there's sort of flat yields over the course of the next 3 years, can you give us an indication of what the RASK accretion just in terms of mix would be from that premium cabin growth over the course of the next 3 years? And then finally, with Leverage now sub-2x liquidity is well above target. And I guess with a very positive direction for free cash flow generation as the exceptionals roll through and with EBIT expansion on the back of your medium-term targets. Have you guys started to think about any potential use of that free cash flow? I guess you haven't paid a dividend since, I think, pre-GFC. Is there any potential in that restarting? Steven Zaat: So very good question. Let's first start with the coloring of October. So I think I already indicated that premium was much -- doing much better than, let's say, the lower-yielding segment. We see a very strong unit revenue actually in North America, and actually all over the world on the long haul, it is pretty strong. On, let's say, the European side, it is still going up, but it is not as strong as we are seeing on the long haul. So you could say that it is, let's say, 3% on the long haul and 1% approximately or even -- yes, 1% on the European network. So still the driving force is the long haul and the driving force is the premium traffic. Yes, that's a very good question. We are just building again the budget for that, but I would say it is around 1% increase of unit revenue. That looks modest, but it is directly -- it will bring a margin up with 1%. So I would say you have part which is in the unit revenue, but also part which is in the unit cost. And I would say, if I have to give an indication in arid because I don't have exact numbers here, I would give that it would bring at least 1% in margins on those networks. Then on the cash flow, so yes, we have indeed a very strong cash position, and we are driving up now our cash flow. We will use that to pay off our hybrids because the hybrids are more expensive than, let's say, a normal Fin loan, as you have seen what we did in August. So the first thing for the short term and the short term is for me '26 is to further pay off our hybrid stock. We have EUR 500 million to pay to Apollo next year, and we will pay that from our own cash flow. That's at least if the situation stays where we are today. And then I think the moment of dividend is more when we end actually, the era that we don't have this payback of the social charges in France and the wage tax in the Netherlands. So that's more for that time horizon. But it's not now, let's say, to disclose to the whole world. We need to first discuss that with the Board because we didn't have these discussions with the Board so far. Operator: [Operator Instructions] The next question comes from the line of Antoine Madre from Bernstein. Antoine Madre: Two questions, please. So first one regarding back on track for KLM. You mentioned the productivity is improving. So is it going faster than what you planned? And can we still expect EUR 450 million improvement this year? And second one on maintenance outlook. How do you see the current headwinds impacting tariff, FX, and issue? Steven Zaat: To start with back on track. So we are still see this contribution of back on track. Of course, that is also to offset, let's say, the triple tariffs and all those kind of increases of cost, but we are fully in sync with the back on track target, which we announced at the beginning of the year, and we will come back on it at the full year results where we exactly are. On the maintenance, we don't see any real big impact coming from the new tariffs. Usually, the parts are excluded. We know that some parts where there's a lot of metal can have an impact in terms of tariffs, but we don't see a significant increase. And you've seen the beautiful results in the third quarter from our Engineering and Maintenance business. So, so far, that impact is very, very limited and not noticeable and not material in our results. Operator: The next question comes from the line of Antonio Duart from Goodbody. Antonio Duarte: A question for me just on Transavia, if I may, and mainly in your -- where do you see strength and weakness within Europe, considering such increase in capacity? Any routes that you see special that you would like to highlight, or where you're seeing particular weakness? Benjamin Smith: So what I look at it from a different way, the strength of Paris and the fact that it's the largest inbound tourist market in all of Europe, and that the airport is very close to Paris and has now got a new direct metro line directly into the terminal, a new Line 14. It's a very attractive airport. We've not been able to exploit our position there in the past because the cost structure of Air France and Hop was probably one of the highest in Europe. And we had a limit on the number of Transavia airplanes we could operate because of the collective agreement we had in place with the Air France pilots. So we negotiated in 2019, it was not an easy negotiation to have that limit removed. We can now operate as many Transavia flights as possible. So now with a competitive cost structure, we can really take advantage of the opportunity here in Paris. So I think the Parisian market is very strong. It's showing resilience. It's actually growing. So we are trying to position all the new capacity that we're putting into Europe with a strong focus on inbound. This is new for us. It's traffic we did not have in the past. And of course, we're trying to deploy this traffic where also there's a strong outbound component as well from Paris. So the typical markets, leisure markets in Italy, in Greece, in Spain, in Portugal, are all still quite strong. But where we're seeing very, very good growth is in Northern Africa, in the Maghreb countries, in Morocco, in Algeria, in Tunisia, as well as Beirude, so in Lebanon and Tel Aviv in Israel, as well as a few destinations in Cairo. So it's quite a unique breadth of destinations that we've got. Not typical for a low-cost carrier, but the fact that it's got so many opportunities to serve the Paris market with a very competitive cost structure, plus the benefits of flying blue, not all the benefits. We don't want to bog it down with the costs that Flying Blue can sometimes entail, but there is quite an array of unique benefits that we offer to customers on Transavia. So a loyal Air France customer does have a low-cost carrier option, which is quite unique in Europe from the main base city of the full-service airline that we have. Meanwhile, at Transavia Holland, we've been trying to manage through a situation where we don't have full visibility on the number of slots and the curfew situations at Schiphol. And of course, the bulk of the Transavia aircraft at Schiphol do start their day early in the morning. So we do have, I think, more visibility than we had 3 years ago now that the Dutch government has agreed to go through the European Commission balanced approach process, which is enabling us to take some decisions on the deployment of our fleet at Transavia. And so we'll be refining the network offering at Transavia Holland, and we believe that should improve in the near future. Operator: [Operator Instructions] We have a question coming from Muneeba Kayani from Bank of America Securities. Muneeba Kayani: This is Kate on behalf of Muneeba. I have a question on unit cost, which is tracking at the lower end of FY guide. Just wanted to ask about 4Q outlook. Are you seeing the trend continue at about 1.3% year-on-year growth into 4Q? And any kind of base effect we need to keep in mind when thinking about 4Q? And then just another question on your forward bookings on Slide 17. If I'm reading the numbers right, I'm seeing about 2% to 4% kind of lower loading factor compared to 2024, but the commentary is in line bookings. So just if you could clarify that. Am I reading the slide correctly? Steven Zaat: Let's first start on the unit cost. I'm quite optimistic about the fourth quarter unit cost. I already gave the indication where we would end in the second half year. And I think Q4 will even be a better development than Q3. We see quite some productivity coming in. And with, let's say, the more modest labor cost increase and also having our operations better running, we are quite optimistic on the fourth quarter, but we don't give an exact number. We have a full-year guidance, and you can see where we will end for the full year. For the load factor, yes, I think that what you -- of course, the numbers are right. If you have followed also the previous presentations, you have seen that we have -- every time we had these kind of gaps -- and at the end of the day, we were able to close them. So in the first quarter, we were almost closing the full gap. In the second quarter, we were 0.1%. So in terms of load factor gap, so very close to 0, and we started almost the same. And in the third quarter, we also saw the same, and we closed at minus 0.5%. So I don't say that we will fully close this load factor gap. We saw a small load factor gap in October, but we saw quite some good unit revenues. But it is too soon to tell. These are the numbers. And of course, there's no mistake in it. Operator: We have a question from Axel Stasse from Morgan Stanley. Axel Stasse: I have 2, if I may. The first one is, could you maybe provide any quantitative guidance on the back on track program contribution on EBIT for 2026? Do you still expect to be on track for the medium-term guidance? And the second question is a follow-up actually on the potential French corporate tax proposals. We have heard a lot of things in the press last week, and many legislative lift hurdles before any such proposal is actually passed. But could you just provide any indication on how much of group PBT is related to France? Steven Zaat: Back on track. We will see, of course, an outflow in 2026. I'm not yet there to guide you on the cost. As you know, I say that it's coming down and coming down and coming down if you look at the unit cost increase, but we have not finalized the full guidance on it. But the program on itself is delivering, but we see now that especially the low-yielding traffic is getting worse. So that hurt especially also KLM, plus the triple trailers. And we have to review what are our next steps with our KLM operations. So that is where we are currently working together with the KLM management. The second question, I don't have any figures, but-- Benjamin Smith: Yes, it's Ben. From what we've seen over the last week, we don't have an aggregate -- any aggregate figures on that and how that could impact us. As you know, things are moving all over the place. But the current government that's sitting, I think we have a good feeling that what we had in place last year is going to be very similar to what should be in place this year. But as you know, it's not very stable here, but the big items that could impact us seem to be under control. And comment actually on the guidance. Because it was a question, we will come back on that with the full-year results. But we are still, let's say, aiming at 8% margin in the period '26, '28. Operator: There are no further questions. So I hand back over to you, Sirs, for closing remarks. Benjamin Smith: Okay. Well, thank you, everyone, for joining us today, and we look forward to sharing our results at the end of the year, the end of the fourth quarter. Thank you. Operator: Thank you for joining today's call. You may now disconnect your lines.
Operator: Good morning, ladies and gentlemen and welcome to the AirSculpt Technologies, Inc. Third Quarter 2025 Earnings Call. [Operator Instructions] Please note that this event is being recorded. I will now hand the call over to Allison Malkin of ICR. Please go ahead. Allison Malkin: Good morning, everyone. Thank you for joining us to discuss AirSculpt Technologies results for the third quarter of fiscal 2025. Joining me on the call today are Yogi Jashnani, Chief Executive Officer; and Dennis Dean, Chief Financial Officer. Before we begin, I would like to remind you that this conference call may include forward-looking statements. These statements may include our future expectations regarding financial results and guidance, market opportunities and our growth. Risks and uncertainties that may impact these statements and could cause actual future results to differ materially from currently projected results are described in this morning's press release and the reports we will file with the SEC, all of which can be found on our website at investors.airsculpt.com. We undertake no obligation to revise or update any forward-looking statements or information except as required by law. During our call today, we will also reference certain non-GAAP financial measures. We use non-GAAP measures in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business. A reconciliation of these measures can be found in our earnings release as filed this morning and in our most recent 10-Q, which will also be available on our website. For today's call, Yogi will begin with an overview of our third quarter and share an update on our strategic priorities. Then Dennis will review our financial results in more detail and provide our outlook. With that, I'll turn the call over to Yogi. Yogesh Jashnani: Thank you, Allison and good morning, everyone. During the quarter, we made strong progress on our key initiatives that focused on new growth opportunities, margin improvement and debt reduction. While third quarter revenue was lower than anticipated, this is reflective of timing instead of trajectory of our business. Most significantly, we are setting the stage to realize a broader market opportunity to provide body contouring solutions that address the unwanted side effects related to GLP-1 use. This represents a long-term growth engine for AirSculpt. Our capabilities, scale and brand uniquely position us to capture this major opportunity in aesthetic surgery, which we are calling the GLP-1 transformation. To that end, we have expanded and refined our strategy to focus on 3 key areas: introducing new services to capture the GLP-1 opportunity, enhancing our sales and marketing strategy and financial discipline in the areas of margin improvement and capital allocation. First, we are introducing new services to capture our GLP-1 market opportunity, which is broader and more durable than I initially expected. We see our skin tightening pilot programs as part of a long-term opportunity that is highly complementary with our core body contouring business. GLP-1 medications have fundamentally reshaped how consumers approach weight loss and wellness and we are seeing this change is beginning to create demand for aesthetic procedures that align to our existing brand and capabilities. In the long term, we believe these procedures can account for a significant portion of AirSculpt's revenue and drive meaningful growth. For context, global GLP-1 prescriptions have grown at roughly 38% annually between 2022 and 2024, with total sales expected to reach $100 billion by 2030, according to a study from McKinsey & Company. GLP-1 therapies are reshaping the aesthetics landscape with 63% of GLP-1 patients seeking aesthetic treatments post use, representing new consumers to the market. Equally encouraging is that nearly 2/3 of patients that have lost 11% to 30% of their body weight have multiple concerns with GLP-1 medication side effects, driving growth in patient needs for skin tightening and overall reshaping after significant weight loss. At AirSculpt, we have begun to serve this patient base as our protocols, scale and brand trust give us a meaningful head start to further capitalize on this opportunity. While it's still early, in our pilots, we are seeing higher conversion rates amongst GLP-1 patients. The first step towards realizing this potential was our successful pilot of skin tightening that began in Q2 and has recently been expanded to multiple centers. While we saw a lift in tightening services in the third quarter, we found that many clients coming in for this procedure have lose skin beyond what skin tightening can address. As a result, we have begun to add new procedures to address loose skin when skin tightening alone is not sufficient, thus expanding our total addressable market. This represents a natural extension for us as the scale player in this space. Looking ahead, we will continue to invest to capture this meaningful opportunity. Our second area of focus is enhancing our sales and marketing strategy. In Q3, we adapted our marketing spend to align with the moderation in our revenue trend and prioritized initiatives that drive higher conversion. As we move forward, our marketing approach will balance near-term lead generation with longer-term brand building with a more diversified media mix, including targeted influencer campaigns and television advertising. This is designed to strengthen lead quality, improve conversion and deepen our focus on the affluent consumer base. With our sales team, we are implementing new training modules and tools as we remain focused on improving conversion. Finally, we have also improved financing options for our patients. Our third area of focus is maintaining strong financial discipline, both in our margins and capital allocation. Year-to-date, we have generated more than $3 million in annualized cost savings, net of investments in new growth initiatives. We expect to continue unlocking incremental value from our current operations, which we anticipate will expand our operating margin going forward. Turning to capital allocation. We have repaid nearly $18 million of our debt year-to-date. Debt repayment continues to be the primary focus of our capital allocation strategy in the near term. Beyond that, we will continue to invest in growth initiatives, including new procedures. In Q3, we made the decision to close our center in London. As part of a strategic review of all our centers, we saw this was the only unprofitable center and would have required significant investment to turn around. Instead, we have chosen to focus our resources on delivering growth to our North America locations where we continue to see considerable opportunity. We are updating our annual outlook and expect 2025 revenue of approximately $153 million as compared to our previous guidance in the range of $160 million to $170 million. We expect 2025 EBITDA of approximately $16 million, the bottom end of our guidance of $16 million to $18 million. For the fourth quarter, we are seeing improving same-store sales performance compared to a year-to-date trend. Additionally, our implied fourth quarter EBITDA guidance highlights stronger margins, both sequentially and year-over-year. Turning to personnel news. This morning, we announced Michael Arthur will be joining AirSculpt as Chief Financial Officer starting January 2026. He assumes the CFO position from Dennis Dean, who will retire, as we had previously announced following a transition period. Michael is a seasoned executive who brings public market experience and has led financial organizations through growth, complexity and change. I am confident he will add meaningful strength to our leadership team. Over the next few weeks, Dennis will work closely with Michael to ensure a seamless transition and I'm looking forward to working with him as we position AirSculpt to realize its true growth potential. Secondly, on Wednesday, we filed an 8-K announcing that Dr. Aaron Rollins has resigned from the Board citing personal reasons. He confirmed this was not due to any disagreements between him and the company, its management or the Board on any matter related to the company's operations, policies or practices. We thank Aaron for all his contributions to AirSculpt and wish him all the best. In summary, we have expanded and refined our strategy to focus on 3 key areas: introducing new services to capture the GLP-1 opportunity, enhancing our sales and marketing strategy and financial discipline in the area of margin improvement and capital allocation. While near-term revenue reflects a period of transition, our growing suite of procedures, balanced marketing strategy and disciplined execution give us the confidence in our long-term trajectory. And with that, I will now pass it over to Dennis. Dennis Dean: Thank you, Yogi and good morning, everyone. As I mentioned in my remarks last quarter, I'd like to thank the team at AirSculpt for the opportunity to lead this organization as Chief Financial Officer for the past 4 years. It has been an exciting journey and I'm certain that Michael is the right choice for CFO. I'm committed to ensuring a smooth transition of my responsibilities and look forward to watching AirSculpt reach greater heights after I exit the business. Now turning to our financial performance. As mentioned, revenue for the quarter was $35 million, a 17.8% decline versus the prior year quarter, with same-store revenue down approximately 22%. Cases declined 15.2% to 2,780 with same-store cases down approximately 20% and average revenue per case for the quarter was $12,587, a decline of approximately 3% from the prior year quarter but above the midpoint of our historical range of $12,000 to $13,000. The percentage of patients using financing to pay for procedures was 52%, which is comparable to what we experienced in the second quarter. As a reminder, we receive full payment of all procedures upfront and we have no recourse related to patients who finance their procedures with third-party vendors. Cost of services decreased by $2.9 million compared to the prior year period and as a percentage of revenue increased to 42.5% versus 41.8%. Selling, general and administrative expenses decreased $6 million in the quarter compared to the same period in fiscal 2024, which reflects the impact of our cost management activities and reductions in our equity-based compensation. Our customer acquisition cost for the quarter was approximately $3,100 per case as compared to $2,900 in the prior year quarter. Adjusted EBITDA was $3 million compared to $4.7 million for the fiscal 2024 second quarter. Adjusted EBITDA margin was 8.7% compared to 11% in the prior year quarter. The declines in adjusted EBITDA and adjusted EBITDA margin is the result of our revenue declines. Net loss for the quarter was $9.5 million and adjusted net loss for the quarter up $2.4 million or $0.04 per diluted share. Our net loss included 2 noncash charges recorded during the quarter. The first relates to our Salesforce technology project. When we initially started the Salesforce project in Q4 of 2022, we planned for it to cover everything from marketing and sales to operations and clinical processes but we realized that the strength of the platform lies in marketing and sales. So that is where we are focusing our energy. As a result, we recorded a noncash impairment charge of $4.6 million during the quarter related to those components we do not expect to be used. For operations and clinical needs, we are pursuing alternative solutions that are better tailored to those workflows and for our business. We continue to be pleased with the portion of this project that we have implemented related to marketing activities and expect to complete the rest of the Salesforce implementation related to the sales function in the first quarter of 2026. We also recorded a loss of approximately $2.3 million related to the closure of our facility in London. This charge primarily relates to an impairment to the long-term assets we have recorded at the center. Additionally, we recorded approximately $1 million to selling, general and administrative expense during the quarter related to accelerating the amortization of the right-of-use asset at this facility. This increase in lease expense had no impact to cash. During the quarter, we generated $400,000 of revenue at the London center and our adjusted EBITDA was a negative $150,000. For the 9 months ended September 30, 2025, we recorded revenue at our London center of $1.4 million and our adjusted EBITDA was a negative $600,000. Turning to our balance sheet. As of September 30, 2025, cash was $5.4 million and gross debt outstanding was $57.9 million and our $5 million revolver remains undrawn. Our leverage ratio as calculated according to our credit agreement was 3.04x on September 30, 2025 and we are in compliance with all covenants under the terms of our credit agreement. As a reminder, during the second quarter, we repaid $16 million of debt, including $5 million on our revolver and a $10 million prepayment as a result of using proceeds from our capital raise and cash from operations. These activities reflect our ongoing commitment to strengthening the balance sheet, which allows us to move forward with an improved capital structure and enhanced flexibility. Cash flow from operations for the quarter was a use of cash of $225,000 compared to an increase of cash of $1.8 million in the third quarter of 2024. Turning to our outlook. For 2025, we are updating our revenue outlook to approximately $153 million versus our previous revenue guidance in the range of $160 million to $170 million. We are reiterating the low end of our adjusted EBITDA guidance of approximately $16 million within our range of $16 million to $18 million. For the fourth quarter, our revenue guidance implies a smaller year-over-year decline and we are seeing improving same-store sales performance compared to our year-to-date trend. At the same time, our implied Q4 EBITDA guidance highlights stronger margins, both sequentially and year-over-year. I will now turn the call over to the operator to begin the question-and-answer portion of the call. Operator: [Operator Instructions] Our first question comes from Joshua Raskin of Nephron Research. Marco Criscuolo: This is actually Marco on for Josh. So cost controls actually looked pretty strong relative to our estimates for the quarter. So I was just wondering if you could go a little deeper on the cost-cutting measures you have taken by line, whether it be G&A or cost of service. And then looking forward, how should we think about the sustainability of the savings you're generating? Should we expect those to continue into the fourth quarter and into next year as well? Dennis Dean: Marco, it's Dennis. Thanks for the question. Yes, a lot of our cost controls, as we had kind of communicated over the past couple of quarters, has focused primarily in the SG&A realm. There are some things that we've done within the cost of services. But primarily, it's been in our SG&A and our support that we've had at regional positions and things of that nature. So that's been primarily the focus on it. We're continuing to heavily focus on that. Clearly, as we kind of guided our number into the fourth quarter, even though we are experiencing some -- the revenue softness, the cost controls are really kind of helping bridge some of that gap for us. So really pleased with that. We keep uncovering things as we kind of push on various vendors and those sorts of things and are identifying additional opportunities. So we expect to continue on this approach being diligent but most of that was in the SG&A line. Marco Criscuolo: Great. That's helpful. And if I could just squeeze one more in. It was good to hear about the progress you're seeing with the stand-alone skin tightening service. But could you just go into a little more detail on what you're seeing there in terms of uptake and how you envision the pace at which that's expanded across the rest of the centers? And then also, if you could just go a little deeper on what new services you're looking to add to address that GLP-1 population. Yogesh Jashnani: Marco, this is Yogi. Thanks for the question. As it relates to skin tightening, our thesis is proving out in that we are seeing there's demand for solutions that address loose skin. Now what we are also seeing is that the pool of qualified candidates for stand-alone skin tightening was smaller than we anticipated, mainly because the loose skin was beyond what skin tightening could address. So while that meant Q3 revenue was muted, we see this as a broader and more enduring opportunity for a suite of procedures to further address additional loose skin. That comes in the form of skin excisions or skin removals, for example. And many of those can be done in our clinics under local. It fits within our model pretty perfectly. So we have started to pilot some of that already. Skin tightening has been expanded to multiple centers. Skin excisions is in pilot right now. And even without marketing it, we are starting to see good demand for that. So we will continue to expand on that. Just as a quick reminder, for all of these procedures, it takes 3 to 6 months for patients to see full results. And so while we are starting off on these, it will take us a few months to get the before and afters and then turn those around into marketing and expand it from there. Operator: [Operator Instructions] Our next question comes from Sam Eiber of BTIG. Sam Eiber: Maybe I can start on a Q3 question and then I definitely want to come back to the GLP-1 opportunity. But Yogi, you talked about a timing issue this quarter. Would love, I guess, your thoughts on exactly maybe what happened here. I know last quarter, leads and consultations were stepping up a bit. So I would just love to better understand the timing issue in Q3. Yogesh Jashnani: Yes. All right. Sam, thank you for the question. So for Q3, we continue to operate in a challenging consumer environment, especially for considered purchases. That hasn't changed since Q2. While we saw leads and consults continue to remain strong, they were strong in Q2 and they continue to remain strong in Q3. We continue to see that consumers are hesitant to go from, I'm interested, I want to talk to you guys, I want to get a quote, to purchasing. However, we are seeing Q4 same-store sales trends are better than year-to-date. And as we are transforming the business, we realized there is a bigger opportunity with GLP-1 users than we initially thought. We initially thought skin tightening would be able to address a broader sliver but we are seeing that the demand is bigger and the needs are broader, which we can address. And we are already starting to see that GLP-1 users are converting better than non-GLP-1 users. So the strategic play is with introducing the new procedures, adapting our marketing and sales to capitalize on that. So in summary, while short-term revenue is lower than expected, we are excited about the broader GLP opportunity in front of us. Sam Eiber: Okay. That makes sense. Very helpful, Yogi. All right. Maybe coming to the GLP-1 opportunity. I would love to, I guess, better understand surgeon interest in the skin excision opportunity within AirSculpt centers, right, their ability to capture maybe some of the economics for these procedures among these patients. And then maybe as a follow-up to that, how you're thinking about any shifts in marketing or brand awareness for AirSculpt to go after this opportunity? Does that need to change at all as you kind of go after this new subsegment of patients? Yogesh Jashnani: Sam, I'll address both parts of that question. As it relates to surgeon interest and expertise, I think you were asking about both, if I understood your question correctly. Look, there is -- both are actually a pretty strong positive for us. I had to -- at a couple of points, slow things down and make sure that we are doing a pilot in fewer locations than where I had surgeon interest. So surgeon base is definitely interested in doing skin excisions and that is evident in our pilot as well. And surgeons are more than capable -- we have an elite network of over 80 surgeons, plastic and cosmetic, who provide excellent care. And many of them have the abilities and have been doing this in their -- whether it's in their private practice or in their past lives as well. So no concerns from that perspective. Now there will be -- to your other question, there will be changes in marketing and sales. It is much more about making sure that we get the messaging right to people who are GLP-1 users or who have loose skin. So that's where we are testing into what is the right messaging, what is the right targeting and what is the right place in the cycle of GLP-1 use that people are looking for loose skin as a problem. Remember, we've been talking about loose skin and also fat removal is another big idea here because with GLP-1, there is uneven weight loss and uneven volume loss. So we continue to see people coming in for removing those stubborn fat deposits that GLP-1 was unable to address as well. Operator: Thank you. Ladies and gentlemen, we have reached the end of the Q&A session. I will now hand back to Yogi Jashnani for closing remarks. Yogesh Jashnani: Thank you again for joining us. I also want to thank the AirSculpt team and our network of over 80 surgeons that provide excellent care and results to our patients. Together, we are powering the next chapter in AirSculpt's growth. We look forward to share our progress when we report Q4 results and wish you a happy and healthy holiday season. Operator: Thank you, sir. Ladies and gentlemen, that concludes today's event. Thank you for attending and you may now disconnect your line.
Carolina Stromlid: Good morning and a warm welcome to the presentation of RaySearch Q3 2025 Results. My name is Carolina Stromlid and I'm new Head of Investor Relations at RaySearch. With me today are our Founder and CEO, Johan Lof; and our CFO, Nina Gronberg, who will take you through the highlights and financials of the quarter. After the presentation, we will open up for questions. So feel free to submit them in the chat or ask them live. With that, let's kick off today's presentation. Johan Löf: Thank you, Carolina, and welcome again, everyone. Before we go through the Q3 results and highlights, I'd like to give a brief overview of RaySearch and our business. So as you know, RaySearch is a pure software company and we develop software for cancer treatments. We have 4 platforms: RayStation, which is our treatment planning system; RayCare, which is the oncology information system; RayIntelligence is our analytics tool for exploring population data; and RayCommand is the treatment control system. So if you look at the comprehensive cancer center. We have usually the radiotherapy treatment in the basement, you see the treatment machines down there. In the comprehensive cancer center, we also perform surgery for cancer and we deliver chemotherapy and other systemic therapies. So comprehensive cancer center can deliver all the types of treatments that are available for cancer. And RaySearch has so far during our first 25 years been mainly focused on radiotherapy or I would say only focused on radiotherapy. So we do the treatment planning for radiotherapy and also with RayCare, we manage the workflows, et cetera, for delivering radiotherapy. We have recently added a new function in RayStation for liver ablation planning and delivery. So there is a room in this clinic picture where you see liver ablation to the far right. And this is the first time we actually go outside of radiotherapy because liver ablation is interventional radiology. And going forward, we will take care also of the other aspects of cancer treatment. Next year we are entering into chemotherapy where we add chemotherapy planning into RayStation and chemotherapy management into RayCare and further down the line, we will also support surgery in the same way. So our long-term goal and vision is to provide the comprehensive cancer center with all the tools necessary to do whatever goes on in a center like that. So we will support comprehensive cancer care. Many patients receive a combination of treatments. Breast for example, you usually first perform surgery to remove the tumor or the breast and then you irradiate lymph nodes and after that you deliver chemotherapy. So many patients have had a combined treatment like that and I would say there's hardly any software support for that situation. So we want to be able to cooptimize and coordinate such treatments in the future. This slide shows the long-term development for RaySearch in terms of revenues. We go all the way back to 2008. I show this slide because I want to emphasize the importance of looking at RaySearch long term because as I have repeatedly stated over several years is that our quarters fluctuate in terms of revenues. That has been quite common for a long time even though maybe we see a little bit less of that than in the past, but it's still a characteristic of RaySearch because there are some big deals that have fallen on either side into one quarter or another quarter. So it is important to look at RaySearch over a longer period. And if you look at this slide, you see that it's a pretty stable growth over the years. The magenta colored bars are the support revenues so they are steadily increasing and they are now about 39%, 40% of the total revenues. There is a dip that you see in 2020 and 2021 that were of course during the COVID years where we were quite badly affected. But overall, over a longer period, we can see that there is a steady growth. So even if we had a somewhat weaker Q2 this year, Q1 and Q3 are record quarters in terms of revenues. We have all-time high this quarter, but Q1 was very close as well. So basically we have 2 all-time high quarters this year so far and 1 a little bit weaker. So I just want to remind everyone that one has to have a longer-term perspective on RaySearch development. Okay. So now over to the latest developments. So I'm happy to report that Q3 was a strong quarter for RaySearch with record high net sales and improved profitability. I think Q3 demonstrates the strength of our business model and the importance of maintaining this long-term perspective. While revenues can fluctuate between quarters, this quarter confirms the company's continued solid performance. We saw continued strong interest for our solutions in the quarter supported by the deliveries to 6 major particle centers in Asia. Net sales grew by 13% to SEK 332 million reaching the highest revenue we have ever recorded. The increase in net sales lifted operating profit by 44% to SEK 89 million with an EBIT margin of 27%. Adjusting for costs from our global employee conference, EBIT was SEK 103 million corresponding to a margin of 31%. Recurring support revenue continued to grow reaching SEK 130 million in Q3 and which represents 39% of total revenues. So let's move on to the operational highlights of the quarter. Overall, customer activity remained strong with order intake increasing by 70%. Many of our existing customers expanded their installations during the quarter to add more systems and functionality. Roughly half of our license sales continued to come from the installed customer base demonstrating steady demand from the existing customers. Interest in RaySearch solutions remain high across all regions with an increasing number of clinics choosing RayStation and RayCare over other systems. I can mention a few notable examples in Q3. Stanford Healthcare in the U.S. placed a new order for advanced proton therapy. [ AKMS ] Oncology selected RayCare and RayStation for its new cancer center in California. Keimyung University Dongsan Medical Center in South Korea will install RayStation and RayCare at its new proton center. RayStation has been installed at 3 new proton centers and 2 carbon ion therapy centers in China. Auckland City Hospital in New Zealand is expanding its radiotherapy capacity with additional RayStation licenses. The replacement of Philips treatment planning system Pinnacle, which will be discontinued by 2027, continued in the quarter. The German health provider Med360 will deploy RayStation across 10 clinics for Elekta and Accuray treatment machines. And in France, several clinics will replace both Pinnacle and Eclipse with RayStation. Another example of customer activity was the annual ASTRO conference that took place in San Francisco at the end of September. This is a very important event for us and we had a great interest in our offering. Finally, in September, we celebrated an important milestone. RaySearch marked 25 years as a company. For the first time since the pandemic, we gathered all our employees from around the world with an internal conference. This created valuable opportunities for knowledge sharing while also strengthening our company culture and engagement. Together, we will continue to build on this, improving cancer treatments for patients worldwide. In September, we launched a new version of RayIntelligence, which is our oncology analytics platform. It's cloud-based and we have built it with modern technology for scalability and accessibility. It comes with interactive dashboards that you can use to visualize data and understand correlations, et cetera. It's seamlessly integrated with RayStation and RayCare meaning that it listens to everything that goes on in these systems. So without the user having to do anything, RayIntelligence will capture the information that's being generated in RayStation and RayCare. There is also a very powerful SQL scripting interface for customer queries and in-depth data exploration. Some examples of use cases for RayIntelligence is that you can get an overview of the clinical operation. You can get an overview of everything that goes on in your department. You can monitor machines, treatments, toxicities. You can also track treatment quality and look at your population of patients over time, what are the side effects and what are the tumor control probabilities, et cetera. In our systems, we have several machine learning or AI models in certain algorithms and RayIntelligence can also be used to monitor the performance of these machine learning models. RayIntelligence is also a very powerful tool to generate reports that takes data from RayStation, RayCare, but also external sources. This is an example of a dashboard where you follow the treatment planning in a specific clinic. So you can track it over time. You see the time axis in 1 diagram there. You can track it on tumor type so how many plans did we create for breast, how many for prostate, for lung, et cetera. There is also statistics here for the different treatment planners. So how many -- I mean which person did the most plans and who did the least, et cetera. So this is just an example of things that you can see and visualize with RayIntelligence. It's also important to note that although RayIntelligence comes with a large number of predefined dashboards that we have made, the user can have tools in RayIntelligence to create their own dashboards. So it's a very powerful addition and complement to RayStation and RayCare. So in the next slide, we try to visualize how RayIntelligence can be used to gather data. RayWorld, the combination of all our systems are called RayWorld, and we want RayWorld to be a learning system. So what this slide illustrates is that those little squares or rectangles are data points that are being automatically at the back end captured by RayIntelligence from RayCare and RayStation and that data is put in the cloud, in the data warehouse in the cloud. It can be a cloud on-premises, but it can also be a cloud in the cloud, so to speak. Based on this data, we achieve clinical insights. We feed back information. Those networks, neural network symbol there, represents machine learning models going back to our systems, but there are also other data points represented by those dots that are insights that we feed back to improve our algorithms. So we have several algorithms as we rely on historical data like deep learning segmentation and deep learning planning. So that is to improve the performance of, for example, RayStation. We can also improve the operational efficiency of the clinic. So RayIntelligence will help determine bottlenecks in the workflow and then you can take action to remove those bottlenecks. We also want to provide clinical decision support by following the patients over time and knowing exactly what we did to these patients and what the preconditions were. We can improve and we can give recommendations to the clinical teams on how to treat the next patient. And combined, all of this will then improve outcomes and treatment outcomes for our patients. So with that, I would like to hand over to Nina to tell us about the financial development. Nina Grönberg: Thank you, Johan. In quarter 3, we saw continued high activity in the market both from new and existing customers and across the regions. Order intake increased by 17%, which brought the rolling 12 curve upward again, up from the smaller drop that we had in the last quarter. And we had high order intake from support contracts in the period. The order backlog ending at SEK 1.617 billion was also affected by that we had 6 Asian particle sales turning into net sales in the third quarter. High net sales gave us a book-to-bill ratio in the quarter of 0.9 and for the last 12 months it was 1. Despite headwind from the strengthening of the Swedish krona, net sales grew with 13% in the quarter and since the SEK 332 million outcome beat the previous record that we had from quarter 1 this year if only with SEK 0.5 million, we did mark out a new record level. License sales growth was 40% and support sales grew with 8%. The organic growth was 19% mainly coming from new orders, but also from the already mentioned particle sales in Asia, sales that was previously recognized in our order backlog. The high net sales drove EBIT up with 44% to SEK 89 million in the quarter and strengthened the margin to 27%. If we adjust for the costs that we had from our internal conference and a very small currency effect in the quarter, EBIT was SEK 103 million and the EBIT margin 31%. Year-to-date net sales was up 11% and 15% organic-wise. And the year-to-date EBIT margin was 21%. Moving on to the rolling 12 development of net sales and EBIT and also the perspective that we believe give a better and more relevant description of RaySearch business performance. We see that net sales for the last 12 months amounted to SEK 1.292 billion and that gave us an annual growth rate of 14% over the last 2 years. And the rolling 12 EBIT of SEK 274 million means a solid margin of 21% and this, I want to point out, is despite that we've had large effects from nonrecurring costs and currency losses during 2025. Recurring revenue from the support contracts was, as mentioned, up 8% amounting to SEK 130 million in the quarter and corresponding to 39% of total net sales. Year-to-date the support contract growth was 13% and amounting to SEK 385 million and that corresponds to 40% of the total net sales. Rolling 12 development pictured with the blue line in this graph show the steady increase that we have in our support revenue over time. Moving on to the cash flow development. Cash flow in quarter 3 was minus SEK 82 million and strongly impacted by the higher working capital. Though this is not a satisfying outcome, I want to break it down for you and I want to point out that the picture is brighter than it first looked like. There is mainly 3 things that has impacted working capital in the quarter. One of them being the already mentioned Asian sales, which were to large extent prepaid, and that is a good thing. I mean we get paid before we deliver anything and that is something that is common when it comes to our sales in the APAC region. But it also means that no cash flow is generated later on when the sales is recognized. Secondly, we have sales with longer payment terms. In some cases, these longer payment terms is related to tenders and framework agreements and that is something that gives us good and profitable sales, but where we have to accept that we get paid a little bit later. For example, in the last 2 quarters, we had strong sales in the French market and there we have these kinds of contracts. And then we get a smaller portion of the payment when we deliver, but we also have to wait with the invoicing until customer has finalized their testing. In other cases, we have accepted longer payment terms or later invoicing since we can benefit from it in terms of price or in terms of long-term value from the customer relations. And third, a portion of the cash flow outcome is always related to timing of the sales in relation to quarter end, a timing that was not in our favor in the third quarter. Cash flow was also affected by quarter 3 being summer months, which means vacation payouts. Last, but not least, I want to remind you that we have a cash balance of SEK 323 million when we exit the quarter. We have no loans and on top of that, a nonused overdraft facility. Breaking it down further to you and looking at the 3 items in our balance sheet building up the main part of the working capital; the contract assets and the contract liabilities, which is receivables and liabilities we have towards our customers. Here we have been used to having a net that is negative and that means that we have more prepayments from our customers meaning they pay us before delivery than the customers owe us because we have delivered and not get paid. And that is an extremely good position I must say. And now in September, it turned the other way around, but as I see it, we're still in a rather good shape. And as with net sales, we will have fluctuations in these items as well going forward depending on the mix of the customer contracts. And we will of course continue optimizing the working capital in relation to the business. And with that, I hand over to you, Johan, that will give a summary of the quarter. Johan Löf: Thank you, Nina. All right. To summarize the quarter, we achieved record high net sales. Our profitability improved significantly. We continue to see increasing interest in our solutions. There is still a very large potential within our existing customer base giving us the opportunity to sell additional systems as well as additional modules to them. With our leadership in innovation, strong partnership and an expanding and loyal customer base, RaySearch is very well positioned for long-term growth. So we will now open up for questions and I will hand over the word to Carolina. Carolina Stromlid: We will start with questions from our analysts and the first question comes from Mattias Vadsten at SEB. Mattias Vadsten: I think I will start with 3 questions. I think first one, as has been discussed in this case before and in conference calls, the upselling potential is quite massive as it looks and this effect, if I do my calculations, has been quite sort of substantial both over time, but also in particular I would say in 2024 and into 2025. So if you could just confirm this is the case? And also if it is something special happening driving this recent mix? And yes, how the sort of setup looks there going into the future here and into 2026, '27? That's the first question. Johan Löf: Okay. Let's take them one by one, please. Then you can ask the second if you may. Also this quarter, we had about 50% of the license sales from the installed base and the other half from new customers. So this seems quite constant. It's just a behavior of our customers. We have a campaign that we're starting in just a couple of regions where we allow customers to use the systems. We unlock all of RayStation's functionality for a limited period of time and have the customers try out everything that -- all the modules that you can buy in RayStation. They are also free to use that clinically. And after this trial period, which we are experimenting with, but it's about 6 months; they have to decide whether they want to buy it or not because the modules are shut down after that trial period. And it has been very well received in the markets that we have initiated it. We want to do it on a small scale to start with in these countries just to gain experience and then based on that experience, we will open it up to other markets. But we believe that that should benefit the sales to our installed base. Did that answer your question? Mattias Vadsten: Yes. When was this initiative started just as a follow-up? Johan Löf: I didn't hear what you said. Carolina Stromlid: Did you have another question? Mattias Vadsten: Yes. First, a follow-up to this question I asked just now. When was this initiative started? Johan Löf: The letter was sent out maybe 2 months ago, something like that. I don't remember exactly, but it's quite recent. Mattias Vadsten: Okay. Good. Next question is I think you point out, also very well in the presentation, a strong delivery quarter in terms of licenses this time, also new customers sales exceeding orders last 12 months in this line and order backlog, therefore, falling vis-a-vis last year and previous quarter for licenses specifically. So just how you view this and sort of how to think about the future with regards to this? That's the second question. Johan Löf: Okay. The reduction of the order backlog was a direct consequence of those deliveries. But as you may have noted, the order backlog and the order intake for 1 quarter is a very bad predictor for the revenues for the next quarter or future quarters because most of the order intake is still -- or most of the revenues are still RayStation revenues. And most of those, except for the special particle centers, et cetera, most of that order intake is directly converted into revenues. So let's say that we have a strong Q4 quarter, then it would be strong both in terms of order intake and revenues. So that's just the nature of the business. Carolina Stromlid: Do you have any other question, Mattias? Mattias Vadsten: Yes. I have 1 final question, then I will allow other analysts. Carolina Stromlid: We will move over to Kristofer Liljeberg at DNB Carnegie. Kristofer Liljeberg-Svensson: It's Kristofer, I think you have some problem in tech. Carolina Stromlid: We'll try with Oscar Bergman from Redeye. We can come back to the phone questions again and move over to questions posted in the chat. Johan Löf: Okay. I can start with those. Lots of different questions here. There's 1 question. Could you give some color on the share of previous Pinnacle clinics accounting for the license sales in the quarter? Yes. About half of the new license sales to new customers were by converting Pinnacle clinics to RayStation and the other half was converting other systems and that will be then Monaco and Eclipse. This was posted by [ Daniel ]. And he also asks, could you elaborate on the revenue model of RayCare? Is it similar to RayStation in terms of license fee plus support revenue? That was the first question. And yes, it is, but it is a bit higher. So you can assume about 30% higher for a certain clinic, but it's of a certain size. And the RayCare installation would be about 25%, 30% more expensive than the RayStation installation. And then the second question and is how is pricing determined? Is it based on patient throughput and users? It's mainly based on patient volume or patient throughput as is stated here and connections to machines. So the more machines linacs you have, the more expensive RayCare becomes and also how many patients you want to treat with RayCare, that also affects the price. So that's the difference between RayStation, which is mainly based on the number of users. A question from another person here [indiscernible]. Could you come back on Philips discontinuation? How well are you positioned to benefit from this? Is it already visible in your order intake or should we wait until 2027? So I would say that we are very well positioned and we are focusing very hard to convert the remaining connected sites. And it's been visible, I would say, so we don't have to wait till 2027. This has been visible for a few years actually. But it's intensifying now as the clinics cannot wait until 2027. They have to work well before the New Year's Eve of 2026 so they cannot have an interruption. Oscar Bergman has asked several questions so I will go through those. Can we check that they can ask questions? For example, Kristofer has reached out. Carolina Stromlid: No. We seem to have some kind of technical issue so I think it's better to take them written. Yes, it's posted in the chat. Johan Löf: Great. So the first question from Oscar Bergman. The EBIT margin was at 27% and 31% adjusted is above your target that I had previously argued is quite conservative. Are you looking to increase your EBIT margin target now as you have done before when you have exceeded the target? Okay. I agree that it looks quite promising that we will achieve at least an EBIT margin of 25% in 2026 given the current performance. We haven't changed that. Clearly we let it stay as it is, but we will communicate new targets later on, but then that will be communicated in conjunction with the press release or report. But for now we will stick to the at least 25% EBIT margin target and we feel quite confident that we will be able to fulfill that target. Second question is end-of-life Pinnacle. Can you elaborate a bit more on the sales funnel here, specifically your market share of winning these accounts? And also what is a more realistic timeline for these centers to have finalized that transition or should we assume that some centers will still be doing this in December of next year? As I said earlier, I think they will do this well before December next year because there are few months of preparation, et cetera, when you move from 1 system to another before you can start to treat patients. I think we are well positioned. It's very hard to know exactly our share, but I think we have more than 50% of these accounts I think that we win. Number three, I understand a lot of resources are going to getting these Pinnacle clinics. Once that window is closed, how quickly can you shift going after non-Pinnacle clinics. Is there any risk of a temporary slowdown after the Pinnacle opportunity? And as I also stated before, 50% of the new sales are other sites and they are a conversion of Eclipse and Monaco. So that is already running and it varies between different markets. For example in Japan, this Pinnacle conversion has pretty much already happened there. All the new license sales are from converting other systems in Pinnacle. So yes, I don't think there will be a temporary slowdown. We are already converting at a pretty -- converting other systems at a good pace. Number four, a 96% gross margin, about 4 percentage points above the average that we had for many years. Were there any one-offs or something like that that gave this strong margin? Yes, there were 2 things that happened. There were less computers being sold through us. We do offer our customers to provide them with servers and hardware necessary to run our products and we have a decent margin on that as well. But since less of those this time in this particular quarter that helped because it's obviously a lower margin on the servers and the software. The other thing was that the deliveries to the particle centers in Asia didn't come with hardware at this point. So that also helped. So I think that's probably an unusually high gross margin. We can't expect that every quarter going forward.. Number five, the final question here. In Q2, you had received 4 new RayCare orders year-to-date and you mentioned that you expect 4 or 5 more during the second half of 2025. Can you give some update on this is the question? We achieved another 2 orders this quarter for RayCare and we will see what happens during the rest of the year. What we can say about RayCare right now is that the interest has intensified greatly and I think we'll see good orders during 2026 for RayCare. Let's see here. [ Carlos Murrian ]. When will RayCare really start to be material to license sales? Is 2025 proving demand for the product? Okay. I guess I just sort of answered that. RayCare when it really start to be material, we have to look 2, 3 years out. But then it will be I think a large revenue contributor. Okay. There is another comment here is that there is problem with the sound. They can hear analysts, but not us, which is a bit unfortunate. I have a question here from Kristofer Liljeberg. It seems it doesn't work to ask questions on the line so here are the ones from me. Number one, will you be able to track how customers are using RayStation modules during the campaign? The answer is yes. Do you expect working capital to come down again or continue to increase? Nina Grönberg: Yes, that's for me. As I also said during the presentation, it will fluctuate also going forward. But of course I see that the items that we have on the receivable side in the working capital, some of them or a big portion of them will get paid during quarter 4 and quarter 1 next year. But I mean the working capital will also be dependent on the deals or the sales that we do later on here in quarter 4. And right now I don't know how those agreements will look like. So I have no clear answer to that. It will be better I can say. Johan Löf: Kristofer's third question is high gross margin from lower hardware sales. Is it temporary or can it be start of a new trend? As I explained before, I think it's temporary. Number four, how do you view deal flow in Q4? In general, we have good momentum can answer to that. Number five, Seems on track to reach EBIT margin target for next year. How do you view investment needs after that? Okay. Number five, I think we will revise our EBIT margin targets up for the future without quantifying that. But we will reach we hope and we are quite confident that we reach the current EBIT margin target. Before that, we're going to define a new EBIT margin target maybe 3 years out. And in general, we believe that this business will be very profitable going forward. Those were all of Kristofer's questions. I can take 1 more question here. How is RayCare integration progressing with other Varian hardware? When could it be expected an integration of Halcyon? And are you working with other vendors such as Hitachi and United Imaging? That's a good question. We are having discussions with Varian on integrating RayCare also with Halcyon. It's hard to say exactly when that will be clinically available. It will be a couple of years from now, but we have very constructive and fruitful discussions with Varian on this. And then the second part of the question was are you working with other vendors such as Hitachi and United Imaging? We work with many other vendors not United Imaging, but we work with Hitachi on both their OXRAY machine and the proton machine. OXRAY is ordinary linac. They have PROBEAT, which is a proton machine. We work with LEO Cancer Care, we work with IntelliRay, we work with Accuray, we work with [indiscernible], we work with Panacea, we work with [indiscernible]. I don't know if we have mentioned LEO Cancer Care. So we are working. Within the next 12 months, there will be quite a large number of additional interoperability interfaces for new machines for RayCare and within 18 months, there will be even more. So this is progressing very well. I take 1 more question. Are there any discussions with Elekta regarding integration of RayCare? We talk to Elekta from time to time about this and we would very much like to integrate RayCare with their machines. But I cannot say anything more on that currently. Carolina Stromlid: And that concludes today's Q&A. A recording of this presentation will be available shortly on our investor website. And if you have any additional questions, you're very welcome to reach out to us. Thank you for joining us today and we look forward to seeing you again on February 12 for our year-end results. Have a great Friday. Johan Löf: Thank you. Nina Grönberg: Thank you.
Operator: Good day, and thank you for standing by. Welcome to the Pacira BioSciences Third Quarter Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Susan Mesco. Please go ahead. Susan Mesco: Thank you. Good afternoon, everyone. Welcome to today's conference call to discuss our third quarter 2025 financial results. Joining me are Frank Lee, Chief Executive Officer; Brendan Teehan, Chief Commercial Officer; and Shawn Cross, Chief Financial Officer. Jonathan Slonin, our Chief Medical Officer, is also here for our question-and-answer session. Before we begin, let me remind you that this call will include forward-looking statements subject to the safe harbor provisions of federal securities laws. Such statements represent our judgment as of today and may involve risks and uncertainties. This may cause our actual results, performance or achievements to differ materially. For information concerning risk factors that could affect the company, please refer to our filings with the SEC. These are available from the SEC or the Pacira website. Lastly, as a reminder, we will be discussing non-GAAP financial measures on today's call. A description of these metrics, along with our reconciliation to GAAP, can be found in the news release issued earlier this afternoon. With that, I will now turn the call over to Frank Lee. Frank Lee: Thank you, Susan, and good afternoon to everyone joining today's call. We're pleased to report another successful quarter of strong execution across our corporate, clinical and commercial initiatives. We're seeing top line growth accelerate with year-over-year revenues increasing by 6%, driven by a strong quarter for EXPAREL and iovera. We continue to make important progress advancing our 5x30 path to growth and value creation. To remind you, this plan supports 2 broad strategic initiatives: first, growing our best-in-class commercial-based business; and second, advancing an innovative pipeline of potentially transformative assets such as PCRX-201. Notable third quarter highlights include increasing EXPAREL demand with year-over-year volumes up approximately 9%. This is the highest quarterly growth we've seen in over 3 years and underscores the value of our commercial investments, improving manufacturing efficiencies and favorable gross margin supporting our second increase in full year guidance, significant cash flows and a strong balance sheet, enabling investments in new growth initiatives, meaningfully expanding our clinical pipeline with the in-licensing of AMT-143. This complementary long-acting non-opioid directly aligns with our 5x30 strategy and has the potential to provide longer pain relief versus currently available local analgesics. Disciplined and strategic capital deployment, including share repurchases of another $50 million. And finally, solidifying our exclusivity runway with the listing of our 21st EXPAREL patent. This now appears in the FDA's Orange Book and additional patents are forthcoming. I'll begin with a high-level overview of our commercial portfolio, where we're seeing improving trends for each of our products. For our flagship product, EXPAREL, momentum is on the rise as a result of strong execution, expanding market access, awareness and utilization. On the market access front, we continue to make important strides improving patient access to opioid-sparing pain therapies. To that end, our GPO partnerships and performance-based contracting are delivering and growing our EXPAREL user base. We continue to secure key wins with additional national and regional commercial payers now providing separate EXPAREL reimbursement. We remain ahead of plan and expect to surpass our full year goal of 100 million covered lives across commercial and government payers. Turning to Zilretta, new initiatives to better support this promotionally responsive product are underway. We're confident the foundation is in place for a return to growth. Our colleagues at Johnson & Johnson MedTech are now trained and active in the field. This partnership is a great example of 5x30 in action. We have tripled our commercial footprint, which we believe will provide a meaningful incremental growth. Lastly, iovera had a strong third quarter as a result of its dedicated sales force and other commercial investments. On the manufacturing front, the team continues to make important progress with third quarter gross margins supporting another increase in guidance. Switching gears to the pipeline. Here, we're focused on becoming the therapeutic area leader in musculoskeletal pain and adjacencies. These are large markets with high unmet need. Our clinical initiatives center around advancing an innovative pipeline along with life cycle management for our commercial base. For new product development, we're prioritizing complementary mid to late-stage derisked opportunities spanning the patient journey. PCRX-201 is a great example that's advancing in a Phase II study for osteoarthritis of the knee. Interest in this study has been high, and we recently concluded enrollment for Part A ahead of plan, placing us on track for 12-month data next year. The data continue to underscore PCR-201's potential to revolutionize OA treatment landscape and be at the forefront of local gene therapy for the masses. Last month, we presented 3-year follow-up data from the Phase I study at the American College of Rheumatology Convergence. These data demonstrated sustained efficacy with improvements in pain, stiffness and function for over 3 years. Importantly, efficacy was observed across all structural severity subgroups, including the most severe. Investigators also highlighted that pre-existing neutralizing antibodies did not affect PCR-201’s efficacy or safety at all 3 doses. Natural immune responses are a major obstacle for gene therapies, and these preliminary data indicate the potential for redosing. We also expanded our pipeline with the recent in-licensing of AMT-143, a novel long-acting formulation of bupivacaine. This asset sits squarely in our wheelhouse, given our deep expertise in long-acting locally administered pain therapeutics. This franchise-enhancing asset is highly complementary to EXPAREL and will allow us to serve a broader range of patients and health care professionals. Its innovative hydrogel technology is a proprietary combination of 2 polymers. It's easy to administer, requiring only installation into the surgical site with minimal reliance on specialized technique. The hydrogel rapidly forms a slow-release depot as it warms to body temperature. In a Phase I study, AMT-143 demonstrated sustained analgesic release through 14 days. This supports its potential for several days of pain control, which would be the longest duration among currently available local analgesics. These data, along with bupivacaine's validated mechanism of action provide an attractive development risk and differentiated product profile. We expect to initiate a Phase II program next year, which places on track for commercialization to begin within our 5x30 time frame. Given its strong commercial synergies, we expect it to be meaningfully accretive to cash flows and earnings. With respect to our HCAd-based preclinical portfolio, we prioritized 3 programs, all with disease-modifying potential in painful conditions of high unmet need. PCRX-1003 for degenerative disease, addressing a major cause of chronic back pain with few currently available effective therapies. PCRX-1002 for dry eye disease, a widespread condition where current treatments offer only temporary relief and PCRX-1001 for canine osteoarthritis, which has strong out-licensing potential for a large market lacking durable solutions. Switching gears to life cycle management. Here, we're highlighting the value of our products with real-world data. Last month, we presented 3 health economics and outcome studies at the AMCP Nexus. The use of EXPAREL was associated with reduced opioid use, lower costs and improved recovery outcomes. Our comprehensive real-world IGOR registry now has more than 3,000 OA patients enrolled. As you know, OA is a unique condition that patients live with for decades and receive a myriad of pain treatments as their disease progresses. IGOR is positioned to provide in-depth insights into the patient journey. We're capturing clinical and economic data as well as patient-reported outcomes for all 3 of our products. Its potential for meaningful evidence is better than any known OA registry of its kind. And to round out the pipeline discussion, our 2 registrational studies for Zilretta in the shoulder OA and iovera in spasticity are progressing. We expect to have interim data readouts from both studies next year. The last item I'll touch upon are the recent Paragraph IV notifications. And as you know, generic attempts are common for successful products like EXPAREL. A great deal has changed since the first genetic filer, where we had one patent at the time. Our current EXPAREL patent estate is stronger than it's ever been, and the team continues to innovate to further solidify our runway. Bottom line, any [ ANDA ] filer has a very high series of hurdles they will need to overcome to be commercially successful. We intend to vigorously protect our intellectual property and have an expert team focused on advancing our legal strategy. As for the rest of us, we're sharply focused on driving growth and remain confident EXPAREL will be a key growth driver of our success for the foreseeable future. With that, I'd like to turn the call over to Bren to share more details on our commercial performance in the third quarter. Bren? Brendan Teehan: Thank you, Frank, and good afternoon to all joining us today. I'm excited to share highlights of the terrific progress we've made over the past few months on the commercial front. Building on our first half trends, we further increased our revenue growth rate in the third quarter, driven by improving EXPAREL volume growth of roughly 9%. This is nearly 3x the first quarter volume growth rate of 3% and significantly higher than our second quarter volume growth rate of 6%. As Frank mentioned, this underscores the value of our commercial investments and positions us for significant and sustainable revenues going forward. We're seeing continued momentum from leading indicators as we head into year-end. These data reinforce our confidence that EXPAREL will be a key driver of our 5x30 objective of 5-year double-digit CAGR for revenue. I'll start with market access, where we continue to reshape the value story for our customers. In addition to clinical value, our accounts consider market access for their specific patient population when making treatment decisions. Here, we're using real-world evidence to highlight EXPAREL's clinical and economic value to national, regional and local commercial plans. We're excited to report that we continue to track ahead of plan and are maintaining an accelerated pace, expanding our commercial coverage map with NOPAIN like policies covering EXPAREL outside of the surgical bundle. We currently estimate that approximately 60 million commercial lives now have access to EXPAREL via the separate reimbursement mechanism. This places us ahead of plan with a total covered population of nearly 90 million lives across both commercial and government payers. As we build this critical mass of coverage, we're communicating these advances to our customers and are very encouraged to see them expanding EXPAREL utilization as evidenced by our growth. Our access efforts continue to be strategic, focusing on key markets with high procedural volumes. We have prioritized our top 5 states, which collectively account for approximately 40% of EXPAREL volumes, where we are steadily expanding coverage. Access here is increasing utilization with third quarter volumes up more than 10% collectively in these markets. Coupled with this progress, we continue to see strong and growing utilization of the EXPAREL J-code for both commercial and Medicare claims. We're also expanding access through compelling strategic pricing programs. Through these preferential pricing programs, health care systems for the opportunity to be at the forefront of opioid-sparing pain management. Our pricing strategy is having a positive impact with our contracted business delivering year-over-year volume growth in the low teens. We expect volumes to improve over time with only a modest impact on net sales dollars. On the GPO front, our third partnership went live in June and is off to an excellent start. Since launch, we have seen significant growth in volumes from accounts within this network, exceeding our forecast. With our 3 GPO networks and individual agreements with health care systems, more than 90% of our EXPAREL business has contracted pricing. Importantly, these are performance-based and designed to maintain and grow both volumes and revenues. In addition to providing our customers with favorable pricing, we are assisting patients in new ways with our recently launched patient assistant programs to further support best practice patient care. Our support specialists are helping qualified patients overcome financial and administrative barriers, minimizing patient out-of-pocket costs. All of these programs have created market access that is more favorable than it has ever been with more key milestones on the horizon for all 3 of our products. Given our strong progress on the market access front, we believe the time is right to mobilize patients to ask for EXPAREL to be part of their treatment plan for postsurgical pain. We rolled out several targeted digital pilot programs in the first half of the year to advance patient and physician awareness and engagement. We're seeing encouraging early signs from these campaigns. Since launch, overall EXPAREL website traffic is up more than 70% across both consumer and health care provider platforms. This is an excellent indicator that our refreshed marketing approach is resonating. Importantly, patient and caregiver awareness, coupled with improved access is translating into real-world volume growth for EXPAREL. Looking at the sites of care, we continue to see strong adoption in ambulatory surgery centers with this setting delivering third quarter volumes up more than 25% over last year. As you know, decision-making in these settings is more streamlined, enabling faster adoption to take advantage of the new reimbursement policies. In the hospital setting, year-over-year volume growth has improved from mid-single digit to a high single-digit percentage. As expected, faster adoption is taking place within community hospitals, where we saw third quarter volume growth in the low teens. Switching gears to our other commercial products. For Zilretta, we're currently expanding our reach through our new partnership with J&J MedTech. In addition, we've rolled out key programs to expand utilization, including our new patient support hub and co-pay assistance programs as well as performance-based agreements with our top customers. We believe these will help meaningfully overcome barriers to Zilretta utilization. For iovera, our sales force realignment is kicking in, and we are seeing a small but growing uplift from the [ MEDEO ] branch launch and improving reimbursement from NOPAIN. We are also ramping up reimbursement training and launching additional customer-facing materials around our new patient services hub. In summary, we believe we are well positioned for a strong finish to 2025 with improving growth ahead. I will turn the call over to Shawn for his review of the financials. Shawn Cross: Thank you, Bren. I'll start with an update on sales and margin trends. Third quarter EXPAREL sales increased to $139.9 million versus $132.0 million in 2024. Volume growth of 9% was partially offset by a shift in vial mix and discounting from our third GPO going live with each having a roughly equal impact. As Bren mentioned, third quarter volumes within this network were ahead of plan, which resulted in a slightly higher-than-expected single-digit year-over-year impact to our net selling price. As we move forward into 2026, we expect volume growth and revenue growth to converge over time as we anniversary these 3-year agreements. Third quarter Zilretta sales were $29.0 million versus $28.4 million in 2024. Looking ahead with our new partnership with J&J and other commercial investments, we believe the stage is set for improving growth. For iovera, third quarter sales grew to $6.5 million versus $5.7 million in 2024. Turning to gross margins. On a consolidated basis, our third quarter non-GAAP gross margin improved to 82% versus 78% last year. Gross margins continue to benefit from the improved cost and efficiencies of our large-scale EXPAREL manufacturing suites. For non-GAAP R&D expense, the third quarter increased to $22.5 million from $17.3 million reported last year. This increase relates to strong enrollment in Part A of our Phase II study, PCRX-201 as well as expenses associated with the Zilretta and iovera registrational studies. Non-GAAP SG&A expense came in at $81.7 million for the third quarter, which is up from $65 million last year. This increase is largely due to investments in our commercial, medical and market access organization, targeted marketing initiatives and field force expansion. All of this resulted in another quarter of significant adjusted EBITDA of $49.4 million for the third quarter. As for the balance sheet, we continue to operate from a position of strength. We ended the quarter with cash and investments of approximately $246 million. With a business that is producing significant operating cash flow, we are well equipped to advance our 5x30 strategy and create shareholder value. We continue to take a disciplined approach to capital allocation where we're focusing on 3 areas: first, accelerating growth of our best-in-class base business; second, advancing an innovative pipeline and becoming the leader in musculoskeletal pain and adjacencies; and third, opportunistically returning capital to shareholders. During the third quarter, we executed an additional $50 million in share repurchases and retired approximately 2 million shares of common stock. To remind you, we have approximately $200 million remaining under our current share buyback authorization, which runs through the end of 2026. We will continue to be opportunistic with stock repurchases given what we believe is a significant disconnect in our market valuation. As we execute 5x30, we expect to prioritize accretive opportunities that benefit operating margins to enhance shareholder value. That brings us to our full year P&L guidance for 2025. Today, we are increasing our guidance for non-GAAP gross margins to 80% to 82% from our previous range of 78% to 80%. 2025 margins benefited from increased manufacturing efficiencies, favorable production volumes and the elimination of our EXPAREL royalty obligation. For all other guidance, we are narrowing our full year ranges as follows: revenues of $725 million to $735 million. While EXPAREL and iovera had a strong uptick in the third quarter as expected, Zilretta's acceleration has been slower than anticipated. Non-GAAP R&D expense of $95 million to $105 million, non-GAAP SG&A expense of $310 million to $320 million, stock-based compensation of $56 million to $59 million. And lastly, for those modeling adjusted EBITDA, we expect our full year 2025 depreciation and amortization expense to be approximately $30 million. Looking ahead, we expect sustainable and significant earnings driven by improving sales, enhanced gross margins and stabilizing operating expenses. In addition, opportunistic stock repurchases and reduction in share count will further enhance EPS. So with that, I'll turn the call back to Frank. Frank Lee: Thank you, Shawn. In closing, I want to thank our entire team for their strong execution, advancing our 5x30 strategy and dedication to the patients we serve. I'm proud of the significant strides we've made this year across our corporate, clinical and commercial objectives. Looking ahead, we believe we're well positioned for sustainable success and significant value creation. Thank you again for joining us today and for your continued support of our important mission. With that, we're ready to open up the call for questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Les Sulewski from Truist. Leszek Sulewski: So in the prepared remarks, you commented that the GPO had a higher volume than expected, which pulled down the ASP. How much of that total volume growth was tied to that GPO? And then second, was there anything noteworthy about the difference in the number of selling days in the quarter? And could you share any metrics around average volumes per day? And then I have a follow-up. Frank Lee: Les, this is Frank. Thanks for the question. Yes, we had strong uptake from the GPO that we signed in June. That's a favorable thing. And so as we anniversary that, that will flow through the system in Shawn mentioned the gap between volume is very strong, as you heard, 9% and sales will start to close as we get into next year. So Shawn, I don't know if you want to say anything more. Shawn Cross: I completely agree. We anticipate them narrowing over time, and we're feeling good about the volume trajectory. Frank Lee: Les, you had another question, remind me the second question? Leszek Sulewski: Yes. The second day was around the selling days in the quarter, any potential impact from that and metrics around average volumes per day. Frank Lee: [ No ] So let's just come back to -- it's an important point overall about as we now think about, as you heard, the volume growth of EXPAREL going from 3% to 6% to 9% and as we get into next year and flow through these GPO agreements. And of course, there will be -- we'll take price at some point. This will all add up into dollar sales that are running more at double digits as we had talked about. So we're encouraged that the second half is starting to turn out the way we start to articulate that at the beginning of the year in terms of growth accelerating in the second half. Leszek Sulewski: Okay. Okay. That's helpful. And just one last one for me, and I'll jump in the queue. What's the rationale [ between ] the AMT-143 program? And then how do you think about the trial design, specifically which pain indications would you pursue? And how do you envision the label ultimately to look like? Will it be indication specific or broad based on your design? And then thoughts around the IP protection around this technology given the compound is generic. Frank Lee: That's a good question. So I'm going to come back to our thinking around how we think about building our pipeline in a disciplined manner. We are certainly well, I would say, from a capability standpoint, well versed in developing products like this. We think there's a place in the market for a product that has longer durability and ease of use, that is installation as opposed to any other method that requires technique and so that's the rationale behind it. We think there's a place in the market. We think it's complementary to EXPAREL. And of course, we have the infrastructure in place, so it will be highly synergistic. When it comes to our development programs, it's early to say, Les, we need to work through this. But my sense of it is that we'll be very consistent with the way that we've built other programs in the past, and we'll provide more light on in terms of specific trial design as we get into next year. So that's broadly what it is. In terms of IP, I believe you can speak to that, AMT-143. Brendan Teehan: Sure. The IP goes out to [ 2042 ]. They have a solid state, and we're going to look to expand upon that. Frank Lee: Yes. Jonathan, anything more on your end? Jonathan Slonin: I agree with you, Frank. opportunity here to provide another non-opioid pain solution. And so we're excited about the potential of this asset. Operator: The next question comes from the line of Gary Nachman with Raymond James. Gary Nachman: So where are you in terms of improving awareness of NOPAIN with the bigger hospitals? Where are you seeing the bigger challenges in getting faster adoption there? And when will that accelerate? Will it be next year potentially? And then what was the overall market growth for elective procedures in the third quarter? And maybe what you're seeing, how that's trending in the fourth quarter so far? Frank Lee: Yes. Thanks for the question, Gary. Let me say a few words, and I'll turn it over to Bren for any of his comments. Just to set the stage, I think we've been very consistent in saying that we've seen a good growth uptake when it comes to the smaller hospitals and ASCs. And these bigger institutions will take more time because it's obviously more decision-makers and of course, they have to implement this into their overall system. So it will take some more time. There's clearly an effort behind it. But let me turn it over to Bren for any additional thoughts here. Bren? Brendan Teehan: Yes, for sure. Thanks for the question. I think we are seeing increased awareness for NOPAIN. And I would reference a couple of our prepared comments. Obviously, where there are fewer decision-makers in ASCs and community hospitals, that's where we have our fastest growth. But we've also seen improvement in the larger and broader hospital segment. And despite the fact that there are more decision-makers, we are seeing formulary and P&T decisions in favor of EXPAREL that would be reflective of an audience that's not only taking into account NOPAIN, but are starting to see the significant commercial wins that we have along the way. And it is one of our key commercial initiatives to make sure that we're engaging more of those economic stakeholders, particularly pharmacists and the C-suite, so they have a broader understanding of not only the reimbursement that's being generated, but the potential for EXPAREL, not just clinically but from a profitability standpoint to be of value to the IDN. Frank Lee: And Gary, you had asked about procedures overall, the market-- and from what we've seen, maybe, Brendan, you can comment on that a little bit. Brendan Teehan: For sure. The first half of the year, elective procedures were sluggish, even a little bit down. Having looked at the data in the third quarter, I would say there are modest improvements, but not monumental. And certainly, I think EXPAREL's performance in terms of continuing to drive increased volumes are despite what I would consider to be sluggish or somewhat headwinds in that space. Fourth quarter to be determined, but I would say that fourth quarter, we tend to see more elective procedures simply as a function of seasonality. Gary Nachman: Okay. Great. And then just a couple more quick ones. Just any early indicators for how the J&J partnership is helping Zilretta so far? When do you expect to see somewhat of an inflection there in sales? I know it's still early days and probably didn't see much of an impact in the third quarter, but could it be as early as 4Q or it's going to take more time? And then just on the gross margin, should that continue to improve next year from the 80% to 82% level that you're at right now? Frank Lee: Gary, with regard to Zilretta, I'll just say a few words here and turn it over to Bren. Just a big picture, as Shawn mentioned, we're very pleased with the way that now EXPAREL has grown and also now iovera with this new dedicated field force it's taken a little bit more time to get Zilretta where it needs to be. And when you take a look at our numbers, that's really what was flat instead of growing. So with that said, let me turn it over to Bren for any other thoughts here about how we're going to maximize J&J MedTech partnership. Brendan Teehan: Yes. Thanks, and thanks for the question. I would say 2 things have been important changes in the third quarter. Obviously, we have a dedicated Zilretta sales force. In doing so, they have an expanded footprint and are engaging a number of customers that for that singular group will be first-time customers. And I think that's just a little bit of disruption you would have expected in the third quarter. Also, the J&J MedTech team was fully trained in the third quarter, but that's a good way to describe it, trained and not yet fully out there to see the entire footprint that we have an opportunity to address. So I expect us to begin to see further momentum in the fourth quarter and then significant progress in 2026 as we see a larger audience multiple times with our message. And I would say that Zilretta fits very nicely into the J&J story of the osteoarthritis of the knee treatment journey, and there are a lot of market dynamics that would help us to incorporate Zilretta logically into that treatment journey. Frank Lee: Thanks, Bren. And for the question, Gary, about gross margin, certainly, we're very pleased with the progress we've made. And I think your question was how we see that going forward. And so let me turn it over to Shawn here. Shawn Cross: Yes. Thanks, Gary. So maybe just a step back from a big picture, the guidance we put out for goals we put out from a long-range plan perspective are in our 5x30, which is the 5 percentage point improvement over the 2024 margin. And just as a reminder, the non-GAAP was 76%. So that's the big picture. So just with regard to the performance we've seen this year, first of all, terrific execution by the team and better-than-expected yields from both the 200-liter facilities. So these higher volumes, simple math have resulted in lower per unit costs that have benefited the margins this year. So inventory target is 6 months. We're a little bit ahead of that. We're selling through the lower cost inventory. And so going forward, as the production volumes normalize, we expect to be back on track for our 5x30 plan for a 5% point steady improvement in gross margins over 2024, 76%. Gary Nachman: Okay. That sounds great. So you should at least be in that level looking out into next year, it sounds like. Frank Lee: Bottom line, inventory levels are higher this year, Gary. And so per unit, the margin is better. Next year, as we work it down, it will be slightly less favorable, but then we'll come back to that favorability probably in the second half of the year as we work through the inventory. Operator: The next question comes from Dennis Ding with Jefferies. Dennis Ding: I have 2, if I may. Number one is on BD. Should we expect more deals like [ Amicathera ], i.e., things that seem fairly early? Or do you plan to do more of these types of Phase I deals or can you be more opportunistic and bring something that's in Phase III or even commercial? And then number two, just on PCRX-201, I know you referenced docs who are excited about 201. But what about feedback from docs who aren't as excited? What's the major barrier there? Is it just data? Or do you think there's broader skepticism around gene therapy, especially in the ortho community who may be unfamiliar with the modality? Frank Lee: Thanks for the question, Dennis. First on BD and then on 201, I'll say a few words and turn it over to Jonathan. BD, as we've talked about, we're going to take a very, very disciplined approach to BD. And so that means that these are things that fit into the broadly defined musculoskeletal pain and adjacencies. And certainly, AMT-143 fits into that. As we look at assets, certainly, we favor those assets that are further along in the clinic that have validated mechanisms of action. And so we're not going to take target risk. And so those are some of the guideposts, so to speak, as we think about bringing things into the pipeline. And so we remain open to those kind of opportunities, and we're going to look at those very, very carefully in a disciplined way and bring in those things where we can really add value to those programs. With respect to 201, what I'd say there is, overall, I believe we've seen very good enthusiasm for PCRX-201. And so let me turn it over to Jonathan to have his thoughts. He's been the recent meetings, et cetera. Jonathan Slonin: Yes. All the feedback has been extremely positive and exciting. To your point, I think we continue as we do education and address some of the misnomers around what our platform is compared to current gene therapy. And we explain the benefits around the safety, the cost, the flexibility because of the payload size, it becomes very favorable, not just over current treatment options, which we see lasting maybe 3 to 6 months. And our research shows that patients just aren't happy, and that's all they have. So once we explain to them the benefits of 201 in that we're not giving you a drug produced in a factory, but we're just helping your body cells become that factory and the safety that we've seen so far in our clinical trials, the first question is usually like when can I get this? So we are very optimistic moving forward with 201 and excited that Part A of Phase II enrolled ahead of schedule for us. Frank Lee: Yes. Thanks, Jonathan. Look, I'd summarize it as this is gene therapy for the masses. And so when we come from that line of thinking, that opens up people's minds this opportunity because the way we do that is by, as you know, a local approach as opposed to systemic and that has obviously favorability when it comes to safety and cost of goods and all the things that Jonathan talked about. So we remain optimistic. We're running the Part B and manufacturing process will -- from a commercially viable standpoint is well underway. And so we've got good momentum on this one. Operator: The next question comes from the line of Serge Belanger with Needham & Co. John Gionco: This is John on for Serge today. Just a couple from us. First, I wanted to touch on the shift in bio mix and discounting associated with the latest GPO that came on board in June. Curious if you could provide any color on the level of discounting that you've seen thus far and when you'd expect pricing to stabilize? And then second, on the in-licensing from for AMT-143. Just curious how you view 143's profile in comparison to EXPAREL? And with the potential of [ bohooan ] being on the market down the line, how would you view the future commercial dynamics between the two. Frank Lee: Yes. So thanks for the question, John. Let me answer the AMT-143 a little bit more, and then I'll turn it over to Shawn to talk about [ volume mix ] and GPOs and [ anniversarying ] that last one. What I'd say is that when we take a look at the marketplace, of course, currently available therapies and analgesics are in the range of what we provide for EXPAREL, 3 or 4 days, et cetera. Now we think there is a place in the market for longer durability of effect. And also in those situations where there might not be an ability to bring in other specialists that the surgeon himself can instill this particular product. And so we think it's complementary to what we have. And so that's how we think about it. Certainly, we've got a little ways to go to get this program to market, and we'll be starting our Phase II program as we talk about next year. But there's clearly a market need for something like this. So let me turn it over to Shawn here to talk about [ volume mix ] GPO. Shawn Cross: Great. John, thanks for the call. So just to reiterate from the prepared remarks, we saw the 9% encouraging volume growth for EXPAREL with a 6% growth on the revenue side. And that 3% delta, as mentioned, was roughly 50-50 split between the volume mix towards the 10 ml and then the impact of the GPO discounting. So we can't talk about specific discounts with regard to the GPOs. But as we move forward, we would expect the fourth quarter to be somewhat similar. But then encouragingly, and we'll talk more about this when we put out 2026 guidance. But as we move forward into '26 and beyond, we do expect volume and revenue growth to converge over time. And there's a couple of key things just to remember. Let's just assume we continue to drive volume at the current levels or even a bit higher, if all goes as planned, January price increase. And then once we do lap the third GPO agreement, which is performing quite well in mid next year, that's when we expect the convergence to sort of hit its stride. Operator: I'm showing no further questions at this time. I would now like to turn it back to Susan Mesco for closing remarks. Susan Mesco: Thank you, Jill, and thanks to all on the call for your questions and time today. We're energized by the opportunities ahead and remain focused on executing our 5x30 growth strategy with discipline and purpose. As we close out the year, we are confident in our ability to build on our momentum and position Pacira for long-term success. Thank you again for your continued support and be well. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good morning, ladies and gentlemen. Welcome to the Dream Office REIT Q3 2025 Conference Call for Friday, November 7, 2025. During this call, management of Dream Office REIT may make statements containing forward-looking information within the meaning of applicable securities legislation. Forward-looking information is based on a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond Dream Office REIT's control that could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking information. Additional information about these assumptions and risks and uncertainties is contained in Dream Office REIT's filings with securities regulators, including its latest Annual Information Form and MD&A. These filings are also available on Dream Office REIT's website at www.dreamofficereit.ca. [Operator Instructions] Your host for today will be Mr. Michael Cooper, Chair and CEO of Dream Office REIT. Mr. Cooper, please go ahead. Michael J. Cooper: Thank you very much, operator, and good morning to everybody, and thank you for joining our call. This morning, we're here once again with Jay Jiang, the CFO; and Gord Wadley, our Chief Operating Officer. We think the third quarter was a pretty significant quarter for Dream Office. We have been able to secure high-quality tenants and are filling up a lot of vacant spaces as we turn over some of our weaker tenants. We've seen a much stronger leasing market. And we hope that over the next couple of quarters, some of the tenants that are committed and not in place will take possession and we'll continue to lease more space. I think the most interesting number is, excluding 74 Victoria, which the federal government vacated at the end of last year, the rest of our downtown Toronto portfolio is now over 90% committed. And we can identify many vacant spaces that are quite leasable, and we expect to make progress throughout the balance of this year and into 2026. So we're feeling pretty good about the shape we're in. With some of the large deals that we've done, getting long-term leases with stable tenants, we have given up some occupancy to make space for them, and Gord will go over that in more detail. But generally, we're seeing the demand for space to be increasing. We see a lot more people back to work. And the market seems to be getting a little bit stronger, and we expect to see that continue throughout the next few quarters. So with that, I'll turn it over to the team to make their prepared comments. Gordon Wadley: Well, that's great. Thanks very much, Michael. Good morning. I hope everyone is keeping well. As always, it's really nice to get a chance to connect with you all today and share some of the work that our team has been doing year-to-date. I also look forward to taking the opportunity to share some of our priorities to close out 2025, as well as key milestones regarding our asset strategies, operating performance and leasing. We remain very committed and I would say, laser-focused on leasing up and improving the quality of our assets despite operating in a challenging environment for the sector. For the last 2 years, we've continued to see very steady and measured growth across the portfolio. As a management team, we've been very consistent in the messaging where we'd say there would be incremental net absorption quarter-over-quarter, and we've been very hypersensitive in identifying and managing risks well in advance to mitigate any material drop in income or committed occupancy. This approach has yielded another consecutive quarter where we've seen committed occupancy growth directly in line with the guidance we shared throughout the year. For Dream Office, leasing continues to actually be quite resilient. We've done over 630,000 square feet of gross leasing year-to-date, and that's made up of 110 deals across the portfolio. More specifically, in Toronto, we've done 520,000 square feet completed across 92 deals. And of that, 252,000 square feet were new leases and 270,000 square feet were renewals. We are in advanced negotiations on another 60,000 square feet of deals, which would bring our annual total, just from Toronto, to 580,000 square feet. For context for everybody, the 3-year average annual leasing volume in Toronto was about 530,000 square feet. This puts us on track to exceed this level in 2025 with even fewer assets. For the 252,000 square feet of new leasing, NERs are outperforming the business plan at about $18 a square foot versus $15. This outperformance is driven by longer WALTs, which allow higher TI and LC costs to be amortized over the extended terms. The average new lease term is 8.5 years versus 5 years what we had in the budget, reducing effective cost to $11 a square foot per year versus $16 a square foot per year. While net rents remain in line with our guidance and top of the market for their respective classes in the mid-30s. For the 267,000 square feet of renewals, NERs are in line with guidance, even with a few large deals executed at lower NERs to accommodate certain blend and extends and protect occupancy. Most notably, IFDS at 30 Adelaide to accommodate a large new tenant at 30 Adelaide to backfill the space we got back. On the balance of the renewals, we've seen improved performance with the weighted average NERs kind of low to mid-20s when you exclude those big blend and extends. To quickly touch on other markets, year-to-date, we've completed 110,000 feet of leasing across 21 deals in Western Canada, including 23,000 square feet of new leasing across 10 deals and 87,000 square feet of renewals across 11 deals. We are well in line with our 3-year average annual leasing volume in other markets or Western Canada. Deal velocity and absorption and committed occupancy is honestly what I get asked the most about by investors, analysts and researchers. I want to give you all some very important context. Our best year of total leasing was 2023, where we did approximately 604,000 square feet gross. And subsequently, the best year of leasing volume, the number of deals that we did was 2024, where we did 104 deals. We're quite pleased year-to-date that we've eclipsed total square footage leased already with 630,000 square feet and total deal volume with over 110 transactions. We still have another quarter to go. We have consistently said our goal is to get incrementally better each quarter, and we have from an occupancy -- committed occupancy perspective quarter-over-quarter since 2023. A big catalyst for our absorption has been our model suite program. Since 2024, we built out 26 model modified suites across 120,000 square feet of vacancy in the portfolio. By being proactive and investing the capital and improving space to attract move-in-ready tenants, we've leased 20 of the 26 spaces for 85,000 square feet. We're also conditional on another 3 for an additional 15,000 feet, which would be 101,000 of the 121,000 or approximately 90% of the units. This summer, many of you might remember, but we had a slide at our AGM that illustrated the growth in occupancy on our Bay Street Collection assets. In Q2 2024, we are at 72% occupancy. We showed that to close out Q1 2025, we were up almost 400 basis points to 76%. And now with our model suite deals completed on Bay Street and the 2 conditional deals we have in the pipeline, we're up another 500 basis points to 81%, just on the Bay Street Collection. As such, we're pretty pleased to see some steady growth in committed occupancy since Q1 2024 in that specific note. Over the course of the year, we have consistently worked and guided our committed occupancy to be in the high 80s, the mid- to high 80s to close out 2025. We're well on pace to achieve this and feel confident to reach about 86.5%, supported by deals signed this year on vacant space with future commitments. A great example is our largest asset at Adelaide Place. Currently, it has 78.5% in-place occupancy. I'm pleased to share that we've done significant leasing in that asset the last 12 months to the tune of 220,000 square feet, bringing our committed -- not our in-place, but our committed occupancy to 95.7%. These deals, while not immediately contributing to NOI, we'll see our NOI go from $15.5 million to just over $18 million in the next year at AP alone. This derisks and anchors the portfolio by being a large fully leased asset with strong steady cash flow, great covenants, long term. Going asset by asset, when you drill down a little further, if you net out our largest single exposure being the remaining vacancy that we had at 74 Victoria, our committed occupancy for the portfolio, as Michael said, is about 90%. As a quick reminder, we had PSPC informed us just over 18 months ago that they were leaving the building in full, giving us 200,000 square feet of vacancy. Since then, we've secured 70,000 square feet direct with PSPC. We completed another deal for 44,000 square feet, and we have a very active prospect in advanced negotiations for another 25,000 square feet. That would take us to over 130,000 square feet of the vacancy that we had received just over a year ago. We had about 187,000 square feet of expiries this year, of which 91,000 square feet are renewals, and it got us to a renewal ratio over the year of about 48.7% year-to-date. What I would like everybody to know is, on top of that, we did another 40,000 square feet of new leasing on that exact same expiring space in advance of them vacating this year, which gets us to 74% coverage on units that are expiring. Ultimately, the management team feels quite good going into 2026 and carrying on the momentum as the Toronto portfolio has about 340,000 square feet of expiries next year. Of these, about 40% are addressed net of known vacates, we only have about another 110,000 square feet of unaddressed expiries. When you look at the deal velocity and absorption we've had over the years, it's quite manageable. Of this 110,000 square feet, we currently have proposals with about 76,000 square feet. So we feel like we're in good shape on addressing year-over-year rollover and more importantly, backfilling space as it comes up. And we've got a track record of doing that over the course of the past 18 months. In closing, our Q3 results reflect the strength and resilience of Dream's Office strategy and execution. Despite ongoing sector challenges, we've tried to be transparent and share with everyone our guidance and really work towards the guidance and do what we say we're going to do. Our team's proactive approach to leasing, risk management and asset quality has delivered consistent growth in occupancy and net absorption. Our Toronto and other markets are outperforming historical averages to date over the last 5 years. Our model suite program and targeted investments continue to attract high-quality tenants while our disciplined management of renewals and backfilling expiries position us to achieve our committed occupancy targets for year-end and beyond. As we look ahead to 2026, we remain very confident in our ability to sustain this momentum, drive portfolio stability and create long-term value for our stakeholders. Thank you to our team for all their efforts and continued commitment, and thanks to you all online for your continued support and interest. I'll now turn it over to my good friend and CFO, Jay Jiang. Jay Jiang: Thank you, Gord. Good morning, everyone. Today, I'll walk you through our third quarter financial results and share our outlook for the rest of the year. Please note, we'll provide formal guidance for 2026 during our fourth quarter conference call in February. This quarter, our diluted funds from operations were $0.60 per unit, matching both our internal expectations and with year-to-date FFO at $1.90 per unit, we're on track to be within the range of guidance we provided on our August conference call. Compared to last year's third quarter, FFO per unit declined $0.17 per unit. The decline was largely driven by the sale of 438 University, the sale of our vendor take-back mortgage in Calgary and 5.9 million units of Dream Industrial REIT. The cumulative impact of these asset sales reduced our FFO by approximately $0.19. These dispositions brought in approximately $180 million of cash proceeds, which we used to repay mortgages and credit facility, which improved our debt-to-gross book value by 280 basis points. At an estimated cost of debt of 5%, we saved approximately $0.11 for the quarter by reducing debt. So the net FFO dilution is approximately $0.08 in exchange for $180 million of debt reduction, improved liquidity and a safer balance sheet. Note that on a cash basis, impact is further reduced by additional $0.03 because the cash distribution forgone on the Dream Industrial REIT units sold is $0.05 versus $0.08 of FFO. Year-over-year, the weighted average interest on our total debt balance increased by approximately 23 basis points. FFO declined $0.06 due to refinancing mortgages at a higher interest rate environment and drawing on our revolver to fund some of our larger long-term lease completed this year to improve committed occupancy. Year-over-year comparative net operating income from our income portfolio was flat for the quarter despite losing $2 million of NOI at 74 Victoria from the federal government expiry. We were able to offset this decline with increased NOI at Adelaide Place, 36 Toronto and 30 Adelaide. Our year-over-year straight-line rent reduced by approximately $0.05 as in the prior year, there were 2 larger tenants that began operations in their premise prior to economic commencement of the lease. Those tenants are now paying contractual rents. We are up $0.03 on the completed development and rent commencement of 366 Bay and down $0.01 on taking 606-4th Avenue in Calgary into development and terminating some of the in-place leases. We're pleased with the progress of our 2 properties under development at 606-4th in Calgary and 67 Richmond in Toronto. Once stabilized, these 2 projects are expected to contribute over $4 million in annual NOI at our share or roughly $0.20 per unit. Other items, including the elimination of previously accrued tenant liabilities and expenses that are no longer required and higher property management expenses offset to 0. Year-over-year, our debt-to-gross book value increased 130 basis points to 53.2% as a result of fair value declines in the income portfolio. Over the past 12 months, the weighted average cap rate of our income portfolio increased from 5.72% to 6.15%. Our debt over trailing 12-month EBITDA improved to 11.4x versus 11.7x on a comparative basis. Currently, there is approximately 450 basis points of spread between our in-place and committed occupancy, which represents approximately $6.7 million of annualized EBITDA, of which $1.7 million comes online at the end of 2025, $4.2 million over the course of 2026 and the remaining $0.8 million in 2027. Once the leases take commencement and we continue to improve our occupancy, we expect our EBITDA to grow and improve our leverage ratios over time. On the financing front, we've already addressed all $741 million of our 2025 debt maturities, which represented 53% of our total debt stack. We've already actively begun to work on $166 million of debt maturities for next year and are confident in our ability to secure favorable terms and higher refinancing balances and maturity. This quarter, we repaid our $8.7 million of mortgages on 606-4th Avenue and then sold 50% of our interest in the project to Pomerleau Capital. Having Pomerleau as a partner in this project makes strategic sense for us as they are one of Canada's largest construction companies and their wholly owned subsidiary, ITC Construction Group, will be the construction manager. In addition, we were able to reduce development risk and repatriate $15.3 million of proceeds to reduce our own debt. Construction is already underway, and we anticipate completion in the fall of 2027 with stabilization by mid-2028. On stabilization, we anticipate that the asset will produce approximately $3.6 million of NOI at a development yield of approximately 5.6%, including land at 100%. We closed on the ACLP loan for $64 million for a term of 10 years at a rate of 3.3%. So the project yield provides an attractive spread of 230 basis points to the cost of borrowing. In addition, we have also worked with 9,000 square feet of tenants to relocate them into our adjacent building at 444-7th. This relocation improved occupancy at 444-7th by 340 basis points. We're overall pleased to have obtained a creative solution that helps us reduce risk, improve liquidity and enhance income and value in our remaining property in an otherwise very challenging office market in Calgary. At 12800 Foster Street, Overland Park, our existing lease with U.S. Bank concludes in November 2025, and we have listed the asset for sale earlier this year. We have received expressions of interest from prospective buyers and are negotiating with them on the sale. We are targeting a transaction in early 2026, and we will provide more information on pricing and timing as we make more progress. On our August conference call, we provided updated guidance of between $2.40 to $2.45 per unit and annual comparative property NOI to be relatively flat to slightly positive for 2025. We are still on track with that guidance to close off the year. Our business planning process is scheduled for December, and we'll provide 2026 guidance during our February call. We believe our portfolio is well positioned for growth in income and value, especially if the downtown Toronto market continues to improve. With that, thank you. And now I'll turn the call back to Michael for Q&A. Michael J. Cooper: Thanks, Jay. Thanks, Gord. And operator, at this time, we'd be happy to answer questions. Operator: [Operator Instructions] Your first question comes from Sairam Srinivas with Cormark Securities. Sairam Srinivas: Gord, this one is probably for you. When you look at the demand that's kind of come up in September across Bay Street, is that more specifically for a certain kind of flow plate? Or is that generally across-the-board where people really need space now and are willing to actually come to smaller plates? Gordon Wadley: Yes. Good question. It's a combination of both. So we're catching a lot of tenants that are in around the 3,000 to 5,000 square foot range that are looking at our Bay Street Collection. And the bulk of the tours, I mentioned are model suites. So they're really kind of coveting improved suites that are move-in ready. And we're starting to see for the first time, a few kind of start-ups dip their toe in the water, but the profile is mostly still professional services firms. Deals we're doing are with money managers, law firms, people that kind of covet having a Bay Street address, but it's in about the 3,000 to 5,000 square foot range we're seeing the most velocity of tours. Sairam Srinivas: That makes sense. And probably looking at 74 Victoria and considering the leasing you guys have done to date on that space and what's remaining out there, is there something that stands out in the space that remains that makes it may be less or more challenging to kind of lease out? And is that something which should probably meet the current requirement out there? Gordon Wadley: Yes. I'm glad you brought it up. So 74 Victoria would be, by any class considered almost a typical government building, like a low B, C class type building. We expect some capital to redo the common areas, which has attracted more tours and help the deal velocity. We just finished the lobby renovation. We've done 2 floors into high-quality model suites that really show what the potential is. But the difficulty with that building is that, it is an old building. It's a large footprint. And as such, it kind of caters to a bit of a submarket in Toronto that has less velocity than the Class AAA or the A class market. It's almost a tale of 2 buildings. Like if you look at Adelaide, for example, our committed occupancy is almost 96%. And if you look at 74 Victoria, a different class of asset, well located. It caters to a different group where you're seeing less velocity of tours and interest. Michael J. Cooper: We might a little bit more positive on 74 Victoria. It's in an incredible location. The floor plates are big, and it probably is good for larger tenants that are looking to have a decent space that is very cost friendly. And I think there's a fair amount of tenants like that. We got a lot of space back last year. We're making progress leasing it. And I think we'll continue to do fairly well leasing that building over the next 24 months. Gord, how long would you budget it to re-lease the space at the federal government left at the end of last year? Gordon Wadley: We put that just about 2 years, Michael. Michael J. Cooper: Yes. So I think like when you have such a big change to a building, it does take time to backfill. And I think we're doing pretty good. So I'm pretty impressed with how well that's going. Sairam Srinivas: That's great. Maybe just looking at the assets out here, I look at the list of assets here right here, 36 Toronto, 330 Bay and 250 Dundas. One thing that's common between all 3 is the in-place committed right now is around between 70% and 75% right there. When you think about these assets and the demand, like do we feel that in the next 12 to 24 months, we'll probably see incremental flow of leases out here? Gordon Wadley: Yes. So 330 Bay -- sorry, Michael. I was just going to go through each of the assets you asked questions on. So 330 Bay, we've seen a real velocity in tours. We've actually done quite a bit of leasing in the building that has forward commitments. So we're quite optimistic about it. 350 Bay, I think, was the other building you mentioned and 250 Dundas. 250 Dundas is a site, I'll let Jay talk about, but it's a site that's a redevelopment site for us. So we've just been holding on to in-place tenants for cash flow purposes. And then on 350 Bay, we had a low in-place occupancy there. But on that building, I don't want to give too much forward-looking information. We're getting pretty close on a deal that would take the occupancy to almost 100%. And we're hoping that deal will be done by the end of the year. Operator: [Operator Instructions] This concludes -- my apologies. We have a question from Anish Thapar with Scotiabank. Anish Thapar: So my first question is, is the impact of the return to work policies on the market vacancy consistent with the prior expectations of 6 to 12 months? Michael J. Cooper: Generally, I think so. We're pretty impressed with how many people are coming back to work and how various governments and banks have been encouraged back to work. But Gord, do you want to go in a bit more detail? Gordon Wadley: Yes. I think really the only group that is trailing back to work is the government. I think the banks that we have in our buildings, they've been communicating with us. They're in at least 4 days a week. The provincial government, they're in 5 days a week. Municipality is starting to come back, but it's just the federal government that hasn't quite landed on a return-to-work program. We're seeing a lot of our private sector tenants. I'd say the vast majority are now in 5 days a week in some capacity. So my personal observation is I feel like everybody's return to work is normalized, saving except the federal government. Anish Thapar: All right. So what's the breadth of the tenant demand right now in Toronto today by category? Is it like majority by banks? Or is it diversified with other industries as well? Gordon Wadley: Good question. So our portfolio, it's all -- the majority are kind of like low-rise buildings, smaller floor plates. So we see quite a mix of tenants through. We're seeing a lot of professional services firms come through. We're starting to see more consulting firms to our buildings. And I think if you read the budget and some of the infrastructure that's coming out with the Fed, a lot of these consulting firms are tying their interest to different provincial and federal government contracts. So we're starting to see some consulting firms come through. The provincial government is very active in space accommodations. They're out looking at vacancies as well as other buildings. And then I'd say, predominantly -- and the other thing we're seeing, too, is I mentioned it before on the first caller is, we're starting to see some more start-up interest, which we haven't seen over the last little while, a lot of tech start-ups have been touring some of our smaller units. And what's appealing to them is, we've got some growth potential in the portfolio as well. So when we speak to them, we say, look, you may be 2,000 today, but let's stay in touch, let's communicate and let's see if we can grow you organically. And then we just kind of show them examples of how we've done it. And it helped us strike a few deals, which is great. Anish Thapar: Nice. Good to know. My next question will be on the NERs. So what kind of trends are you seeing on the NERs on smaller that is like less than 10,000 square feet and the larger deals? Gordon Wadley: Yes. So for net effective rents, I mentioned on new deals, we're doing better than we had budgeted. We're seeing kind of high-teens, low-20s. We were seeing a real aversion to term lengths the last few years, but this has kind of changed. We've been able -- I think you could see in our stats, our WALTs have gone up as well, too. So that's helped net effective rents get stronger. We have more time to amortize the cost. So on new deals, we're in and around high-teens, low-20s. Our renewals were brought down a little bit this past quarter just because we did some blend and extends. And on these blend and extends, we put some costs in to attract and retain some of our largest tenants. We were successful in doing it, but it did cost us some free rent and some TIs to do so. The other thing that's contributing to NERs, and I'm not complaining about it because it's a necessary function in the market is leasing commissions for brokers have more than doubled over the last 2 years. So the whole market is susceptible to that, and that contributes to NER compression as well. Anish Thapar: All right. Makes sense. Just the last one. So do you see any incremental pickup in the Toronto office buyer sentiment? And how should we think about your disposition plans for 2026? Michael J. Cooper: That's a great question. I think that there's definitely a better mood around office. There was a recent transaction that closed at 70 York. And that was interesting because that was somebody buying an office building as an office building as most of the trades over the last few years have been buying office buildings to use this institutional quality. So we think it's marginally getting better, but it's not very deep. So I think that will take some more time, but there's definitely more people who are getting educated on it, studying the market. So we'll see what happens. Anish Thapar: All right. And any disposition plans for 2026? Can you give any color on that? Michael J. Cooper: Well, I think that in the other category, I think that Jay mentioned our Kansas City asset. If we can, we might lighten up there a little bit. In Toronto, we really like what we have. We may sell a building, but I don't think we're intending to sell much in Toronto over the foreseeable future. Operator: This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Cooper for closing remarks. Michael J. Cooper: Thank you very much, operator. I just want to close with a little retrospective. For those who may not recall, at our year-end for 2015 in February 2016, we announced that we were concerned about suburban assets and some other assets, and we were going to sell a lot of assets and buy back stock. So between 2016 and 2019, we sold 38 of 40 buildings in Alberta. We sold 142 buildings in total. We reduced the size of the REIT from $7.2 billion by 60%. We bought back about 60% of the stock. And by the time we got to 2019, we were in great shape. There was like less than 3% vacancy in Toronto, rents were very high, buildings were full competition for space. And then we woke up at the beginning of this decade with COVID and people not being able to go to the buildings. And that was a total shock. Work from home was something that was really a fringe item before that. And it's basically been one thing after another with inflation going up, interest rates going up, uncertainty around policies with the U.S. and elsewhere. And we're going into 2026, which is actually the seventh year of this decade. So there's no doubt it's been a tough sector to be in office. But we're pleased with the budget. We're pleased this morning, there was just a bunch of new jobs created in Canada. The unemployment rate went down. It's a relatively mixed environment, but we think that there's becoming more confidence. So the question was, is it just banks that are expanding? Well, they definitely are expanding as they bring tenants back, but we're seeing with the budget and the incentives in it. We expect that there's going to be more and more businesses taking chances and growing. And we think things look more positive than they have for a while. But that doesn't mean that we don't -- that we're not fully aware of just how difficult it's been to be in the office sector for the last 6 or 7 years. So I think we're quite optimistic for what's going forward. I think we're through a lot of the difficult times. We've made huge adjustments, but continues the way it's been for the next couple of quarters will be good. But there's no quick fixes, but we're pleased with the progress we're making. So I guess that's my summary. It's a little bit -- it's just like what we've been doing in the last decade. And we're hoping now we're through most of the difficult times and things are getting better. With that, I'd like to thank the listeners. And please know that Gord, Jay and I are available at any time to answer any more of your questions. Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
Operator: Welcome to Onex' Third Quarter 2025 Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the conference over to Jill Homenuk, Managing Director, Shareholder Relations and Communications at Onex. Please go ahead. Jill Homenuk: Thank you. Good morning, everyone, and thanks for joining us. We're broadcasting this call on our website. Hosting the call today are Bobby Le Blanc, Onex' Chief Executive Officer; and Chris Govan, our Chief Financial Officer. Earlier this morning, we issued our third quarter 2025 press release, MD&A and consolidated financial statements, which are available on the Shareholders section of our website and have also been filed on SEDAR. Our supplemental information package is also available on our website. As a reminder, all references to dollar amounts on this call are in U.S., unless otherwise stated. I must also point everyone to our webcast presentation for our usual disclaimer and cautionary factors relating to any forward-looking statements contained in today's presentation and remarks. With that, I'll now turn the call over to Bobby. Robert LeBlanc: Good morning, everyone. Before providing my comments on the quarter, I wanted to provide some thoughts on our pending acquisition of Convex and new strategic relationship with AIG. These transactions are a transformational step forward for Onex with the potential to meaningfully enhance long-term shareholder value. Since becoming CEO, one of my main priorities, beyond optimizing the business and focusing on those areas where we have a right to compete, has been to identify opportunities to deploy our balance sheet to create enterprise value. I truly believe these relationships with Convex and AIG, 2 industry-leading organizations that are well aligned with our own culture and principles, is one of these opportunities. In Convex, we are not only acquiring an outstanding organization and proven leader in the insurance industry, we are strategically and intentionally leaning into a business and ecosystem that we know extremely well and where we have been able to generate outsized returns. In just 6 years from its inception, the business has delivered well beyond expectations and still has excellent growth prospects. Further, the informational advantage we have built up related to Convex puts us in a far superior position, with much lower risk than if we were acquiring a business we didn't know as well. What Stephen Catlin and Paul Brand have achieved to date with Convex is truly remarkable. We'd like to thank Stephen and Paul and the rest of the employees at Convex for their efforts and results. They are one of the most talented teams in the industry and we're delighted to remain their long-term partners. In addition to the strength of the team, Convex has built a differentiated underwriting platform, one that has grown gross written premium by 22% annually since 2022. Profitability has also improved steadily with recent combined ratios in the high 80s to low 90s as the business continues to scale into its expense base. Convex has also demonstrated prudent underwriting and has had consistent favorable prior-year reserve development since 2022. Importantly, it carries no legacy insurance liabilities having been established as a de novo insurer in 2019 with the support of Onex and our LPs. Convex' efficient cost structure with no legacy technology burden and a focus on outsourcing noncore functions should allow for meaningful incremental operating leverage as the business continues to grow. As we highlighted in the investor presentation available on our website, Convex' key performance indicators clearly position it ahead of its peers, particularly on an organic growth basis. At our entry price of 1.9x Q3 tangible book value, we see meaningful upside as Convex continues to compound tangible book value through disciplined underwriting and retained earnings. As we have consistently outlined to our shareholders, we only want to deploy capital in areas where Onex has deep domain expertise and a clear right to compete. We've spent decades building experience and relationships across the insurance sector, and Convex is a great example of our deep domain expertise. Owning a property casualty insurer gives us 2 powerful engines of value creation. First, from through-cycle underwriting profits, which can be reinvested back into the business or become available for future dividend distribution. Second, as Convex' investment portfolio, which is currently around $8 billion, grows, allocation to alternative assets will grow with it, which will include Onex' own private equity and credit funds. This should drive incremental AUM growth and fee-related earnings for our asset management business. While the P&C market is not immune to cyclicality, we're comfortable with that risk given we expect to be a long-term owner of the business and Convex is still in the early stage of its growth trajectory. The business has significant opportunity to capture additional market share, underpinned by its high-quality relationships and reputations with brokers and clients. The combination of best-in-class growth and high-quality underwriting should allow Convex to compound its equity value at attractive rates through the cycle. We see that growth as a meaningful driver of Onex' future shareholder returns and a key contributor to the ongoing expansion of our net asset value over time. Turning to AIG's investment. This new relationship with one of the world's largest and most sophisticated insurance companies is an incredibly positive development for Onex. Their $2 billion commitment to our private equity and credit funds will contribute an incremental $15 million to $20 million of fee-related earnings, more than offsetting the impact of dilution. Moreover, this opens the door to a number of other benefits, including the potential to collaborate on future investments and a range of other initiatives that could prove significant over time. Overall, our relationship with AIG not only reflects a shared perspective on both the upfront value and long-term prospects of Convex, but is also an endorsement of the Onex platform and our ability to create future shareholder value. Across our existing businesses, we are also thinking strategically about how to best enhance enterprise value. Upon closing, Convex will account for 42% of our balance sheet. With the remaining $5 billion of investing capital, we will continue to grow it and deploy it through 2 key areas. First, by allocating up to 10% per fund into our own strategies while relying increasingly on third-party fundraising to scale FG AUM and related FRE. Second, by pursuing direct on-balance sheet investments. These would be in areas where we have a clear right to compete, but with differing risk-adjusted return, holding period and leverage parameters so as not to conflict with OP and ONCAP opportunities. Added to this will be a continued focus on growing fee-related earnings. We have made significant gains on FRE throughout 2025 in large part due to the work of our credit team, and we are now positioned to exit the year with a positive total FRE run rate that is ahead of plan. This growth will be accelerated by AIG's commitment to our alternative asset strategies as well as the addition of future investment into these strategies by Convex. As we work towards our objective of closing the transaction in the first quarter of 2026, we will keep shareholders updated on key developments and we'll continue to look for opportunities to provide the appropriate information to understand and value this transaction, including why we believe Convex deserves to be recognized at a premium valuation within our overall NAV. And now a few comments on the quarter. Again, credit continues to outperform our expectations this year, led by the ongoing momentum in structured credit. The team priced 22 CLO transactions through October, raising or extending $10.7 billion of fee-generating assets across our structured credit and tactical allocation platforms. The performance of our CLO portfolio continues to be top tier across important risk metrics. Our private equity teams continue to be active in Q3 with both realizations and deployments, ensuring that we continue to return capital to our limited partners while putting new investment money to work on opportunities that align with our chosen sectors. Onex Partners announced a sale of approximately 55% of its investment in OneDigital, in a transaction that values the business at more than $7 billion, which was completed at a valuation almost on top of our Q2 mark. In addition, we successfully closed the sale of our 25% stake in WestJet at more than a 40% premium to our mark. Including these 2 transactions and pro forma for the closing of the Convex transaction, Onex Partners V will have reached DPI of 0.7x, a strong achievement relative to the average DPI of comparable funds in this vintage. Following the sale of Precision Concepts in Q2, the ONCAP team successfully closed their sixth investment in Fund V, which is now approximately 50% invested. On the human capital front, we announced that Meg McClellan will join Onex as our new CFO following Chris' decision to step down from the role he has held since 2015. We are looking forward to welcoming Meg, who will assume the CFO responsibilities following our year-end call. I'm pleased that Chris has agreed to stay on in a leadership capacity to help ensure a smooth transition and provide continued guidance and support. I also want to acknowledge Tawfiq Popatia's confirmation as Head of Onex Partners. Tawfiq has always shown great leadership and strong investment acumen and is a true ambassador of the Onex culture and entrepreneurial spirit. Finally, I want to thank everyone for their condolences and support following Nigel Wright's passing. Onex lost a friend and colleague. Nigel was a gentleman in the truest sense of the word. I'll now turn it over to Chris. Christopher Govan: Thanks, Bobby, and good morning, everyone. While most of my remarks will focus on our results for the quarter, I'll also take some time to address some financial aspects of our acquisition of Convex and relationship with AIG. So let's start with our investing segment. Onex ended Q3 with investing capital per share of $121.61, up slightly from Q2 and representing a return of 7% for the first 9 months of the year. The 5-year CAGR on investing capital per share is 13%, just below our target range. Our PE portfolio was up slightly during the quarter. While Onex Partners V, the Onex Partners Opportunities Fund and ONCAP IV continued to generate positive returns across a broad range of their portfolio companies, these gains were mostly offset by losses in Onex Partners IV. As Bobby said, it was an active period for our PE teams on both realizations and deployments. In September, Onex Partners V announced the sale of 55% of its investment in OneDigital, which is expected to close later this year. We also had 2 partial exits closed since Q2: ONCAP IV's sale of approximately 80% of its interest in Precision Concepts International and OP V's sale of 25% of its stake in WestJet to a consortium of leading global airlines. The combined proceeds to Onex from these realizations will be approximately $360 million. It is worth noting that the last 13 realizations across our PE platform, dating back to 2022, have been completed at attractive values relative to their prior quarter's mark. In fact, only 1 was executed below the prior quarter's mark, and in that case, at only a 3% discount, and 5 were done at premiums of 15% or more including the recent partial sale of WestJet at a 40% premium. On the new investment front, in September, the Onex Partners Opportunities Fund announced the acquisition of Integrated Specialty Coverages or ISC. The company is a technology-enabled insurance platform that fits well within the portfolio, with our long history of successfully investing across the entire property and casualty insurance value chain, particularly in founder-led businesses like ISC. And in October, ONCAP V announced an investment in CSN Collision, a leading network of collision repair centers. As some of you will recall, ONCAP has experience investing in this industry having previously owned Caliber Collision, an investment that generated a 7.5x multiple of capital to Onex Corporation. Both the Opportunities Fund and ONCAP V are off to strong starts with investment pace on target. On the asset management side of the business, Onex ended the quarter with $42 billion of fee-generating AUM, with private equity and credit increasing by approximately 22% and 18%, respectively, during the year. The increases primarily reflect the earlier commitments made to ONCAP V and the Onex Partners Opportunities Fund, as well as the issuance of new CLOs. The asset management segment generated earnings of $20 million in Q3, of which $11 million was fee-related earnings from the PE and credit platforms. After factoring in the costs associated with managing Onex Corporation's capital and maintaining the public company, total firm-wide FRE was $1 million for the quarter and year-to-date. Credit continues its strong FRE trajectory, with an end-of-quarter run rate of $50 million. By year-end, we expect this run rate to increase to approximately $60 million, exceeding our 2023 Investor Day target. With credit FRE ahead of plan, we also expect to exit 2025 with positive firm-wide run rate FRE. As we noted in the presentation we posted last week, our forecast is to exit 2025 with firm-wide run rate FRE of approximately $17 million based on Q4 FG AUM initiatives in process. And this is before any of the benefit that we'll accrue from the $2 billion of allocations to our alternative asset strategies from AIG. At this point, we're estimating incremental FRE of $15 million to $20 million on this $2 billion of AUM. And we'd expect an increased allocation of capital from Convex to Onex strategies to be additive here. The actual FRE impact will depend on the strategies to which AIG and Convex ultimately allocate capital. But in all cases, we expect a very high conversion of management fees to FRE. As we've discussed before, we're at a point in both PE and credit where the infrastructure can manage incremental capital with very little in the way of additional costs. As the capital from AIG and Convex gets allocated, we'll continue to update our run rate FRE reporting to reflect the actual benefit. Now turning to Convex and AIG. As Bobby said, we think this is a terrific evolution of Onex, and we're confident it will allow us to accelerate enterprise value creation for the benefit of shareholders. I thought it would be helpful for me to add some color around the funding of the transaction and Onex' go-forward liquidity. Onex' funding could be affected by further PE realization and investment activities between now and closing. But at the moment, we expect our $3.8 billion investment in Convex to be funded by a combination of $1.5 billion of cash from our balance sheet, a $1 billion draw on the new NAV loan facility, rolling over our existing $700 million investment in Convex, including carried interest, and finally, approximately $600 million from the issuance of Onex shares to AIG. After factoring in cash flows from PE transactions we've already announced, we expect to have approximately $300 million of cash on Onex' balance sheet at close. In addition, Onex will have $200 million of undrawn capacity on the NAV loan. We're very comfortable that $500 million of liquidity is sufficient in the near term. And if you look out over the next 1 to 2 years, we expect Onex to generate meaningful additional liquidity, mainly from net PE realizations. As I mentioned, we expect to generate positive overall FRE going forward. And our credit business will continue to grow without the need for meaningful net new allocations of Onex capital. So that leaves our PE investing as the key driver of medium-term liquidity. Ignoring Convex, Onex has approximately $5 billion of PE investments in the ground, relative to only $750 million of unfunded PE capital commitments, of which only $400 million are to fund in their commitment period. So with that ratio, we expect meaningful net realizations from PE will allow Onex to pay down the NAV loan in relatively short order. Overall, the acquisition of Convex and strategic relationship with AIG position Onex to create long-term enterprise value. In one fell swoop, we're better leveraging our balance sheet to reduce the historic cash drag, allocating about 40% of our investing capital to an investment we know really well that will compound value over the long term, and paving the way for strong growth in FRE by demonstrating our commitment to an asset-lighter model and securing significant new AUM from AIG and Convex. That concludes the prepared remarks. We'll now be happy to take any questions. Operator: Certainly. And our first question for today comes from the line of Bart Dziarski from -- research analyst. Bart Dziarski: Great. It's RBC Capital Markets. Wanted to ask around the -- with the AIG new partnership, Bobby, would love your thoughts in terms of how you're thinking about this having the impact around fundraising. Does it change any of the outlook in terms of OP VI timing, sizing, et cetera? Robert LeBlanc: Yes. So look, I think having an organization like AIG look at where we brought our asset management business to over the last couple of years and want to invest in Onex Corp., it's a really strong endorsement. And I think it's only additive or a positive for fundraising going forward. I don't think it impacts timing of our fundraisers coming up for OP, ONCAP or credit. Specifically for OP, I would still target sort of mid-2026 as a fundraising launch date. And again, Chris mentioned it, the 0.7x DPI is a very significant stat for that platform, and it looks very, very good relative to other PE firms in that vintage. Bart Dziarski: Okay. And could you remind us, like what percentage of the fund are you in OP V? And would that be a similar percentage for OP VI that Onex invests in? Or are you thinking maybe more capital-light direction where you'd be a lower percentage of that fund? Robert LeBlanc: Yes. So for OP V, we were $2 billion, of about $7 billion. And again, we expect to be up to 10% of our various funds going forward. So it will be a much more capital-light model, if you will, from Onex Corporation's perspective and balance sheet perspective. Bart Dziarski: Okay. Great. And the last one for me is, we're hearing lots around the kind of this private credit narrative within alternative asset managers. I would love your thoughts around are you seeing anything in your portfolio? Maybe walk us through how you differentiate in terms of origination to protect the book. Any thoughts there on private credit? Robert LeBlanc: Yes. So private credit has had a couple of big blow-ups over the last couple of months. I'm happy to report that our credit team had no exposure to those blow-ups. I think Ronnie and the team have a "protect the downside" mentality. And when they see problems come up, not in those particular names, because we weren't in those names, but they tend to move very quickly when they see a problem and not wait for the problem to get confirmed. So I don't think it's systematic on what we're seeing. I think there were reasons why those credits went bad from governance, control and other reasons. But from our own portfolio, we haven't been in any of those to date, which I give again the credit team a lot of kudos for. Operator: And our next question comes from the line of Graham Ryding from TD Securities. Graham Ryding: Can you just talk about the strategic shift underway here with this Convex acquisition? So if we look out over the next 1 to 3 years and you are successful in monetizing some of your existing PE co-investments, should we expect a similar strategy going forward where you make some further concentrated investments in sort of majority type positions? And if so, what's the right mix? How many of these would you think would be the right mix to sit within your NAV? Robert LeBlanc: Yes. So again, just to step back a bit, but I'll answer that specific question, there's really 3 things that I'd like our shareholders and fellow owners to focus on in the near term. First is the acquisition of Convex, we'll own 63% of it on the balance sheet. And again, we have controlled that company for 6 years, so the informational advantage that we had going in, in terms of doing 6 years of due diligence, essentially, and the fact that AIG invested more than $2 billion in the Convex at the valuation that we had, makes me feel very good. At least initially, right? That part of our NAV ought to be looked at very differently than our NAV has been looked at going -- historically, sorry. On the asset management side, I think it's nothing but positive to have AIG and incrementally more Convex dollars coming in, I think, is going to help our PE platform, is going to help our subscale credit products that I've been talking about wanting to get the profitability to get outsized FRE growth. And just the endorsement of those organizations on our overall platform, I think, is going to be a net positive for fundraising. But you point out a very important third leg of the strategy, and that's as we become more of an asset-lighter model in terms of Onex Corp.'s balance sheet commitment to our various products, there is an opportunity, and I use the word opportunity, to redeploy, or reorient is a word I like to use, that $5 billion of capital into Convex-like transaction, that will -- my goal would be that would make perfect sense to our fellow owners in terms of where we have a demonstrated right to compete as that capital gets deployed. But think about it in terms of lower to no leverage like a Convex. It could be a junior security, it could be a control position. But we'll have enough influence in whatever we're doing to make sure that we have the ability to explain it well to our shareholders. And importantly, you're going to much, much more transparency around those types of investments. You'll notice what we put up on our website in terms of the transparency around Convex and all the financial metrics that one looks at to evaluate a company like that, you'll see that for anything that we do on the balance sheet, so again, so our fellow owners will know how to value the pieces. But I see it being very concentrated, just so you understand, maybe 1 or 2 other ones. Insurance obviously is a very natural one for you to think about. But there's other things that we really have done remarkably well over the years that we would be open to as well. But it will not be something opportunistic that isn't one of our demonstrated areas to have the right to compete. Graham Ryding: Okay. Great. And you talked about having a 6-year sort of due diligence period here on Convex. Going forward, would it make sense for you to follow a similar pattern here and look closely at your existing portfolio companies as likely candidates for further kind of concentrated investments? Robert LeBlanc: Yes. The one thing that made Convex different, because it was a de novo, it really was never a leveraged buyout, even though it had a PE return for Onex and our LPs. I think it will be very difficult for me to do a traditional PE-type deal with a huge chunk of our capital, i.e., something I need to do 5x leverage or something like that to get the appropriate return. So I see -- I don't see immediate opportunities where the next one would come from that set of opportunities, but I would never close my mind to it because you never know. Graham Ryding: Okay. Understood. On the FRE side, Chris, I just want to make sure I'm understanding the guidance correctly here. You talked about in your presentation last week of a $17 million overall FRE run rate as you exit 2025. Should I be -- or should we be expecting sort of Q4 25 FRE annualized to be $17 million? Or is it more like Q1 2026 annualized? Christopher Govan: Yes. No, not Q4, because it is a run rate calculation so there's always a little bit of a lag effect. Just -- so I would think you'd probably see us grow into that on an annualized basis, probably more in Q2 when the stuff -- the capital we raise between now and the end of the year is kind of fully online and fully fee-paying. Robert LeBlanc: And Chris, just -- sorry, shareholders, just define run rate and what it actually means, so people truly understand it. Christopher Govan: Sure. What -- in a lot of cases, when we raise capital and start earning management fees, there's just a lag associated with when the management fees actually kick in versus when the capital is allocated or invested. So we're simply looking at our fees -- or excuse me, our FG AUM that's sort of in the house and in the ground, and calculating what the management fees are on that capital sort of on a fully deployed basis. And then we also obviously just look at our expense base sort of as where we are at that point in time given what we need to spend to manage the capital that we're calculating the fees on. So it's a bit of a forward-looking calculation as opposed to backwards-looking calculation. Graham Ryding: Okay. And essentially, by Q2 2026 then, not Q4 2025, you're expecting to be delivering kind of a $4 million plus FRE in the quarter? Christopher Govan: That would make sense. But again, the run rate will again have probably grown from annualized $17 million to something much better than that at the end of Q2. But yes, I think in terms of actual reported in the period, that would be a pretty good estimate. Graham Ryding: Okay. Understood. And then my last one, if I could, just fundraising on the credit side. I always find it a little bit confusing when you make reference to sort of extended AUM and new AUM. Can you give us a bit of an update on what's the sort of new AUM fundraising in the quarter and year-to-date on the credit side? Christopher Govan: Sure. Let me just get that data pulled up for you. Robert LeBlanc: While he's looking for that, they're also having really good success on OSCO II, which is our structured credit fund; ONCAP, which is our dynamic credit fund; and again, the high yield and senior credit. The fundraising for credit has been pretty good across the board. But Chris, go ahead if you have those answers. Christopher Govan: Yes. So across credit through the end of Q3, FG AUM -- new FG AUM raised was, call it, just over $5 billion in the year. Operator: Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Bobby Le Blanc for any further remarks. Robert LeBlanc: Thank you for your time today. We are truly excited about the strategic steps we made last week with the acquisition of Convex and the new partnership with AIG. We look forward to having a dialogue with you in the coming months to answer any of your questions and make sure you fully understand exactly how we're thinking about Onex going forward. But we think it's a very exciting time. Have a great weekend, everybody. Thanks. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Operator: Good morning, and thank you for standing by. My name is Ludy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Silvercorp's Second Quarter Fiscal 2026 Financial Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Lon Shaver, President of Silvercorp. Please go ahead. Lon Shaver: Thank you, Ludy. On behalf of Silvercorp, I'd like to welcome everyone to this call to discuss our second quarter fiscal 2026 financial results. They were released yesterday after the market closed and a copy of our news release, MD&A and financial statements are available on our website and SEDAR+. Before we get going, please note that certain statements on today's call will contain forward-looking information within the meaning of securities laws. And also please review the cautionary statements in our news release as well as the risk factors described in our most recent regulatory filings. So let's kick off the call with our financial results. We delivered more solid performance in Q2 highlighted by our revenues of $83 million, which was up 23% from last year and marks the second highest quarter ever. Additionally, cash flow from operating activities was $39 million, and that was up 69% from last year. This performance was mainly driven by a 28% and 37% rise in the realized selling prices for silver and gold compared to last year. Also notably, the amount of gold sold in the quarter was up 64% compared to last year. Silver remains our most significant revenue contributor at approximately 67% of net Q2 revenue, followed by lead at 16% and gold at 7%. Moving down the income statement. We reported net income of negative $11.5 million for the quarter or negative $0.05 per share. This is down from positive $17.8 million or $0.09 a share in Q2 of fiscal 2025. However, this quarter had a significant $53 million noncash charge on the fair value of derivative liabilities, which was partially offset by a $22 million gain on investments. Removing noncash and onetime items such as this, our adjusted net income for the quarter was $22.6 million or $0.10 a share versus $17.7 million or $0.09 a share in the comparative quarter. Note that the average shares outstanding used to calculate EPS this quarter was 218.6 million compared to 206.5 million in the same period last year. On the capital spending side, we invested nearly $16 million at our operations in China and $11 million in Ecuador during the quarter. We generated $11 million in free cash flow for the quarter, which supported our strong closing cash position of $382 million. This cash position does not include our investments in associates and other companies, which had a total market value of $180 million on September 30. And after quarter end, we participated in New Pacific Metals equity financing and acquired an additional 3 million common shares for roughly $7.8 million. Also, subsequent to quarter end, in October, we made the first draw on our $175.5 million Wheaton Precious Metals streaming facility for the El Domo project. We drew down the first $43.9 million tranche, which will be used to fund our ongoing construction at El Domo. Now to just quickly recap our operating results. As we reported last month, in Q2, we produced approximately 1.7 million ounces of silver, just over 2,000 ounces of gold, 14 million pounds of lead and 6 million pounds of zinc. Silver production was essentially flat, but gold production was up 76%. So silver equivalent production, considering just the silver and gold was up 5%. Lead production was up 8% and zinc production was down 3%. Production at Ying was impacted by the temporary closure of certain mining areas, which have since reopened. We expect to mine approximately 346,000 tonnes of ore in this current quarter Q3 compared to the 265,000 tonnes mined in Q2. At the GC mine, production in Q2 was interrupted for about 10 days by Typhoon Ragasa. Year-to-date, we have produced 3.5 million ounces of silver, 4,135 ounces of gold, 30 million pounds of lead and 11 million pounds of zinc, which represents increases relative to last year of 3%, 78% and 4%, respectively, in silver, gold and lead production and an 11% decrease in zinc production. On the cost side, Q2 production costs averaged $83 per tonne at Ying which was down 11% from last year. The improvement reflects greater use of shrinkage stoping over the more labor-intensive cut-and-fill resuing method along with higher ore throughput. Year-to-date production costs also averaged $83 per tonne, which was below the Ying annual guidance of between $87 to $88 per tonne. Ying's cash cost per ounce of silver net of byproduct credits was $0.97 in Q2 compared to $0.62 in the prior year quarter. The increase was driven by a $4 million increase in production costs due to 26% more ore being processed, while silver production grew by only 1% as shrinkage mining tends to have higher dilution rates. This was partially offset by a $3 million increase in byproduct credits. Q2 all-in sustaining cost per ounce net of byproduct credits was $11.75 at Ying, up 30% from the prior year quarter due to a $1.4 million increase in mineral rights royalties following its implementation in China in Q3 of fiscal 2025. A $2.6 million increase in sustaining CapEx and those previously mentioned factors that impacted cash costs. Overall, for the operations, consolidated mining operating income came at $40.8 million in Q2, with Ying contributing $38 million of that or over 93% of the total. Turning to our growth projects. At Ying, we invested $6 million in the quarter for ramp and tunnel development to enhance underground access and increased material handling capabilities. This work goes hand-in-hand with our efforts to expand mining capacity across the 4 licenses at Ying. Recall that last year, the SGX mine permit was renewed for another 11 years with capacity increase to 500,000 tonnes per year. The HPG permit was also renewed and expanded to 120,000 tonnes and the DCG permit was increased to 100,000 tonnes. We're now in the process of applying to increase the TLP LM permit to 600,000 tonnes per year with approval expected later this quarter. Once all approvals are in place, Ying's total permitted annual mining capacity will rise to 1.32 million tonnes from approximately 1 million tonnes currently. At Kuanping, that's the satellite project north of Ying, mine construction continued with 831 meters of [ ramp ] development and 613 meters of exploration tunnelling completed in this quarter. Kuanping has a mining permit to produce 200,000 tonnes per year, which at a full contribution, would bring our total mining capacity at Ying up to 1.52 million tonnes per year. Switching to Ecuador. Construction at the El Domo project is moving ahead steadily. In Q2, around 1.29 million cubic meters of material work cut for site preparation. Roads and channels, and that was a roughly 250% increase over the previous quarter. A 481-bed construction camp has been completed and work on the tailings storage facility began in September. For the 6 months ended September 30, approximately 1.66 million cubic meters of material were cut or removed, and $14.6 million of expenditures were capitalized. Contracts for 4 sections of the external power line have been awarded to qualified Ecuadorian contractors, pending review by the state power distributor, CNEL. Additionally, orders for equipment with a total value of $22.2 million have been placed. Overall, since January of this year, approximately $18.9 million has been spent on capital expenditures and prepayments for equipment purchases related to El Domo. At the Condor Gold project, we kicked off the [ PEA ] for an underground gold operation and expect to complete this study before the end of the year. As a reminder, at Condor, our plan is to construct 2 exploration tunnels into the deposits, which will allow us to conduct underground detailed drilling. In order to do this, we required environmental license and water permits. The studies to support these applications have been ongoing over the year. And during the quarter, we submitted our application for the water permits. The application is now pending final approval. We have submitted our application for the environmental license, and it is under review by the relevant authorities. And with those updates, I'd like to open the call for questions. Operator: [Operator Instructions] With that, our first question comes from the line of Joseph Reagor with ROTH Capital Partners. Joseph Reagor: I guess first thing on El Domo, the guide for CapEx compared to what you spent year-to-date, is it a matter of -- there's a big lift coming here soon or some long lead items that you guys have to pay for? Or is it -- are things maybe tracking a little slower than anticipated as far as capital spending goes? Lon Shaver: I was probably tracking a little slower initially. We began construction this year focusing on earthworks, and it was clearly a wetter year than Ecuador has experienced in past rainy seasons. But I think we've ramped up significantly here in recent months as indicated by the results that we published this quarter. And going forward, we should be able to provide an update on our construction progress this quarter, particularly as we are looking to execute the contract for bid package #2 in due course. And that's obviously the contract associated with stripping of the open pit and actually mining of the deposit. And we'll be in the position here shortly to share results from the metallurgical testing program that we've undertaken this year. So we expect to have an update prior to year-end where we can bring all these items forward and provide any updates. Joseph Reagor: Okay. And also on El Domo with the Wheaton drawdown, I think initially, when you guys made the acquisition, there was some thought that there was a potential to maybe buy that stream out or not use it in some way, but now you've drawn down on it. Does that just reflect that there was no way to really negotiate out of it given gold and silver prices have moved so positively since it was signed? Lon Shaver: Well, I think your last comment really indicates what we'd be dealing with to renegotiate. There was contractually an opportunity to adjust the stream at the time of the acquisition. It didn't make sense at the time, and it still doesn't make sense based off of those numbers. What might be available to negotiate with Wheaton, I can't comment on. You'd have to speak to them as well in terms of what their expectations are based on the contract that they entered into with Adventus. Joseph Reagor: Okay. Fair enough. And then just on guidance, it sounds like you guys are expecting a pretty strong catch-up quarter at Ying in Q3 and that, that will get you back in line with guidance, whereas if you were operating at normal rates, you'd kind of be tracking a little below after the Q2, let's call it, issue for lack of a better word. Lon Shaver: Yes. I mean, clearly, Ying is a mine in transition as we look to increase mechanization, we've certainly been demonstrating other than the temporary setback in this last quarter, the ability to generate tonnes. So that has been ramping up nicely. Also, we've been able to deliver more tonnes and produce more gold. So that is a bit of a shift in the profile. But whether we're able to make up for what was missed in so far this year, a little early to tell. I think it will depend on our ability to run at those expanded rates, great profile going forward and also Q4, just -- last year, we had some excess tonnes and we had a brand-new mill with excess capacity to work through those. So it kind of remains to be seen what we can push through in Q4 to get away from what has seasonally been a slower quarter. So still a bit early to tell. But as you point out, we're in a bit of a catch-up mode here. Operator: [Operator Instructions] And we have no further questions at this time. I would like to turn it back to Lon Shaver for closing remarks. Lon Shaver: Okay. Well, great. Thanks, operator, and thanks, everyone, for joining us today. If anyone does have any further questions after the call, please feel free to reach out by calling or e-mailing us. We look forward to hearing from you, and we look forward to catching up to discuss the results of our third quarter. Thanks, everyone, and have a great day. Operator: And ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.
Operator: Good day, ladies and gentlemen, and welcome to the Galiano Gold, Inc. Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Friday, November 7, 2025. I would now like to turn the conference over to Matt Badylak, President and CEO of Galiano Gold. Please go ahead. Matt Badylak: Thank you, operator, and good morning, everyone. We appreciate you taking time to join us on the call today to review Galiano Gold's third quarter results that we released yesterday after market close. On Slide 2, we'll be making forward-looking statements and referring to non-IFRS measures during the call. Please refer to the cautionary notes and risk disclosures in our most recent MD&A as well as this slide of the webcast presentation. Yesterday's release details our third quarter financial and operating results. They should be read in conjunction with our third quarter financial statements and MD&A available on our website and filed on SEDAR+ and EDGAR. Also, please bear in mind that all dollar amounts mentioned in the conference call are in U.S. dollars unless otherwise noted. On Slide 4, with me on the call today, I have Michael Cardinaels, our Chief Operating Officer; Matt Freeman, our Chief Financial Officer; and Chris Pettman, our Vice President, Exploration. For this presentation, I will initially provide a brief overview of the quarter, Michael will give an operations update. Matt will discuss the financials, and then Chris will review the ongoing exploration success his team is having at Abore. I'll then provide some closing remarks and open the call for Q&A. Here on Slide 5, we can see the team continued the momentum during the third quarter towards an improved overall operational outlook. Let me walk you through the highlights on this slide. Safety remains a top priority. I am proud to report that, again, no lost time injuries were reported for Q3, maintaining a strong safety record and demonstrating our unwavering commitment to our workforce. Turning to production. We produced just over 32,000 ounces of gold in Q3, up 7% from 30,000 ounces produced in Q2. This increase was driven by higher grades and increased throughput quarter-on-quarter following the commissioning of the secondary crusher in late July. From a financial perspective, Revenue came in at $114 million, up 17% quarter-over-quarter from $97 million. This was driven by higher production and improved gold prices. Our balance sheet remains solid. We ended the quarter with $116 million in cash and cash equivalents, a slight improvement on Q2 despite stripping at Nkran increasing during the period. This strong cash position provides us with the financial flexibility to continue to invest in our operations, particularly as we accelerate stripping at Nkran in 2026. Exploration remains a key focus area. At Abore, we drilled just over 11,000 meters during the third quarter focused on infill and step-out drilling around the high-grade zones identified earlier this year. Moving to Slide 6, please. Here on this slide, I'll provide a few words about the events that occurred at Esaase during the quarter. As previously disclosed, on September 9, an incident occurred when a group of illegal miners attacked military camp, housing members of the Ghana Armed Forces and damaging our contractors' mining equipment at the Esaase deposit. Regrettably, the incident also resulted in the death of a community member. Due to the scale of damage sustained to the fleet, mining operations at Esaase were paused. However, haulage from low-grade stockpiles resumed shortly after the incident. Since early September, we have worked closely with our mining contractor to remobilize the fleet to Esaase. This process continued into early November, and I'm pleased to report that mining operations at Esaase now recommenced and will continue to ramp up over the balance of the year. With that, I'll turn it over to Michael and Matt to discuss production and financial performance in more details in the coming slides. Over to you, Michael, and Slide 7, please. Michael Cardinaels: Thank you, Matt, and good morning, everyone. As Matt just highlighted, we continue to see an upward trend in performance during the third quarter of the year. We had a significant increase in personnel hours worked on site during Q3 with the ramp-up of Nkran mining staff and contractors involved in the secondary crusher project and the TSF Stage 8 construction. Our safety statistics continue to improve, with over 4.2 million man hours worked since the last lost time injury. On a 12-month rolling basis, our lost time injury and total recordable injury frequency rates up 0.39 and 0.9, respectively per million hours worked at the end of September. In terms of mining production, Esaase mining was impacted by the incident mentioned earlier by Matt. But production from Abore increased significantly, including a 57% increase in ore mined compared to the previous quarter. As Abore development has progressed with increasing depth and the pit is opened up to a steady state. We now have a better understanding of the ore body and our ability to recover the resource. We find ourselves mining more ore tonnes at lower grade, resulting in approximately the same number of ounces. And Abore currently provides the majority of the mill feed and will continue to do so for the balance of the year. Despite the Esaase mining interruption, production from both Abore and Nkran pits increased, and the total material mined increased 26% in Q3 compared with Q2. On to Slide 8, please. As you can see from the images on this slide, Cut 3 of Nkran pit is progressing well, including the development to support infrastructure in the form of an overhead power line extension and relocation and the drilling of additional deepwatering bars around the perimeter of the pit. Nkran stripping also increased 111% compared to Q2, primarily as a result of an additional excavator being mobilized to site as part of our ramp-up plan. Development capital costs for pre-stripping at Nkran totaled $12 million in Q3 and $22.1 million year-to-date. The contractor is on track to deliver additional equipment in Q4 2025 and the remainder of the planned fleet to ramp up to full capacity in 2026, putting us in good stead to continue stripping as per our schedule with steady-state ore production still due in the early 2029. On to Slide 9, please. On the processing performance, with the successful commissioning of the secondary crusher circuit at the end of July, we saw an increase in the plant performance for Q3. Milling rates since commissioning of the secondary crusher have increased approximately 13% compared to Q2. There remains some modifications in the circuit to fully optimize the performance, and as such, we expect to see further increases in production in Q4. Mill feed grade also improved compared to Q2 as we are getting deeper into the Abore pit and have access to better grade at depth, which in turn helped increase the recovery. On the back of the improved plant throughput and grade, we increased gold production to 32,533 ounces for the quarter compared to just over 30,000 ounces in Q2. The incident and subsequent interruption at Esaase have unfortunately had an impact on our plan for 2025. Despite having now restarted mining in Esaase, we will continue to see an impact as we ramp back up production over the balance of the quarter. Our forecast takes this into consideration, along with our improved understanding of the Abore deposit and the recent performance of the plant following the commissioning of the secondary crushing circuit. We estimate a revised production guidance of between 120,000 and 125,000 ounces for the year. And with that, I would like to turn over to Matt Freeman to discuss the company's financial results. Matthew Freeman: Thanks, Michael. Good morning, everyone. Here on Slide 10, we've outlined some of the key financial metrics for the quarter. We recognized revenues of $114 million, at a record average price of just over $3,500 per ounce for the impact of hedges. We earned income from mine operations of $48.2 million, while net earnings continue to be negatively affected by the fair value adjustments to our hedge book, following the continued run-up in gold prices such that we recorded a net loss before taxes of $5 million. This quarter, we also recognized a tax expense for the first time now that we have exhausted previous tax losses and a forecast to be taxable this year. Indeed, we've already paid $12 million in tax installments to the Ghanaian government. We generated $40 million of cash flows from operations in the quarter and ended the period with a strong cash balance of approximately $116 million. This included, as mentioned before, payments of additional $6 million in income taxes. In addition, as previously advised, given these strong operating cash flows, we have continued to allocate capital to accelerating the waste to the Nkran, incurring $12 million in the quarter as Michael noted, we expect the Nkran mining volumes ramp up further as more equipment is mobilized. All-in sustaining costs were consistent with the second quarter at $2,283 per ounce, we expect AISC to start to reduce in Q4 as production volumes increase compared with Q3. Despite our expectation that all-in sustaining costs will be lower in Q4 than Q3, given the overall shortfall in production ounces that Michael mentioned, we have increased our all-in sustaining cost guidance for the year to between $2,200 million and $2,300 per ounce. And this includes all the impacts of the royalties under the higher gold prices that we previously mentioned. On to Slide 11. Despite the headline increase in AISC that really is primarily production-driven. We continue to focus on the cost structure of the mine and are pleased that fixed operating costs such as processing and G&A in aggregate remain consistent with previous quarters. Of note, pricing costs per tonne have continued to reduce quarter-on-quarter, seeing a 13% decline in unit costs since Q1, and we expect further decreases on a unit basis as the full impact of the secondary crusher is realized in the fourth quarter. Mining costs at our producing deposits, namely Abore and Esaase declined on a per tonne mined basis by approximately 8% as mining volumes increased. Additionally, Nkran mining costs are also subject to a fixed unit mining contract, and we expect to see those unit costs continue to decrease as volumes increase over the next 12 months as management costs, which affects a shared over more tonnes. We also remain disciplined with capital allocation with regards to capital. The largest project ongoing currently is the Raise 8 at the tailings facility, which is expected to be completed in 2026. So overall, costs are being well managed, and we should see an improvement in unit rates as the year progresses. Now that the secondary crusher is online, and we expect to produce more tonnes and subsequently produce more ounces. This will generate higher operating margins and cash flows for the business. On to the next slide, please. Our cash margins have improved with the run-up in gold prices, which has meant that despite investments in the development capital for the secondary crusher project and stripping Nkran, we continue to maintain a very strong balance sheet with approximately $116 million of cash and no debt. We're also pleased to have progressed discussions to implement a $75 million revolving credit facility to further enhance the balance sheet to be earmarked for general working capital. And with that, I'll turn it over to Chris to discuss the exploration progress we've seen at Abore. Chris Pettman: Thanks, Matt. Q3 was another excellent quarter for us in exploration and was highlighted by exceptional results from drilling at Abore. Our press release dated August 20 detailed the first results from the Abore Phase 2 drilling program, which commenced in Q2 and led to the discovery of multiple new high-grade ore shoots across the Abore South and main zones as well as a significant new high-grade discovery at the northern end of the deposit. Some of the highlighted intercepts from this stage of drilling are shown here on Slide 13. Following these results, drilling at Abore remained the focus of exploration activities at the AGM through Q3 as we began infill drilling to prove continuity of these new high-grade zones while also continuing to test for further extensions of mineralization below the mineral resource. Drilling activity was ramped up through the quarter from a total of 5,040 meters drilled at Abore in Q2 to an additional 11,554 meters drilled in Q3. Based on the continued success of Abore drilling, the program has been further expanded with an additional 10,000 meters now planned for completion by the end of this year. This drilling is currently underway and the next round of results is expected to be released shortly. In addition to our work at Abore, we continue to advance our regional greenfield portfolio targets through the quarter. Most notably, the ground IP survey at the Nsoroma target area, which is located approximately 8 kilometers southwest of the processing plant was completed on schedule in Q3. The survey was successful in identifying chargeability and resistivity targets coincident with previously identified gold and soil anomalies along the interpreted extension of the Nkran shear zone. Drilling is now underway, and approximately 2,000 meters of RC drilling is planned for completion in Q4. The Nsoroma target area lies within a 5-kilometer long gold and soil anomaly located on the Nkran shear southwest of the Nkran deposit and is one of the several high-priority regional targets being evaluated by the AGM exploration team. Next slide. This image on Slide 14 is a long section through Abore showing the location of highlighted assay results received in Q3. Drilling has identified 2 primary ore shoots plunging to the north at low angles under the south and main pits. Additionally, high-grade mineralization has been intercepted below the saddle zone between the 2 pits along the conjugate south plunging structure as well as in the new high-grade zone under the North pit. We are particularly encouraged to see wide intercepts of mineralization at significantly higher grade than the current Abore reserve grade of 1.27 grams a tonne over long strike length as we continue to evaluate the potential for an eventual transition to underground mining. Next slide. Slide 15 shows the locations of the drilling I've been discussing in plan view to further illustrate the fact that mineralization intercepted in this round of drilling spans the entire 1.8-kilometer strike length of the Abore deposit. Next slide. This cross-section here shows one of the holes drilled below the south pit hole 368 which intercepted 45 meters at 2 grams a tonne, including 17 meters at 3.3 grams a ton. This image is reflective of how strong mineralization is being intercepted below the mineral resource across the deposits and the potential growth upside as the system remains open. Next slide. As mentioned earlier, based on the success of Q2 results and what we've been seeing through Q3, the Abore drill program has been further expanded with an additional 10,000 meters now scheduled for completion in Q4. Drilling will continue to focus on conversion of mineral resources and testing for further continuations of mineralization down plunge and beneath the current drilling. We're very pleased with the Q3 results and are very optimistic about continued exploration success at Abore and across the AGM portfolio targets. With the support of Matt and the Board, we have been giving access to additional resources to capitalize quickly on these positive results and have secured our drills through 2026 to ensure we can continue the Abore program unabated. And with that, I'll hand it back to you, Matt. Matt Badylak: Thank you, Chris. In closing, I'd like to highlight that although the quarter fell slightly below expectations and the incident at Esaase necessitated a review of full year guidance Q3 showed continued positive momentum. We saw quarter-over-quarter improvements across key operation metrics, including total ore tonnes mined, mill grades, mill throughput, gold production and cash balances, all moving in the right direction. As we continue to optimize the secondary crushing circuit, we expect further throughput enhancements in the quarters ahead. On the exploration front, I'm particularly pleased with our progress. The upside we are seeing at Abore reinforces my confidence in the organic growth potential of the AGM, and I remain excited about what lies ahead. This quarter also marked an important shift in our shareholder base. Following Goldfield's divestiture of the 19.5% stake, we have strengthened our register and improved our trading liquidity. I want to remind everyone that Galiano is well positioned as Ghana's largest single-asset gold producer with compelling fundamentals across many key areas. We maintain a robust production outlook supported by strong financial discipline, including a solid $116 million cash position, which provides flexibility to execute our mine plans. With that, I'll turn it back to the operator and open the line up for any questions. Thank you. Operator: [Operator Instructions] Your first question comes from Heiko Ihle from H.C. Wainwright. Heiko Ihle: Decent quarter overall, I guess, even given the guidance. You obviously had great recoveries in the period, and that really matters given the current pricing environment. And it seems like additional improvements are made to the circuit. Walk us through what you see as the longer-term impact of all of this? And if you were in my shoes, how would you model this out? I mean these were the best recoveries in over 4 -- I think, 4 quarters it was. Matt Badylak: Yes. Thank you, Heiko. I appreciate the question. I think best if I just pass it across to Mick for an initial adds up, and then I can add anything if needed. Michael Cardinaels: Yes. I think we've benefited from the increasing grade that was seen quarter-on-quarter over the year. And with that improved grade comes an improvement in our recoveries as well. And we expect those to be maintained into next year. And obviously, hopeful that the grades improve further with depth as well. We do have a number of things that we are finalizing in the secondary crushing circuit, as I mentioned, we're upgrading a number of conveyor drives. We're trying different configurations with our screen panels and a few other things to further optimize that circuit. We think that there's additional throughput enhancements that we can achieve. So we expect to trend upwards and obviously targeting that 5.8 million tonnes per annum. if that answers. Heiko Ihle: It does. Matthew, do you want to add anything or do you want to move on? Matt Badylak: No, no. I think mix answered your question, ultimately, there's only one other thing, I guess, that we didn't touch on is that the SAG mill discharge grades are also going to be reduced in size as well, and we feel that that's going to improve our throughput and also potentially recoveries as well. So yes. Heiko Ihle: So yes. Fair enough. On Slide 13 in the presentation, you talked about some of those high-grade ore shoots. You also discussed this in the press release with the earnings and then also back in August. These intercepts, some of which you see 3 grams per tonne are obviously very economic, especially right now. With this transition to underground mining, I mean, I know it's quite early to ask this question, but I assume at least some thinking has been done on this. What exactly would be needed to start underground mining related to costs, permitting, duration to get a decline, all that good stuff? Matt Badylak: Yes. Good question, Heiko. Well, obviously, we're really, really excited about the grades that we're seeing just below our current reserve pit, right, as highlighted in the slide that you mentioned. I think the first step that we need to tick off, and this is quite imminent for us at the moment, too, is to define what the underground resource looks like there at Abore. And as I said, I mean, that's not too far away, and there will be some work internally and also with external consultants that is currently going on. We do expect to have a view on that in the early next year, Heiko. So that's the first stage. And on the back of that resource or the maiden resource, we will be able to provide a little bit more color in terms of what we're seeing with regards to the cost time lines, permitting, et cetera, on that front as well. But again, I will highlight that the upside for underground at the Asanko Gold Mine is not within the next 12 months, right? It's probably a year or 2 away. We have to continue to mine through the bottom of Abore at the moment. And then once we do that, it will come on the back of the depletion of this under open pit resource. That doesn't mean that we can't start the work concurrently, but the ounces delivered to the mill are some time away at this stage. Operator: Your next question comes from Raj Ray from BMO Capital Markets. Raj Ray: The first one is more a clarification on, I think, Michael's prepared remarks, and my apologies if I got it wrong. Michael, you're saying that with Abore, you're getting more tonnage at the lower grade and then the overall ounces is still the same? Is that correct? Michael Cardinaels: Yes, that's correct. A function of basically being deeper into the pit has allowed us to open up and we're mining full width across the granite ore body now. And with the reduction in material that has come out of Esaase, we're basically relying heavily on Abore to feed the mill. So we -- we're seeing with our mining methodology to keep tonnes to that mill, we can basically mine such that we're limiting how much material is being stockpiled. So we're less selective in terms of high grading that material, knowing that it's all going to the process plant to keep ourselves fed at the moment. Matt Badylak: Yes. Maybe I'll just add to that. This is kind of quite specific to the last quarter, as Mick was saying, and we do know that the mineralization at Abore, you don't want to lose any of the high grade that may be lost if you tighten up your [indiscernible] too much, right? So we had the opportunity in Q3 to maybe step out a little bit and accept a little bit more dilution in Q3, and that's kind of driving the commentary as well. Raj Ray: Okay. Got it. And the second question I had was, I noticed that part of the CapEx has been -- the development CapEx has been deferred into next year and you've lowered your number. Is there any potential for any impact early in '26 as a result of Esaase being out for 2 months? And then if you can comment on what your stockpile levels were at the end of Q3 in terms of tonnage and grade? Matt Badylak: Yes, sure. Listen, in terms of guidance and outlook for 2026, obviously, that will come in due time. We're working through that at the moment internally. And once we have clarity on where the numbers lie on '26, we'll obviously provide the market with an update in early 2026 on that. But at this stage, as we were saying, we do expect that the material movement from Esaase will ramp up and be in a position where this impact of the shutdown that we had that we saw in Q3 and early into Q4 is probably going to be addressed by that stage as well. So we don't expect it to be extending into the new year. And then in terms of stockpile grades and balances, guys, do we have that at hand? Or should we get back to Raj on that one? Matthew Freeman: I think we can get back with specifics. So I don't have the actual numbers to hand. I think we obviously don't have a particularly big stockpile at this point. I think, as Mick alluded to, given the pause in mining at Esaase we won't be able to mine excess material. So we build up maybe 0.5 million tonnes or a bit less than that, but no more on keeping it fairly small. And the grades of that will be similar to what we've been seeing going through the mill. So maybe slightly lower where we could have got some slightly better grades through the mill, but pretty consistent with what you've seen from the mining... Raj Ray: And if I may, one last question. On the Ghana audit, is it possible for you to give any color in terms of what they are specifically asking from the companies? Matt Badylak: Yes. I think you're referring to the MinCOM audit. This was not that was received by all large-scale mining companies earlier in the quarter. So it's not specific to Galiano. We are of the understanding that our site audit will take place in January next year. It's been staggered monthly between all the large-scale mining companies. There's been no additional information provided to us at this point in time in terms of what's being specifically audited or any request for pre-documentation before that. So -- that's all I can provide on that at the moment, Raj. Operator: Your next question comes from Fred Schmutzer from Equinox Partners. Alfredo Schmutzer: Matt, first, I just wanted to have maybe an update on the community relations. How has that evolved since the incident? Matt Badylak: Yes. I mean, again, it's a very good question. Like we worked hard Alfredo to ensure that the community relations across all of our tenements, which are quite large, are maintained. I'm pleased to report that shortly after that incident the relationships there were brought back into check and we've been able to haul, as I mentioned earlier, we've restarted haulage operations from Esaase stockpiles very shortly after that incident occurred. So from that point until now, everything has remain calm and has returned to normal. But these kind of things do flare up. And we're keeping close relationships with all of our community members across all our tenements. So nothing to be concerned about at this point in time on that front, Alfredo. Alfredo Schmutzer: Okay. That's great. And then on unit costs. So you mentioned that they're going to keep decreasing as you increase the volumes. But how can we maybe model that reduction of unit cost in terms of dollar per tonne? Like how much can it go down? Matthew Freeman: Alfredo, it's Matt Freeman here. I think from a sort of a G&A and processing standpoint, the easiest way to model it is to see that our absolute costs are pretty fixed on a month-by-month, quarter-by-quarter basis. So therefore, as we increase those in the milling and increase the throughput, that will actually bring your unit cost down. So if you make some assumptions, as Mick said, hopefully getting back towards the 5.8 million tonne run rate through -- an annual basis throughput, fixed costs will therefore come down on a unit cost basis. Mining cost is a little bit harder. I think the reduction is modest as we increase the mining volumes because really, that the mining contracts are largely variable cost, but we do have a management -- a fixed monthly management cost component, and that's a bit where you start to benefit in those unit rates. So as we move forward, certainly through Q4, we're seeing those rates come down a little bit. But then again, as we move into future years as you get deeper in some of the pits, then you start to maybe as things start to creep back up again a little bit or get back to where they are now as you have longer haul cycles and you're in deeper parts of the pit. So it's a little bit hard for me to guide you exactly on that, but I think the mining costs are sort of where we are now is a good point and it's not going to get higher in the short term, and it should drive down a little bit in Q4, if that makes sense. Alfredo Schmutzer: Yes, yes, very helpful. And then my last question is on taxes. So you mentioned you have already paid $12 million this year. And I know this year is especially more difficult to model because you just finished, I guess, using all those losses. So do you have a kind of a range of how much you're going to pay for this year? Let's assume spot prices until the end of the year, like just to have a range of how much would you pay? And then going forward, how should we calculate that? It's just like a 35% effective tax rate? Matthew Freeman: Yes, you're right. It is a bit complicated and it's a little bit hard to guide clearly. But yes, I think we're -- this year, we're probably in the -- depending on if prices stay where they are now, we could be in that $20 million to $30 million range, hopefully, more towards the low end, but we'll see. We certainly paid more than -- we probably paid a good half of it in installments so far for the year. And there's a few nuances in the final tax returns that we're looking at where we can maximize and optimize our positions. And then from a go-forward basis, yes, I think the Ghanaian tax rate is 35%, we will start seeing a bit of noise with deferred taxes coming through. But on a base sort of current income tax expense basis, 35% would be a good number for you to use. Alfredo Schmutzer: Okay. Okay. And if I may, very quickly, sorry, maybe the revolver credit facility, any specific reason why you decided to take that this year or I mean this quarter? Matthew Freeman: No. Obviously, this is a process that takes a period of time. We're very much looking at it. It's just prudent balance sheet management. We've got an opportunity to put it in place just to reinforce things and get ourselves flexibility. But that's the reason we felt it's prudent at this point to do that for risk management. Operator: [Operator Instructions] Your next question comes from Vitaly Kononov from Freedom broker. Vitaly Kononov: First one relates to Esaase. So as it was paused temporarily in September, those bottleneck, let's say, lasted for 2 months. Can you elaborate on the measures taken to prevent any further disruptions that could take place in the operations? Matt Badylak: Yes. Sure. I mean, I think our first defense in all of this is making sure that we've got strong relationships with the host communities in which we operate. And we do that on a day-to-day basis, right? So that's our first priority. I mean, the fact is that with gold prices doing what they're doing at record levels. And if you have any knowledge of West Africa as a region, illegal mining is prevalent in those parts of the world. And with those factors considered, there is an acceleration or an increase of illegal mining in our tenement. So the first thing that we need to do is make sure that the communities and the key community leaders that we have good relationships with as those relationships are maintained. And then the other thing that I will say is that we do mention about the military presence on site. I will point out that -- Asanko is the only the second large-scale mining company in the country that has access to military full-time 24-hour military presence on site. And with that as well, we feel that we're in a strong position to ensure that something like this doesn't occur in the future. Vitaly Kononov: That covers my question. Perfect. And then second one relates to the secondary crushing unit that was recently installed. Can you elaborate on what would be the nameplate capacity going forward with this new equipment on hand, would you expect to raise full year guidance from the 5.8 million tonnes of... Matt Badylak: No. I mean, listen, we've stated before that the purpose of the installation of that secondary crusher is to get us back up to the 5.8 million tonnes per annum. We were obviously a little bit shy of that because of the hardness of the ore that we were processing during the course of this year. We'll continue to process into 2026. So that's the target. The nameplate target will be 5.8 million tonnes per annum. Vitaly Kononov: Wonderful. And the last quick one. So you've had a lot of exploration results that you're probably longing to share. Shall we expect to see a mineral resource update provided with the end year results? Matt Badylak: Yes, we're expecting to provide an update to the mineral reserves and resources early in 2026 and most likely accompanying our full year financial and operating results at that time point. Operator: There are no further questions at this time. I will now turn the call over to Mr. Matt Badylak for closing remarks. Please go ahead. Matt Badylak: Yes. Thank you, operator. And I just want to say that I appreciate everyone's time who dialed into the call and asked questions. And as a management team, we're looking forward to execute to our revised guidance for the balance of the year and continue to provide the market with some exploration results as we continue drilling at Abore. So thank you very much and have a good day. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.
Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Supremex Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. I would like to remind everyone that this conference call is being recorded on Thursday, November 6, 2025. I will now turn the call over to Martin Goulet of MBC Capital Markets Advisors. Please go ahead. Martin Goulet: Thank you, and good morning, ladies and gentlemen. Thanks for joining this discussion of Supremex' financial and operating results for the third quarter ended September 30, 2025. The press release reporting these results was published earlier this morning via the Globe Newswire News services. It can also be found in the Investors section of the company's website at www.supremex.com, along with the MD&A and financial statements. These documents are available on SEDAR+ as well. A presentation supporting this conference call has also been posted on the website. Let me remind you that all figures expressed on today's call are in Canadian dollars unless otherwise stated. Presenting today will be Stewart Emerson, President and CEO of Supmax; as well as Norm Macaulay, CFO. With that, I invite you to turn to Slide 37 of the presentation for an overview of the third quarter, and I turn the call over to Stewart. Stewart Emerson: Thank you, Martin, and good morning, everyone. I'm joined today by Norm Macaulay, Supremex' new Chief Financial Officer. Norm joined us mid-September and brings more than 20 years of experience as a financial executive with large private and public companies. We're very pleased to have him on board as the company will benefit from his leadership, skills and expertise in all matters related to corporate finance, M&A, process optimization. Welcome aboard, Norm. While the results may not have been where we wanted them to be, largely due to external forces, we have been under -- we have been uber active in building the business, returning value to shareholders and positioning ourselves to execute on our plan and long-term success. First, I want to draw you to -- draw your attention to our financial position, which is as strong as it has ever been. As you know, during the quarter, we completed the sale leaseback of two owned properties in a transaction that grossed $53 million. This transaction unlocks significant value for our shareholders who were rewarded with a $0.50 per share special dividend on top of the regular $0.05 quarterly payout. We also repaid a substantial amount of debt, leaving us with net debt of only $89 million at the end of Q3, which provides us with excellent flexibility to carry out our business strategy. Norm will discuss the net debt position in more detail shortly. Now let's look more closely at operations, beginning with the Envelope business. While revenue decreased 5% year-over-year, it was up 3% sequentially from Q2 as we battle significant headwinds. To provide color on those headwinds first, obviously, the Canada Post uncertainty continues to affect volumes, primarily in the high value-added direct mail and fundraising space. I wish I could give you an exact number, but it's difficult. However, looking at the DM-centric accounts and anecdotally, it's clear that the uncertainty of when a time-sensitive piece will arrive in the mailbox has taken its toll on volumes. Second, if you recall from last quarter, we highlighted a substantial volume decline with an important U.S. direct mail client, and that situation affected Q3 results considerably. More on that later in the commentary. Finally, economic uncertainty, instability and a slowing economy, both in Canada and the U.S. is not helpful to volumes, particularly in the direct mail and fundraising segment. Frankly, being minus 5% versus last year and up 3% sequentially can be viewed as a good outcome through our prism. We worked hard to manage costs effectively, augment our position in the Canadian market with a tuck-in acquisition of Canada's third largest producer. And while nothing is in the bucket, our relationship with the aforementioned U.S. direct mail account is solid. We continue to do work for them, and we are optimistic about 2026. I understand quarter-to-quarter is an important measure. And as I said a moment ago, we view a 5% decline in revenue as a pretty good outcome given the challenges. But to me, year-over-year is a better measure. And in that case, despite the headwinds created by Canada Post, which has persisted virtually all year and the slowing economies, that single U.S. customer reduction has accounted for more than 100% of the revenue decline year-to-year. In fact, net of the impact of one customer, U.S. units and revenue are up mid- to high single-digit percentages. And across the entire Supremex Envelope segment globally, units are down less than 1%, revenue is flat and average selling price is up year-over-year. Our team has done a tremendous job, both operationally and on the sales side to mitigate the effects in a tough environment on both sides of the border. A few moments ago, I mentioned the acquisition of the third largest envelope manufacturer in Canada, and I wanted to provide a little more context. In July, we acquired the assets of Enveloppe Laurentide in Saint Laurent, Québec, a suburb of a mere kilometers from our LaSalle envelope facility. Laurentide manufactured and brokered envelopes primarily in Eastern Canada. As planned, we ceased production at their facility on August 15 and integrated both the manufactured and brokered volume within our existing network in Canada. This highly accretive acquisition will improve absorption and will deliver meaningful synergies going forward. In a nutshell, while on the surface Enveloppe performance may not have been where we wanted or expected them to be, the team has done a good job navigating very choppy waters. Our underlying fundamentals are solid, and we have confidence in our ability to drive volume to maintain high levels of utilization and absorption across our highly efficient network. Turning to packaging. Although revenue was down, we sustained our momentum with double-digit growth in both folding carton and e-commerce solutions, while Paragraph's commercial printing activities largely for the direct mail market, not surprisingly, had a difficult quarter. In folding carton, double-digit growth both in the quarter and year-to-date was driven by continued strong performance in the health and beauty and over-the-counter pharmaceutical segments, new business wins from current and reactivated customers and revenue from the newly acquired Trans-Graphique folding carton business, which supports our strategic plan to enhance our presence in the food-grade packaging, where we see solid growth prospects. While the Enveloppe Laurentide transaction closed on July 14 and ceased production a month later, in this highly accretive transaction, we closed Trans-Graphique a week earlier on July 7 and ceased production 14 days later. As planned, most of Trans-Graphique's activities have been transferred to the Lachine facility, which will allow us to grow in the food packaging space, improve efficiency and absorption as well as achieve meaningful synergies. It should be noted that we exited both facilities by the end of October. In e-commerce and Specialty Packaging, momentum created by new customer wins and greater volume from existing customers produced well into double-digit revenue growth for yet another quarter and year-to-date. While the core of the packaging business continues to perform admirably both in terms of revenue and profitability, unfortunately, the less core commercial print business continues to have its challenges. We haven't really spoken about Paragraph's customer and product base in the past. However, like envelope, this business has meaningful reliance on Canada Post, direct mail and fundraising with respect to the inner components and couponing. Not surprisingly, these revenues have been materially impacted by Canada Post uncertainty, delivery of time-sensitive offers and promotions. And while we are focused, we just haven't been able to offset the precipitous drop in volume and revenue in the relatively small Québec market. As for profitability in the segment, the drop in Paragraph revenue took the wind out of our sale after an encouraging first half and strong revenue performance of 2 of the 3 legs of the business in Q3. This quarter's adjusted EBITDA margin of 10.5% is clearly not acceptable. The stark lack of volume and contribution from Paragraph has shaved off approximately 300 basis points of packaging margin on a year-to-date basis. I reiterate what I've said for several quarters now. We have high-quality assets, available capacity, deliver quality products and service, have a premium diversified customer base on both sides of the border as well as the right leadership in the right seats. Volume is magic in terms of absorption, and we continue to look for profitable revenue growth, but there's also more to capture within our network in terms of efficiencies and synergies. This is our priority. With that, I turn the call over to Norm for a review of the financial results. Normand Macaulay: Thank you, Stewart. Good morning, everyone. I'm very pleased to join Supremex, a dynamic, well-managed and financially disciplined company. Please turn to Slide 38 of the presentation. Q3 total revenue came in at $65.7 million compared to $69.4 million last year. Envelope revenue was $45.1 million, down from $47.5 million last year, but up sequentially from $43.8 million in the second quarter. The year-over-year variation reflects a 4.2% decrease in average selling prices, mainly due to a less favorable customer and product mix between the U.S. and Canada. Meanwhile, volume decreased 0.8%. And as Stewart mentioned, volume in Canada increased due to the Enveloppe Laurentide acquisition, while the U.S. decline was essentially related to one customer. Packaging and Specialty Products revenue was $20.6 million versus $21.9 million last year. The decrease is mostly attributable to lower revenue from commercial printing activities. This was offset by higher folding carton revenue, driven by greater demand from sectors more closely correlated to economic conditions, new business wins from existing customers and the contribution from Trans-Graphique, which was acquired in July. Revenue from e-commerce-related packaging solutions also increased driven by higher demand from existing customers and new customer wins. Moving to Slide 39. Adjusted EBITDA totaled $6.2 million or 9.4% of sales compared to $7.9 million or 11.4% of sales in last year's third quarter, but up sequentially from $5.8 million or 8.8% of sales in the second quarter of 2025. Envelope adjusted EBITDA was $5.3 million or 11.8% of sales versus $7.9 million or 16.7% of sales last year. The decrease reflects lower selling prices and the effect of lower volume on the absorption of fixed costs. These factors were partially offset by benefits from optimization measures in the Toronto area and procurement optimization initiatives. Packaging and Specialty Products adjusted EBITDA was $2.2 million or 10.5% of sales compared to $2.5 million or 11.3% of sales last year. The decrease is due to a less favorable revenue mix, partially offset by procurement optimization initiatives. Finally, corporate and unallocated costs totaled $1.3 million versus $2.5 million last year. The decrease is attributable to a foreign exchange gain this quarter as opposed to last year and to lower professional fees. Turning to Slide 40. During the quarter, Supremex recorded a $6.1 million gain on the sale-leaseback transaction, transaction, which resulted in increased right-of-use assets and lease liabilities, created a deferred tax asset, which gave rise to an income tax recovery of $3.1 million in Q3 2025. As a result, Supremex concluded the third quarter with net earnings of $9.1 million or $0.37 per share versus a net loss of $23 million or a loss of $0.92 per share in last year's third quarter in which an asset impairment charge of $23 million was incurred. Adjusted net earnings were $4.7 million or $0.19 per share in Q3 2025, up from $1 million or $0.05 per share a year ago. Moving to cash flow on Slide 41. Net cash flows from operating activities were negative $0.6 million compared to positive $7.6 million last year, mainly due to a lower working capital release this year compared to last. Turning to Slide 42. Net debt stood at $8.9 million as at September 30, 2025, down significantly from $38.4 million 3 months ago, reflecting a long-term debt repayment of $31.5 million using proceeds from the sale leaseback. Further, we used $13.5 million of the proceeds from the sale leasebacks to pay both the regular dividend and special dividend and $7.9 million to acquire both Enveloppe Laurentide and Trans-Graphique during the quarter. Our ratio of net debt to adjusted EBITDA was 0.3x versus 1.1x 3 months ago, well within our comfort zone of keeping our leverage ratio below 2x net debt to adjusted EBITDA. Our strong financial position leaves us with significant flexibility to finance our operations and future investments, including acquisitions as well as to return funds to shareholders. In this regard, following the launch of a normal course issuer bid program in August, we repurchased approximately 44,000 shares in Q3 for a consideration of $0.2 million. Subsequent to period end, we repurchased an additional 38,864 shares for consideration of $0.1 million. The NCIB program allows Supremex to purchase for cancellation more than 1.5 million shares, representing 10% of our public float until August 10, 2026. Finally, the Board of Directors declared a quarterly dividend of $0.05 per common share payable on December 19, 2025, to shareholders of record at the close of business on December 4, 2025. I now turn the call back to Stewart for the outlook. Stewart Emerson: Great. Thanks, Norm. Although our results were short of our potential, we're buoyed by the significant important improvements in our core business. Materially improved operations and the benefits of the tuck-ins completed partway through the quarter as we continue to methodically build the business for the long term. As I've said previously, we can't control the economy and the trade environment, but we will focus on making our envelope and packaging networks more productive and efficient while actively driving sales and seeking additional revenue opportunities. We have a solid foundation ready to be further built on. Our balance sheet is very strong, which provides us with the flexibility to execute our business strategy and sustain long-term profitable growth. We will also utilize our available capital and strong cash flow judiciously. First, by looking for acquisition targets that we can rapidly and efficiently tuck into our existing footprint to enhance absorption to drive profitability or towards transactions that grow reach in our principal markets while enhancing absorption to drive profitability. And second, we are committed to returning value to shareholders via share repurchase and a fair yet conservative regular quarterly dividend payout that reflects our confidence in the ability to sustain free cash flow growth. This concludes our prepared remarks. We're now ready to answer your questions. Operator? Operator: [Operator Instructions] The first question comes from Donangelo Volpe with Beacon Securities. Donangelo Volpe: Just looking at the two acquisitions, just shy of $8 million spent. Just curious on what was the split between the two on a revenue basis and kind of what their trailing 12-month revenue and EBITDA profiles look like? Stewart Emerson: Well, so the Enveloppe, Don -- sorry, the Enveloppe acquisition was a little north of $10 million and the folding carton was somewhere around just shy of $3 million. So these are splits there. Normand Macaulay: Those are on a TTM basis. Stewart Emerson: On a TTM basis, yes. And both businesses were profitable, but with the synergies of the tuck-in, highly accretive for Supremex in a very short period. Donangelo Volpe: Okay. Perfect. And then just pivoting over to the packaging side. Can you just provide a little bit more color on the underperformance from the commercial printing? Just curious how big this drag was and kind of what your outlook is over the coming quarters? Because how I'm looking at this is the folding carton and e-commerce packaging revenues are tracking above expectations. Stewart Emerson: Yes. So I mean, obviously, it was a significant drag with reference at both e-com and folding carton, both double-digit percentages, significant increases, but were more than offset by the decline in the commercial print operations. And I wish I had talked a little bit more about what's inside that commercial print business. As you can imagine, anything in direct mail and fundraising has internal components that go in it. And there's a fair bit of couponing. And that work is largely done by commercial printers and Paragraph was no exception to the rule. So if there's no direct mail going out, there's no post cards showing up in your mailbox or significantly reduced numbers, it has a drag on the commercial print sector and Paragraph's top two customers are direct mail customers. And it just overshadowed significant growth on sort of the core piece of the business, if you will. As Canada Post stabilizes and get this thing behind us and under our belt, that revenue should come back or a large chunk of it should come back. We're actively addressing the cost side of the business to align with the changes in revenue. Donangelo Volpe: Okay. Perfect. And then just pivoting over to, I guess, the geographic revenues. We were impressed with the revenues in Canada. It's relatively flat year-over-year. The decline was mostly attributable to the U.S. operations. I'm assuming it's through that one customer. So I'm just -- can you talk to some of the dynamics you're seeing throughout the start of Q4 so far? Has there been any positive commentary from that one customer? Or do we kind of expect the continued year-over-year declines over the next couple of quarters from the U.S. predominantly driven through that -- through the one customer? Stewart Emerson: There is a lot of questions wrapped up in that question there, Don. Donangelo Volpe: I'm going to be asking a million questions. Stewart Emerson: Yes. I was writing them down, but I presume you're talking envelope predominantly. But before I forget, I will reference packaging just a little bit. Both folding carton and e-commerce, they continue on a bit of a tear on the revenue side. While we don't provide guidance specifically, both of them got out of the gate in Q4 and the backlogs are really good. So we're excited there. On the envelope side, yes. So Canada envelope, I mean, it's a little engine that could. There's not a lot of direct mail envelope in Canada. So the postal strike doesn't sort of affect as much as a lot of people would expect. But the Canadian envelope business just chugs along. It got a little growth in average selling price, and it was buoyed by the 2.5 months, 2.25 months of Laurentide in the foundation, a little bit offset by some increased costs early in the acquisition that you sort of have to absorb, but the revenue of Laurentide certainly helped. And it contributed exactly on pace of what we would have expected given their TTM revenue. On the U.S. side, the team has done a heck of a job trying to offset and getting growth to try and offset, call it, customer pay, if you will, just to make it easier. And they've done a good job sort of offsetting it and the conversations with customer A are very encouraging. And as I said in my comments, it's not like we lost the customer. That's an important consideration. The customer changed some buying habits. Our share of the customer weren't at the same level that they've been previously. But we continue to do business for them. We continue to execute on their behalf. We're an important supplier to them, and we continue to be an important supplier. We think we're going to be an even more important supplier next year. Did I catch them all? Donangelo Volpe: You got them all. I appreciate that. And then, final one for me, if I may. Just like with the cleaned up balance sheet post sale leaseback, can you just talk a little bit on the M&A pipeline at the moment? Obviously, I understand that the focus is on the Packaging segment. I'm just curious on priority is Canadian focused or U.S. focused or if it's -- if you're kind of indifferent between the two? Stewart Emerson: Yes. So our stated strategy has been we'll look for tuck-in acquisitions either in envelope or packaging, which we did in Q3. We're not -- we're good at envelope. We're not afraid of envelope. And if we can shore up absorption in a particular geographic market, we're excited to do that. And we're in and out 3 months bang we're gone. So they're highly accretive very quickly. So with the balance sheet, we'll continue to look at some good tuck-ins. It doesn't really matter. It can be envelope for packaging. And on the packaging side, our stated strategy is predominantly Canada in folding carton, and that persists, then we've got a good solid pipeline. Operator: [Operator Instructions] This concludes the question-and-answer session. I would like to turn the conference back over to Stewart Emerson for any closing remarks. Stewart Emerson: Thank you, operator. Thanks very much for joining us this morning, folks. We really appreciate you taking time out, and we look forward to speaking to you again at our next quarterly call. Have a great day. Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
Operator: Good day, everyone, and welcome to the Global Partners Third Quarter 2025 Financial Results Conference Call. Today's call is being recorded. [Operator Instructions] With us from Global Partners are President and Chief Executive Officer, Mr. Eric Slifka; Chief Financial Officer, Mr. Gregory Hanson; Chief Operating Officer, Mr. Mark Romaine; and Chief Legal Officer and Secretary, Mr. Sean Geary. At this time, I'd like to turn the floor over to Mr. Geary for opening remarks. Please go ahead, sir. Sean Geary: Good morning, everyone, and thank you for joining us. Today's call will include forward-looking statements within the meanings of federal securities laws, including projections or expectations concerning the future financial and operational performance of Global Partners. No assurances can be given that these projections will be attained or that these expectations will be met. Our assumptions and future performance are subject to a wide range of business risks, uncertainties and factors, which could cause actual results to differ materially as described in our filings with the Securities and Exchange Commission. Global Partners undertakes no obligation to revise or update any forward-looking statements. Now it's my pleasure to turn the call over to our President and Chief Executive Officer, Eric Slifka. Eric Slifka: Thank you, Sean. Good morning, everyone, and thank you for joining us. We performed well in the third quarter, consistent with our expectations, reflecting operational strength and disciplined execution across the organization. We experienced a strong performance in our Wholesale segment in Q3, driven by favorable market conditions in gasoline and the continued optimization of our liquid energy terminal network. Over the past 2 years, we have significantly scaled our terminal assets, meaningfully enhancing our product distribution network and positioning Global Partners for long-term growth. This effort reflects our strategy of efficiently connecting liquid energy products with downstream markets, leveraging the integration of terminals acquired from Motiva, Gulf and ExxonMobil. These assets continue to perform well, strengthening our supply chain flexibility, contributing to throughput growth and enhancing our network. We are pleased that fuel margins have remained historically strong even with the year-over-year decline. Our retail network is a critical part of our strategy as we invest in, optimize and upgrade our portfolio. Recently, we expanded our marine fuel supply operations into the port of Houston. As a reminder, today, our bunkering business is centered in the Northeast, and now we have extended this business into the Gulf Coast. On the retail side, we're continuing to redefine the convenience store experience through our all-time Fresh and newly reimagined Honey Farms Market brands. These brands embody our 4 pillars: community, hospitality, local and fresh, while introducing chef-driven menus, clean label offerings and hyperlocal engagement. Through our new loyalty platform, these benefits, we are creating a seamless personalized experience designed to drive repeat business, build long-term loyalty and strengthen the connection between our guests and our brands. Turning to our distribution. In October, the Board declared a quarterly cash distribution of $75.50 per common unit or $3.02 on an annualized basis. This marked our 16th consecutive quarterly distribution increase. The distribution will be paid on November 14 to unitholders of record as of the close of business on November 10. With that overview, I'll turn it over to Greg for the financial review. Greg? Gregory Hanson: Thank you, Eric, and good morning, everyone. As I review the numbers, please note that all comparisons will be with the third quarter of 2024, unless otherwise noted. Net income for the third quarter was $29 million versus $45.9 million last year. I would note that last year's quarter had a $7.8 million onetime gain on asset sales that affected that number. EBITDA was $97.1 million for the third quarter compared with $119.1 million and adjusted EBITDA was $98.8 million versus $114 million. Distributable cash flow was $53 million compared to $71.1 million, while adjusted distributable cash flow was $53.3 million versus $71.6 million. Trailing 12-month distribution coverage remained strong as of September 30, with 1.64x coverage or 1.5x after factoring in distributions to our preferred unitholders. Turning to our segment details. GDSO product margin decreased $18.8 million to $218.9 million. Product margin from gasoline distribution decreased $19.3 million to $144.8 million, primarily due to lower fuel margins compared with the same period in 2024. On a cents per gallon basis, fuel margins of $0.37 were down 7% from the previous year. In the third quarter of 2024, we experienced strong fuel margins, in part due to Wholesale gasoline prices declining by $0.57 during the quarter. In comparison, in this year's third quarter, Wholesale gasoline prices declined only $0.11. Station operations product margin, which includes convenience store and prepared food sales, sundries and rental income, increased $0.5 million to $74.1 million, in part due to an increase in sundries. At quarter end, we had a portfolio of 1,540 sites, 49 fewer than the same period last year. The site count does not include the 67 locations we operate or supply under our Spring Partners Retail joint venture. Looking at the Wholesale segment, third quarter product margin increased $6.9 million to $78 million. Product margin from gasoline and gasoline blend stocks increased $18.5 million to $61.5 million, primarily due to more favorable market conditions in gasoline and the expansion of our terminal network. Product margin from distillates and other oils decreased $11.6 million to $16.5 million, primarily due to less favorable market conditions in residual oil. Commercial segment product margin decreased $2.5 million to $7 million, in part due to less favorable market conditions in bunkering. Turning to expenses. Operating expenses decreased $4.6 million to $132.5 million in the third primarily related to lower maintenance and repair expenses at our terminal operations. SG&A expense increased $5.8 million to $76.3 million, reflecting in part increases in wages and benefits and various other SG&A expenses. Interest expense was $33.3 million in the third quarter of '25, down $1.8 million from last year, in part due to lower average balances on our credit facilities. CapEx in the third quarter was $19.7 million, consisting of $11.9 million of maintenance CapEx and $7.8 million of expansion CapEx, primarily related to investments in our gasoline stations and terminals. For the full year, we now anticipate maintenance capital expenditures of approximately $45 million to $55 million, while expansion capital expenditures, excluding acquisitions, are anticipated to be approximately $40 million to $50 relating primarily to investments in our gas station and terminal business. Our current CapEx estimates depend in part on the timing of completion of projects, availability of equipment and workforce, weather and unanticipated events or opportunities requiring additional maintenance or investments. Turning to our balance sheet. As of September 30, leverage as defined in our credit agreement as funded debt to EBITDA was 3.6x. We had $240.6 million outstanding on the working capital revolving credit facility and $124.8 million outstanding on the revolving credit facility. Looking ahead to our Investor Relations calendar, next month, we'll be participating in 2 events, the BofA Securities 2025 Leveraged Finance Conference and the Wells Fargo 24th Annual Energy and Power Symposium. Please contact our Investor Relations team if you'd like to schedule a meeting during the conference. Now let me turn the call back to Eric for closing comments. Eric? Eric Slifka: Thanks, Greg. We remain focused on capital discipline and operational efficiency, continuously seeking opportunities to drive sustainable returns and long-term value creation for our unitholders. Our scale, integrated operations and talented team give us the flexibility to respond to market shifts and pursue growth opportunities that create lasting value for all of our stakeholders. Now Greg, Mark and I would be happy to take your questions. Operator, please open the line for the Q&A. Operator: [Operator Instructions] Our first question comes from the line of Selman Akyol with Stifel. Selman Akyol: Can you talk a little bit more about entering the bunkering market in Houston? Eric Slifka: Yes. I mean we're already obviously in the business. We felt that there was an opportunity, and we feel like the assets that we've entered into there are differentiated versus our competition. And so we're already, like I said, in that business, we already have the customer list. We already have the know-how and the knowledge, and we think it's a good fit for the company. Selman Akyol: Got it. And when you say sort of differentiated offering, can you just explain that a little bit? Eric Slifka: Yes, primarily just the location of the facilities and how we're going to go to market to supply that very busy corridor that is not always so easy to deliver fuel in. Selman Akyol: So you're on the Houston Ship Channel? Eric Slifka: We're outside of it, yes. Selman Akyol: Just outside Okay. Can you talk a little bit about the acquisition environment? And you noted that store counts were lower relative to where you were third quarter last year. And so I'm just curious to more to go there? Or do you think you can add stores from here? How should we be thinking about that? Gregory Hanson: Yes. Stifel, it's Greg Hanson. I can talk a little bit about the sites. I mean, I think we went through a pretty big optimization program on our sites last year. So year-over-year, we've -- in the last 12 months, we've sold 7 sites. We've converted 15 sites, and then we terminated some of our dealer relationships that were low margin. So we continue to optimize. I think that said, there's probably not that big a runway right now on sort of site divestitures for us. I think we're pretty happy with our portfolio in general. It still looks a little obviously down year-over-year because last year was a big optimization period for us. But we'll continue to, I think, move around the edges on that portfolio, but we're pretty happy where it is now. And then on the M&A side, I think overall, it was pretty quiet going into the fourth quarter on the retail M&A. I think we're seeing some signs of life and more deals that are out there on the fourth quarter on the retail side. And then the terminalling side, we continue to look at opportunities as we go through the year. But I think that we have seen a pickup on the retail side. Selman Akyol: Got it. So Parkland, which is north of the border, was recently acquired, but they have stores in the U.S. Do you face much competition from them? Gregory Hanson: We do not. No. We don't -- we're not in -- none of our retail, the GDSO segment operates in their footprint as of today. Selman Akyol: Got it. And then there's been reports of sort of the lower end consumer being under pressure. And I'm wondering if you're seeing that and if you have any thoughts going forward on that? Gregory Hanson: Yes. I mean we've -- I think not unlike a lot of other retailers out there, we've definitely seen it this year. There's definitely pressure on lower income. You see consumers trading down from more premium brands to more sub-generic brands. We continue to try and leverage our loyalty program that Eric mentioned earlier to grow promotions. But I think it's -- yes, they've definitely been under pressure overall. That said, we look at the quarter, we were pretty happy with this summer, how the C-stores did. We were actually up year-over-year, and that's not even adjusting for same site. That's just pure, and we were down 16 company-operated sites year-over-year. So to be above on the GDSO station operations is pretty good in our book. It was a decent strong summer. And where we're located in the Northeast, I think, continues to be trend towards a higher income consumer. So overall, we're pretty happy with how the summer went on the C-store. But yes, I would agree. I mean, I think it's pretty well recognized that the lower-end consumer continues to face pressure, but the higher-end consumer has been continuing to spend, which is good. Selman Akyol: Got it. And then the last one for me. Just how is labor going for you guys? Is it getting any easier? Gregory Hanson: It's the -- I would say the wage inflation has calmed down a little bit. But operating in a retail environment, you continue to face a lot of high turnover. But compared with the '22 and '23 time frame, I think we're still -- we're in a better place. I think what we're working on is trying to optimize around our labor hours and make sure we have the right associates in the right stores to optimize sales, and we'll continue to work on that. Selman Akyol: Got it. I guess what I was thinking about is, is it easier to get people now? Are you seeing more resumes, more people? I mean resume is too strong of a word, but are you seeing more applicants, that kind of thing? Gregory Hanson: Yes. I think we are overall versus the last couple of years, definitely. Operator: We have reached the end of the question-and-answer session. Mr. Slifka, I'd like to turn the floor back over to you for closing comments. Eric Slifka: Thanks for joining us this morning. We look forward to keeping you updated on our progress. Everyone, have a great Thanksgiving. 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: Good morning, ladies and gentlemen, and welcome to the Emera Third Quarter 2025 Earnings Conference Call. [Operator Instructions] This call is being recorded on Friday, November 7, 2025. I would now like to turn the conference over to Dave Bezanson. Please go ahead. David Bezanson: Thank you, Joanna, and thank you all for joining us this morning for Emera's Third Quarter 2025 Conference Call and Live Webcast. Emera's third quarter earnings release was distributed this morning via Newswire and the financial statements, management's discussion and analysis and the presentation being referenced on this call are available on our website at emera.com. Joining me for this morning's call are Scott Balfour, Emera's President and Chief Executive Officer; Greg Blunden, Emera's Chief Financial Officer; and other members of Emera's management team. Before we begin, I'd like to advise you that this morning's discussion will include forward-looking information, which is subject to the cautionary statement contained in the supporting slide. Today's discussion and presentation will also include reference to non-GAAP financial measures. You should refer to the appendix for a reconciliation of historical non-GAAP measures to the closest GAAP financial measure. And now I will turn things over to Scott. Scott Balfour: Thank you, Dave, and good morning, everyone. Emera enters these last months of 2025 with solid momentum. Our third quarter marked our fifth consecutive quarter of strong adjusted earnings growth, which has been underpinned by disciplined execution and customer-focused investments and reflects both the strength of our strategy and the quality of our portfolio. With a record $3.6 billion in capital investment this year and a newly extended 7% to 8% rate base growth profile, and a $20 billion capital plan through 2030, we're confident in our ability to continue to deliver sustainable value for customers and shareholders alike. This morning, we reported third quarter adjusted earnings per share of $0.88, a nearly 9% increase over the same period in 2024. Year-to-date, adjusted earnings per share of $2.94 represents a 14% increase over the same period in 2024. The progress this year sets us up well to deliver on our 5% to 7% adjusted earnings per share growth guidance through 2027. In September, our Board of Directors approved a 1% dividend increase, our 19th consecutive year of annual increases. This continued growth in our dividend reflects our confidence in the strength of our premium asset portfolio and our ability to deliver consistent earnings and cash flow growth. We remain focused on delivering value to all stakeholders and we're delivering. We're on track to deliver our largest annual capital spend of $3.6 billion in 2025, with more than $2.6 billion already deployed across key projects, including solar and reliability investments at Tampa Electric, energy storage and transmission upgrades in Nova Scotia, and gas infrastructure at Peoples Gas, and we remain on track to fully execute on our full year plan. Looking forward, our 2026 to 2030 capital plan adds $20 billion of essential investment across our portfolio, enabling us to continue to deliver the reliable energy our customers expect. Like many across the sector, we see increased demand for core investments in reliability, resilience, modernization and generation capacity driven by key market conditions, such as accelerating demand growth, changing grid configuration, renewables integration and of course, electrification. Put simply, there is no shortage of investment opportunity across our portfolio. Our capital plan thoughtfully maintains our 7% to 8% rate base growth trajectory as we remain focused on pacing our capital investment in a way that best delivers value and manages cost impacts for customers while also delivering solid and sustainable growth for investors. Affordability for customers is an important consideration that we must balance with the need to invest in our systems to ensure we were able to reliably deliver the energy our customers need. Since our acquisition of Tampa Electric in 2016, Tampa Electric's rate base has grown by more than 8% annually, driven by investments to support the delivery of essential service to our customers. Over the same period, Tampa Electric's bill increases have remained below the national average. Our success in managing customer cost impacts is driven by prudent cost management, smart investments and a focus on strategic initiatives that deliver value for customers. For example, our solar investments in Florida have saved customers more than USD 350 million in avoided fuel costs. In Nova Scotia, investments required to meet growth in the province to maintain reliability in the face of increasing severe weather and to support government policies of closing coal plants are also driving rate base investment and growth. And we're working to find creative solutions to minimize the impact on customer rates. Last year, Nova Scotia Power is supported by both federal and provincial governments, we securitized more than $600 million in fuel costs and the recently filed consensus general rate application proposes an additional $700 million of securitization related to a portion of Nova Scotia Power's thermal generation assets. These steps are helping to minimize near-term customer cost impacts and demonstrate the thoughtful approach we continue to take in managing rates for customers. Florida continues to be a powerful engine of growth, with robust population and economic expansion driving increased demand for electricity and natural gas. In the last 5 years, Florida has experienced nearly 38% GDP growth. And in 2024, it was the #1 state for net migration and experienced the second highest population growth in the country. To support that growth, more than 80% of our capital plan will be deployed here. The influx of new customers has translated into increased demand for both electricity and natural gas across both residential and commercial sectors. At Tampa Electric's capacity needs grow as a result of economic development, our 2026 to 2030 capital plan includes approximately $1.2 billion of transmission expansion and capacity improvements, averaging approximately $240 million of investment per year. This is in addition to the more than $2 billion of anticipated ongoing spend on solar and complementary energy storage projects, which will result in 2,100 megawatts of solar to be in service by the end of 2028. At Peoples Gas, our investments will be targeted at bringing new customers online as we see continued growth in natural gas demand. In addition, our investments will continue to focus on hardening the system and increasing reliability for customers. As a direct result of the growth we continue to see in Florida, we expect rate base growth from our local utilities to outpace the average of our consolidated plan with these investments driving 8% to 9% rate base growth through 2030. And with the recently approved settlement of Peoples Gas and last year's Tampa Electric rate case, both of which include subsequent year adjustments, we are pleased to have regulatory clarity in support of our investment in rate base over the next 3 years. I'd like to acknowledge that a capital plan of this size is not just numbers on a page. It requires a team of dedicated professionals to execute on. I'm very proud of our teams across all our companies that year after year developed thoughtful plans to take our customers' current and future needs and government regulations and policies into consideration, anticipate what it will take to execute and then go out and deliver on these plans, safely and efficiently. We made a meaningful regulatory process in 2025. The Florida Public Service Commission approved the Peoples Gas settlement with USD 67 million of new rates to go into effect in 2026 and subsequent year adjustments of USD 25 million and USD 5 million in 2027 and 2028, respectively. The settlement agreement also reflects a 15 basis point increase in return on equity, bringing it to 10.3%. This agreement helps to manage regulatory lag and the recovery of investments and important reliability and distribution expansion needs across the state. Earlier this week, the FPSC formalized Tampa Electric's 2026 base rate increase of USD 88 million, which was approved as part of their 2024 decision. In Nova Scotia, the utility filed a consensus general rate application with the Nova Scotia Energy Board in September, requesting new rates for 2026 and 2027. This consensus GRA reflects agreement reached with all customer representatives following extensive engagement and constructive collaboration with key stakeholders across the province. The hearing has been scheduled for January 2026, and we expect a decision and new rates early next year. The GRA enables critical reliability and infrastructure investments necessary to support the needs of Nova Scotians, which are reflected in our updated capital plan. If approved as filed, the settlement provides Nova Scotia Power with a path to return to earning its approved ROE in 2026 and 2027. Finally, at New Mexico Gas, the sales process is proceeding. The regulatory hearing began earlier this week, and we remain confident in obtaining regulatory approval in early 2026. Before turning the call over to Greg, I wanted to highlight that while we extended our rate base growth forecast today through 2030, we've maintained our 5% to 7% adjusted earnings per share growth guidance through 2027. We plan to roll forward our EPS guidance on our fourth quarter call in February of 2026. And with that, I'll turn the call over to Greg. Gregory Blunden: Thank you, Scott and all of you for joining us this morning. Turning to our financial highlights. This morning, we reported third quarter adjusted earnings of $263 million and adjusted earnings per share of $0.88, compared to $236 million and $0.81 in the third quarter of 2024. This represents a 9% increase in our Q3 earnings per share. Year-to-date, we reported adjusted earnings of $878 million and adjusted earnings per share of $2.94, compared to $603 million and $2.10 per share in 2024, representing a 40% increase in earnings per share over the same period in 2024. The robust earnings growth the business has delivered so far has translated into a 23% increase in operating cash flow compared to the same period last year when normalized for fuel and storm deferrals. In addition, recently, we issued USD 750 million in hybrids, effectively replacing the expected proceeds from the sale of New Mexico Gas this year and derisking our hybrid maturity in 2026. This quarter's cash flow growth, in addition to the hybrid offering in late September has delivered an over 150 basis point improvement in our key credit metrics since this time last year, bringing us to 11.9% on a trailing 12-month basis for the must-watch Moody's metric. Turning to the drivers of our third quarter results. Adjusted earnings per share increased $0.07 to $0.88 compared to $0.81 in Q3 2024. At Tampa Electric, new rates in 2025, reflecting the level of capital we've invested on behalf of customers and continued customer growth increased contributions by $0.16 compared to the third quarter of 2024. Contributions from our other electric utilities modestly increased due to lower operating costs and a slightly stronger U.S. dollar increased adjusted earnings by $0.01 during the quarter, while a higher share count decreased adjusted earnings per share by $0.03 compared to 2024. Contributions from our Canadian Electric Utilities decreased $0.04 compared to the third quarter of 2024, primarily driven by higher operating costs and higher depreciation expense. Timing differences in the valuation of long-term compensation and related hedges primarily related to a large gain recognized in 2024 drove a $0.02 increase in corporate costs compared to the third quarter of 2024. And at Emera Energy, favorable weather conditions that led to higher natural gas prices and increased volatility, modestly increased contributions from marketing and trading, but this was offset by lower earnings at Bear Swamp due to an outage. And at our Gas Utilities, lower contributions from New Mexico Gas and Peoples Gas decreased earnings by $0.02 compared to the third quarter of last year. Year-to-date adjusted earnings per share is up $0.84 compared to the same period in 2024, many of the drivers for the quarter are the same as for the year, but there are a few items I'd like to highlight. In addition to new rates at Tampa Electric in 2025, driving increased earnings year-to-date, favorable weather conditions in Florida contributed $0.07 year-over-year. The timing differences in the valuation of long-term compensation related hedges and the reversal of a valuation allowance on deferred tax assets, also drove lower corporate costs. The weakening Canadian dollar increased the earnings contribution from our U.S. operations by $25 million for the year, contributing $0.09 year-to-date. Emera Energy's year-to-date performance reflects the record first quarter where cold weather in the Northeast early this year brought higher pricing and market volatility that the business was able to capitalize on. As a result, in the first quarter of this year, we adjusted Emera Energy's earnings guidance up to a range of USD 35 million to USD 45 million. And contributions from Canadian Electric Utilities benefit from the recognition of investment tax credits related to the ongoing energy storage projects and favorable weather in Nova Scotia in the first quarter of 2025. This was partially offset by the sale of our equity interest in Labrador Island Link in June of 2024. Our capital plan for 2026 to 2030 is similar in size to our previous capital plan, and that is true for our funding plan as well. The only change in our funding plan this year is the inclusion of the proposed asset securitization at Nova Scotia Power that Scott mentioned earlier. The largest source of funding for our new $20 billion capital plan will continue to be reinvested cash flows from our operations. We expect organic cash flow generation to provide 45% to 50% of our funding needs. We expect debt to be issued by our operating companies to support staying in line with the regulated capital structures. And at the holding company, we expect to maintain our holding company debt at 30% to 35% of total debt. As Scott mentioned in his regulatory update, a final decision on the sale of New Mexico Gas is expected in early 2026, and we remain confident in a constructive outcome. Proceeds from the sale will be used to fund approximately USD 700 million of our capital plan. And in addition, Nova Scotia, the expected securitization of thermal assets will contribute an additional CAD 700 million for our funding needs. We continue to expect to access equity markets through our DRIP and ATM programs for up to 10% of our funding needs, supporting the strong profile of organic growth reflected in our $20 billion capital plan. On average, this represents approximately $400 million of equity annually. And we believe hybrid capital has an important role to play in meeting our funding requirements and are pleased with the competitive rates we accessed in the hybrid market a few weeks ago. The 50-50 debt equity treatment by rating agencies makes them attractive tools that we will strategically access to fund up to 5% of our funding plan. And with that, I'll now turn it back over to Scott. Scott Balfour: Thanks, Greg. Before I move into my closing remarks, I want to take a moment to acknowledge that after nearly 10 years, this will be Greg's last earnings call as CFO. On behalf of all of us at Emera, I'd like to thank Greg for his significant contributions over the last decade. Over his tenure, Greg helped the company to navigate a challenging macro environment, unexpected headwinds driven by policy changes and help to absorb our transformative acquisition of TECO. Thanks to Greg's leadership today, Emera is on solid financial footing and well positioned to execute on the organic growth we see ahead. And importantly, I'm pleased that Greg will continue to be part of the team in his new role of Executive Vice President, Finance for our U.S. Utilities supporting our largest and fastest-growing businesses. We also look forward to welcoming Jared Green to the Emera team as our CFO as of December 1. Greg will, of course, work closely with him to ensure a smooth and seamless transition of finance responsibilities, as Jared steps into his new leadership role at Emera. More broadly, for everyone in our industry, this is a critical time to invest in meeting growing demand while strengthening resilience and improving efficiency and, of course, being focused on affordability for customers. Emera will continue to build on our strong momentum, executing our customer-focused $20 billion capital plan at a pace that best manages cost impact for customers. With a strong foundation, premium portfolio of assets and expert teams, we will continue to deliver value for customers and shareholders alike and achieve our targeted adjusted per earnings per share growth. This concludes our formal presentation, and we now open the call for questions from our analysts. Operator: [Operator Instructions] The first question comes from Rob Hope at Scotiabank. Robert Hope: And Greg, all the best. Thanks for all the years. Okay. Maybe just taking a look at the capital forecast. So if we compare the capital forecast that you put forward today versus your prior one, there seems to be a little bit of a different shape specifically a little bit less capital here in the next couple of years, looks like across the board and maybe a little bit more in kind of that '29, 2030 time frame. Can you maybe speak to kind of how some of the capital has been shifted as well as kind of what the key drivers are there? Gregory Blunden: Yes. Rob, it's Greg. I think there's a couple of things. One of the things that you may notice is that some of the planned capital at Tampa Electric for the '26 and '27 period. Some of that has been accelerated into 2025, in particular, around some of our solar investments and getting in front of some of the uncertainty that we see from a policy perspective a couple of years out. And secondly, as part of the rate settlement at Peoples Gas, there was an agreement with intervenors that some of the capital we had planned to spend, it would be better to profile that out over a little bit longer period of time. So that would be an example of a couple of things. Robert Hope: All right. Appreciate that. And then maybe once again on the capital forecast. What -- how do you think about your credit metrics as being a governor or maybe to ask us a different way, are you seeing potential upside to the forecast? And would you be willing to go there if it did require some incremental equity? Gregory Blunden: I think as Scott said, Rob, there's no shortage of opportunities to deploy capital in our business. I think it's a question of pace. And when we look at that, we look through all lenses in terms of the ability to execute the lead times on certain equipment, the impact on customer rates and whether there's any kind of regulatory lag associated with large capital projects and, of course, funding and credit metrics are part of that as well. But like I think many companies in our sector, we're not going to shy away from issuing equity if we need to, to fund accretive capital projects in our businesses. Operator: Next question comes from John Mould at TD Cowen. John Mould: First, best wishes to Greg on the next step, and thanks very much for your assistance. I'd like to just start appreciating it's early days here, but starting with Wind West. It continues to be topical across political levels came up in the federal budget. I appreciate any involvement by yourselves would be on the transmission side. But wondering what conversations have you been a part of on this initiative? How are you thinking about potential scale and timing? And maybe just higher level comments on the broader opportunity for Emera that could come from this push on projects of national importance. Scott Balfour: Yes, John, thanks for the question. And I may get Peter to add on to perspective you hear from me here. So first of all, obviously, it's still very early days on all of these projects of national interest that are all at various stages of planning activity, some -- as you know, the SMR program in Ontario is already under construction. And I think from a broad perspective, from Emera's perspective, we're here, we're interested in seeing how this progresses. We're cheering the premier on certainly for his bold vision as it relates to the Wind West initiative. I'm pleased that the federal government seems to have been captured with that vision and enthusiasm. But of course, it is still very early days, we'll be looking to support the premier's initiative in any way that we can. You're right, we would not naturally look to be participating in offshore wind development. That's not our game. But if we can be assisting those developers with subsea connection into Mainland Nova Scotia, we can be assisting and participate in the transmission build requiring to bring that energy to broader markets beyond Nova Scotia. Of course, we're interested to be doing that. We'll be paying attention, of course, to the Budget Implementation Act, which is expected in the coming weeks. It will increasingly provide more clarity. We will support the office of the -- that is organizing these projects of national interest led by Dan Farrell in any way we can. So at this point, we're early days. We're trying to be helpful to the parties that are there, and there's still a lot of questions to answer as to where this project sits and its timing. But overall, I think it's exciting to see that the focus of the federal government and many premiers is on enhancing and building national infrastructure in Canada, and we'll be pleased to play any part in that, that we can. Peter, anything you want to sort of add a little more Nova Scotia perspective within that? Peter Gregg: I think you covered it really well, Scott. But I'd just say, I think the potential for that East-West transmission is real. We've looked at that in the past. I think it's an exciting opportunity getting a lot of attention at both the provincial and federal level. I think the opportunity to start optimizing generation resources through transmission links in the region is something we should look at. I think it's good for Nova Scotia, and I think it's good for Atlantic Canada. So we'll continue to stay close to the conversation and see what happens. John Mould: Okay. Great. And then just going back to the capital plan and the generation aspect in Florida, you commented earlier about the magnitude of customer savings that solar investments in Florida have brought through avoided fuel costs. Just curious, as you work through your capital plan, how did all the moving pieces with the federal tax credits and some of the [ FEEAC ] concerns or uncertainty effect where you landed in terms of the timing of generation spend and whether there's potential for further customer saving investments there if you do get further clarity on some pieces of that puzzle. Gregory Blunden: Yes, John, it's Greg. Yes, the fuel savings that Scott referred to, obviously, is related to the build of the solar in our service territory that is obviously economic for customers, and part of that is the availability of tax credits. And if I go back to my comments in response to Rob, that's one of the reasons why we've accelerated some of the otherwise planned solar investments for the next couple of years is to advance those projects, realize the savings for customers earlier and also just get in front of what could be some policy uncertainty in the next couple of years. So it hasn't changed our overall plans, but on solar, in particular, a little bit more sooner rather than later. Operator: The next question comes from Maurice Choy at RBC Capital Markets. Maurice Choy: Can I just start with the Nova Scotia rate case? I wanted to specifically ask about your engagement with the Nova Scotia government proceeding up to the settlement and even after the filing with the regulator, particularly given the government's public comments about the rate impact, and with that, what can be done to avoid the outcome that we saw in 2022? Peter Gregg: Thanks, Maurice. It's Peter again. I think obviously, affordability is on a lot of people's minds, including our premier. I won't speak for the premier. But when we look at how we came to this filing, and I think it's important to underline that it's a consensus filing, as Scott mentioned, with all of the customer representatives. So we spent several months working with them. I think we found the path to balancing reliability and affordability through this rate case. So I think it's significant that it is a consensus agreement that was filed. And we're on a path to that hearing in early January. Obviously, you would imagine there have been ongoing discussions with provincial officials for months, those continue. We do have a productive relationship with officials inside the government, and we continue those discussions. I think it's important, too, that the premier statements, while he's concerned about affordability and I understand that, his statements have also been that they will become intervenors in the process, the regulatory process, which is normal, that the government does have a lawyer that participates in that. So that's our expectation. We'll continue to prepare for the hearing in January. Maurice Choy: Maybe as a quick follow-up. Are you detecting any differences in, say, body language or engagement that would avoid the legislative intervention? Peter Gregg: No, no. We continue to have those discussions with, I'd say, partners in government on a number of files, a number of issues. We'll stay close to that. But again, I think the strength of the filing in front of the regulator because we spent all of that time with all the customer representatives. I think, has struck that right balance between reliability and affordability. Maurice Choy: That's great. And if I could just finish up with a discussion about credit metrics and payout ratio, I wasn't much mentioned here about credit metrics. And I remember, Greg, that previously, you mentioned that the funding plan supports about a 50 bps improvement annually in your cash flow to debt metrics as well as payout ratio towards 80% by 2027. Just thoughts on what the funding plan and CapEx plan today... Gregory Blunden: Yes, I think -- thanks for the question, Maurice. Yes, nothing has changed from our view with the funding plan is consistent with what we had before and with the soon to be closing of the sale of New Mexico and the securitization of the thermal plants or assets at Nova Scotia Power. We fully expect to continue to have that level of improvement in our credit metrics over the next couple of years. So we're very pleased about that. On a trailing 12-month basis, we are at our downgrade threshold or a threshold with Fitch now who has us at stable. We've got about 150-plus basis point cushion on our downgrade threshold at S&P, they have us at stable. And as I mentioned in my remarks, we are effectively at the 12% with Moody's as well. So albeit we're still on negative outlook. So all to say is we've accomplished what we needed to do and the path for further improvement over the next couple of years has not changed. Operator: The next question comes from Eli Jossen at JPMorgan. Elias Jossen: Just wanted to kind of start on the strategic leadership changes. Congrats to Greg on next steps and Jared and the rest of the team just top priorities going forward. I think the release highlighted a lot of the strategic goals for the business, but just from a very high level, how should we think about this leadership transition moving forward? Scott Balfour: Yes. Eli, thanks for the question, and welcome to Emera. So yes, I mean, this is really just about continuing to strengthen the bench as we've shared with others in the past, Greg and I are within months of the same age and looking to bring Jared in and just continue to strengthen the bench. We're blessed with -- I'm blessed with working with a great team. And as I say, pleased that Greg can continue to contribute to the team and adding Jared on just continues to bring some fresh talent and fresh perspective and position us well for the future. And we've got great talent those that are on this call and their teams underneath them. We're, as I say, blessed with a team of really terrific people. We don't -- I don't use that term in the call script, expert teams lately, I really believe that we've got a deep bench and a strong team and just continue to think about ensuring that succession planning in the years ahead, continues to be thoughtful as we've navigated in the past with a number of executives retiring and not missing a beat and keeping the momentum that we've got a strong performance through the piece. So just looking to continue to do that. Elias Jossen: Great. And then maybe just pivoting to some of the attractive growth that's been discussed on this call in Florida. So I guess, can we just talk a little bit about potential pockets of upside beyond the plan that you see, whether that's in the near or longer term? What do those look like from a mix shift industrial possible data center opportunities across your service territory? Scott Balfour: Yes. I think Eli, I would say, first of all, I'd anchor back to the point that Greg made, which is there is no shortage of capital for us to invest. We could easily put forward a capital plan that saw significant more CapEx over the next couple of years. But we're working really hard to balance that capital investment profile with the impact on affordability for customers. And at the same time to make sure that we can execute it both safely, but also cost effectively and construction capacity and supply chains in this market are constrained. And so there's risk that in the ability to execute with excellence as I think we have over the years in our capital programs. And so that is sort of home base for us. Now as you mentioned, data centers, data centers have not yet been a part of our story. But I would say that we continue to see active interest in and by the data center side of things in our service territories, of course, particularly in Florida. And there's nothing material that we're in a place to share now, but it continue to be encouraged by the conversations. And I would like to think that we may see some opportunity to grow at the very least to make sure that we're sustaining that 7% to 8% rate base growth for durable time, which I continue to believe. But over time, we may see some opportunity to upside that. But as we sit today, we've continued to believe that 7% to 8% rate base growth profile is kind of the sweet spot, and data center growth may help to support the affordability impacts on broader customers if we can use some of that revenue generation from data centers to mitigate cost impacts for the broader system. This is all part of the equation that every utility I know is dealing with. And as we sit today, as I say, that 7% to 8% growth is home base for us, and we see that as durable for a long time. Operator: The next question comes from Mark Jarvi at CIBC Capital Markets. Mark Jarvi: Scott, when you guys gave EPS guidance, I think you said you wanted walk before you run and weren't comfortable going out to sort of 5 years. As you think about rolling over guidance next year, is the plan to stay with that 3-year guidance? Or would you line that up with the capital plan to 5 years? Scott Balfour: I mean, we haven't fully landed on that yet, Mark, but I would reasonably expect that we'll stick with the 3-year forecast for now. Mark Jarvi: Got it. And then just one question on Maritime Link. It's depreciating asset kind of a bit of a drag on the rate base CAGR. It doesn't require capital. But what's your view on that asset? Are you wedded to it? Is there a lot of strategic value when you think about potentially some of the transmission opportunities in the Atlantic provinces, just sort of long-term view on that asset? Scott Balfour: Yes. It's a pretty strategic asset, I think. I mean it really is just an extension of Nova Scotia Power. It's regulated by the same regulator as Nova Scotia Power, all of that cost profile effectively it is, in a way, a generation source for Nova Scotia Power through import through the Maritime Link. So it really is tagged with Nova Scotia Power. And the only reason really it was separated into its own distinct entity was for financing purposes, and being able to secure the federal loan guarantee. The federal government was looking to ensure that, that asset was physically separated -- legally structurally separated from Nova Scotia Power. So I'd really think of it as an extension of Nova Scotia Power. Mark Jarvi: Would there be an opportunity to maybe do like a minority sale if you saw some other opportunities to continue to push rate base investments across your portfolio? Scott Balfour: We've always got options like that, Mark, but not something that we're thinking of or pursuing at the current time. Operator: [Operator Instructions] The next question comes from Ben Pham at BMO. Benjamin Pham: I have a follow-up question on the Mark's query on the EPS CAGR. I'm wondering from the Emera perspective, when you think about setting the CAGRs and that starting year, you roll forward. How do you guys thinking about '25 as a base just because you had the marketing trading benefit and Tampa rates going up, like it's a high starting point that it's tough to get a CAGR that looks similar to the last or the current CAGR that you have right now? Scott Balfour: And I think -- sorry, go ahead Greg, if you want it. Gregory Blunden: Yes, Ben, I think if you think back to when we first established it, there was a couple of, I'd call it, baseline assumptions that was embedded on the 5% to 7%, and that was that Emera Energy would earn kind of their midpoint of their earnings range of $15 million to $30 million, and it was also based off a consistent foreign exchange rate over the period. So again, I don't want to get over our skis in terms of what we're thinking about for February. But I think it's fair to assume that when we talk about going forward, EPS guidance, it would be normalizing for some of those things that were a bit of a tailwind in 2025. Benjamin Pham: Okay. That makes sense. And what we're seeing from other companies as well. Can you talk about -- I'm not sure if on Nova Scotia Power, the rate base CAGR you have here, it's been quietly creeping up over the years in a good way. What's in that rate case? What's driving that? And I assume you note here, you're normalizing for the thermal securitization, it's apples-to-apples? Gregory Blunden: Yes. We are, Ben. The rate base investments going forward in Nova Scotia Power are really focused on reliability investments. And predominantly, if I take even a step back, transmission and distribution investments. And what I would include in that also is like battery projects, battery storage. So transmission upgrades between Nova Scotia and New Brunswick, strengthening the backbone of the transmission system in the province, more vegetation management and other distribution things all the things to support the transition to an ISO in New England and ultimately getting to our 2030 renewable energy targets in Nova Scotia. Benjamin Pham: Okay. Maybe just one last cleanup question. I know there's a -- I think I saw a positive contribution from BlockEnergy, which I thought your Emera shutdown a while back, is that different now in terms of where that business is? Gregory Blunden: No, we had a settlement on a contract that we had accrued last year as part of the wind up and the settlement was more favorable than we would have anticipated. So basically, just adjusting for an over accrual from 2024. Operator: We have no further questions. I will turn the call back over for closing comments. David Bezanson: That concludes our call for today. Thank you all for joining us. Please reach out to the Investor Relations team if you have any further questions. Have a great weekend. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.
Operator: Greetings, and welcome to the Conduent's 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, Joshua Overholt, Vice President of Investor Relations. Thank you. You may begin. Joshua Overholt: Thank you, operator, and thank you for everyone joining us today to discuss Conduent's third quarter 2025 earnings. I'm joined today by Cliff Skelton, our President and CEO; and Giles Goodburn, our CFO. We hope you had a chance to review our press release issued earlier this morning. This call is being webcast, and a copy of the slides used during this call as well as the press release were filed with the SEC this morning on a Form 8-K. This information as well as the detailed financial metrics package are available on the Investor Relations section of the Conduent website. During this call, we may make statements that are forward-looking. These forward-looking statements reflect management's current beliefs, assumptions and expectations and are subject to a number of factors that may cause actual results to vary materially from these statements. Information concerning these factors is included in Conduent's annual report on Form 10-K filed with the SEC. We do not intend to update these forward-looking statements as a result of new information or future events or developments, except as required by law. The information presented today includes non-GAAP financial measures. Because these measures are not calculated in accordance with U.S. GAAP, they should be viewed in addition to and not as a substitute for the company's reported results. For more information regarding definitions of our non-GAAP measures and how we use them as well as the limitations to their usefulness for comparative purposes, please see our press release. And now I would like to turn the call over to Cliff. Clifford Skelton: Thank you, Josh, and thank you, everyone, for joining Conduent's Q3 2025 earnings presentation. As you can tell, Josh Overholt is now our new Head of Investor Relations. We've been waiting for Josh to arrive from the other side, if you will, where Josh was part of an investment team we periodically communicated with. It's great to now have Josh's advice as our new Head of FP&A and Investor Relations. Let me start by saying, wow, it's been kind of an uncertain ride in our federal government lately, as you all know, with the shutdown. I've often said that the bulk of our business in the public sector is at the state and local level, even though some of the funds the states distribute come from the federal government, obviously. We're lucky enough that most of these funds are entitlements unaffected by shutdowns, although SNAP, for example, can come with some concern. We were told as recently as yesterday that the emergency fund allotment is now at 65% and includes our administrative fees. So that's good. So far, we haven't seen an impact due to unfunded programs, but we have seen an occasional wait-and-see perspective from time to time on new deals and milestones. Regarding the quarter from a financial perspective, it was a good quarter as it relates to adjusted revenue, EBITDA and margin. We're proud of our performance given the current environment, and we're equally proud to see consistent sales performance and an expanding sales pipeline. Revenue was in line with guidance, slightly up sequentially to $767 million and directly in line with our pursuit of positive year-over-year growth objectives. Giles will talk about the puts and takes in revenue in a few minutes. EBITDA also came in as per guidance with both year-over-year and sequential improvement at $40 million and a margin of 5.2%, up from 4.9% last quarter and 4.1% in Q3 of 2024 and exactly where we said it would land in our Q2 narrative. Regarding sales, performance was consistent and steady year-over-year amidst some reticent buyers who were a bit preoccupied with the government shutdown in the public space specifically. Meanwhile, Commercial sales is a bit behind performance expectations as we focus on changes to our go-to-market approach and look to upgrade business development leadership. Still, there is pent-up demand in the Commercial space, and the pipeline has expanded and will expand further. As mentioned previously, the opportunities and momentum in our Transportation business specifically remains strong, and the Government pipeline indicates some very strong buying signals and go-forward opportunities. Once the shutdown concerns are behind us, cash and milestone achievement hurdles will also open up and manifest. In previous earnings, I stated that our portfolio rationalization efforts were underway, and those efforts continue in a manner that we hope to discuss no later than Q4 earnings as we continue our strategy work. Meanwhile, as you know, we've refinanced our revolving credit facility, allowing us to pay off our Term Loan A balance, further simplifying the balance sheet. Again, the timing of milestone payments in the shutdown influenced environment should soon free up cash payments and improve the free cash flow metrics and cash on the balance sheet. As we look to rightsize our Board and further populate it with folks that have been in our industry, we added a new Board member the last week of October, who is the former Chair of Deloitte U.S., Mike Fucci. We're confident that Mike will add new perspective and new support across both the Commercial and Government businesses based on his background and leadership experience. Now I'll talk in my closing remarks about our AI initiatives and some of our recent wins. This will be important because one of the topics we need to focus on is our technology strength versus our operational peers. We need to showcase our significant capabilities and the resident AI initiatives more forcefully. A recent proof point is that we're now beginning to actually license some of our software with built-in AI to our clients, proving that we aren't strictly a services company, but a service technology integrated business that has proprietary intellectual property far and away more impressive than our BPaaS competition. One example of how we're showcasing our capabilities is our recently developed AI experience center in New Jersey, which we're beginning to socialize with some of our biggest clients in the health care and auto manufacturing businesses. Meanwhile, Giles will take you through the detailed financials. We are still directly on course despite some of that lumpiness that happens, especially in the Government space. Finally, with patience, you'll soon see that our portfolio rationalization plan is clearly underway and working. With that, let me turn it over to Giles. Giles? Giles Goodburn: Thanks, Cliff. As we've done in the past, we are reporting both GAAP and non-GAAP numbers. The reconciliations are in our filings and in the appendix of the presentation. Let's discuss the key sales metrics on Slides 5 and 6. We signed $111 million of new business ACV in the quarter, consistent with prior year. Year-to-date 2025, new business ACV is up 5% versus the same period in 2024. While we have line of sight to achieve stronger sales this year than in 2024, the uncertainty surrounding the speed to execute agreements within the government agencies could push some deals into 2026. Within the quarter, we signed 10 new logos and 25 new capabilities, both sequentially up versus Q2 and on a combined basis, up 7% year-to-date versus the prior year, with the strength coming from supporting our existing client base with new capabilities. New business TCV was up 5% versus the prior year at $246 million. This was another strong quarter of sales execution in our Transportation business, which includes the Richmond Metropolitan Authority new logo win and puts that segment up 320% year-to-date versus 2024. Our qualified ACV pipeline remains strong at $3.4 billion, which is up 9% year-over-year. The strength here is driven by our Government segment as we pursue opportunities in the federal space. Let's turn to Slide 7 and review the Q3 2025 P&L metrics. Adjusted revenue for Q3 2025 was $767 million compared to $781 million in Q3 2024, down 1.8% year-over-year, but within the range that I guided last quarter. Transportation generated another quarter of strong growth. However, the decline was driven by our Commercial and Government segments, which I'll discuss in more detail in a moment. While still down year-over-year, we continue to narrow the gap towards positive revenue growth. Adjusted EBITDA for the quarter was $40 million as compared to $32 million in Q3 2024, and our adjusted EBITDA margin of 5.2% is up 110 basis points year-over-year, again, right in line with where we guided and a sequential step-up versus last quarter. Let's turn to Slide 8 and review the segment results. For Q3 2025, Commercial segment adjusted revenue was $367 million, down 4.7% as compared to Q3 2024. We continue to experience volume declines in our largest Commercial client, which is a significant contributor to the lower revenues. Excluding this largest client, our top 25 Commercial accounts grew year-over-year, most notably from within our health care vertical. We also signed another software license agreement in the quarter to a large public health plan, but these positives only partially offset the lost business. Commercial adjusted EBITDA was $37 million, and the adjusted EBITDA margin of 10.1% was up 100 basis points year-over-year. The drivers here were the software license agreement I just mentioned and cost efficiency programs more than offsetting margin from lost business. Government segment adjusted revenue for the quarter was down 6.7% at $238 million. This decline is attributed to the impacts associated with completing several implementations in the prior periods and extending several implementations in the current period as well as a client canceling an implementation to perform the work in-house. Adjusted EBITDA was $61 million, slightly higher than prior year, with adjusted EBITDA margin of 25.6%, up 210 basis points versus Q3 2024. The drivers here resulted from our AI initiatives and efficiency programs, resulting in lower fraud, labor and telecom expenses, offsetting the negative implementation impacts. Transportation segment adjusted revenue was $162 million for the quarter, an increase of 14.9% year-over-year, while adjusted EBITDA was $4 million and adjusted EBITDA margin was 2.5% for the quarter, up 250 basis points versus Q3 2024. Both revenue and EBITDA improvements were driven by strong equipment sales in our international transit business. Unallocated costs were $62 million for the quarter versus $63 million in Q3 2024. The improvement here is driven by our cost efficiency programs in the corporate functions, which more than offset significantly higher employee health care claims activity we experienced in the quarter. Let's turn to Slide 9 and discuss the balance sheet and cash flow. During the quarter, we completed the refinancing of our revolving credit facilities by amending the credit agreement, allowing us to prepay in full the Term Loan A, reduce the revolving credit facility to $357 million, of which $187 million extends to 2028 and $170 million continues to mature in 2026. We also added a $93 million performance line of credit facility maturing in 2028. We utilized the revolving credit facility to prepay the Term Loan A and at the end of the quarter, had $198 million unused. We ended the quarter with approximately $264 million of total cash on balance sheet and adjusted free cash flow for the quarter was negative $54 million. Free cash flow in the quarter was impacted by a number of timing items. Firstly, we are still awaiting a number of contract amendments being approved by federal government agencies, which given the current environment is taking longer than usual and is a prerequisite for us billing clients for work already performed. Secondly, we are in the post-implementation phase for a couple of contracts in the Government and Transportation segments, which once stabilized, will allow us to routinely bill and collect for steady-state operations and maintenance activity as well as bill the final milestones. The combination of these 2 factors are the reason for the increase in both our contract assets and accounts receivable balances compared to last quarter. Of the $168 million contract asset balance at the end of Q3, we expect to bill over $100 million by the end of Q1 2026, assuming the federal government resumes a more normal level of operations. Our net leverage ratio increased to 3.2x this quarter, which was a result of the cash flow items I just referenced. Capital expenditure for the quarter was 3.8% of revenue, and we repurchased approximately 4.7 million shares in the quarter at an average price of $2.70. Let's turn to Slide 10 and look at the 2025 outlook. At the beginning of 2025, we guided the year under the assumption of broad stable macroeconomic conditions. During the third quarter and entering into Q4, we are starting to feel the impact of a reduced federal government workforce in certain agencies, delaying the progression of RFPs and contract approvals, compounded by the current extensive government shutdown, which in combination creates greater ranges of variability and predictability in where we will finish the year financially. The good news is we still believe we will achieve the adjusted EBITDA margin range of between 5% and 5.5%. However, we now believe adjusted revenue for the year will be between $3.05 billion and $3.1 billion, and adjusted free cash flow will be dependent on the timing items I referenced earlier. As we enter the final stages of 2025 and the 3-year exit rate targets established back in 2023, we feel we are making good progress with the business and we'll lay out 2026 expectations when we deliver Q4 earnings in February next year. Turning to Slide 11. We continue to make progress with Phase 2 of our portfolio rationalization strategy. And as Cliff stated, we will provide further updates no later than our Q4 earnings. We incrementally increased the number of shares repurchased to approximately $70 million and are confident in achieving the $1 billion of capital deployment we committed to in early 2023. That concludes the financial review of third quarter 2025. And if you now turn to Slide 12, I'll hand it back to Cliff for his broader view on the business. Cliff? Clifford Skelton: Thank you, Giles. As always, a couple of closing comments prior to taking questions. Our revenue continues to reflect the puts and takes of our transformational journey, while, as you can see, adjusted EBITDA and margin are meeting expectations on the high end and continue to be predictable. You can now tell that we remain on track for the 2024 to 2025 EBITDA expansion we've been talking about, where we said you should expect a significant increase and then continued year-over-year increases in adjusted EBITDA and margin. Meanwhile, we're focused on revenue and conversion of working capital to cash for the remainder of 2025 as areas somewhat inhibited by a weaker start in Commercial sales and as mentioned, some deal pushes in the Government space associated with the timing of milestone recognition and what was in anticipated government shutdown in late Q3. But again, much demand remains pent up and on the horizon. Some tactics we have underway are as follows: we revised our Commercial go-to-market and leadership model to take out layers and produce increased opportunities to penetrate our current client base. We're enhancing sales and revenue generation talent to open new doors with proven leaders in the BPO and BPaaS technology industries. Not only have we embedded our solutions with more Gen AI, but we've begun to do a better job telling our digitization and AI story, including the as mentioned launch of our AI experience center in New Jersey and the deployment of numerous AI initiatives, not pilots, but real production solutions in areas like agent assist, language smoothing, language translation tools, automated indexing in our digital platforms and automated detection of pharmaceutical reportable events, all of which will drive margin expansion and open new revenue generation opportunities. We've seen significant fraud reduction in our electronic payment card platforms as well due to AI deployment. The bottom line is we will tell these stories more often as our clients continue to ask for innovation and examples of where we can help them do their jobs better. Conduent solutions, unlike many of our competitors, are based on technology platforms infused with AI and automation that enable better outcomes for our clients. And we deploy our CapEx to continue to evolve these solutions with new innovation to solve client challenges. We've also seen some new software license wins with our HSP claims adjudication platform, which now opens up new pathways for not only more software licensing of that product, but potentially simplifying the claims process for even larger health care insurance payers. A couple of other proof points for our quarterly progress. We refinanced our revolving credit facility, as mentioned. The sales pipeline is growing, and there are definitely deals in the waiting. Our transportation business has seen an expected uptick in sales with some recent wins in Richmond Pay-by-Plate processing, as Giles mentioned, additional work in the Bay Area tolling space, additional transit work in Abu Dhabi in Israel as well as a recent transit win in Greece, among others. As mentioned in the past, the journey clearly has twists and turns, evidenced by phenomena like government shutdowns and natural disasters, which we certainly have contingency plans for. But we're continuing that progressive path toward year-over-year growth and have already seen the pitch up, if you will, from the EBITDA trough we described in 2024 to growth. The plan is working. As mentioned, more rationalization is on the horizon as is continued margin expansion from the cost coming out of the center and less capital intensity associated with future expected transactions. Thanks for listening today, and thanks to our 55,000 strong team for their hard work. Finally, I'd be remiss if I didn't send best wishes to our folks in Jamaica, but also in Cebu, Philippines, where hurricane activities have done serious damage to those environments and the necessary ingredients of everyday life. So far, our business continuity efforts have held our operations in good stead, but many have real personal hardship to deal with. As I stated, we're optimistic about our future and see sunny skies ahead. Thanks, and I'll open up to the operator for questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Gowshi Sri with Singular Research. Gowshihan Sriharan: Can you hear me? Clifford Skelton: Yes. We got you, Gowshi. Gowshihan Sriharan: Just -- you flagged that you had near closes in Q2 that was -- that was expected to close in Q3. How much of that pipeline actually closed this quarter given that the closings were kind of flattish year-on-year? And would that be -- would we be seeing some acceleration if the government shutdown eases up? And when would that be? Clifford Skelton: It's sort of like the small animal through a snake. It's coming through. I think it's exacerbated, Gowshi, in Q3 because of the government shutdown due to timing in the federal government releasing some deals in places like the CMS where approval is needed in order to get states to be able to approve health care deals, Medicaid deals. I don't see any massive change from Q3 to 2 to 3 to 4 other than in that Government space that we just talked about. Gowshihan Sriharan: Got you. I know you highlighted Gen AI deployment in both Government and Commercial space. How are you measuring productivity or quality gains that will concretely boost the client stickiness or cross-sell opportunity? Any solutions that might be in the public sector win? What is your expectation on the contract size and the margin uplift from the Gen AI pilot? Clifford Skelton: Yes, it's a great question. The primary pilot in the Government space is in our fraud category, specifically in our Direct Express program where address validation is really important. We've used Gen AI to expedite that and create a faster determination from our associates. We see that spreading throughout the Medicaid and the SNAP environments as well, where we can reduce fraud quickly, and that's been a big mission of the federal government as well. In the Commercial space, it's more around customer experience where everybody is deploying fraud, things like language translation, smoothing, agent assist, those kinds of things as well as where we see a real opportunity in scanning and indexing where we can use Gen AI to automate the indexing to create a claims adjudication-ready platform for our clients. So that's a big space. That's going to create both revenue and expense opportunities. The fraud space is more about expense reduction opportunities. What's still outline is how do we pass those capabilities on to the client. In other words, where do we share in both those expense reductions and those revenue increases. Those are contract by contract, to be honest with you, and it's going to depend on exactly what the endeavor is. Giles Goodburn: And just to add to that, Gowshi, we're seeing the expense -- positive expense impact from the fraud initiatives in the Government space turn up in the P&L now and in the last quarter as well. So we're seeing the fruits. Clifford Skelton: And we're seeing in Commercial as well. Yes. Giles Goodburn: Yes. Gowshihan Sriharan: Got you. Given that there's a negative operating cash flow, I know you said 87% of that -- the divestitures done. Are there any specific cost out of stranded cost areas left to tackle? What's the internal time line for fully realizing those benefits? Giles Goodburn: Yes. So I think we're through the initial phase of stranded costs related to the divestitures we did last year. Clearly, we're in the process of Phase 2 of the portfolio rationalization, and there'll be a little bit that we act on in 2026. One thing I will say is we do have a very strong cost discipline in the organization, and we're continually looking to optimize areas, whether it's in spans and layers in the organization or our real estate portfolio. So it's a continual effort, and we'll keep on that journey. Gowshihan Sriharan: Okay. And just my last question. As you -- given the environment as it is, are you changing the contract clauses or structural changes, especially given the recent Government or Commercial deals to reduce churn risk or exposure to budget delays? Clifford Skelton: No, we're not, Gowshi. I mean the thing to remember here, given the government shutdown is it hasn't affected our revenue stream. It's affecting the timing of milestones and the release of sales opportunities that all are going to get through the end of the snake, as I mentioned earlier. But the revenue stream and the revenue deployment is not affected, and we're primarily a state and local government business in the public sector. So we see no reason to change the model as we speak today. Operator: Our next question comes from the line of Marc Riddick with Sidoti & Company, LLC. Marc Riddick: I was wondering if you could talk a little bit about the client mix that you're seeing, particularly on AI endeavors. You made mention of the fraud focus. I was wondering maybe you could talk a little bit about maybe what the industry verticals look like and maybe if there's sort of a first movers, if you will, that are engaging and maybe what you're learning from them? Clifford Skelton: Yes. It's two different questions really depending on whether it's Commercial or in the Government space. In the Commercial space, we're in the neighborhood of 30% to 40% in health care. And a lot of the opportunity from an AI perspective and efficiency perspective and potentially even the fraud reduction perspective, although not yet, is in that health care space. In the Government space, it's a different kind of health care. It's Medicaid processing primarily and Medicaid eligibility, where there's a lot more fraud and a lot more opportunities to reduce expense and drive fraud reduction. So I mean, it's 2 different opportunities, but most of those opportunities from an early mover perspective are centered around health care. Marc Riddick: Great. And then as we sort of think about the opportunities on the Commercial side. I was wondering if you could talk a little bit about as we sort of look into next year, I can understand some delays with activity and the like. But do you get the sense that there's any particular areas that you would like to shore up bandwidth or sort of maybe the level of comfort that you have as far as being able to meet opportunities -- growth opportunities on the Commercial side? Clifford Skelton: On the Commercial side, I mean, if you think about our product sort of penetration, we're less than 2 products per client, which for a company that has as many products and opportunities as we have is too low. We're very focused on that client penetration, especially in our top 60, top 80 clients. And we're putting some new processes in place to deploy against that. Again, health care is a big play there. But the continuum -- for example, the continuum of service and claims adjudication from -- all the way from the beginning of a claim through the servicing of a claim as opportunities end, we're intently focused on that. And we're also focused on some software deployment and software licensing opportunities that we've never really deployed in the Commercial space. We just had our first one with our HSP license to a midsized client in California. We've always done it to a lesser degree in public health medicine in the public sector with our Maven platform, but we're now starting to do the same thing in Commercial. So we see real upside here in technology deployment. We see real upside in further penetration of our current client base. We're putting a new business development team together to feed the top end of that pipeline better, which we think is the Achilles' heel for us in Commercial. It's really not sales execution. It's feeding the top of the pipeline. So we're all over that, and then we're all over the penetration of our current client base. Giles Goodburn: And I think, Marc, we're seeing some of the results in that, right? As I said in my remarks, on a year-to-date basis, we're up year-over-year as far as new capability sales are in the Commercial and overall in the Conduent organization, and that's selling new product into the existing client base. And specifically, as it relates to Commercial, put aside the largest client that we've got, the other '24 of '25 clients are growing year-over-year as well. So we're seeing some of that actually flow through into the financials. Clifford Skelton: I mean that's a great point. While we're not satisfied with our Commercial sales in 2025 just yet, I mean, absent that one client, it's already growing. So there's real opportunity. We're seeing growth already. We just need to outrun that one client. Marc Riddick: Got you. And then so do you potentially see -- I think there was a mention made as far as adding talent, sales talent. Is there sort of a general time frame or sort of runway that you see there? I guess that's kind of a '26 question. I know we're not doing '26 guidance, but I guess maybe I'm sort of thinking about the time frame of how some of that might roll out. Clifford Skelton: Well, it necessarily will affect '26 performance, but it necessarily needs to happen in Q4 2025. Operator: And we have reached the end of the question-and-answer session, and this also does conclude today's conference, and you may disconnect your lines at this time. We thank you for your participation. Have a great day.
John Andersen: Good morning, everyone. My name is John Andersen. I'm the Chairman of the Board of Norsk Titanium, and welcome to this third quarter operational update. I know that you are all eager to hear from our new CEO, Fabrizio Ponte. But since Fabrizio joined us only 4 weeks ago on October 6, we thought it was appropriate that I make some introduction on our performance in the third quarter before leaving the floor to him. We also have online our CFO, Ashar Ashary. Ashar is unfortunately unable to travel due to a back injury, but he will be able to participate in the Q&A session. So just a quick reminder of our position in the additive manufacturing space. Norsk Titanium has a proprietary technology validated by the OEMs with large installed capacity. This is our starting point. We have a significant value proposition, and we do have manufacturing capacity installed and ready to serve our customers. We operate in what we would describe as a large market. As of today, we estimate the addressable market to be at USD 7 billion. Now you might argue that, that's quite a bit to work with in itself. But clearly, this market will continue to grow over time for 2 reasons. First of all, we see increasing build rate in our core markets, first and foremost, aerospace, defense, and then on the other hand, we continue to expand on our capabilities, so we will be able to serve a growing proportion of the market as we continue to expand on these capabilities, both in part size and into new metals. And finally, we have an established customer base. We have frame agreements with the leading OEMs. And our focus now is really to make sure that we can grow the business under these framework agreements, the existing ones and the ones to come. So this is really our starting point, a qualified technology, a certified technology, installed capacity, it's all about commercial execution, and you will hear more about that later in the presentation. What happened in the third quarter? Well, first and foremost, we did transition 2 additional industrial parts into serial production. I openly admit that this was less than we expected and less than we hoped for. It doesn't mean that opportunities have disappeared. But as you have seen before, it do take time to convert these opportunities into serial production. So what happened in addition? First of all, we continued to progress our discussions with Airbus. These are discussions in the short term about the third production order that we know many are following closely and waiting for. These discussions continue to progress with a wide range of stakeholders in Airbus, and Fabrizio will speak in somewhat more detail about that later. In addition, we also work with Airbus under a longer-term road map. And when Fabrizio talks about that later, please have a look at how the interaction between Airbus and ourselves map to the road map that Airbus has announced publicly about how they intend to expand the utilization of additive manufacturing. Then we had strong -- then we see strong momentum in defense, which is no surprise, I think, to -- for people following that sector today. Governments increased their spending in defense and time is of essence for obvious reasons. We have an ongoing discussion with ICAM, which is the Innovation Capability and Modernization Office under the Department of Defense. They have named our technology a key enabler to be able to drive increased capacity for defense products across a number of domains in the U.S. So we are hopeful that this will increase our revenues short term because these are paid development activities. And at the end of this development time line, 18 months, there will be increased serial production. And this is a good illustration of what defense offers, right? They offer funded development activities as well as significant parts manufacturing opportunities. Then we continue to expand in industrial markets. This is also something that Fabrizio will talk a bit more about later. But of course, the 2 parts that I mentioned is targeted in those specific markets. We did raise $22 million to strengthen our balance sheet and to strengthen our financial position first in a private placement and then in a repair issue closely thereafter. Under the same heading, we have also, after having made initial investments in the first half to make sure that we have the capabilities needed to convince our customers, we have also then taken a more careful approach to our cash burn in the third quarter, and you should expect those activities also to continue to make sure that our costs are aligned with our revenue development. Clearly, as I started with, our #1 challenge, our #1 priority is to convert our technology position, our industrial position into the commercial opportunities. And that's an excellent segue into my introduction of Fabrizio Ponte. Why did we feel that it -- that he had the right profile to lead this company forward? It's about commercial execution. It's about operational readiness. It's about financial discipline. And you will hear now from Fabrizio in his own words, how he feels that his background makes him very well equipped to take on this challenge going forward. So with that, Fabrizio, please. Fabrizio Ponte: Thank you, John. All Right. So maybe I take control. Can you hear me okay? So good morning, everybody. I'm Fabrizio Ponte. I'm the new CEO of Norsk Titanium. And I can tell you, I'm really excited to be here in Oslo and to have joined Norsk Titanium. A little bit about my background. I've been -- I spent the last 30 years replacing metal with very special polymers, okay? And now I made a jump on the dark side, joining a very special company in very special processes, making very special metal parts, replacing forgers, okay? So I know the drill. I know what it takes to get from point A to point B and push it across the tipping point. Why am I excited about Norsk Titanium? I mean, first and foremost is the technology. I mean, it's a game changer. From the outside, before joining, I studied a lot. I saw the potential for this technology. But then as soon as I joined, I started to hear about the pull that we have from the market, aerospace structures, defense and many other industries. And this gives me really, really a lot of confidence for the future of Norsk Titanium. What do I bring to the table? As I said, I've been working on replacing metal. So I know how to set up operation, scale operation and work with the markets, multiple markets in order to make technological changes. And this is very, very exciting to me. I think this is what I bring to Norsk. And I think with all the expertise that we have and the commercial expertise that I bring, we are going to be very, very successful in the coming years. As a leader of Norsk Titanium, I mean, I'd like to share a little bit what I believe. And first of all, quality and safety for me are nonnegotiable cultural traits. It is important that especially when you operate in aerospace and when you operate in defense, quality is nonnegotiable, okay? So you need to make sure that everything you do meets the standards of your customers. So this is going to -- I think it is, but it will remain a very important feature of Norsk Titanium. The second most important thing that is always in my head are customers. I have, I say, customer obsession. I really believe on working and everything has to be done with the customer in mind. I mean we exist because we have customers. So we need to serve our customers and working with them, gaining their trust and developing partnership is very important, especially in markets like this, where it takes time to develop and you need to have working in partnership together because together, you're going to cross the finish line. I believe on accountability. I believe in team play, but at the same time, I believe in accountability. So we are going to set clear targets that we're going to work very hard to deliver. I really believe that we have the right expertise in place. I saw that in my first month in the job. And this gives me also a lot of confidence. All right. So that's a little bit about me and a little bit about why am -- I joined Norsk Titanium and what I believe in. What is going to happen -- what has happened in the first 30 days? What is going to happen in the next 60 days? We had a plan for my first 3 months. No questions about it. There is a lot that I need to learn. As I said, I come from a very similar background, specialty products, replacing technologies and making advances in the market and scaling operation. But at the same time, titanium and special alloys are different than polymers. So of course, I need to learn. And the first -- and I'm really trying to be a sponge. I've been working very hard in the first 30 days internally. I'll continue to do that in the coming months. I mean, I believe I will learn from my colleagues and my team at Norsk, but I also will learn from customers. And I can tell you, as soon as I'm finished here in Norway, next week, my tour with customers will start with a number of very important discussion already lineup. This will help me to understand where we are, what we do and what our customers think of Norsk Titanium and what is in the future. Now what is the plan here? The plan is laid out across 3 different dimensions. Number one is commercial execution. I'm lucky enough to have joined Norsk Titanium with a rich pipeline of work. So it's not that I'm starting from scratch. So Norsk has been around for quite some time and advanced the technology and the customer relationship quite a bit. So I take advantage of all that. But I'm really trying to understand and digest what really our status is and what is going to take in order to really go across the finish line from the commercial standpoint. To me, that's my priority #1 in the first 3 months. In parallel, I'm working with operation. We want to be ready when we will need to serve large volumes with our operation. And scaling is always a big challenge. You never know what is going to happen. I mean -- but you need to be prepared, you need to get to a certain level. And then when it's going to hit, you need to know what the plan is and what to do. So I'm working with my operation to understand the strong points, the weak points and work towards making sure that we are ready when we need to be ready, which is going to happen very, very soon. Last but not least is financial discipline, okay? We have a finite funds available, and we know that we need to work with that in mind. So it is important that the entire company is aware of that and it works with the right discipline from the financial and the cash standpoint. So this is critical, and I'm positive we are in the right direction here. All right. So let's jump into the business. And I'll do my best to provide you an update. Please -- and I know that I can use this excuse only once, so I'm using it today. So -- but I've been with the company for 30 days now. It's actually the 6th. I mean, it's 1 month today, okay? So it's my birthday today, 1 month with the company. But I'll do my best to provide you an update of what happened in quarter 3 and a little bit of an outlook for the future. And -- okay, I'd like to say that quite a bit happened, okay? So of course, we continue to deliver parts to Boeing and Airbus. It's not huge, as you saw from the numbers. But nevertheless, we are making parts that are currently flying on different airplanes. So that's a very good starting point. But what I think made a difference in this quarter is really the ongoing discussion that we had with Airbus. This is really I'd like to think, a partnership between Norsk Titanium and Airbus. Airbus is focused on implementing additive manufacturing within their processes. They see additive manufacturing as a key enabler to the next-generation airplane. And they know that in order to get there, they need to translate parts now in order to be ready. And this is where Norsk Titanium comes into play. So Norsk Titanium is one of the key players in the technology at Airbus. We have -- you can see here the road map that Airbus has developed, and you can recognize some of our parts already there. So this is very comforting. You can see our position with Airbus. I don't have to explain that to you. Very -- I think we've been very active and with a lot of intense discussion, you understand that commercial aerospace is a very regulated market. You need to go through the steps and the steps are controlled by the OEM. Our job is to support them, help them, push them sometimes to stay at target. But these discussions are ongoing on a daily basis, okay? So next week, one of my first stop is going to be exactly with these guys. And because I look at Airbus as a very strategic and relevant customer and opportunity, which is going to really unlock the potential for us. What is even more remarkable is, as I said, the Airbus is looking into using additive manufacturing as a pivotal technology for the future. There are a lot of discussion on how Norsk Titanium can support Airbus to do that. This really goes beyond the third production order that John referenced. So of course, the third production order is the step that is going to take us over there. But even more exciting to me for the future is the fact that they want to work with us in order to define the standards of additive manufacturing. So that's very comforting and very exciting for me as a CEO and for Norsk Titanium as a whole. Last but not least, also to help you to understand how we work in the industry and what we need to do in order to really cross the finish line. I think this was a couple of months ago, we organized a very strategically important meeting with all the regulators, North American and European and Airbus. And altogether around the table, we discussed how to sort everything out and how to make progress towards part manufacturing with our technology and in additive manufacturing. So I think this is very unique when a company is able to bring around the table the key stakeholders that are going to make the decisions and define plans with key milestones in order to move forward is really a remarkable thing. I'm very excited about commercial aircraft. I think I'm excited about structures. I'm excited about other application we are working on like in engines and other parts in the aerospace. It's very, very good, okay? Second, defense. Defense is changing. It's a new industry. I mean it used to be as conservative and as regulated as aerospace. Now the situation is, because of geopolitical drivers, is a little bit different. So the industry is trying to acquire speed. The industry understands the need to change the way it makes parts and develops technologies that will make parts faster, stronger and in a much larger scale. We are an enabler to that, okay? And as John mentioned, we've been selected by ICAM, so the Innovation Capability and Modernization Program within DoD on 18 months program to validate our technology. So they're going to work in order to qualify us and validate us. When they qualify the technology, then to go and make parts, it becomes much, much easier, okay? So we are going to work very hard in order to succeed in these 18 months. And when we are at the end of the program -- and by the way, we are going to work with a number of primes there. We're not just there by ourselves. Then we're going to go and start to enable part manufacturing in a number of, let's say, sectors within the defense, air, land, sea, these are all targets that we're going to go for. And I think this is going to provide quite a bit of surprise -- positive surprises to us. Number three is all the industrial part. So we have a good starting point. We are already in semiconductor. I've been operating in semiconductor in a previous life. This is an important part. It is a wafer carrier. It goes to one of the -- if not, is one of the most important OEMs in the semiconductor industry. I'm very excited about this. They had a slowdown. Now things are picking up again. I'm going to be meeting these guys next week, too. And I think semiconductor is going to be also an opportunity. It's the first, let's say, industrial application that we are in production and gives me comfort that our technology has a play outside of just pure aerospace. As you read from the summary, we also converted other 2 parts in 2 other industrial applications. So all this tells me that we are on the right track. We -- before my time, so I will enjoy that, too, we set up -- we have started to set up a commercial team. We have dedicated and focused sales and [ biz ] development managers working in industrial. We mapped the entire industry. We understand what the priorities are. And we have a number of focused discussion with key OEMs in a number of industries, energy, again, semiconductor, oil and gas and a few others. So this will bring quite a bit of diversification. As I said, we've been all in aerospace, which is heavily regulated with a long development cycle for quite some time. All these markets are less regulated than that. There are going to be faster cycle, and I think they're going to bring opportunities in a shorter period of time and make up to the delays that oftentimes we have to bear within the aerospace industry. So to conclude, okay? So I'm the new CEO in Norsk Titanium. I'm very excited to be here. I like to believe I'm really the right person for this very moment in Norsk Titanium. I come exactly in the time where we need to go across -- we need to push it a little bit, go across the tipping point and then really start to scale it, and I know how to do that. So I'm very excited about this. I think I worked in the last 30 years to get to this opportunity. So I really think that my background helped me to be here, and I'm really energized to go after this challenge and take Norsk Titanium to the next level. I see this as the opportunity of my lifetime. We are really focused across 3 different work streams, okay? Commercial, operation and financial. Commercial to me, I always say starts first, we need to make sure that we secure our revenues, profitable revenues. So we need to -- in the next months and years, we need to work with our customers in order to secure our revenues and make the jump that Norsk Titanium needs to make. This is the priority #1. Everything else follows, okay? Operation, being ready in an efficient way, but also being able to scale it. And in additive manufacturing, it's slightly different than in other industries. So you scale in a different way that, for instance, you scale in the polymer industry, okay? But you need to be sure that you do that ahead of time. You cannot be caught off guard when you are there. And then financial discipline, very important across the entire industry. Finally, obviously, modest near-term revenue. I mean you saw that this year as certainly we cannot claim a victory and -- but having said that, we made solid steps towards success. I'm very positive about that. I mean when people ask me, what you see. And what I see is I'm very confident about the future and the outlook. I have no doubts about that. So I always say it's not a matter of if, but it's a matter of when. My job is to make sure that this when comes as fast as possible, and I will work diligently and with a lot of energy in order to make sure that, that happens. Thank you for today. I really hope this was informative. I hope you know me a little bit better. You started to know me a little bit better. I think in the coming quarters, this will continue, and we're going to get to know each other and work together for the future and to make Norsk Titanium very successful. Thank you, everybody. Unknown Executive: Thank you, Fabrizio and John. I think we'll move over to the Q&A section. So we'll start with the audience here in Oslo. Please raise your hand if you have any questions. And please state your name before you ask the question. Unknown Attendee: [ Preben Rasch-Olsen ]. I have actually 3 questions. I hope that's okay. A few of them should be pretty easy. First, on the outlook, no mentioning of any revenue targets next year or 3 years from now. Are you finally done with that stupid guidance? Fabrizio Ponte: I may take this one. So okay. You say it's a stupid guidance, so I accept your constructive feedback. I've been here for 4 weeks, okay? So I'm working to understand exactly what we have in place, what our customers are saying and expecting from us. So very difficult for me to give you a firm feedback on this. I mean I'll work another couple of months. So in the next review, which is going to happen early next year, I mean, we're going to talk about that. But yes, I mean, it's -- maybe we will stop the stupid guidance... Unknown Attendee: I think that's smart. What you could guide on and would be interesting to hear is a realistic cash burn in the first half of '26. What sort of the level you can reach and should reach? Fabrizio Ponte: So also here, I mean, we are -- okay, we're already reducing this. I mean we were successful at going from $2.9 million to $2.4 million. Now we want to go at USD $2 million. But certainly, before the end of the year, I want to be in the position to set a target that we can absolutely achieve, which is not going to go up, but it's going to go down. What is achievable? I cannot tell you right now. But what I can tell you that I'm committed to define a very clear target that we're going to work on and deliver on an average for next year. But this is absolutely, as I said here, one of our targets. I mean we know that we need to reduce our cash burn rate, and we're going to do it, okay, one way or another one. Unknown Attendee: And last one is really on the aerospace. My understanding was that you sort of was done with all the approvals from the regulators. But you were saying you're sitting down with Airbus and the regulator... Fabrizio Ponte: Okay. I hear too. And you can correct me if I say something stupid, okay, [ Preben ]. So okay, It's -- okay, first of all, you know that there is a government shutdown in the U.S. This is impacting us a little bit. So right now, actually, everything is blocked and standing still until they reopen, the government. I mean they cannot progress. Aligning the FAA and EASA is not easy work, and they need to be aligned for us to be approved to go forward. So everything is done. We need to complete the paperwork. And this did not happen for multiple reasons. Hence, we decided to take the bull from the horn. We brought everybody around the table to do exactly that. This also says that, hey, we are not sitting and waiting hoping that it's going to happen. We are actively trying our best to influence and progress, which is not easy work, believe me. John Andersen: So if I may add to what Fabrizio said because this is also a legacy issue, right? So you're absolutely right, [ Preben ]. The fundamental approvals, the fundamental certification is obviously there. But if you look at Airbus road map and what they want to do going forward, we cannot continue to work in the same way. We cannot continue to approve additive manufacturing parts with a forging legacy. And the regulators agree, and Airbus agrees. So this was more about how can we streamline processes going forward, how can we ensure information flow, how can we have an approach that actually is based on the fundamentals of additive manufacturing, right, not to reopen the certification process, but to make things more efficient going forward. Because if you look at the road map that Airbus has been quite vocal about, it requires a change also on the regulator side. And it's a bit unusual, right, that both the regulators sit down, as Fabrizio said, with a company like ours to actually talk about -- I mean, it's like the regulators would actually accept that we are really the point of gravity in the additive manufacturing space. We have gone through this cycle. There are no other additive manufacturing companies that have gone through this cycle. So we put them together in the same room, which they don't do often. And then we can talk about how to make this efficient going forward because otherwise, there is a risk that we will have stumbling blocks as we try to help Airbus implement their road map. That's how to think about it. Unknown Executive: Any more questions in the audience? Okay. We'll move over to the web. With delay in revenues, what operational changes have been made to ensure better execution as revenue scales? John Andersen: So maybe I can start because this is a bit of legacy. So -- and this ties in with what we discussed earlier about burn rate, right? So we did make certain investments, which we also described in our third quarter update. We did make certain investments to be ready in the first half and hence, the slightly higher burn rate. Now we are in a position where we can manage that more carefully. So it goes to a number -- it goes to capacity, it goes to inventory. It goes to securing downstream capacity, not only in-house capacity. It goes to how we approach testing. I mean it's a wide range of operational issues that we can fine-tune and therefore, on the one hand, still be a credible supplier because that's important, right? We don't want to do anything which would give our customers the possibility to escape, if you like. On the other hand, we also need to be mindful and disciplined in how we allocate capital. Fabrizio Ponte: And on the other hand, I mean, we put a lot of efforts also of creating a commercial force, which is now dedicated to bring home revenues. So go out, hunt, bring them back. And I think that's really also a big change, and we're going to continue down the line to become better and better at going out and bring back opportunities that we can serve, okay? So that's a very big change. Unknown Executive: Good. And following up on the cash burn topic. Are you self-funded with your current cash balance? John Andersen: Well, I don't think that we will change the messaging because this refers back to what we did in the first half report. And I think we have no other message at this point in time. You have heard Fabrizio and his plans for the next 60 days. I'm sure that we will look for ways to accelerate. We will look for ways to be more disciplined and not go back to any specific guidance different from what we have already given the market at this point in time. Unknown Executive: How is the diversification progressing? And what are your strategic priorities going forward? Fabrizio Ponte: So I think it's progressing well. I mean we mapped -- we spent, I think, a month together with a consulting firm to put together a thorough map of the opportunities, matching our technology with the different industries. We were able to identify 3, 4 key industries. And now we are focusing on those industries, and we have a go-to-market strategy in every single one of them. We have a single point of accountability for every single industry, and we are now working already with customers on projects and on parts. So they bring back their ideas, their blueprints and we come back with the pricing. And so it's, I think, progressing well, and I'm very, very happy on the execution that we have. We're going to take this now forward in a step up in the coming months. John Andersen: And if I may add to that, we have talked about this also historically. Our value proposition in aerospace and in aerostructures is pretty clear. I mean, the customers are complicated to navigate, as Fabrizio talked about, but our value proposition is pretty clear and our customers value the properties of the parts. In the industrial segment, it's a little bit different. So you need to be more selective in how you identify parts, right? Because our value proposition could be a bit different from industry to industry and from customers to customers. So of course, the Hittech part, it's not like Hittech and the end customer necessarily need aerospace quality for the strength of the material, right? It's really our ability to reuse material consumption. That is the key value proposition that we offer on those particular products, right? So you have to be a bit more mindful about how you approach customer and therefore, this more deliberate approach that Fabrizio just described. Fabrizio Ponte: Yes. And then the positive thing is that, okay, in aerospace, the tailwinds are very clear, okay? So they need to increase their build rates. They need to change their production processes in order to meet those build rates, okay? This is very clear. I can tell you that we see tailwinds also in all those markets. I mean if you can be out there with a technology that is faster, that is more efficient, both from the raw material standpoint and the power consumption and you can work with customer in a nimble and quick way, then you have a very strong value proposition. And we see that across multiple industries, and I'm positive we'll be able to identify the areas where we can be successful fairly quickly because these are, as I said, not as regulated as aerospace. So technically, the development cycle should be much faster. So still technical because we are not in the business, I always say, of potatoes and tomatoes. We are business on selling very technical parts that make a difference and oftentimes are structural. So you need to go through the steps, which is normal for specialty products. But then these are much faster than aerospace, where you have agencies that you need to convince OEMs that you need to align and so on and so forth. Unknown Executive: Good. You began the year with an annual recurring revenue of $12 million. Year-to-date, you have revenue of $2.6 million. And then assuming Hittech represents just a small portion of the annual recurring revenue, what explains this deviation? And maybe also remind people on your definition of annual recurring revenue. John Andersen: And maybe this is a question -- if Ashar is still online, maybe this is a question that you would like to address, Ashar? Ashar Ashary: Yes. Thank you. So yes, so the -- so let's start with the definition of annual recurring revenue. As you can see from this report in Q3 that we are not guiding to an annual recurring number anymore. Hittech is actually not a small portion of that $12.8 million number that we reported. It is actually quite a significant portion of that number because of 2 things. Volumes in 2024 were quite high. And it's a fairly large part as most of you have seen, and the dollar value of that large part was significant. So out of the $12.8 million, it was -- it was a significant -- it's a significant amount -- it was a significant amount of revenue. In 2025, as we have explained in the first half report, that purchase order was dwindled down because of the demand that Hittech was seeing. We do intend to bring that -- we have a purchase order for later this -- in Q4 to deliver parts to Hittech, but it is not at the same level as we were delivering in 2024. John Andersen: And then I think it's fair to say that we will continue to -- reflecting on the essence of the question, right, we will obviously continue to consider also in light of [ Preben's ] previously -- previous advice, what is the best way to guide forward and whether ARR is, in essence, a relevant concept for the industrial segment. I would still argue quite strongly that it's probably a relevant concept for the commercial aerospace segment. But as Fabrizio alluded to earlier, the industrial segment is more transactional in nature. So I think that, that is something that we need to consider in order to provide the best possible guidance to the market. Unknown Executive: And then we have received quite a few questions regarding Boeing and the status of your current relationship and the outlook, I guess. Fabrizio Ponte: I can start. We are delivering parts to Boeing. We are working on a number of development, helping them to learn and improve their knowledge on additive manufacturing. We are going to increase our discussions with Boeing. I've been working with them for a long period of time in another technology. So I will -- I'm bringing that along. I'm positive that there is opportunity there to go beyond the parts that we are already supplying and with all the developments that we have in place to have line of sight to part manufacturing, okay? So no doubt about it. Airbus is our current front-runner. Boeing is there, and I think there is opportunity to be -- to establish our presence very similarly to the one we have at Airbus. Unknown Executive: And then we have received some questions regarding Q4 and maybe order intake. So could you comment on how sales will look in Q4 and maybe comment on budget flush within your defense customers? Fabrizio Ponte: So I think Q4 is going to be also along the line of Q3. We are working very diligently and very actively to bring things home and to make sure that we are prepared for 2026. Defense, as you know, we are delivering parts also in the defense industry to a number of primes. But the development here, this is not here, but the one I discussed before, it's a game changer, not only because they're going to work and validate our technology, but also from the revenue standpoint, as John said, is an important number for us for next year. So it's a multimillion dollar contract that is going to unlock opportunities for parts. So we are extremely excited about this. John Andersen: And just to clarify, it's a multimillion dollar development contract, right, to establish the basis for parts manufacturing. So we don't know exactly how big that platform will be eventually. But I think it shows the commitment of the defense -- of the Department of Defense when they invest a few million dollars in developing this. And that makes us hopeful, as Fabrizio touched upon earlier about the potential there. That's not going to move the needle production-wise in the fourth quarter, just to make sure that we are on the same page. Fabrizio Ponte: But revenue-wise is relevant and... John Andersen: But revenue-wise, it's relevant. Unknown Executive: Then we have a question from [indiscernible]. Can you comment on the Airbus time line? And how do you expect the different steps from here to serial production and revenue recognition? Fabrizio Ponte: So -- okay. Again, difficult for me to provide point of contacts. I'm starting my customer journey at the end of the week. So I wish this question came a month from now. But I can tell you that there are very clear milestones that we know we need to hit, and we know how to get there. It's a matter now to work with Airbus to sort everything out and meet every single milestone in the next weeks/months, okay? So that's -- this is what is happening and where we are currently active. Ashar Ashary: Yes. And I would like to add to that. We are currently delivering Airbus parts that are in serial production. There are 12 part numbers that are in serial production with Airbus that we are delivering consistently right now and recognizing revenue. Unknown Executive: What sales advantages does the September MMPDS provide? John Andersen: First of all, right, this has been in the making for a while. And as you have seen throughout various updates, we have gone through qualification cycles with a number of OEMs, right? And the OEMs, they would typically have their own specification and their own framework and their own process to reach a qualified process or a qualified technology. With this particular standard, to simplify it, right, because MMPDS is a mouthful. But with this particular standard, that allows companies that do not have their own specification, that do not have their own design process for approval to basically use the properties that are in this standard, documented by our technology. So we are the first additive manufacturing technology to go -- that will go into the standard. And this is the go-to book for a number of engineering environments that are looking to bring new technologies into their various industries. So I would say that this is probably particularly important in industrials and also to some extent, in defense. But it really... Fabrizio Ponte: I think also aerospace is critical. I'm personally very excited about this. I mean the MMPDS is the handbook when it comes to metal parts. So as John said, I think this is coming out officially in December. So in December, we are going to be listed officially. We know it's going to happen, but officially is going to come in December. And you're going to read a lot about that because I think we need to give a lot of visibility and make sure that the industry understand how relevant that is. As John said, imagine, I mean, you are an engineer and now you're going to go to the handbook, the MMPDS, where you see that this technology is listed, validated, now you can make parts. And mechanical properties are in there, safety standards are in there. So it's really a game changer from my point of view. And then I think we need to make sure that we leverage that to expand our reach and make sure that engineers start to write specifications based on the standard we're going to have in this handbook. Unknown Executive: Is it possible to leverage this before it gets released in December? Fabrizio Ponte: So it's November 6. So I think we have another 25 days to do that. But what I can tell you is that in anticipation of the release, we are going to work on really a communication campaign to make sure that this is highly visible. And this will be used in the future to make sure that everybody understands that we are listed in the handbook and this can be used to make parts. So it is a game changer also for our [ biz ] development people, okay, so that they can go along with this. Unknown Executive: Okay. Last question from the web. With industrial market set to account for almost 50% of your, I guess, '26 target -- revenue target, what is the anticipated split among the different industrial segments like oil and gas, semiconductor and so on? Fabrizio Ponte: Yes. I think semiconductor will play an important part next year. This is already business that we have, and we are working to expand. We have 2 new parts which are in energy infrastructure. But I think the dominant part will be the semiconductor part. Unknown Executive: Okay. Do we have any last questions from the audience? No? I think that concludes today's presentation. So I would like to thank Fabrizio and John and of course, everyone watching in and being here in person as well. Fabrizio Ponte: Thank you. Thank you very much. John Andersen: Likewise, thank you.
Operator: Thank you very much. Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the MPS Group Third Quarter and 9 Months 2025 Results Presentation. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Luigi Lovaglio, Chief Executive Officer and General Manager. Please go ahead, sir. Luigi Lovaglio: Good morning, everyone. Thank you for joining us today for the presentation of our third quarter and 9 months 2025 financial results. This is a landmark moment for Monte Paschi. At the end of September, we successfully completed the acquisition of Mediobanca, a strategic move we have always believed in. And 86.3% of Mediobanca shareholders confirm that belief by tendering their shares. That's a clear endorsement of the industrial strength and the long-term value of this combination from both core shareholders and from Italian and international institutional investors. So first, let me thank all of our shareholders for their trust and confidence in our vision and in our ability to execute. I also want to thank our people. Our teams at Monte Paschi have stayed laser-focused through intense months, and they continue to serve clients, deliver strong commercial momentum and produce another solid quarter. They showed what that commitment to performance and integrity looks like. I also want to acknowledge our colleagues at Mediobanca as well. Their results this quarter demonstrate the resilience of their business model and the strength of their client relationship. That is exactly the kind of excellence we want to build with. Finally, thanks to our clients. Your continued trust is the foundation of everything we do. Together, shareholders, employees, clients, we made this possible. With Mediobanca, we have created a new competitive force in Italian banking. This combination brings together strong brands with deep client loyalty, exceptional professionals across both organizations, complementary business strength across Commercial Banking, Wealth Management, Corporate & Investment Banking, Consumer Finance and cutting-edge and scalable technology. This is an accretive combination financially, strategically and commercially. It accelerates growth and value creation. Our combination process with Mediobanca with more than 20 ongoing work streams is structured on track and is going smoothly with discipline. And I'm pleased to start working closely with Vittorio Grilli and Alessandro Melzi d'Eril, who will be key in ensuring that together, we reach new heights as an integral part of this project. We will present our group business plan in the first quarter of next year, that will be the moment to outline the full strategic and financial road map and potential power of the combined group. In the meantime, as you can see from the third quarter results, Monte Paschi continues to perform very well, thanks to the strength of our franchise and disciplined cost management. I am especially pleased to note that our people were not distracted by the Mediobanca transaction. Across the organization, they were able to stay focused and deliver on their business target to achieve profitable growth. We reached net profit at about EUR 1.4 billion, up by 17.5%, excluding net taxes. Our balance sheet as a consequence of the combination with Mediobanca continues to be stronger and stronger. We maintain a very solid level of core Tier 1 at 16.9%, including the preliminary impact of Mediobanca. This is higher than we expected when we announced the transaction in January. For the 2025 full year, we are setting new guidance on pretax profit. We now expect to well exceed EUR 1.6 billion. Let's move on to the 9-month results, which testify our capability to build sustainable value and deliver high returns to our shareholders. We closed the first 9 months with a net profit of EUR 1.366 billion, up by 17.5% year-on-year, excluding the positive net taxes in both periods, sustained by the solid growth fees, thanks to the clear focus on commercial activity. Third quarter net profit was EUR 474 million, up by 16.5% compared to the third quarter last year, confirming the solid progression while the quarterly comparison quarter-on-quarter was affected by the typical third quarter seasonality on revenues, while confirming a high level of profitability. Net operating profit increased by 3.7% year-on-year, reaching about EUR 1.4 billion in 9 months, thanks to resilient revenue sustained by fees, offsetting rate impact on net interest income almost totally, operating costs under control and improved cost of risk. Third quarter net operating profit at EUR 453 million, up by 2.4% year-on-year and decreasing by 7.3% quarter-on-quarter due to the seasonality. After 9 months, gross operating profit reached EUR 1.643 billion, almost stable year-on-year, thanks to the resilient revenues in a declining interest rate scenario sustained by fee income and cost well under control. Third quarter gross operating profit at EUR 532 million. 9-month cost-income ratio at 46%, stable year-on-year. Strong progression on bank's commercial performance in 9 months driven by the clear focus of Monte Paschi's franchise on key strategic areas. Wealth Management with gross inflow close to EUR 13 billion, up by 18% year-on-year. We granted mortgages to families worth EUR 4.8 billion, more than doubling last year volumes. New consumer loan showed a 17% increase compared to the same period of last year. These are tangible signs of bank deeply connected to its client and to the real economy. Our cost of risk dropped to 42 basis points in 9 months from 53 basis points last year. Gross NPE ratio 3.7% and net NPE ratio at 2% and NPE coverage at 48.7%. The combination with Mediobanca will lead to a further enforcement of the balance sheet structure of the new group. With a sound liquidity position with counterbalancing capacity above EUR 53 billion. Core Tier 1 fully loaded at a solid level of 16.9% including the preliminary impact of Mediobanca transaction, confirming best-in-class capital buffer and providing strategic flexibility. With the successful completion of Mediobanca tender offer, we are opening a new chapter in 553 years history of Monte Paschi. The 86.3% acceptance gives us clear governance from day 1 and the strategic flexibility to move quickly in implementing the combined industrial project. The new Mediobanca Board appointed on October 28 marks the start of the new phase of development for the combined group. But before we move forward, a warm welcome to our Mediobanca colleagues as we begin this new journey together. We are now one team, building the future. Now on third quarter and 9 months results. As I mentioned, net profit for the first 9 months reached EUR 1.366 billion, up by 17% year-on-year, excluding the positive net tax in both periods. We reported as well a solid quarter contribution for EUR 474 million, up by 16.5% year-on-year. Net operating profit after 9 months amounted to EUR 1.389 billion, showing a positive trend, growing 3.7% year-on-year, with resilient revenues, sustained by fee income. The net operating profit in the third quarter amounted to EUR 453 million, showing a 2.4% increase versus a year ago. Now let's move on to gross operating profit. We reached EUR 532 million in this quarter, showing resilience year-on-year. And cost/income ratio at 47%, basically stable year-on-year. Gross operating profit after 9 months reached EUR 1.643 billion, almost stable year-on-year, thanks to resilient revenues, again, driven by net fee income. All this confirms our disciplined approach to both costs and revenue generation, ensuring steady performance. For the first 9 months of 2025, we maintained the cost/income at 46%. Now I think it's important to underline the strong commercial performance, as you can see, after 9 months in this slide. Total commercial savings crossed EUR 174 billion and were higher by almost EUR 10 billion since September 2024. And Wealth Management gross inflows amounted to almost EUR 13 billion in 9 months, up by 18% year-on-year. new retail mortgages granted in 9 months reached EUR 4.8 billion, 2.2x compared to 9 months of 2024. As well, new Consumer Finance flows amounted to almost EUR 1 billion with a 17% year-on-year increase. I believe these are a confirmation of capability and effectiveness of our commercial network. And I would like once again to thank you, my colleagues, for the excellent results achieved. Now let's move on to the net interest income evolution. In the third quarter, it amounted to EUR 544 million, down by 1.3% quarter-on-quarter, confirming a certain resilience also in terms of overall spread. In the first 9 month of 2025, net interest income reached EUR 1.638 billion with an early trend in line with the guidance given to the market at the beginning of the year. Net loans dynamic in 2025 has been strong with the growth in retail and small business component by almost EUR 4 billion with a positive trend also quarter-on-quarter despite seasonality. The same performance we are observing in total savings with total commercial savings in September crossing the level of EUR 174 billion and are up by more than EUR 3 billion quarter-on-quarter, supporting an increase year-on-year, exceeding EUR 10 billion, with EUR 7 billion from the beginning of the year. Now on portfolio govies. As usual, this is stable, almost stable with a small decrease in fair value through OCI and with credit spread and sensitivity confirmed a very low level and slightly longer duration, reflecting reinvestment of maturities. Now let's move on to fees and commission income. If we look at the quarter, we reported an amount of EUR 382 million with a solid 7.4% increase versus third quarter 2024, with an excellent performance on the Wealth Management component, up by 10.6% year-on-year. And the positive dynamic also on the Commercial Banking component, up by 4.5% year-on-year. The quarterly evolution is affected, as I was already mentioning, by the typical third quarter seasonality on both Wealth Management and Commercial Banking Fees. If you look at the performance after 9 months, you can see that thanks to the excellent work of our commercial network, the total fees reached the level of EUR 1.185 billion, up by 8.5% year-on-year, with Wealth Management and Advisory Fees up by almost 13% year-on-year. And the positive dynamic also in Commercial Banking Fees increased by 4.4%. In the third quarter, operating costs amounted to EUR 468 million and were marginally lower quarter-on-quarter, driven by non-HR component decrease. Costs were flat year-on-year with the increase in HR costs related to labor contract renewal and increase in variable remuneration pool was completely offset by the effective management of non-HR costs. After 9 months, total operating costs amounted to EUR 1.411 billion and were higher by 1.4% year-on-year. As I mentioned, again, the growth was driven by the HR component due to the labor contract renewal and the variable part of the remuneration. And part of this increase was offset by effective cost management of non-HR costs. Now let's move to asset quality. The stock of nonperforming decreased to EUR 3.1 billion, reflecting a reduction of EUR 400 million in the quarter, mainly due to the sale of NPE portfolio completed in August. The gross NPE ratio is 3.7%, and the net NPE ratio at 2%, in line with the business plan targets. Cost of risk for 9 months was 42 bps, down versus 53 bps of full year 2024, confirming the good status of our asset quality. The breakdown on NPE stock shows a low incidence of bad loans on total NPE at about 30% (sic) [36%], and that's why this portion -- this proportion should be considered in analyzing the coverage that anyway is a very good level of 48.7%. You can see from the slide the solid liquidity position of Monte Paschi, leading to a more diversified funding structure and a lower ECB funding weight on total liabilities. Moving on capital. I believe that this is a very interesting set of figures. The strong capital position of the bank is confirmed also in this quarter. We have common equity Tier 1 ratio fully loaded at 16.9%, already reflecting the preliminary impact of the Mediobanca transaction. This ratio incorporates the net profit of the period and is calculated net of dividend, assuming 100% payout ratio on net profit. As you can see, the Mediobanca transaction is impacting around 2 percentage points, in line with our preliminary estimates. It is worth mentioning that we are not fully incorporating the purchase price allocation. As for example, we have not yet factored the valuation of financial asset and liability fair value. The capital ratio are, therefore, very strong with a large capital buffer compared to regulatory requirements and also our management target that we were indicating at the level of 13%, and that gives us strategic flexibility going forward. Now I would like to spend just a few words on the results that were already published of Mediobanca. I think it's important to underline the positive trend and the potential that is deriving from the combination. The commercial momentum remains solid with EUR 2.5 billion on net new money, robust merger acquisition activity in Corporate & Investment Bank division and EUR 2.3 billion of New Consumer Finance volumes, very remarkable results. The diversification of the business has supported resilient revenues even in a challenging macroeconomic environment. Now let's again go through some key important message regarding our combination. So we have really transformed into a new leader in Italian banking with the scale and credibility to compete at the European level. This transaction was driven by a clear conviction that Italy deserves a stronger, more innovative, more diversified financial institution, one capable of supporting families, SMEs, and large corporates across the country. On this slide, you see some of the key financial metrics of the combined group, EUR 8 billion in pro forma revenues and around EUR 3 billion in adjusted net profit. I would like again to underline the strong industrial rationale of our project. From the get-go, the industrial rationale has been clear and consistent. Monte Paschi and Mediobanca are different and therefore, complementary. Together, we combine leading capabilities in Retail & Commercial Banking, Consumer Finance, Asset Gathering and Wealth Management, Private Banking, Corporate & Investment Banking. The result is a more resilient, diversified and innovative group with a balanced source of profitability and multiple engines to invest, to grow and to better serve clients. On this slide, you can see an overview of our combined operating model and the strong industrial merits of the transaction in each business line. In Retail & Consumer Finance, we bring together Monte Paschi nationwide network encompass best-in-class product and risk expertise. In wealth and Private Banking, we now operate with greater scale and higher advisory capability, spanning Monte Paschi Premium, Banca Widiba, Mediobanca Premier, Mediobanca Private Banking Company, Compagnie Monégasque de Banque, Monte Paschi Family Office. This will allow the group to deliver more sophisticated solutions and attract high-value clients. And in Corporate and Investment Banking, our clients benefit from a stronger balance sheet, a deep adviser expertise in Italy and abroad through Messier Maris and Arma Partners. Insurance and Asset Management and stability -- add stability and optionality, diversifying our revenue base and supporting loan lifetime value creation. The combination creates a more resilient, diversified and innovative group. Then on the slide, the figures that you see represent a preliminary illustration of the pro forma business line on the basis of historical numbers and not including synergies. From revenues mix composition, asset gathering and Wealth Management represent almost 30% of the total revenues. Retail & Commercial Banking stands around 31%. Consumer Finance, 17%. And Corporate, Investment Banking, including the lending business for Mediobanca and Monte Paschi, large corporates represent almost 15%. While the Generali insurance contribution represents 7%. This is a first snapshot of what the combined entity will look once that we have complete our project. And we are working with our colleagues at Mediobanca to further optimize the target business model. Clearly, we will provide additional information and all details in the new business plan. We began the combination process immediately. We structured work streams and join teams across both organizations coordinated through regular cross-functional governance. The plan covers all key business and support functions with clear accountability, senior leadership oversight and the focus on maintaining business continuity and exceptional client service throughout. As a part of our integration strategy, a dedicated HR work stream has been established, focused on retaining key managerial talent. This initiative reflects our deep commitment to preserving and enhancing brand value during this transformative phase. We want to ensure continuity, safeguard institutional knowledge and support long-term leadership stability. Our objective is to build a solid, efficient operating model step-by-step, with disciplined project management and transparent communication. A detailed analysis, for example, is already completed on IT architectures, operating models and development priority, aiming at enhancing, the best solution for each area and planned IT investment for digitalization to ensure resilience and efficiency. And this is just an example of how the work is progressing at full speed. The EUR 700 million industrial synergies target we communicated is now in this preliminary assessment, reconfirmed on the basis of this work we are performing. Mediobanca remains a distinctive and highly valuable franchise within the group with its brand, client relationship and professional capability preserved and strengthened. The ambition is to unlock new opportunities for our growth across both organizations. The group will increase productivity, expand its product and service offering, invest in technology and digitalization and continue to attract and retain top talent. So Mediobanca is an accretive combination from all perspectives. Return on tangible is expected around 14%. We expected to confirm our payout ratio of 100%, and the capital position remain best-in-class in Europe, providing strategic flexibility. Now a short update about the process and indicative timeline. I have to say that our approach is quite methodical, step-by-step and transparent. All key milestones have been met, demonstrating disciplined execution and strong project management. In the first quarter of next year, we will present a combined business plan that reflects the full potential of our group. We will hold the Capital Market Day to present it to the market. Now going back to Monte Paschi stand-alone. Again, we reported another solid quarter with almost EUR 1.4 billion after 9 months, strong commercial performance, strong capital position with core Tier 1 at 16.9%. We are further improving our 2025 full year guidance with the pretax profit expected to be well above EUR 1.6 billion. The capital position is expected to be about 16% at the end of the year, a very sound level, which provides confidence in ensuring a 100% payout for the coming years. Monte Paschi plus Mediobanca creates a third competitive force in the Italian bank industry with potential to increase its European scale. We have organized teams with people from Monte Paschi and Mediobanca working together with a common strategic vision and spirit of collaboration, each bringing their skills, know-how and sense of responsibility to bear. The values are aligned around integrity, respect, customer focus and accountability. Now it is clear that together, we are capable of making things happen. Our goal is clear and within reach, to play a leading role in Italian and European banking with vision and the desire to create sustainable value for all our stakeholders. Thank you very much, and we are ready to answer to your question. Operator: [Operator Instructions] The first question comes from Antonio Reale of Bank of America. Antonio Reale: It's Antonio from Bank of America. Just a couple of questions from my side, please. The first one on distribution. Your capital ratio at 16.9%, as you said, incorporates the new dividend policy of up to 100% on net profit, which is a big change, I think, for you and as you were not previously paying the tax reassessment out. Now does this mean that you're now looking to pay out on a reported net profit basis, so including potential DTA write-ups and similar? Just trying to get a sense and better understand what this means for your dividend per share going forward. I remember during the tender offer, I think you mentioned that you wanted to try not to deviate too much from the DPS of last year. And related to that, if I may, pretty much if I look at all your peers, they pay dividends on an interim basis. I think it was the case also for Mediobanca. Do you think it's something you would look to consider for 2026 fiscal year? That's my first question. And then my second one is really trying to get a sense of how you're thinking about the reorganization of the new businesses that you plan to sort of reorganize following the deal with Mediobanca, both from a divisional and a legal entity standpoint, if I may. Your Slides 27 and 28, I think, show very clearly how -- well, in one go, you bought back all the product factories that Monte Paschi had lost over the years and more. So the question is, how do you plan to integrate all these businesses and at the same time, monetize Mediobanca's strong brand and achieve the synergies that you targeted? Luigi Lovaglio: Okay. I will try to be very clear. So yes, we confirmed that we expect to distribute for this year a dividend with the dividend per share, broadly in line with the one of previous year, ensuring to our shareholders yield among the highest in Europe. And afterwards, we are committed to deliver a growing DPS while preserving our strong capital position on which we want to leverage for industrial projects and additional remuneration for our shareholders. As far as interim dividend, it's clear that is one of the options we are -- we will consider, and we will be very precise once that -- we are going to present the business plan in the first quarter next year. Now as I was mentioning regarding the integration, yes, in our project, we were quite clear saying that we would like Mediobanca to be focused on Corporate & Investment Banking and high-level Private Banking. Let's simplify, as we believe there is a strong competency there, excellent capability in dealing with customer and a huge potential on which we can leverage in order to enrich our total level of profitability. And I have to say that from these few days where we are already working together, I feel even more comfortable that this is the right direction because we can create and build up a really unique potential additional powerful institution that will support the Italian economy with the competencies in terms of advisory capability to which we are going to add the balance sheet of Monte Paschi. On Private Banking, Mediobanca is a top player. Strong and excellent professional team is over there. And I strongly believe we have room for significantly increasing our total asset and our penetration in the overall Italian landscape. Now it's clear that the approach we want to use in order to be very effective is already from the day 1, a sort of divisional approach. And already, we are setting our overall way in managing this opportunity in this way. Then we are going to consider, again, once that we have a clear view about the business plan, how we can optimize in terms of also legal structure, this exercise. Clearly, Mediobanca will be a legal entity with its brand because it's too important to preserve the value and the peculiarities that Mediobanca has that are, in some way, different necessarily from Commercial Banking. And we want to leverage on this diversity in order to increase the value and to be a player that is unique in the Italian landscape for the balanced approach we can have on the market compared to other big players. Antonio Reale: Very clear. Just maybe on the interim dividend, if I may, just follow up on that as part of the question. I don't know if you have any early thoughts on that. Andrea Maffezzoni: Antonio, Andrea speaking. Can you share again the follow-up question because we missed it? Antonio Reale: It was just, if you had any early thoughts on your interim dividend and observations.. Operator: Mr. Reale, we cannot hear you. Can you please speak closer to the phone? Luigi Lovaglio: I think I mentioned, right, that is an optionality we are going to consider with the business plan. When we are going to present, we will be clear on that. But clearly, we have a positive attitude towards the opportunity to have an interim dividend. Operator: The next question is from Marco Nicolai of Jefferies. Marco Nicolai: First question on -- again, on the DPS. Your comments about this year DPS broadly in line with last year, and growing DPS from this level. I'm just trying to understand the moving parts for the 2026 DPS because clearly, this year with the big positive one-off you will have at the end of the year in terms of DTA write-up, you can pay pretty much -- if I look at the amount of net income that will bring, you will be able to pay pretty much the DPS you want. But for 2026, I'm just trying to understand the moving parts there because the DPS you had in 2024 seems relatively high. So I was just trying to understand in terms of synergies, what do you expect, already coming through in '26, if any? And also how you plan to split the restructuring costs between this year and next year and in general, all the moving parts that can bring us to DPS in '26 above -- broadly above the one of 2024? So this is the first question. And the second question is if you can update us on your Asset Management partnerships. So my interpretation of Banco BPM management comments yesterday is that they are relatively open to a merger and/or any way to do something with you. And obviously -- so these comments were kind of at the crossroad with the -- with Anima as well as with the stake that they have into BMPS. So I was just trying to understand what's your view on this topic? And if you can help us understand what are the future plans in terms of M&A. So these are my two questions. Luigi Lovaglio: Okay. So thank you. We will provide clearly quite detailed information once we are going to present the business plan. Now we wouldn't like to go too much too deep in providing early drivers now in order to get this growing dividend, right? What -- we are confident that our level of synergies is even conservative starting from the first outcome from these work streams that we are practically developing together with the Mediobanca team. And so at least the level we already plan are, in our understanding, ensured, and then we will be, as I said, more precise one that we are going to finalize the business plan as well as on the integration costs on which we are now analyzing how to split them. But anyway, we believe that what has been planned from the very beginning when we launched the deal, is confirmed. And as I said, we are even more confident that we can get our goal. And also at the time, we will be speaking about growing DPS per share. Now Anima is for us an important partner. We are keeping growing in offering this product. And I believe this is also reinforcing our relationship with Banco for this common pattern that we work with and, clear for us, has an important value and also strategically is important to keep reinforcing this cooperation. Now anyway, we are completely focused in delivering this combination -- industrial combination. I'm not using the word integration because this is not an integration. It's a combination of two excellent institutions. And we believe that the more we are focused on this implementation, and the sooner we will get the results that we committed by launching the tender offer. So full speed on making all what we plan, implemented and effective. Operator: The next question comes from Ignacio Ulargui of BNP Paribas Exane. Ignacio Ulargui: I have two questions. One is coming back a bit to Antonio's question on the integration and your comments, Luigi, about Mediobanca being a legal company. I wanted just understand a bit better how do you think the listing is going to go, whether you will plan to further integrate by taking over the minorities and integrating that? And what would be the impact if you don't do that in synergies? Because I think it will be a bit more difficult to go ahead with all the planned cost savings. The second question is on the commercial activity of Monte Paschi in the quarter, has been super strong in lending and deposits. Just wanted to get a bit of a sense of where you're gaining market share in lending. And in terms of deposits, you mentioned in 2Q results that you were focusing on transactional deposits. And I think that -- I just wanted to get a bit of color on how do you think about your NII implications after the good quarter into coming quarters? Luigi Lovaglio: So let's start by saying that the success of the tender offer at the level of 86% acceptance rate is ensuring us effective governance from the very beginning. In the presentation, in some way, we already provided the first glance how we see this combination. We are working, as I said, with our Mediobanca colleagues, and the deep dive on the target business model we will provide, as I said, in the context of Capital Market Day in first quarter, next year. What is important to underline is that we will maintain and leverage the two strong brands, Monte Paschi and Mediobanca, with the respective entities focused on what we say the core business. On the current listing of Mediobanca, let me say that with the 14% free float, we see reduced volumes and liquidity on the stock. However, it's too early to take any decision of a potential delisting. That is part of the assessment in the context of the new business plan, as I was mentioning. As far as net interest income dynamic, I think that we expect in the fourth quarter to keep almost the level of the third quarter and then to have, again, a level of 2026, almost in line with the one of this year. We can have some positive upside, if you will, capable as we are now aiming to increase the level of our lending, thanks to the combination of -- with Mediobanca capability in advisory and the balance sheet of us. Clearly, the expectations are as well to keep under control the cost of deposits that are growing. But as we were mentioning, we are really intensifying our commercial efforts, leveraging on the very positive attitude that we have now observing in the network, that are very well motivated, we reinforce our capability in managing. We are getting continuous feedback, very positive, in new meetings with customers. So this will enable us also to keep growing in deposits without compromising the spread. So that's why we are very positive that we can continue. Clearly, we have to think that part of this deposit are collected with the scope then to convert in Asset Management product. So we can have some fluctuation just depending on the capability to make this kind of conversion, at the same time to replace what we are converting in Asset Management product or Bancassurance product with regular deposit. But anyway, we are, really, at this point, enjoying a very positive moment of all our network, our franchise. And so it's not only deposit that we see a good pace without compromising the spread, but also, as you saw in the presentation, inflows of Asset Management product, Bancassurance product. Overall, it's a very positive momentum for Monte Paschi. Operator: The next question is from Giovanni Razzoli of Deutsche Bank. Giovanni Razzoli: I have just one question. Sorry for asking you this detail, but in the broader context of your capital position and dividend policy is important in my view. So you have reported a 17.9% CET1 ratio, which includes a part of the PPA. I was wondering whether you can share with us what was the impact of the PPA. You've mentioned that there could be more in the coming quarter due to the fair value of assets and liability of Mediobanca. So if you can help us understanding what was the impact of the PPA in this quarter, and what could be the impact in the next quarter? I'm wondering, for example, whether the PPA this quarter includes or not the revaluation of Mediobanca real estate assets. Andrea Maffezzoni: Giovanni, Andrea speaking. Good morning to everybody. So as mentioned, the PPA as of 30th September '25 was partial and preliminary. So not including, for example, as mentioned by the CEO before, the valuation fair value of financial assets and liabilities. It includes mainly the revaluation of Generali that is anyway not impacting the capital position and a few hundred million regarding what you mentioned, the real estate, which is in line with the projections that have consistently been delivered throughout the public offer. Operator: The next question is from Hugo Cruz of KBW. Hugo Moniz Marques Da Cruz: I have a few questions, if I may. So first on, can you be a bit more clear on the CET1 ratio impact? So the impact coming in Q4. Do you expect that to be positive or negative? So that's my first question. Second, on -- related to this, so the DTAs, I thought all the DTAs would be fully brought on balance sheet on day 1. You still have EUR 1.1 billion off balance sheet. So why is that still off balance sheet? When do you expect that to come on balance sheet? It will be Q4 or not? Then a third question on clarification on your comments about the dividend for 2026, so out of 2026 earnings. So you still have a lot of DTAs, very strong capital ratio. So is there any possibility that you can manage the DPS to show that growth versus 2025 DPS? Or will it be just mechanical DPS out of 100% of payout? And then a final question on the bank tax. Some of your peers, BPER and BAMI have given a bit of an indication of the potential impact. Can you comment what could be the impact for you? Andrea Maffezzoni: Okay. So thank you for your questions. So on the first question, i.e., capital ratio -- common equity Tier 1 ratio end of the year. This will depend on the final impact of the PPA, that it is under assessment. What we can, let's say, confirm now is that we expect that it would be higher than 60% anyway. So that's the answer. Then about the DPS in '26, is what was mentioned by the CEO, so it's too early to give a guidance on net profit. What we can already confirm is that we expect to achieve a good chunk of synergies already in '26. Then on the tax law, the impact is definitely manageable in '26. '28, we expect based on the current draft of the law, an impact on the combined perimeter. So let me reiterate, on the combined perimeter, of around EUR 100 million per year. And then on top of this, this year, there might be the impact of the taxation of the so-called profit reserve that we expect would be accounted anyway directly into equity. The fourth question I missed. Hugo Moniz Marques Da Cruz: It was on the DTA. Andrea Maffezzoni: Sorry, the DTA. Sorry, the DTA. The DTA. No, actually, we have still EUR 1.1 billion of DTA of balance sheet when we update the new business plan. So end of the year, we expect that this amount will be basically written up. We expect in full. Hugo Moniz Marques Da Cruz: And sorry, if I may, a clarification, the EUR 100 million impact on the tax, that would be through P&L? Andrea Maffezzoni: The yearly one in '26, in '27 and '28, yes. It's additional tax, so yes. Operator: The next question is from Luis Manuel Grillo Pratas of Autonomous. Luis Pratas: My first one -- I have essentially a bunch of clarifications. The first one is on the -- so you essentially mentioned that you didn't include any fair value adjustments on the Mediobanca balance sheet. And if I'm not mistaken, the 2025 annual report of Mediobanca included a large positive effect there. So I wanted to hear any comments whether we should expect a positive in Q4 coming from this. And then you just mentioned to Hugo that maybe in Q4, we shouldn't expect any meaningful DTA capitalizations. Can you confirm that? So essentially, the large one, the EUR 1.1 billion will only happen when the business plan is released next year? And then I also wanted to ask you about the -- your comments on the combined entity. So it seems that you are not going to the approach of doing a merger buying corporation, if I read that correctly. I wanted to confirm if this has any impact on your synergies execution. I'm thinking, for instance, on the funding side, if there could be any MREL dis-synergies for maintaining both entities separate? And yes. Luigi Lovaglio: Okay. So I think I'm just confirming that we were very, very much conservative on this preliminary assessment of PPA. And as Andrea was mentioning, overall, at the current stage, being very much conservative and wanting to go deeper in making the analysis, we are hopefully expecting to complete this process for the main item within the end of the year. At the current stage, we are also confident that we can have a positive impact. But let's complete the work before being much more -- giving much more detail on that, right? Then regarding the reorganization and the combination, I want just to underline that we will implement actions in order to get all the synergies, and I was mentioning, even at the level that we expect now to be even higher than what we plan. The fact that we are speaking about legal entity doesn't mean that we cannot exploit all the potential we can have from the combination. But as I said, it is a work in progress and hopefully, will be soon completed. And as I said, in the first quarter, we'll be very precise about the option that we are going -- the target model we are going to implement. What should be clear that in our preliminary estimation, we see only positive upside in whatever we are going to implement in terms of synergies. Andrea Maffezzoni: And then there was a clarification requested on the DTA write-up since I mentioned the approval of the new business plan. Anyway, we expect to be able to write up the DTA already in Q4? That was your question, potentially also based on preliminary projections. So the expectation is that the write-up to the best of our current knowledge happens in Q4. As regards to MREL, we do not expect the synergies. We're expecting such synergies because the new entity will be a single point of entry. Operator: The next question is from Lorenzo Giacometti at Intermonte. Lorenzo Giacometti: So the first one is on your excess capital, which is seen growing year-by-year due to DTA's compensation and potentially even more with the merger or with the Danish compromise treatment. And so do you intend to distribute it to your shareholders? And if yes, do you see distribution via dividends or buybacks as more likely? And the second one is a more strategic one. And are you planning to expand abroad with some of your businesses? I was mainly thinking about Consumer Finance, but also Wealth Management and Investment Banking. Luigi Lovaglio: Okay. So let's start from, what is for me even more exciting that is the expansion of the business? So we strongly believe that Compass with this merger has the full potential to expand the business outside Italy. They have expertise. They have a very good technology, and they have a proven track record in terms of scoring. So I believe that this is an option that we are going to explore very quickly. And my personal view is also that for some part of the business as well Private Banking, investment bank already is there. We have a strong opportunity because once the Mediobanca will be completely focused on Corporate, Investment Banking and Private Banking, there will be additional opportunity to expand business not only in Italy, but also abroad. So that's why it's a nice project, because we are opening a new market and new potential revenue generation for the benefit of all the stakeholders. Yes, we have a nice excess of capital. And as you were mentioning, starting from this year, we will have also the EUR 500 million of DTAs that we are going to contribute to the increase to the overall capital level. As I was already mentioning, for us to have an important buffer of capital is an opportunity, and we would like to use in the best way or getting opportunity to expand additionally, our business, or we can say, and eventually further reward our shareholders with even high level of remuneration. Then, if it's through buyback or if through extraordinary dividend, whatever, is something that we evaluate time to time. What is important that this is a strong opportunity. And I believe, today, by showing the revenue stream with almost 1/3 of revenues coming from asset gathering and Wealth Management, it's clear that this part of business deserve a significant rerating as well the other component. And this is an additional evidence that our valuation deserve to be much more in line with our fundamentals and the potential of value that we can generate. And this kind of approach in exploring all the opportunity for better extract value from the combination will materialize. I believe, even earlier than what we plan. I think we have a strong expectation and again, confirmation that we are really representing an attractive case of investment. Operator: The next question is from Andrea Lisi of Equita. Andrea Lisi: The first one is on, if you can provide us a bit more update on the integration charges. If -- from your preliminary analysis, clearly pending the business plan presentation, you are still confident with what you have initially indicated. And if you can provide us some preliminary indication at least of how many years these integration charges will be split? If it is reasonable to see already a big portion in the last quarter of this year and then the rest through 2026 and maybe some portion also in 2027? And the other question is on capital. If you can confirm that your preliminary indication of kind of 50 bps additional contribution in case of obtainment -- in case of regulatory treatment of the insurance component like in Mediobanca? And last question is regarding, if you can provide us a further update on the management of the stake in Generali? Luigi Lovaglio: Okay. So integration charge is something that we are assessing, clearly, looking at what now -- we are considering. We are going to invest money clearly in retention package. And then it depends how we complete the assessment, particularly on IT. That is one of the main area where practically we are going to have some cost. But overall, we are confident first that we can -- the estimation we fixed when we launch a transaction is absolutely actual. And the second is that given the work of the teams that are now analyzing the combined business, we believe that we are going to have even room for having even a positive outcome from the overall cost we plan. The impact on core Tier 1 regarding the potential Danish compromise is 50 plus. And on Generali, we are focused on Mediobanca. And as I was mentioning, the Generali is for us, a nice, correlated bulk of revenues. And for the time being, we are, as I said, completely involved and committed to deliver what we were mentioning earlier regarding the combination of the two entities. Operator: [Operator Instructions] Mr. Lovaglio this time, there are no questions registered, sir -- excuse me, we do have a follow-up question from Luis Manuel Grillo Pratas, the Autonomous. Luis Pratas: Sorry, just a quick clarification on the Generali treatment. When do you expect to receive those more than 50 basis points impact? Luigi Lovaglio: No. As I was saying, we like to be very conservative. All the figures we were mentioning are without this benefit. So we are working in order to have this kind of benefit. Honestly, it's difficult to predict when this can be completed. But I believe we deserve it. So we will do our best in order to get as quick as possible, but it depends not exclusively on us. For the time being, we manage everything without considering this benefit. That should be obvious and should come to us. Operator: Gentlemen, there is a final question from Ignacio Ulargui of BNP Paribas Exane. Ignacio Ulargui: I just was wondering whether you could consider entering a total return swap as BPER has done on their own shares given the confidence that you have about integration and the strength of the franchise and the combined franchise. Could that be a possibility or is something that you don't explore at this stage? Andrea Maffezzoni: Sorry, Ignacio, I have not understood what do you suggest we can consider. Ignacio Ulargui: So whether you could consider doing equity derivative buying your own shares like BPER did on the 9.9% of the capital. If that could happen? Luigi Lovaglio: We are focused on what we know better, that is doing banking, honestly. So we -- for the time being, we are not considering any kind of transaction like that. And we want to be really focused in getting the best from the two entities. Operator: Gentlemen, at this time, there are no questions registered. Back to you for any closing remarks. Luigi Lovaglio: No other questions, right? So thank you very much. And see you in next presentation. Operator: Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.
Operator: Thank you for standing by. My name is Karen, and I will be your conference operator today. At this time, I would like to welcome everyone to the Peloton Interactive First Quarter Fiscal Year 2026 Earnings Call. [Operator Instructions] I will now turn the call over to James Marsh, SVP of Investor Relations. Please go ahead. James Marsh: Thank you, operator. Good afternoon, and welcome to Peloton's First Quarter Fiscal 2026 Conference Call. Joining today's call are Peloton Chief Executive Officer and President, Peter Stern; and Chief Financial Officer, Liz Coddington. Our comments and responses to your questions reflect management's views as of today only and will include forward-looking statements related to our business under federal securities law. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business. Please refer to our SEC filings and today's press release, both of which can be found on our Investor Relations website, for a discussion of our material risks and other important factors that could impact our results. During this call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is provided in today's press release. I'll now turn the call over to Peter. Peter Stern: Thank you, James. Good afternoon, everyone, and thank you for joining today's call. Before I summarize our performance in Q1, I'd like to address our voluntary recall announced earlier today. As previously disclosed, we have received a small number of reports of an Original Series Bike+ seat post breaking during use. As of today, we are aware of 3 such incidents. The well-being of our members is our highest priority. And therefore, in cooperation with the U.S. Consumer Product Safety Commission and Health Canada, we are voluntarily recalling approximately 833,000 units in the U.S. and approximately 44,800 units in Canada of the Original Series Bike+ model. These units were manufactured from December 2019 to July 2022 and sold beginning in 2020 to April 2025. We are offering an updated self-installable seat post replacement, which is the CPSC approved remedy. Impacted members will receive an e-mail with order instructions and the notification will also appear on their Bike+ touchscreen. This recall does not impact any other equipment models, including our new Cross Training Series Bike and Bike+. The anticipated financial impact is reflected in our results and our guidance, including the increases to our adjusted EBITDA guidance and minimum free cash flow target. Liz will share more details about the financial impact later in this call. Turning our attention to the first quarter of the fiscal year. I am proud of Peloton. In the quarter leading up to our October 1 innovation reveal, our team once again successfully executed on our business priorities, progressed our financial results and delivered positive human impact at scale. As a result, our performance came in above the guidance range on most key financial metrics in this seasonally slower quarter for fitness equipment sales, and we continue to see year-over-year growth in average workout time per Connected Fitness subscription. Looking from the outside in during the first quarter, it may have felt like business as usual, as we continue to demonstrate financial discipline and established a strong foundation for achieving our full year financial guidance. But behind the scenes, the quarter was anything but. Throughout the quarter, the Peloton team was hard at work, setting the stage for our new chapter by innovating on every aspect of our magic formula of premium equipment, software powered by AI, world-class instructors and a deeply engaged community. In last quarter's remarks, I laid out Peloton's strategy. The first and most foundational part of that strategy is our commitment to improving member outcomes. To that end, on October 1, we simultaneously unveiled and began shipping the most significant product update in our history with an all-new equipment lineup, the Peloton Cross Training Series and the Peloton Pro series. Our understanding of human health has progressed since Peloton took the world by storm with the introduction of the original bike. And today, we know that adults need to pursue a combination of cardio, strength and more to achieve their wellness goals. To that end, all Peloton products now feature advanced swivel screens, allowing members to easily transition between cardio and strength to complete floor workouts, including strength, yoga, Pilates and stretching. Our new Plus line includes an advanced computer vision movement tracking camera that counts your reps, corrects your form and offers weight suggestions in real time, along with voice control, enabling members to adjust weights, skip moves or pause their workout without touching a thing. We've made several additional upgrades, including improvements in audio across the board and featuring sound by Sonos in our Plus line for a studio-like experience. On October 1, we also launched Peloton IQ, which gives every Peloton member a personalized coach regardless of whether they own our new Cross Training Series, our Original Series or work out with a Peloton app subscription. Peloton IQ uses AI to turn years of insights and data points, including your goals, class activity and health stats from wearable devices into personal training guidance. In so doing, Peloton IQ makes some of the benefits of personal training accessible to millions of people, providing individual insights and recommendations based on members' intentions, preferences, level of fitness and performance. Since launching the Cross Training Series and Peloton IQ, we've observed a favorable mix shift toward our more premium products, including a mix shift toward Tread sales and toward our Plus line of products, the latter of which we believe is driven by excitement around the advanced computer vision features. Beyond our work on cardio and strength, the trust we've built with our community gives us an opportunity to address an even broader array of wellness domains. In September, we acquired Breathwrk, an award-winning app specializing in breathing exercises, which have been shown to positively impact sleep, focus, blood pressure, heart rate variability, stress and anxiety. The Breathwrk subscription app makes mental fitness accessible to all, and now our members can enjoy Breathwrk as part of their All-Access or App+ subscriptions. We'll have more to share over time as we evolve in this important category. We also announced a first-of-its-kind collaboration with the Hospital for Special Surgery, the world leader in orthopedics to offer Peloton members access to expert care for joint and muscle pain, injuries and orthopedic conditions. We've co-developed class collections with HSS medical experts, recently launching the first 5 on preventing some of the most common types of injuries. We're also committed to meeting members where they are in their life stages. In response to member demand, we started with menopause, a life stage that impacts the majority of our members at some point in their lives. We're extremely proud of our partnership with Respin Health, founded by Halle Berry to revolutionize menopause care with an integrated holistic approach, and have just launched a study with over 1,000 women to measure the benefits of targeted movement strategies and other evidence-based lifestyle interventions. These findings will power our evolving evidence-based exercise programming and menopause support. The second part of our strategy is to meet members everywhere. We have made great progress on this front over the past few weeks. We now have 10 micro stores in the U.S., up from 1 prior to Q1. And we also announced a new retail partnership with Johnson Fitness & Wellness, the nation's largest independent fitness retailer with 100 locations across the U.S. We now have a physical retail presence in 46 states, while in Australia, we launched a retail presence in 11 franchise locations throughout the country. Our expanded retail footprint positions us well for the holiday season, providing opportunities for consumers to test and experience our new innovations. Our commercial business unit continues to show strong performance and is an area in which we are also innovating. The new Peloton Pro series offers a complete lineup of Peloton equipment for commercial environments such as hotel gyms and multi-residential buildings, and includes the Tread+ Pro, Peloton's first ever commercial treadmill. And Precor launched its new commercial Tread, the Breakaway. This new slat belt treadmill includes a sled-style push mode, cadence coach and a new console design. Peloton also recently became the primary fitness partner powering Utah City, a 700-acre mixed-use development outside of Salt Lake City. And now every residential building in Utah City will feature a Peloton space that includes several pieces of Peloton equipment and accessories for residents. The third part of our strategy is to make members for life. Celebrating achievement is crucial for sticking with any program. So last month, we launched Club Peloton, our first loyalty and recognition program. As members engage with our platform, they progress through levels from bronze to legend, unlocking exclusive content recognition and rewards. Already more than 500,000 members have engaged with Club Peloton. On October 1, we also introduced official Peloton teams led by Peloton instructors, including Move for Life, Menopause, HYROX and Cross Training. These teams provide a forum for members to connect, discuss goals and learn from each other and from experts, further elevating Peloton's community. Since October 1, engagement with teams is up nearly 50%. Ultimately, all these strategic initiatives, product innovation, wellness expansion and new distribution are underpinned by the fourth part of our strategy, our commitment to operational discipline and business excellence. Our full year guidance announced in August included targeted initiatives to improve monetization, such as the introduction of expert assembly fees. These were implemented within the quarter and exceeded our expectations. At the same time, our cost reduction plans remain on track. Perhaps most important, we remain confident in our ability to inflect toward revenue growth as the fiscal year progresses, building on the actions we took in Q1 and on October 1. We continue to monitor and respond to evolving tariff policies and broader changes in the macro environment and consumer spending. While those external factors are real, our focus remains on execution and being the best fitness and wellness partner to our members. We believe we offer an unmatched ecosystem of products and experiences to help our members invest in their health and well-being. As we enter this important holiday season, Peloton is exceptionally well positioned with great new equipment, Peloton IQ, new wellness partnerships, expanded distribution, a resurgent commercial business unit, new loyalty features, successful monetization changes and improvements in our financial performance. I'll now pass it over to Liz, who will share more details about our Q1 financial results and guidance for the remainder of the year. Liz Coddington: Thanks, Peter. I want to begin with our first quarter financial results in which we exceeded the high end of our guidance on most key metrics. We ended the first quarter with 2.732 million Paid Connected Fitness Subscriptions, reflecting a decrease of 6% year-over-year. Q1 is typically a seasonally lower quarter for hardware sales and seasonally higher quarter for churn. We exceeded the high end of our guidance range by 2,000, driven by higher-than-expected gross additions. Connected Fitness gross additions outperformed our expectations due to higher unit sales of our Connected Fitness products in both first-party and third-party retail channels. Average net monthly Paid Connected Fitness Subscription churn was 1.6%, an improvement of 20 basis points both year-over-year and 10 basis points quarter-over-quarter, in line with our expectations. We ended the quarter with 542,000 ending paid app subscriptions, inclusive of subscriptions from our acquisition of Breathwrk. Total revenue was $551 million in Q1, comprising $152 million of Connected Fitness products revenue and $398 million of subscription revenue, outperforming the high end of our guidance range by $6 million. Outperformance relative to guidance was primarily driven by Connected Fitness products revenue from higher-than-expected hardware sales of both Peloton and Precor products. Connected Fitness products revenue decreased $7 million or 5% year-over-year, driven by lower equipment sales and deliveries, partially offset by a mix toward higher-priced products. Subscription revenue decreased $28 million or 7% year-over-year, primarily driven by lower ending Paid Connected Fitness Subscriptions, lower content licensing revenue and lower ending paid app subscriptions, partly offset by used equipment activation fee revenue, which was introduced in late August of fiscal 2025. Total gross profit was $284 million in Q1, a decrease of $20 million or 7% year-over-year. Total gross margin was 51.5%, a decrease of 30 basis points year-over-year and 50 basis points below our guidance of 52%. Total gross margin was negatively impacted by a $13.5 million accrual for Bike+ seat post inventory costs this quarter, in addition to $3 million we accrued in the prior quarter, representing a total estimated impact of $16.5 million. Excluding this $13.5 million charge in Q1, total gross margin would have been 54% or 200 basis points above our Q1 guidance. Beginning in the first quarter of fiscal 2026, we began assigning executive compensation and other corporate overhead expenses associated with our corporate facilities as we focus on driving more accountability for costs at a functional level. Prior to fiscal 2026, these costs were all recorded in G&A, but starting in Q1 are assigned across cost of goods sold, sales and marketing, G&A and R&D. Connected Fitness products gross margin was 6.9%, a decrease of 230 basis points year-over-year, primarily driven by the Bike+ seat post inventory accrual I just noted. Excluding the inventory accrual, Connected Fitness products gross margin would have been 15.8%, an improvement of 660 basis points year-over-year, driven by a mix shift toward higher-margin products, lower warranty costs, a decrease in inventory reserves and lower warehousing and distribution costs. Subscription gross margin was 68.6%, an increase of 80 basis points year-over-year. Total operating expenses, excluding restructuring, impairment and supplier settlement expenses were $230 million in Q1, a decrease of $30 million or 12% year-over-year, reflecting the continued progress we've made in rightsizing our cost structure as well as a reduction to advertising expenses in Q1 ahead of our hardware portfolio refresh announced on October 1. We are on track to achieve our target to deliver at least $100 million of run rate cost savings by the end of fiscal 2026. Sales and marketing expenses were $67 million in Q1, a decrease of $15 million or 18% year-over-year, primarily driven by decreases in acquisition, brand and creative marketing spend as well as a decrease in retail showroom expenses. As of the end of Q1, we had 7 legacy retail showrooms remaining. Research and development expenses were $62 million in Q1, an increase of $4 million or 6% year-over-year, primarily driven by cost assignments from G&A, which were partially offset by lower product development costs from a reduction in contractor spend. General and administrative expenses were $101 million in Q1, a decrease of $19 million or 16% year-over-year, primarily driven by cost assignments to other functional areas and lower professional fees. This quarter, we recognized $13 million of impairment and restructuring expenses, of which $8 million was noncash. The noncash charges were primarily related to asset write-downs associated with accelerated retail store closures, while the remaining $5 million of cash charges were primarily related to exit and disposal costs and professional fees. Adjusted EBITDA was $118 million in Q1, which was a $2 million or 2% improvement year-over-year and $18 million above the high end of our guidance range. To note, the $13.5 million accrual for Bike+ seat post inventory costs was not added back to adjusted EBITDA. We generated $67 million of free cash flow in Q1, an increase of $57 million year-over-year, significantly outperforming our prior expectation for slightly negative cash flow in the quarter. Free cash flow benefited from tariff-related favorability associated with both lower-than-expected tariff rates and delayed timing for certain tariffs going into effect, lower operating costs associated with realizing indirect cost savings faster than anticipated, revenue favorability and other smaller impacts. Q1 free cash flow included roughly $30 million of timing favorability. We ended Q1 with $1.104 billion in unrestricted cash and cash equivalents, an increase of $64 million quarter-over-quarter. Net debt was $395 million, a decrease of $382 million or 49% year-over-year. Overall, our first quarter profitability performance has enabled us to continue deleveraging our balance sheet. Our gross leverage ratio, defined as our gross principal debt outstanding divided by trailing 12-month adjusted EBITDA was 3.8 in Q1, a substantial improvement from the 14 in Q1 of last year. Similarly, our net leverage ratio, defined as gross principal debt outstanding net of cash and cash equivalents divided by trailing 12-month adjusted EBITDA was 1.1 in Q1, down from 7.5 in Q1 of last year. We believe we have more cash on the balance sheet today than we need to run the business and are evaluating opportunities to optimize our capital structure over time. In February 2026, roughly $200 million of 0% convertible notes will come due, and we intend to pay them down at that time. It's also worth noting our $1 billion term loan has a 1% call premium through May of 2026. We are mindful of the timing of when this call premium expires as we evaluate our options. We expect a refinancing to deliver a lower cost of capital and more flexibility to our capital allocation strategy. Next, I'd like to share context for our financial outlook for Q2 and the remainder of the fiscal year. Our full year fiscal 2026 revenue outlook of $2.4 billion to $2.5 billion is unchanged from what we provided last quarter and reflects a 2% revenue decrease year-over-year at the midpoint. Our recently announced changes to subscription pricing were incorporated into our previous full year outlook. And so far, the impact of those changes has been in line with our expectations. We are pleased that our members continue to see the value in their Peloton membership and the recently added benefits like Peloton IQ, Club Peloton, Breathwrk and more. As we noted last quarter, our full year guidance anticipates an inflection toward growth during certain quarters within the fiscal year. Our Q2 revenue outlook of $665 million to $685 million reflects this expectation with a slight increase of 0.2% year-over-year at the midpoint and an increase of 23% quarter-over-quarter as a result of seasonally higher equipment sales and recent pricing changes. We are raising our full year fiscal 2026 guidance for total gross margin to 52%, which is an increase of 100 basis points from our prior guidance and an improvement of 110 basis points year-over-year, primarily driven by favorable tariff rates relative to our prior full year guidance as policy continues to evolve, a favorable mix of sales toward higher-margin products and our continued focus on driving cost efficiency to our supply chain. These tailwinds are partially offset by the accrual for the Bike+ seat post inventory impact in Q1. Q2 total gross margin is expected to be roughly 49%, down 250 basis points quarter-over-quarter due to an expected seasonally higher mix of Connected Fitness products revenue. We are raising our full year fiscal 2026 guidance for adjusted EBITDA to $425 million to $475 million, reflecting an increase of $25 million from our prior guidance and an improvement of 12% year-over-year at the midpoint, driven by favorable gross profit and operating expenses, reflecting our expectation for realizing cost savings faster than previously anticipated. To note, we are increasing our full year guidance by $25 million, notwithstanding the $13.5 million accrual for Bike+ seat post inventory costs in Q1. Our Q2 outlook for adjusted EBITDA of $55 million to $75 million reflects an increase of 11% year-over-year at the midpoint, but a decrease of 45% quarter-over-quarter due to seasonally higher marketing spend in Q2. Our Q2 guidance for ending Paid Connected Fitness Subscriptions of 2.64 million to 2.67 million reflects a decrease of 8% year-over-year at the midpoint. Average net monthly Paid Connected Fitness Subscription churn is expected to increase year-over-year and quarter-over-quarter due to an increase in subscription cancellations and pauses following our pricing changes announced on October 1. However, our guidance reflects an expectation that our net churn rate will be flat year-over-year in full year fiscal 2026. We also expect gross additions to decrease year-over-year as a result of an expected year-over-year decrease in hardware sales. Generating meaningful free cash flow remains a top priority. We are raising our full year fiscal 2026 minimum free cash flow target by $50 million to at least $250 million, reflecting the benefit of lower tariffs, both from lower rates and later-than-expected implementation timing and our progress on realizing indirect cost savings sooner. This target reflects our expectations for a roughly $45 million impact to free cash flow as a result of tariff exposure, which remains a dynamic situation that may change in the future. Overall, our guidance for Q2 and the remainder of the fiscal year reflects continued improvement in profitability and progress toward revenue growth. We still expect to achieve the important milestone of positive operating income on a full year basis in fiscal 2026. Now we'd like to open the line for Q&A. James Marsh: Thanks, Liz. We'll begin the Q&A process this evening by taking a couple of questions from investors that send in their topics in advance. The first question will come from Bill, leaderboard name Pizza is Life. Bill asked, what is the market opportunity for the new commercial business unit? How will you be approaching the new geographical markets? And will you successfully integrate Precor and Peloton for a unified B2B offering? Peter? Peter Stern: Bill, I love your leaderboard name. Strategically, our commercial business unit is set up to win. First, the market opportunity is large, and we still have very low share. And when I talk to gym operators, they all tell me that there's only one brand that consumers ask for by name, and that's Peloton. Second, the combination of Precor and Peloton just makes sense. You think about Precor's brawn coming together with Peloton's brains, and you've got something no one else can match. And let me explain what I mean by that because we've got plenty of smart people over on the Precor team. Precor builds equipment that is truly commercial grade. It's the kind of stuff that's built to be run like 12 hours a day. And they also have the installation and service capabilities for commercial establishments. Peloton has software, content, community that's absolutely unmatched. You bring those things together, and we've got every reason to be able to win. Bill, you talked also about a third point I'd raise, which is international. Peloton is only in 6 countries right now, but Precor is in over 60 countries. So that opens up opportunities for Peloton to enter these new markets in ways that build on existing distribution and relationships that we've already got, starting with B2B. So strategically, we're in a great place. It's just an execution challenge from here, and you can already see us executing on this. For example, Precor now provides all the installation and service for Peloton commercial locations, including hotels. Last month, we announced Precor's first slated tread, the Breakaway with a new smarter, more powerful screen and Peloton's first-ever commercial tread initially for hospitality and for multi-dwelling units was launched as part of the new Peloton Pro line. So you add all of this up, I feel great about where we are with our commercial business unit, and I'm confident we're going to be able to bring this together and deliver an industry-leading set of products and solutions on behalf of commercial clients. James Marsh: Great. Thanks, Peter. Our second question comes from Christopher in San Francisco, leaderboard named Create SF. Are there any plans in the next 5 years to provide for dividends? Liz, maybe you can handle this one. Liz Coddington: Sure. So while this question is specifically asking about offering dividends. It might actually be more helpful if I take a step back and update you all on our current capital structure and talk through our perspective on overall capital allocation strategy. As many of you may recall, in May of 2025, we were approaching a maturity wall, and we successfully completed a $1.35 billion refinancing of our balance sheet. Now following our refinancing, we have generated meaningful free cash flow with $380 million of free cash flow in the last 12 months. And we're really proud of the work that we've done to really strengthen and quickly deleverage our balance sheet with net debt decreasing by $382 million or 49% year-on-year. Our net leverage ratio really reflects the great work that the company has done to get healthy. And the deleveraging story really is a positive for our company, and it should open doors for us to be able to potentially lower interest expense in the future and also invest in strategic uses of our cash. We do think it's still a bit early to discuss a specific framework for capital allocation, but we do expect that it will become a focus when we pursue a refinancing at the right time. Now there are a few things that I would like to highlight. We talked about this earlier, but we believe there is more cash on our balance sheet than we need to run the business today and that we are a much better credit today than when we last refinanced. Our current priority is continuing to deleverage as we believe this will maximize the optionality for us in the future and reduce our cost of capital. Now when we think about appropriate range for our gross leverage ratio targets, we're thinking about them in terms of established framework, such as the public ratings framework. Ideally, we would want to align with companies that maintain single -- high single B to BB ratings, and we think a gross debt-to-EBITDA ratio in the range of 2x to 4x is reflective of a good sustainable structure. So with that continued deleveraging, we expect to have more capital allocation alternatives available to us, and those could include things like buying back stock, reinvesting in the business to drive organic growth, pursuing potential inorganic growth opportunities or going back to your original question, offering cash dividends. James Marsh: Great. Karen, can you open it up to Q&A at this stage? Operator: [Operator Instructions] The first question comes from Andrew Boone from Citizens Bank. Andrew Boone: I would love to just ask about the recall. Can you guys compare this to the initial recall and just help us understand why those 2 recalls weren't combined? Peter Stern: Sure, Andrew. I'll cover that. This is Peter. As I'm sure you can imagine, decisions around recalls are really complicated and depend on a lot of factors. But what I can say is that the Original Series Bike and the Original Series Bike+ are different models and they're physically different pieces of equipment. And at the time of the bike seat post recall, there were no incidents. There was 0 incidents relating to the Bike+. Andrew Boone: Okay. And then just as a follow-up, I'd love to understand if there are any derivative impacts from the recall around the business, the brand. Can you guys, again, compare this to the previous recall? Just help us to understand if there are any ripples that we should be thinking about the broader business? Liz Coddington: Sure. So I can take this one. So let me just first talk about the cost impact. We talked in our prepared remarks about the $13.5 million accrual that we booked last -- in Q1 and in addition to the $3 million that we accrued in Q4, which is a $16.5 million impact. And we do believe that, that is that we made the appropriate assessments and judgments around sizing that accrual, but estimates are forward-looking and actual results may differ. For subscriptions, which I think is one of the things that you were asking about comparing to the prior recall, based on behaviors from our prior seat post recall that was in May of 2023 and which applied only to our original bike models, our Q2 guidance incorporates a small anticipated headwind to Paid Connected Fitness net churn, and that's driven by elevated subscription pauses. We expect the majority of these incremental pauses to be on pause in Q3. And so that nets out to a small drag on subscriptions for the year. Now in terms of revenue impact, unlike our prior seat post recall, this recall affects bikes manufactured during a specific period that we no longer sell. And we already have replacement seat post inventory available to begin to fulfill anticipated replacement orders. And the overall revenue impact is expected to be immaterial and is reflected in our full year guidance. Operator: The next question comes from Arpine Kocharyan from UBS. Arpine Kocharyan: So I'm going to combine 2 questions into one, if I may. And you alluded to this in your prepared remarks, but you're raising EBITDA and your revenue guidance is unchanged, which tells me that there's no major change in your thinking as it relates to underlying churn assumptions from before you raised pricing. First, is that a correct read? And secondly, if you could talk through your thinking of how you see churn normalizing? I think you saw churn normalizing within 8, 12 months post price increase back in 2022. Could you maybe talk about how your base of subscribers is different today versus '22 kind of emerging from COVID lockdown. On the other hand, you've been targeting maybe segments of the market that have underlying churn a bit higher through your rental program and the secondary market. Just if you could talk through what you see different today would be super helpful. Peter Stern: Yes. Arpine, this is Peter. I'll get us started on this, and then Liz feel free to jump in as always. As Liz said, the impact of the price increase in terms of churn has been in line with our expectations, and we're pleased with how it's going. Just to give you a sense of kind of the timing of the thing, we saw elevated cancellations in the first week or so after the announcement. And that was, as you can imagine, mostly concentrated in the first couple of days, and it was concentrated also in members who were more inactive versus our most active members, as you'd also imagine. And some of those people were likely to cancel at some point anyway. Since then, our churn has mostly moderated back to normal. As we indicated on our remarks here, our churn was actually down in Q1. That was the second quarter in a row that, that had taken place. And so we feel pretty good about the overall churn dynamics associated with the business. We have an increasingly tenured base of loyal members at this stage. And so if we step back and look at what to expect over the course of the year, the higher cancellations and pauses as a result of the price increase will -- that will manifest as higher churn in Q2. Then we should see an improvement in Q3, especially because we'll be reactivating some of the people who paused rather than canceled in Q2. And if we look at the year overall, we're projecting to see overall flat churn on a percentage basis over the entire year despite the tick up in Q2, and that's based on our confidence in the relationship that we have with our members. Yes, we have a very -- a different composition of our members. We have more people who are on programs like rental, for example, are coming from the secondary market, which tend to have higher churn, but that's offset by the fact that we have more -- much more tenured members and that tenure effect leads to lower churn. So all of those things add up to us feeling the level of confidence we've expressed about churn. Liz, do you want to jump there? Liz Coddington: Yes, I could just -- I was just going to add a little bit about EBITDA. So our EBITDA for the year, we did -- it reflects the outperformance that we had in Q1 because we are taking it up relative to our prior guidance by about $25 million on the full year basis. And so we outperformed in Q1. And then we do expect to see continued tariff favorability associated with the timing delays and lower rates than we had anticipated when we set our prior guidance. And then we also expect that we will realize some of the cost savings related to our $100 million run rate cost savings plan sooner than we anticipated. So all of those factors are driving some of that improvement in adjusted EBITDA. Operator: The next question comes from Marni Lysaght from Macquarie Capital. Marni Lysaght: I know you've called out some of the factors driving the free cash flow result. You're talking to the full year as well. But can you -- just when we kind of go through the balance sheet and you're talking about timing benefits, like receivables has come in quite lower relative to sales. And I appreciate inventories are a touch high. You've obviously been potentially preparing new products. So just thinking about some of the working capital nuances feeding into free cash flow trends going into this quarter and how you might think about this current quarter and for the -- and how that ties into the full year? Liz Coddington: Yes. So in terms of Q1, we certainly exceeded our expectations, which we had thought would be slightly negative, and we had some outperformance, and we talked about tariffs and some of those things as well and our cost savings plan. But we did have about $30 million, which I talked about earlier of benefits from vendor payment timing. And so some of that is related to payment terms, improvements in our payment terms and things like that. So that is probably a bit of what you're seeing. And on a full year basis, I do -- we expect to see that continued favorability and then -- but the timing will reverse in there. So we're taking our free cash flow target up by $50 million, but that is a minimum free cash flow target. Also, I want to make sure that to remind you all of that, we expect to be able to outperform that over the course of the year. Marni Lysaght: Understood. And just kind of, I guess, with new products coming to market, the right way of thinking about inventory? Liz Coddington: Yes. So we are balanced in terms of how we thought about inventory for our new products. Even though it's news to everyone here that we launched them in October, obviously, we have been planning for this for quite a while. And so we had a balance of working down our inventory on our old products, and we're being pretty measured about how much we built up in advance of the holiday season. So we feel pretty good about where we are at, at this point. Marni Lysaght: Okay. That's understood. And just a quick one on -- with Repowered, the kind of like the marketplace platform. How do we think about, I guess, the early progress that had a national rollout over the summer? And would the recalls, would that impact some of the vendors on that? Liz Coddington: Yes. So on Repowered, we -- again, that's -- it still a relatively new marketplace for us. And -- but we did create it as a way to help facilitate secondary market transactions because we are pretty -- the secondary market is an important entry point for us for price-sensitive customers. Now in terms of the recall, we do have -- we will have -- either we do already or we very well have a process in place to make sure that anyone buying on our Repowered marketplace will have access to a Bike+ seat post, it will be part of kind of the flow that they go through when they purchase a Bike+ through that marketplace. Operator: The next question comes from Shweta Khajuria from Wolfe Research. Shweta Khajuria: Let me try 2, please. First is, Liz, if you could speak to just the overall demand environment. And as you think about the rest of the quarter and into calendar quarter Q1 post the holidays, how are you -- what are you seeing right now that gives you conviction on demand trends generally, especially in the U.S.? And then my follow-up question is on your commercial opportunity. You kind of talked to this earlier as part of your answer to the first question. Could you please help us frame how big that opportunity could be for you in the, call it, near to midterm? And how are you measuring progress as you tap into that opportunity? Liz Coddington: Sure. So let me talk a little bit about demand trends that we're seeing. So for the Connected Fitness market overall, our internal estimates when we use third-party sales data do indicate that, that category in the U.S. is still declining year-over-year post the surge that we saw from mid-2020 to mid-fiscal 2022, but the rate of decline has decelerated to low single digits. So we're pretty encouraged by the trajectory it is moving towards. But we do expect to see some continued softness in Connected Fitness equipment demand in the short-to-medium term, and that is incorporated into our full year guidance. It's also worth reminding everyone that we are a large player in the Connected Fitness market segment. So our actions to focus on profitability do have an impact within the segment overall, especially for hardware sales. But in the long term, we do remain bullish on our growth potential as well as growth for that -- for the Connected Fitness category and the fitness and wellness economy overall. I do want to touch on the overall economy -- fitness and wellness economy because we do see that consumers are placing just a higher value on fitness and wellness. And if you think about that, it's much broader than just Connected Fitness in the framing of cardio fitness for the most part. And while it's not a nearly defined TAM today, there is third-party research overall that sizes, if you think about the entire wellness economy in totality, just within the U.S., at over $2 trillion. And now that's a huge number. We don't plan to participate in all of those categories that fall within the wellness economy. But we are focusing on moving toward areas beyond connected cardio and toward categories that demonstrate scale and growth and proven results for our members. And you've heard Peter talk about some of these. As we redefine our strategy, our market opportunity becomes much larger than connected cardio fitness. So you can think about cardio Connected Fitness as a big piece of us today, but our intent is to go well beyond that. And some of those categories, we've mentioned them before, but I'll just mention them one more time are in addition to cardio, we've got strength. We've got mental well-being, nutrition and hydration and sleep and recovery. And we'll continue to talk about these more as we execute on our strategy. Peter Stern: And just to cover the commercial side of that equation. The overall gym market in the United States is considerably bigger than the in-home Connected Fitness market. And although our internal analysis suggests that it experienced a bit of a slowdown over the last month or 2, if we look over the last couple of years, it's been continuing to grow. And we've experienced growth from the Precor side of our business. In some ways, I think we should be able to outpace the growth rate of the others due to the strategic benefits that I talked about earlier as well as the fact that we are refocusing on the commercial business unit and on Precor itself and recommitting to our commercial partners in that space. In terms of the metrics for success there, as you, I think, at this point, know about us overall as a management team, we are focused on growth, but the growth needs to be profitable. And so we are working with the commercial business unit to ensure that the plans that we develop results both in top line growth as well as increased margins associated with that business as well. And again, we feel really good about that category and in particular, our positioning in the category. Operator: The next question comes from Douglas Anmuth from JPMorgan. Bryan Smilek: It's Bryan Smilek on for Doug. Just 2 quick questions. Just thinking about the durability of double-digit sustainable Connected Fitness gross margins, can you just help parse out the drivers between product mix shift, the cost savings, obviously, that you're enacting? And I guess, conversely, but also similarly tied, you mentioned increased marketing spend in 2Q. Can you just shed more color on just overall brand positioning, where you're leaning into in terms of target demographics or service or channels as well for marketing? Liz Coddington: Yes. So in terms of gross margins, just -- I think your question was really kind of more about like long term and thinking about where we're going with gross margins. So if you look back at Q1, our -- to get to the -- this is Connected Fitness gross margin specifically, was 6.9%. That was negatively impacted by the inventory accrual for Bike+ seat post. And if you exclude that, our gross margin would have been 15.8%, and that's up 660 basis points year-over-year. Now if you look ahead to Q2, we're anticipating Connected Fitness products margin to improve compared to Q1, and that's driven by fixed cost leveraging with seasonally higher hardware sales and favorable mix of higher-margin products. And it's also worth noting that it's our highest quarter for seasonal promotions over the holidays. So even with that, we are expecting margin improvement. We do anticipate our full year fiscal '26 product Connected Fitness product gross margins to increase year-over-year. And then in terms of a long-term target, you mentioned double digits. Our goal is eventually to be in around the 20s range, and we intend to make progress towards that in the fiscal year. I do want to point out, though, as we've talked about on many prior calls, that we will continue to make trade-offs between gross margin and marketing spend based on the LTV to CAC efficiency that we see. Now Peter, did you want to talk a little bit -- I can talk about marketing. Peter Stern: On marketing spend, so for us, Q1 was a particularly low quarter. As Liz sort of intimated, we were sort of finishing up in many cases, the inventory that we had of our products. In fact, we went out of stock on the original bike in September in anticipation of the big launch. So there was no point, for example, in blowing it out on marketing when we knew we were doing great and running out of equipment. But as we look at Q2, we have a lot of messages to convey. And I'm so excited about those messages, right? Our launch of an entirely new product lineup with the Cross Training Series is a great reason for us to talk to our members and nonmembers alike. The introduction of Peloton IQ is it's a new concept, right, what we're trying to do in this space. And there's a lot of education that needs to take place. And of course, we've got all of this additional distribution. So we want to make sure that we actually are driving people into those stores because you got to provide the air cover in order for people to see that. That being said, we are, as always, very careful about our spend and pay close attention to our LTV to CAC and ensuring that we are acquiring members profitably. So what you will see is an increase in our marketing spend in Q2. There will be a higher percentage of our spend on brand and education than you've seen historically as compared with performance marketing in the early parts of the quarter. And then as we get into the latter parts of the quarter, the holiday season itself provides quite a lot of momentum for us. And we shift over to much more efficient performance marketing, and then you should see that over the -- much of the balance of the year, where we'll basically reap the benefits of some of the investment we made in Q2. But all of that, as you can tell, is included in the guidance that we provided for Q2, which still has considerable profitability. So again, our discipline is something that we take pride in, and that is certainly the case in the marketing area. James Marsh: Thanks, Peter. Karen, maybe we have time for one more question. Operator: And the last question comes from Susan Anderson from Canaccord. Susan Anderson: I guess maybe just to follow up on all of the additional wellness offerings you guys added to the subscription. Just curious if you've seen an uptick in usage of those services yet. It still may be a little early. And then maybe also if you can give an update on how the new certified refurbished equipment program is going. Peter Stern: So let me start with the usage point. It's actually been really -- that's been really positive. So we mentioned earlier that we've had 500,000 of our members use Club Peloton already. We're also seeing more people taking workouts from our home screen, and let me explain why that matters. For a lot of our members, they kind of stay with the same old, same old. They go to the classes page, and go to their comfort zone. But when people are taking workouts from the home screen, it means that the recommendations that we're delivering with Peloton IQ are starting to hit home. We've also seen a meaningful increase in strength workouts. And that's based on both our understanding of the science and what's important to our members in terms of their overall health as well as the personalized programs that we've developed for people who started to set goals around building strength and increasing longevity. The most important point is that if we look at the month of October, every kind of usage on a per member basis is up. And what I mean by that is like whether you're talking about workouts in that month, total workouts or the total workout days or total workout time, all those things are up, whereas historically, we typically see workouts go down from September to October. So we think our investments, in particular, AI, but also the investments we're making in the community on the software side are making a difference. In terms of the -- I think, Susan, your question was about the Repowered program. When you talked about a certified refurb program. And what I'll note right now is that the Repowered program actually doesn't do certified. It is, by the way, an awesome, awesome idea and one of the things that is certainly in our consideration set to actually provide certification because I think trust in this space is one of the areas that we can help to address. But so far, what we've been doing is solving a sort of more basic set of problems. One is creating a trusted marketplace to match sellers and buyers locally, but also to be able to give them the option to have a professional come and do the pickup and the delivery so that you don't have to go into somebody else's house if you don't want to or have somebody come into your house if you don't want someone there. So that's been the focus so far for Repowered. It's still early days, but we're seeing from what we're being told, good performance from the partner that we're working with on that program, and it's scaling as we expected. But stay posted for more cool stuff, and thanks for throwing out the idea. Why don't I close this out at this point with thanks, first of all, for everyone who joined today's call and also some encouragement for you to tune into some fun class moments that we have coming up. After Thanksgiving, we will have a veritable buffet of new live and on-demand classes available, including a live Turkey Burn Ride with Robin Arzón; a live Turkey Burn Run with Kirsten Ferguson; and The Feast, a live full-body strength class with 6 of our strength instructors. And coming soon, Emma Lovewell will release her third installment of her popular Crush Your Core program. And we recently launched a podcast, Move for Life hosted by instructor Matt Wilpers and Dr. Kavita Patel that's focused on longevity and it's available on YouTube. And for the investment professionals and analysts out there, our co-developed collection with the Hospital for Special Surgery on Desk Worker Strength & Mobility was made for you. With that, we look forward to seeing you on the leaderboard and wish you a happy and healthy holiday season. James Marsh: Thank you. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining, and you may now disconnect.
Operator: Welcome, ladies and gentlemen, to the Third Quarter 2025 Earnings Conference Call of Organogenesis Holdings, Inc. [Operator Instructions] Please note that this conference call is being recorded and that the recording will be available on the company's website for replay shortly. Before we begin, I would like to remind everyone that our remarks today may contain forward-looking statements that are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including the risks and uncertainties described in the company's filings with the Securities and Exchange Commission, including Item 1A, Risk Factors of the company's most recent annual report and its subsequently filed quarterly reports. You are cautioned not to place undue reliance upon any forward-looking statements, which speak only as of the date made. Although it may voluntarily do so from time to time, the company undertakes no commitment to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable securities laws. This call will also include references to certain financial measures that are not calculated in accordance with the generally accepted accounting principles or GAAP. We generally refer to these as non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release on the Investor Relations portion of our website. I would now like to turn the call over to Mr. Gary S. Gillheeney, Senior, Organogenesis Holdings President, Chief Executive Officer and Chair of the Board. Please go ahead, sir. Gary Gillheeney: Thank you, operator, and welcome, everyone, to Organogenesis Holdings Third Quarter 2025 Earnings Conference Call. I'm joined on the call today by Dave Francisco, our Chief Financial Officer. Let me start with a brief agenda of what we'll cover during our prepared remarks. I'll begin with an overview of our third quarter revenue results and provide an update on key operating and strategic developments in recent months. Dave will then provide you with an in-depth review of our third quarter financial results, our balance sheet and financial condition at quarter end, as well as our financial guidance for 2025, which we updated in our press release this afternoon. Then we'll open up the call for questions. Let me begin with a review of our revenue results for Q3. We delivered sales results, which exceeded the high end of our guidance range outlined in our second quarter call, driven primarily by better-than-expected growth in sales of our Advanced Wound Care products, which increased 31% year-over-year. Sales of our Surgical & Sports Medicine products also performed well, increasing 25% year-over-year in the third quarter. The record revenue performance we delivered in the third quarter reflects our team's strong execution and commitment to our strategy to build upon our deep customer relationships and promoting access to existing and recently launched products despite continued aggressive pricing strategies from our competitors. On October 31, CMS announced the final Medicare physician fee schedule for the calendar year 2026. As mentioned in our last quarter's earnings call, this is a watershed moment for the industry and the most impactful development in more than a decade. And we congratulate CMS on taking this significant step in payment reform and are pleased CMS finalized skin substitute classifications based on FDA regulatory status and a per square centimeter payment methodology in both the physician office and hospital outpatient settings. We are pleased that CMS has recognized the clinical differentiation of PMA products and has taken steps toward higher payment and expanded access for PMA products. We remain committed to working with CMS and other stakeholders to further expand access to these life-saving technologies as well as incentivize investment and innovation in the space and achieve long-term market stability. We believe this new policy will address abuse under the current system and the resulting rapid escalation in Medicare spending while ensuring a much-needed consistent payment approach across sites of care. With more than 40 years in regenerative medicine and a diverse evidence-based portfolio with technologies in each FDA category, we believe we are best positioned in the skin substitute market for 2026 and beyond, and we'll continue to be a leader in the space with highly innovative, highly efficacious products that deliver on our mission of advancing healing and recovery beyond our customers' expectation. Before turning the call over to David, I wanted to provide some updates on key clinical and regulatory developments in recent months. Beginning with an update on our ReNu program. On September 25, we announced that the second Phase III trial of ReNu did not achieve statistical significance for its primary endpoint despite demonstrating a numerical improvement in baseline pain reduction that exceeded the results of the first Phase III trial. Baseline pain reduction at 6 months for ReNu was negative 6.9 for the second Phase III study compared to negative 6.0 in the first Phase III study. Additionally, ReNu results from the second Phase III study continue to demonstrate a favorable safety profile. Given the first Phase III trial achieved statistically significant reduction in pain compared to saline and the second Phase III trial demonstrated a numerical improvement in baseline pain reduction that exceeded the results of the first Phase III trial. We believe these combined results support the potential approval of ReNu for pain symptoms associated with knee osteoarthritis included in those patients classified as the most severe. ReNu has been studied in 3 large RCTs of more than 1,300 patients combined. Organogenesis believes the totality of this data is compelling evidence for the FDA to review in a biologic license application. Additionally, FDA granted ReNu Regenerative Medicine Advanced Therapy, or RMAT designation based on ReNu demonstrating the potential to treat an unmet need in symptomatic knee osteoarthritis, a serious condition affecting more than 30 million Americans. We have a meeting scheduled for December 12 with the FDA to discuss our submission, including using the combined efficacy analysis from both Phase III studies to support a BLA approval. We believe gathering robust and comprehensive clinical and real-world evidence is an essential component of developing a competitive product portfolio and driving further penetration in the markets where we compete. While we did not meet the November 1 submission deadline for new data for LCD coverage consideration in 2026 for PuraPly AM, for DFU and Affinity or VLU, these studies and analyses continue, and we intend to submit for coverage once they're published. We remain confident in our strong competitive position in the skin substitute market heading into next year. We have substantial advantages, including strong brand equity, deep customer relationships and importantly, 3 highly innovative, highly efficacious commercialized products on the covered list if the LCDs take effect as scheduled on January 1, 2026, specifically our Apligraf product for DFU and VLU and our Affinity and NuShield products for DFU. We have strongly advocated for CMS to implement an integrated coverage and payment policy for the skin substitute market. We believe they have taken the right steps to address rapidly escalating Medicare costs while ensuring patient access to the most appropriate clinically effective technologies. We believe these changes present an enormous opportunity for Organogenesis to serve more patients and importantly, will be positive for the long-term health of the wound care market. Beyond 2026, we expect to advance our competitive position as we leverage our development engine fueling new innovation, capacity to launch and reintroduce products, including our Dermagraft product, which is already covered for DFU and VLU under the LCDs. Strategic investments in expanding the body of clinical evidence supporting our technologies and a transformational opportunity with ReNu. With that, I'd like to turn the call over to Dave. David Francisco: Thanks, Gary. I'll begin with a review of our third quarter financial results. And unless otherwise specified, all growth rates referenced during my prepared remarks are on a year-over-year basis. Net product revenue for the third quarter was $150.5 million, up 31% year-over-year and up 49% sequentially. As Gary mentioned, these results came in above the high end of our expectations we provided on our Q2 call, which called for total revenue in the range of $130 million to $145 million. Our Advanced Wound Care net product revenue for the third quarter was $141.5 million, up 31%. As Gary mentioned, the commercial team executed well in the period, building upon the momentum that we experienced towards the end of Q2 that we discussed on our last earnings call. Net product revenue from Surgical & Sports Medicine products for the third quarter was $9 million, up 25%, primarily due to an increase across the PuraPly family of products. Our total revenue results for the third quarter included $0.4 million of grant income related to the grant issued from the Rhode Island Life Sciences Hub, offsetting our employee-related costs in our Smithfield facility. This compares to no impact in the prior year period, and we continue to expect grant income to be immaterial in 2025. Gross profit for the third quarter was $114.2 million or 76% of net product revenue, compared to 77% last year. The change in gross profit was due primarily to a shift in product mix. Operating expenses for the third quarter were $130.1 million compared to $108.9 million last year, an increase of $21.2 million or 19%. Excluding cost of goods sold of $36.3 million for the third quarter and $26.8 million last year, our non-GAAP operating expenses for the third quarter were $93.9 million compared to $82.1 million last year, an increase of $11.7 million or 14%. The year-over-year change in operating expenses, excluding cost of goods sold, was driven by a $7.9 million or 11% increase in SG&A expenses, a $2.9 million or 28% increase in research and development expenses and a $0.9 million write-down of certain nonrecurring expenses. Operating income for the third quarter was $20.7 million compared to an operating income of $6.2 million last year, an increase of $14.5 million. Excluding noncash amortization and certain nonrecurring costs in both periods, our non-GAAP operating income was $23 million compared to $7.1 million income last year. GAAP net income for the third quarter was $21.6 million compared to a net income of $12.3 million last year, an increase of $9.2 million. Net income to common for the third quarter was $14.5 million compared to a net income of $12.3 million last year. As a reminder, net income to common includes the impacts of the cumulative dividend, the noncash accretion to redemption value on our convertible preferred stock and undistributed earnings allocated to participating redeemable convertible preferred stock. Adjusted EBITDA for the third quarter was $30.1 million compared to adjusted EBITDA of $13.4 million last year. Now turning to the balance sheet. As of September 30, 2025, the company had $64.4 million in cash, cash equivalents and restricted cash with no outstanding debt obligations, compared to $136.2 million in cash, cash equivalents and restricted cash with no outstanding debt obligations as of December 31, 2024. On October 31, 2025, we amended our credit agreement to better align with the underlying fundamentals of our business. The amended credit agreement now provides access to up to $75 million of future borrowings. We believe we are well capitalized with our cash on hand and other components of working capital as of September 30, 2025, and available under our revolving credit facility and net cash flows from product sales. Now turning to a review of our 2025 revenue guidance, which we updated in this afternoon's press release. For the 12 months ended December 31, 2025, the company now expects net revenue of between $500 million and $525 million, representing a year-over-year increase in the range of 4% to 9%. The 2025 net revenue guidance range now assumes net revenue from Advanced Wound Care products of between $470 million and $490 million, representing a year-over-year increase in the range of 4% to 8%. Net revenue from Surgical & Sports Medicine products between $30 million and $35 million, representing a year-over-year increase in the range of 6% to 23%. With respect to our profitability and EBITDA guidance, the company now expects GAAP net income in the range of $8.6 million to net income of $25.4 million compared to a range of a net loss of $6.4 million to net income of $16.4 million previously. EBITDA in the range of $19.1 million to $41.9 million compared to $6.2 million to $37 million previously. Non-GAAP adjusted net income in the range of $21.5 million to $38.4 million compared to $5.5 million to $28.3 million previously, and adjusted EBITDA in the range of $45.5 million to $68.3 million compared to $31.1 million to $61.9 million previously. In addition to our formal financial guidance for 2025, we are providing some considerations for our modeling purposes. Our profitability guidance for 2025 now assumes gross margins in the range of approximately 74% to 76%. GAAP operating expenses, excluding cost of goods sold, up 1% to 2% year-over-year. and excluding noncash intangible amortization of approximately $3.4 million, the nonrecurring FDA payment related to our renewed BLA filing of $4.6 million and the $9.8 million write-down of assets and restructuring activities in the first 9 months of 2025, our total non-GAAP operating expenses will increase in the range of 3% to 5% year-over-year. With that, I'll turn the call over to the operator to open up the call for your questions. Operator: [Operator Instructions] We will take our first question from Ross Osborn from Cantor Fitzgerald. Ross Osborn: Congrats on the strong quarter. So starting off, I would be curious to hear how your conversations are going with the clinical community in terms of when you're expecting physician behavior to change following the PFS. Is that December this year, earlier? Any thoughts there? Gary Gillheeney: Yes. So this is Gary, Ross. We're starting to see some of that behavior change now. where clinicians are moving to products that are on the approved LCD list. We're seeing some contracts starting to get processed to get those products on and apparently get the other products off. So we're starting to see some of the administrative behavior starting now. I'm not -- I don't think we've seen any sales behavior at this point in time, but we're certainly seeing the pieces being put in place where there'll be a change in utilization going forward based on the physician fee schedule. Ross Osborn: Okay. Got it. And then looking to next year, what can you do from a company standpoint to help generate awareness regarding your products as incremental volume opens up as many players that were selling higher ASP products won't be able to operate in the market. Gary Gillheeney: Well, fortunately, we have strong brand equity for our products, and we focus on the clinical efficacy of what our portfolio contains. We will continue to message that. I think that plays extremely well in today's -- or into next year's world. We think with wiser as well, getting products that are appropriate for use and will get reimbursed. I think -- will carry a lot of weight. The clinical evidence of those products will support utilizing those products and will carry a lot of weight. And those are the messages that we'll continue to beat and to make sure the market is aware of what we have, the clinical evidence, the likelihood of reimbursement as a result of being on the LCD and being appropriate with appropriate data, if challenged. Operator: [Operator Instructions] Our next question comes from the line of Ryan Zimmerman from BTIG. Iseult McMahon: This is Izzy, on for Ryan. So I wanted to start or continue, I guess, on the physician fee schedule for 2026. I was curious how you think the new rates might impact margins as we start to think about our models for next year? David Francisco: Yes, sure. So I mean, obviously, it's a little bit early to be talking about 2026, but we'll maybe connect on a couple of things around the revenue profile and the margin one as well. Again, we're not providing financial guidance today, but I'm glad you asked the question because I think there are several key changes in the marketplace for 2026 that I think people should be cognizant of. First off, with the LCD going into place, there's over -- well over 200 products that will no longer be covered for DFUs and VLUs under that LCD that's scheduled right now to go and be enacted on 1/1/26. As Gary mentioned in his prepared remarks, we have 3 commercialized products that are covered by the LCD with an additional one in Dermagraft coming back online in the back half of 2027. And those products are NuShield, which is a dehydrated amnion that's covered for DFUs, Affinity, which is a living amnion, which is covered for DFUs and then our Apligraf product, which is a bioengineered cellular product -- and it's the only PMA-approved product for both DFUs and VLUs. So we're excited about having those on the covered list. In addition to that, the financial incentives will be dramatically reduced in the marketplace, leveling the playing field, which is what we've been advocating for, for quite some time. And overall, as Gary mentioned, too, we have the brand equity, efficacy and service, which puts us in a very nice position, which is the attributes that we'll be competing against in 2026 once the field is leveled, as I mentioned. And then, of course, we've got a broad portfolio across many different FDA classifications that are addressing multiple indications. And then the last piece I'd say is that the commercial team has done a nice job of pivoting in a dynamic market environment. And I think that's indicated over the last couple of years and certainly in this last quarter. So all those things coming together, I think there's obviously no implication to the surgical business next year. So that's one element that you should think about. And I think the other components around wound care would be is that our dominant position in the hospital outpatient setting can drive incremental growth given that the reimbursement there has been unbundled. In addition to that, I think, obviously, there's been several new entrants into the market over the last couple of years, and we expect that share that's been lost over the last couple of years to be regained. And so we expect to participate in that. The offset to that is, of course, the market has expanded to some extent, and we expect that to contract based on overuse. And then the last piece I'd say is overall on the market standpoint, ASPs across the entire market will decline. So from that perspective, ours will as well, but there's a couple of other components there. Obviously, with Apligraf on the market and again, the only PMA-approved product for both DFUs and VLUs, very, very strong product, particularly in HOPD, will now be reimbursed at a much higher rate than it has been in years past. So from our perspective, we see a lot of growth drivers next year, and we also see improvements in margin and cash flow as well. Iseult McMahon: That's very helpful. And to your point about ASPs coming down, I was curious if you were surprised at all by the final rate ending up in that $127 range? Or is that kind of where you were expecting? Gary Gillheeney: Yes. We -- I think we were public and thought that it was going to come out, finalized at the rate that it was proposed in the proposed rule. We didn't think that at this point in time, CMS was going to change that rate, though they have indicated that they recognize PMAs, have a clinical differentiation and resource costs associated with them in value and expect that, that reimbursement will be higher over time than the 510(k)s and the 361. So I think over time, we're going to see a change. And I think one of those will be the PMAs will be separated. And perhaps once the market absorbs this change, CMS will take a look and see if that rate of 127 for the 361s and 510(k)s is appropriate or not? Or has it really, in some way, curtailed care in any way, shape or form. But I think they want to see if that's what's going to happen. So that's why we think they left everything at what's 127. Now the proposed rule was 125 -- that's why we felt it would come out at the 125 or something close to it. Iseult McMahon: Got it. That's helpful. And then just shifting focus over to ReNu. I know you're meeting with the FDA in December, but I was curious if the initial approval time lines that you had called out before, I believe it was late 2026 or early 2027 are still on the table given the recent data readout. Gary Gillheeney: Sure. So we still think there is an opportunity to still file and we'll be filing in a modular form in December if we have a successful meeting with the FDA. But I would guide to a 2-month delay is probably safe. It's possible we could stay on our current time line, but 2 months, I think, is reasonable based on where we are today in preparing for that December 12 meeting. Operator: [Operator Instructions] We are currently showing no remaining questions in the queue at this time. That does conclude our conference for today. Thank you for your participation. You may now disconnect.
Operator: Good morning, and welcome to Mercer International's Third Quarter 2025 Earnings Conference Call. On this call today is Juan Carlos Bueno, Mercer's President and Chief Executive Officer; and Richard Short, Mercer's Chief Financial Officer and Secretary. I will now hand the call over to Richard. Richard Short: Thanks, Michelle. Good morning, everyone. Thanks for joining us today. I will begin by touching on the financial and operating highlights of the third quarter before turning the call to Juan Carlos to provide further color into the markets, our operations and our strategic initiatives. Also, for those of you that have joined today's call by telephone, there is presentation material that we have attached to the Investors section of our website. But before turning to our results, I would like to remind you that we will be making forward-looking statements in this morning's conference call. According to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, I'd like to call your attention to the risks related to these statements, which are more fully described in our press release and in the company's filings with the Securities and Exchange Commission. This quarter, our EBITDA was negative $28 million, including a $20 million noncash inventory impairment, a decrease from negative EBITDA of $21 million in the second quarter. One of the key drivers of our results was negative pressure on pulp pricing and demand from global economic and trade uncertainty. We had lower sales realizations for both softwood and hardwood pulp, which negatively impacted EBITDA by roughly $15 million, and was also a key factor behind our noncash inventory impairment charge. In the third quarter, our pulp segment had negative quarterly EBITDA of $13 million, while the solid wood segment had negative EBITDA of $9 million. Additional segment disclosures are available in our Form 10-Q, which can be found on our website and that of the SEC. Third quarter average published prices for NBSK and NBHK pulp decreased across all our markets compared to the second quarter. This decrease was due to weakened demand caused by a sustained uncertain global economic and trade environment. The price decline in China was further impacted by an oversupplied paper market and the increase in integrated pulp production. NBSK pulp prices faced additional pressure from the increased substitution of softwood with lower-cost hardwood. In the third quarter, the NBSK net price in China was $690 per tonne, a decrease of $44 from the second quarter. The European NBSK list price averaged $1,497 per tonne, a decrease of $56 from the prior quarter, while the North American NBSK list price decreased $120 in the second quarter, averaging $1,700 per tonne. The market price gap between NBSK and NBHK in China was about $190 per tonne this quarter, a slight decrease from the roughly $200 in the second quarter. In China, the third quarter average NBHK net price was $503 per tonne, down $30 compared to the second quarter, and the North American third quarter price was $1,203, down $107 per tonne. As mentioned previously, the third quarter included a $20 million noncash inventory impairment, primarily driven by lower pulp prices. Of this amount, approximately $15 million was attributed to hardwood inventories and the remainder was primarily against softwood inventories. Pulp sales volumes in the third quarter increased by 26,000 tonnes to 453,000 tonnes. Pulp production in the third quarter was -- of 459,000 tonnes was flat compared to the second quarter. We had 20 days of planned maintenance downtime in the third quarter compared to 23 days in the second quarter. In the fourth quarter of 2025, we had 18 days of planned maintenance downtime at our Stendal mill. For our solid wood segment, lumber pricing in the third quarter was relatively stable compared to the second quarter in both the U.S. and European markets, as reduced supply offset relatively weak demand. The Random Lengths U.S. benchmark price for Western SPF #2 and better averaged $477 per thousand board feet in the third quarter, a modest increase from $472 per thousand board feet in the second quarter. Today, that benchmark price for Western SPF #2 and better is around $460 per thousand board feet, a modest increase from the beginning of 2025. In the third quarter, lumber production decreased by about 4% to 150 million board feet from the second quarter due to planned maintenance at our Friesau mill. Lumber sales volumes also decreased to 110 million board feet, down about 9% from the second quarter, reflecting the lower production and timing of sales. Electricity sales for the quarter totaled 204 gigawatt hours, a 6% decrease from the second quarter due to planned turbine maintenance at the Rosenthal and Celgar mills. Third quarter pricing increased to about $106 per megawatt hour, up from $90 in the second quarter, driven by higher spot prices in both Canada and Germany. Fiber costs for both our pulp and solid wood segments were flat in the third quarter compared to the second quarter. Overall fiber costs remained high in Germany with strong sawlog demand and constrained supply, while in Canada, demand was stable. Our mass timber operations within the solid wood segment had stable revenues in the third quarter compared to the second quarter as the elevated interest rates in the U.S. continue to impact project timelines and overall market momentum. However, despite the headwinds, our mass timber business has developed a healthy order book as we continue to see growing interest in mass timber and expected improvement -- and we expect to improve results in 2026. We continue to make progress on our One Goal One Hundred program. As a reminder, this initiative focuses on cost reduction and operational efficiencies with a target to improve our profitability by $100 million by the end of 2026, using 2024 as a baseline. We currently expect to realize approximately $30 million in cost savings and reliability improvements by the end of 2025. Juan Carlos will provide more details on our progress on this initiative. We reported a consolidated net loss of $81 million for the third quarter or $1.21 per share compared to a net loss of $86 million or $1.29 per share in the second quarter. In the third quarter, we consumed about $48 million of cash compared to $35 million in the second quarter. This increase was primarily driven by lower EBITDA. In the third quarter, we invested a total of $30 million in capital across our facilities. These investments were primarily for maintenance, but also included upgrades to the log yards at Friesau and Torgau. The upgrades are expected to enhance efficiencies, positioning us favorably for improvements in the solid wood market. At the end of the third quarter, our strong liquidity position totaled $376 million, comprised of about $98 million of cash and $278 million of undrawn revolvers. That ends my overview of the financial results. I'll now turn the call over to Juan Carlos. Juan Bueno: Thanks, Rich. This quarter's operating results were disappointing, mainly due to trade uncertainty, which created significant industry headwinds such as China increasing its paper exports to Europe, thus negatively impacting European paper producers. The economic uncertainty created by tariffs and trade disputes is negatively impacting demand for both paper and lumber. Another factor this quarter was the $200 price gap between hardwood and softwood pulp, which incentivizes certain customers to use more hardwood in their furnish. In spite of these factors, demand for softwood pulp has been steady, but weak hardwood pricing is holding softwood prices down despite strong overall softwood fundamentals. In addition, the ongoing trade disputes are putting downward pressure on the U.S. dollar, which negatively affects our operating results. This U.S. dollar weakness increased our operating costs by almost $11 million compared to Q2. While these uncontrollable factors create significant macroeconomic headwinds for our business, we continue to focus on the things we can control. In this sense, we have made good progress on our mill reliability, and our cost control initiatives are gaining traction. As a reminder, in the second quarter, we launched a company-wide program aimed at identifying $100 million in cost savings and profitability improvement opportunities by the end of 2026 when compared with 2024. We have named this program One Goal One Hundred. Currently, we expect to achieve $30 million of cost and reliability-related savings by the end of 2025. This initiative also includes targeting working capital reductions of $20 million, as well as $20 million in CapEx reductions relative to our previous 2025 guidance. A significant part of the One Goal One Hundred program relates to reliability improvements that, combined with additional cost savings expected to be realized next year, gives us high confidence that we will reach our $100 million target by the end of 2026. In parallel, our working capital and CapEx reduction plans are tracking as planned. The trade war has created an unprecedented level of uncertainty in the markets in general. However, we are beginning to have clarity on the direct impacts of tariffs on our business. During the quarter, the U.S. Department of Commerce concluded their Section 232 review on lumber. European lumber is now subject to a 10% tariff, as is Canadian lumber. The 10% incremental tariff on Canadian lumber brings the total duty and tariff impact to about 50% on average for Canadian lumber. As a result, we have already seen Canadian lumber curtailment announcements, and we expect more to come. This will create a reduced supply of residual chips for pulp mills and will inevitably create pressure on fiber costs. We feel, however, that our Celgar mill is well positioned, given its ability to access the U.S. fiber market and our ability to harvest and process whole logs. Nonetheless, we expect to see some cost inflation. On the other hand, our Peace River mill's hardwood supply will not be impacted. Today, our pulp shipments to the U.S. from Canada are not impacted by tariffs as pulp is CUSMA compliant. As mentioned, our main import from the U.S. into Canada is wood chips for our Celgar pulp mill, which today amounts to about 45% of the fiber consumption of the mill. We have the ability to grow this percentage slightly going forward if required. Most importantly, there are no counter tariffs applied to this fiber. Our EBITDA of negative $28 million reflects 20 days of planned downtime, maintenance downtime, including 16 days at our Rosenthal mill and lower pulp prices in all markets. Overall, pulp markets weakened significantly in the third quarter. Seasonality-driven weak paper demand, combined with low fiber costs in China, contributed to this weakening. We believe these market dynamics have also encouraged opportunistic pulp substitution in some paper grades as paper producers are running their machines more slowly, given the overcapacity. In addition, we believe pulp destocking by paper producers is putting additional pressure on pulp prices. At present, we believe paper producers' pulp inventories are low, supported by the availability of prompt delivery pulp. Looking ahead, we expect to see some modest NBSK price improvements late in Q4 and into Q1 of 2026 as the impact of the announced European NBSK curtailments impact Chinese port stock and the [Technical Difficulty] Operator: Please stand by. We are experiencing a technical difficulty. Please stand by. Pardon me. This is your host. Please stand by. Your conference will resume momentarily. Thank you for your patience. Your conference will resume momentarily. Richard, I see that you have rejoined. Are you able to hear me, sir? Richard Short: Yes. Juan Bueno: Yes. Operator: Okay. Sir, you may proceed. Juan Bueno: Thank you, Michelle. Apologies for the disconnect. We don't know exactly what happened. So I'll repeat the last statement. Looking ahead, we expect to see some modest NBSK price improvements late in Q4 and into Q1 of 2026 as the impact of the announced European NBSK curtailments impact Chinese port stock and the impact of delisting of low-quality Russian pulp from Shanghai Futures Exchange is realized. Despite the recent announcement of trade deals, the global trade landscape continues to be unclear. We expect this trade uncertainty will persist at least through the near term, likely keeping commodity prices subdued. However, we remain optimistic that once trade clarity returns, markets will begin to normalize. In total, our pulp production was flat at almost 460,000 tonnes compared to Q2. As part of our objective to keep all of our pulp mills running reliably, we planned major maintenance shutdowns at all mills throughout the year. Our Q4 shut schedule has [indiscernible] down for 18 days, or about 36,000 tonnes. Our lumber production was down slightly relative to Q2 by about 4% due to maintenance that was scheduled at our Friesau mill. Overall, we are pleased with our lumber production. And even though the ramp-up of our Torgau mill incremental lumber capacity has been slower than anticipated, we do expect to realize the increased annual capacity rate of about 100,000 cubic meters of dimensional lumber, or roughly 65 million board feet, by the end of the year. Pulp fiber costs were essentially flat relative to Q2. In Germany, reduced demand for pulp logs pushed fiber prices down modestly, while in Canada, costs were up slightly due to increased logistic costs. However, on the sawlog side, reduced supply due to limited harvesting pushed our fiber costs up as expected compared to Q2. Looking ahead to Q4, we expect fiber costs to increase for both our pulp and sawmill businesses. Our pulp business will be impacted by reduced sawmill residual availability. And our German pulp mills will also face increased seasonal competition for wood chips from biofuel producers, while our German sawmilling business adapts to the impact of reduced harvesting levels. In Germany, we expect harvesting levels to improve as the lumber market improves, while in Canada, lower fiber availability will keep prices under pressure on fiber unless the demand side of the equation changes. The business environment for our solid wood segment was consistent with Q2. Our solid wood segment continues to be held back by a weak European economy and the impact of high interest rates on the construction industry and high mortgage rates despite some modest price improvements on certain grades in the U.S. lumber market. This segment is also facing the impact of higher wood costs in the short term. As a result, our solid wood segment posted a negative EBITDA of $9 million in Q3 with essentially flat lumber pricing and sustained weak demand for pallets. Given the many economic forces affecting U.S. construction activity, U.S. lumber pricing could be volatile in the short term. Currently, weak housing construction due to high mortgage rates is a headwind, but the implementation of significantly higher antidumping and countervailing duties is expected to push lumber prices up as the resulting production capacity reductions begin to materialize. However, the market has been slow to react due to large volumes of lumber being shipped prior to the implementation of the higher duties and tariffs. In contrast, we expect modest upward pricing pressure in the European market, primarily due to increasing sawlog prices. However, any meaningful long-term improvement in either the European or U.S. markets remain dependent on improved economic conditions and lower interest rates. The cost-competitive configuration we have in Friesau gives us the flexibility to maintain a strong presence in Europe and the U.S., while also serving a quality-sensitive Japanese market. In Q3, 44% of our lumber volume was sold in the U.S. as we continue to optimize our mix for products and target markets to current conditions. Looking forward, we believe the U.S. lumber market will be driven by favorable homeowner demographics. [ Additionally ], factors that we believe will improve lumber market dynamics include potential Canadian sawmill curtailments in the aftermath of higher softwood lumber duties and relatively low housing stock. Combined, we expect these factors will put sustained positive pressure on the supply-demand balance of this business in the short to midterm. European shipping pallet markets remain weak with pricing staying generally flat due to the overhang of the European economy, particularly in Germany. However, once the economy begins to recover, we expect pallet prices to recover towards more historical levels, allowing Torgau to deliver significant shareholder value. We're optimistic we will see that recovery start in 2026. As a reminder, a $1 per pallet increase or roughly 10% will put our pallet business into a clear positive cash flow position. Heating pallets prices were flat relative to Q2. We expect demand and prices to be slightly higher in Q4 due to higher seasonal demand and supply concerns as a result of higher German fiber costs. With regards to our mass timber business, we continue to see a steady volume of incoming project inquiries. In the last 2 quarters, the potential sales volumes of these inquiries have been about $400 million and equate to well over 100 projects per quarter. And as a result, our order book continues to grow. The projects we're bidding on and winning today are meant to be constructed about 9 months from now or well into 2026. We expect revenue will start picking up momentum now to the point that we're planning on ramping up one of our facilities to 2 shifts in the early part of 2026. Today, our mass timber backlog of projects sits at about $80 million. We remain confident that the environmental, economic, speed of construction and aesthetic benefits of mass timber will allow this building product to grow in popularity at a pace similar to what happened in Europe. We're also seeing increasing interest for data center construction applications in an effort to reduce the carbon footprint of these facilities. This is exciting for us because we're well positioned to capture this growth due to the location of our industry-leading North American capacity and our technical capabilities. As a result, we are highly confident in this business being a growth engine for Mercer. We have roughly 30% of North American cross-laminated timber production capacity, a broad range of product offerings, including design assist and installation services, and a large geographic footprint with manufacturing sites in the Northwest, as well as the Southeast, giving us competitive access to the entire North American market. In light of the ongoing economic uncertainties, our planned CapEx spend is about $100 million in 2025. This capital budget is heavily weighted to maintenance, environmental and safety projects that includes both Torgau's lumber expansion project and Celgar's recently completed woodroom project. While we're still early in our planning, we expect 2026 CapEx to be meaningfully lower than our 2025 spend as we prioritize our liquidity through this trough. We're in the process of conducting a FEL-2 engineering review for a potential carbon capture project at our Peace River mill. This project is a few years away from potential completion, but we're excited about the prospective economic benefits such a venture could bring to this mill. We remain committed to our 2030 carbon reduction targets and believe our products form part of the climate change solution. We also believe that products like mass timber, green energy, lumber, pulp and lignin will play important roles in displacing carbon-intensive products, products like concrete and steel for construction or plastic for packaging. In addition, the potential demand for sustainable fossil fuel substitutes is significant and has the potential to be transformative to the wood products industry. As a result, we remain bullish on the long-term value of our products and what they can bring to society and our stakeholders. Overall, our Q3 operating results were disappointing, driven by a number of industry headwinds. These headwinds are expected to persist in the fourth quarter. And as a result, we're taking further actions as liquidity remains our top priority. While we have made good progress on advancing our One Goal One Hundred program and remain committed to rebalancing our portfolio of assets, we're also implementing decisive measures to support our liquidity position. These steps include further cost reductions, capital expenditure reductions and other working capital measures that combined will improve our balance sheet. Above all, we are committed to prudent financial management. Finally, the headwinds facing our industry have proven to be both longer and more severe than many anticipated. Global trade tensions haven't helped in this regard. However, our experienced management team has navigated through previous commodity downturns, and we have strong assets in our portfolio that will allow us to weather the storm. I am also encouraged by the fact that today's weak commodity cycle is validating our long-term strategic plan, which revolves around transforming our pulp mills into biorefineries with additional revenue streams that can not only help balance our product mix but grant us further resilience during the pulp down cycles. As such, we have made very good progress on this transformation with our lignin pilot plant in Rosenthal, a carbon capture pilot plant in Peace River and the work that we're doing in Stendal on sustainable aviation fuel. We will navigate through these turbulent times and implement our strategic plan by transforming our pulp mills into biorefineries. Thanks again for listening, and I will now turn the call back to the operator for questions. Thank you. Operator: [Operator Instructions] The first question comes from Sean Steuart with TD Cowen. Sean Steuart: Juan Carlos, I appreciate all the points on cost savings initiatives, working capital reductions and lower CapEx. Wondering if you can give some perspective on thinking around potential asset sales to expedite deleveraging on the balance sheet. Anything under consideration? And can you give us a sense of the scale? Juan Bueno: Absolutely, Sean. Yes, we've been looking at this in detail for the last few months. At this point, we're not at liberty to disclose anything. We do recognize, however, that the current market environment is not ideal for us for divestitures. Sean Steuart: Okay. And on the broader softwood pulp market, it's an extended trough. Mill inventories still look really high. We're closer to the bottom [indiscernible]. Can you give perspective on how much capacity you think needs to be taken out permanently to right-size the industry to what demand will normalize to over the next few years? Juan Bueno: Yes, Sean, it's a very good question, not easy to answer with a precise number. We do see -- we have seen along the year several mills curtailing and curtailing for extended period of time. We know about a few in Finland specifically that were down for probably more than 6 months of the year. And while those are important steps, they do not end up making the impact or having the impact as an announcement of a full closure will have as they are obviously temporary situations. We do think that given how long this trough has been and even though we do believe that we're, as you said, in the bottom of the price curve, there should be closures of pulp mills. We wouldn't be surprised if either some of the Finnish mills or the Canadian mills that have bigger situations or bigger problems to deal with access to fiber would be going belly-up. The situation in Canada is obviously very complicated in the back of the additional tariffs. We've seen the announcements of several closures of sawmills, which -- as we already know and have said, that puts pressure on fiber on a market that is already tight on fiber, particularly in BC. I think that gains a significant -- very strong significance. So we see those conditions in BC at least deteriorating significantly with the introduction of these tariffs and additional countervailing duties. As we said, in the case of Celgar, because of our location and because of our strategy, the fact that we're less dependent on that BC fiber gives us that edge. But obviously, that's not the case for many others in the interior of the province. So yes, again, in Germany, we have the advantage of having a forest around us. And even though the costs are going up, it's still fiber that we can access and have assets that are very competitive and they can still make money in these conditions, different from the Finnish mills or the Swedish mills that are facing very, very high wood costs in their normal traditional fiber baskets. Operator: And the next question will come from Sandy Burns with Stifel. Sanford Burns: I'm hoping you could talk a little bit more about the substitution issues that you mentioned this quarter. I mean, it's certainly been an ongoing issue for the industry. Would you say, the increase, is it more region-specific or end user specific? And maybe tied into that also, at what differential do you think that substitution then may abate? Juan Bueno: Yes, Sandy, very good question. As you well said, substitution has been going on for several years now. This is not a new concept. This is not something that we have not seen before. That's part of the growth that we all see in hardwood is on the back of substitution. And yes, that's a reality and has been with us for several years. What is probably different this time around is that over the past few years, I think everybody has -- or paper producers of all kinds have taken their furnace to what they believe would be their limits on taking advantage of those price differentials between the 2 fibers. Now, as that differential has grown significantly and well above what we've seen in previous years, then that kind of puts it to another level and another test of, okay, we thought we've done everything. Can we do anything more? And I think that's what we've seen happening not only in Europe, we've seen that happening in China as well, where that price differential of $200 per tonne would allow them to -- would allow some of the producers to say, okay, well, now we're going to use less softwood and add more chemicals. Or now that, again, there's a lot of capacity out there with machines running slowly, then that gives them the opportunity also to reduce the amount of softwood naturally. So those additional measures of adding chemicals or doing -- or taking things beyond the limits is what we see with this $200 price. Now, it does have an impact, and we've discussed this with certain customers. It does have an impact on the end quality of the product. So there's limits to that. If you think about a paper towel that you buy, traditionally, if they were to just reduce even further the softwood, then the absorbency of the paper towel would not be the same. The properties would not be the same, and the customers would understand that the product has changed and the quality has deteriorated. So there is a limit to it. What we've seen in terms of substitution recently with this $200 gap is about 2%. That's how we've measured it. When we look at our European customers and how much has gone, as we talk to them about how much they have changed, that's the dimension of it, 2% given this $200. But again, as you said at the beginning, this is on top of the substitution that has already been taking place for several years, which is, I think, on percentages much bigger than that. So do we see that maintaining? Well, we already are starting to see the gap closing a little bit. Hardwood is gaining some traction. There is some order around how hardwood producers are being able to push prices up. Still very little, $20 here and there, but it's a trend that is obviously encouraging. If we close that gap to the $170s, $150s, then that -- the use of chemicals and the use of these things, these extreme measures, we don't see them continuing, and there could be more of a going back to where we were before the $200 gap. Sanford Burns: And I guess, related to that, whether Mercer or other NBSK producers like just further discounted NBSK to close the gap and then at least get the volume, although at much lower margins? Juan Bueno: Obviously, when hardwood prices are that low, it puts a cap on softwood. When you think about a year ago, what everybody was talking about was that the softwood market was very tight and that there was no reason for softwood prices to deteriorate because it was just very, very tight. Then we got into a situation where hardwood continued to drop -- continue to drop and it pulls softwood down naturally. So I think that's a big element of the whole equation. It doesn't pull it completely down, and that's why the gap increases so much because there's some resilience in pulp. Otherwise, it would fall just as hardwood falls. It maintains certain value in it, and that's why that gap increases to $200 precisely because there's that inherent value in the softwood fiber. So we do feel that obviously, it's independent decisions on producers, whether they want to sacrifice price for volume. We have our own policy on it, and we know that we can sell everything that we produce. We have very good relationship with customers for many, many years, and that gives us that confidence and doesn't put us in a situation where we're forced to do things that we shouldn't be doing from a price perspective. So yes, that's about that. Sanford Burns: Okay. And maybe a last one for me, shifting gears on the liquidity front, you mentioned asset sales. Any other liquidity-enhancing actions you could be considering? And I know, on the last call, in terms of minimum liquidity, you felt it was a long way from being uncomfortable. How are you feeling about it now? Have you maybe had to start discussions with banks about maintaining liquidity during this rough period for the company and industry? Juan Bueno: Yes. We've started some of those discussions. We started discussions. For example, we have revolving facilities that are due in '27 that need to be renewed. We've started those conversations, and those are going very well. There's no reason to believe that we won't be able to renew those if we decide to go for that. Also, looking at the senior notes coming in '28 and '29, there's still runway for them, but we're not necessarily waiting for all that runway to expire. We're acting upon those things. So yes, we're looking at all the things that we have to do preemptively so that we don't let time go by and take us by surprise. We know that it's a complicated market that we're dealing with. We know that asset divestitures is part of the options that are out there. As I mentioned before, anybody would say today that probably the conditions are not the best for you to go out and try to sell something. Nonetheless, obviously, we look at options and are actively working on things, looking at what can be done on that end. But in the meantime, it's all about reducing the other things that we can reduce that are significant, focusing on working capital, and there's good progress that we've made. Same thing on CapEx. There's still room for us to reduce CapEx and focus basically on maintenance and leave some of those growth projects for later. So yes, there's things that we can do other than the usual cost reductions that are obviously in full motion already since the second quarter. Operator: And the next question will come from Hamir Patel with CIBC Capital Markets. Hamir Patel: Juan Carlos, you indicated looking at reducing CapEx. What do you -- for 2026, what sort of range of CapEx outcomes that you could see? Richard Short: Hamir, it's Rich. We're sort of starting around $75 million, but we're looking to see if we can reduce that as well. So that's probably the ballpark we're going to play in for next year. Hamir Patel: Great. And then, I guess, related to that, how should we think about the planned shuts for 2026? And is there any sort of maybe room to stretch some of those out? Juan Bueno: Yes. In fact, for example, in 2026, we won't have a shut in Stendal. Stendal is under an 18-month cycle, an 18-month cycle that we're actually reviewing whether it could be a 2-year cycle. We were actually thinking about that for this particular year, but we decided to keep the 18 months. Otherwise, we wouldn't be having a shutdown right now. So, that is good news for 2026, no shutdown in Stendal. On the other mills, Celgar is on an 18-month shutdown. And Peace River, we're looking to also moving a little bit beyond the traditional 12 months that we have for that mill. So yes, we're stretching things on shutdowns for next year. Operator: And the next question will come from Matthew McKellar with RBC Capital Markets. Matthew McKellar: Just one for me. How would you describe the industry supply-demand balance in North American mass timber right now? And with recent changes in capacity and the demand inflection we're seeing, what are your expectations for how that trends into 2026? Juan Bueno: Thank you, Matthew. As I was mentioning, or we were mentioning before, we're pretty excited about how we see mass timber developing. The amount of project inquiries, the amount of biddings that we're participating that I already talked about is very encouraging. Probably the biggest element there, and I think it's of incredible significance, is the AI data centers and all the transformative AI investments that are coming through. To give you some order of magnitude, when you think about the hyperscalers, I'm talking about the Googles, the Amazons, the Metas, those companies, the Amazons, their plan for the next 4 years includes a $2.6 trillion investment in construction of data centers. So this is a massive amount of business that is going to come into North America. I don't think that right now, there is capacity installed that would be able to not even get close to serving the demand that will be coming. When we see the actions from other competitors, we see already the addition of some capacity coming next year, which will be very well absorbed with the market growing -- if you think for a minute, our own results, we were going to be moving from $50 million -- let's say, let's call it, $60 million this year to $130 million next year of sales. And we're going to be doing second shift now in one of our mills and probably in one of our other assets as well during the course of the year. It just proves that there is an incredible demand that we will need to serve, and we all would need to shape up and do our best. Keep in mind, and this is important, over the last couple of years, as Europe has been more mature and those mills in Europe are running or have been running at full capacity for now several years, they've seen opportunities to direct some of their volumes to North America. Even though they're shipping across the Atlantic at very high cost, it has been a good business for them. It keeps them running at full speed rather than slowing down. Well, now what they are seeing is that they have to pay 15% tariff, and their currency is 15% more expensive now. So, that puts them at a lower competitiveness versus where they were just a year ago. That is significant because that means there's going to be less product coming from Europe, more pressure on North American producers to cope with that demand that is -- that will continue to grow at a very good pace. Again, the way these -- we have obviously very good connections with some of these hyperscalers. We're active with some of the projects that they're bringing to the market. We have gained some of those projects already. We have secured some of those projects. Those are part of our backlog and part of our order book. So yes, it's very encouraging. That's all I can say for that. And again, AI being a very, very significant driver for this. Operator: [Operator Instructions] The next question comes from Cole Hathorn with Jefferies. Cole Hathorn: I've got 3 on my side. I'll take them one by one. The first on any items that you're expecting into the fourth quarter around kind of energy rebates and things like that from the German government for kind of energy-consuming industries. I'm just wondering if there's anything that we should be thinking about for your business for the fourth quarter, which might be positive. [Technical Difficulty] Operator: Please stand by. We are experiencing a technical difficulty. Please stand by. Pardon me. This is your host. Please stand by. Your conference will resume momentarily. Richard, I see that you have rejoined. Are you able to hear me? Richard Short: Yes. Juan Bueno: Yes. Sorry, folks. Operator: You may proceed. Juan Bueno: Apologies, Cole. I don't know what's happening today, but anyway. Cole Hathorn: No problem. Let me start again. Juan Bueno: Reflection of the markets. Cole Hathorn: Richard, maybe you could help with one on any rebates or items that we should think about on the energy side in your German business. Is there anything like that we should expect in the fourth quarter? Richard Short: No, no rebates. Cole Hathorn: Then, following on, on Germany on the lower -- well, elevated wood costs, you're referring to kind of the sawlog prices. Could you give a little bit of color on what you're seeing on the wood chips on that side? Juan Bueno: Absolutely, Cole. On the wood chips, the situation is, right now, the pallets or the biofuels are being sold at pretty good price levels. They're above EUR 300 per tonne. That means that the pallet producers are able to buy wood chips at much higher prices than what we are able to buy. And therefore, they're taking obviously a significant piece of the equation and putting a lot of pressure on us when we go to those same sawmills and ask for our chips. So, that is basically what's creating that increased volatility in prices for wood chips for pulp specifically. It's the impact of wood pallets. That's -- we'll have to wait and see how the winter plays out. If those conditions will persist or if it's a milder winter, those conditions will reverse quickly. We've seen these fluctuations before. We don't see them as structural changes. It's one business taking advantage of a very particular situation. Cole Hathorn: And then, we've seen West Fraser Timber, unfortunately, closing a sawmill in British Columbia [indiscernible] announcing it yesterday. I'm just wondering how many do you need to see close before you kind of have that tipping point where too many wood chips are removed from the British Columbia market and we see a pulp mill really under pressure? Juan Bueno: I think that situation is already there, to be honest with you. Sometimes, I'm astonished by the fact that we haven't heard of any pulp closure because the situation in chip access is incredibly tight. You remember that 2 years ago, we divested Cariboo. We had 50% on Cariboo, together with West Fraser. And the reason for our divestiture from that business was precisely because we didn't see a future there in terms of fiber supply. As I said earlier in the call, it's completely different for Celgar because we have the U.S. as a very significant source that we can play at even higher levels than what we're doing already. So we're very limited to the dependence on British Columbia itself. But that's -- we're probably 1 of maybe 2 sawmills -- 2 pulp mills that have that luxury. The rest are stuck with BC chips. And yes, there's incredible amount of pressure on them already. Cole Hathorn: And then, I've got a more challenging question, but I've been asked to ask it, around potential financing and government support from Canada, I mean, considering tariffs and industries like the paper and packaging industry in British Columbia that's under pressure. Have you investigated any opportunities to access much lower-cost financing from either the regional or kind of federal government there? Juan Bueno: We do a lot of lobbying as part of our industry associations. We are very, very active through the associations, as well as through direct contacts we have with, for example, Minister Parmar or even Premier Eby. So we do have interactions that -- where we bring to the table some of the issues that obviously are important for us. However, be reminded that since we -- most of the efforts that the BC government have put out are in favor of the lumber industry because, obviously, with all the tariff situation, that is the core of the focus. Beyond steel, beyond auto, beyond those things that we know are heavy in those conversations, lumber is the element. And then, that goes into sawmills, of which we have none. So we don't have access to particular credit lines or something that are more geared towards the lumber business, the sawmills that are in very difficult situation. Now, with the counter tariffs adding up, with countervailing duties adding up and now additional tariffs, all these measures that the government have made public, they will benefit, hopefully, some of those sawmill companies. But again, we're not privy to those as our business is not [ through sawmilling ]. Operator: I show no further questions in the queue at this time. I would now like to turn the call back to Juan Carlos for closing remarks. Juan Bueno: Okay. Thank you, Michelle, and thanks to all of you for joining our call. Rich and I are available, obviously, to talk more at any time. So don't hesitate to call one of us. Otherwise, we look forward to speaking to you again at our next earnings call in February. Bye for now. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.
Operator: Greetings. At this time, I'd like to welcome everyone to the Barings BDC, Inc. conference call for the quarter ended September 30, 2025. [Operator Instructions] Today's call is being recorded, and a replay will be available approximately 2 hours after the conclusion of the call on the company's website at www.baringsbdc.com under the Investor Relations section. At this time, I will turn the call over to Joe Mazzoli, Head of Investor Relations for Barings BDC. Joseph Mazzoli: Good morning, and thank you for joining today's call. Please note that this call may contain forward-looking statements that include statements regarding the company's goals, beliefs, strategies, future operating results and cash flows. Although the company believes these statements are reasonable, actual results could differ materially from those projected in forward-looking statements. . These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including those disclosed under the sections titled risk factors and forward-looking statements in the company's quarterly report on Form 10-Q for the quarter ended September 30, 2025, as filed with the Securities and Exchange Commission. Barings BDC undertakes no obligation to update or revise any forward-looking statements unless required by law. I will now turn the call over to Eric Lloyd, Chief Executive Officer of Barings BDC. Eric Lloyd: Thanks, Joe, and good morning, everyone. On the call today, I'm joined by Barings BDC's President, Matt Freund; Chief Financial Officer, Elizabeth Murray; Baring's Head of Global Private Finance and BBDC Portfolio Manager, Bryan High, as well as Barings BDC's newly announced incoming Chief Executive Officer, Tom McDonnell. Before I discuss our quarterly results, I'd like to take a moment to speak about the leadership transition that we announced yesterday. As you saw in our press release, effective January 1, 2026, Tom will succeed me as Chief Executive Officer of Barings BDC. While I will continue to serve as Executive Chairman of the Board of BBDC and in my ongoing role as President of Barings LLC. This marks an important and exciting milestone for our company. Over the past decade, Barings has grown into one of the leading middle market lenders anchored by a long-term perspective, disciplined underwriting and strong alignment with our shareholders. Barings BDC is an efficient access point into the Baring's direct lending franchise and reflects the full strength within our business. I'm incredibly proud of what our team accomplished together and confident that the next chapter will build on that foundation. Tom is a proven leader within Barings. During his nearly 2 decades at the firm, he has played a pivotal role across our U.S. high yield and global loan strategies, overseeing complex portfolios through multiple market cycles and helping to shape our credit platform into what it is today. His deep investment experience and commitment to our culture make him exceptionally well suited to lead BBDC going forward. From my vantage point, this transition represents continuity, not change. Tom and I have worked very closely together for many years, and we will continue to do so in the months ahead to ensure a seamless handoff. I wholeheartedly believe he is the right person to step into this role at this time. Importantly, I will remain actively involved as Executive Chairman of the Board of BBDC and as President of Barings LLC, supporting Tom and the overall leadership team as we continue to execute on our long-term strategy. I want to thank our shareholders, partners and the entire Barings team for their continued trust and support. We have built something enduring here, an institution with the scale and discipline to thrive across market environments. And I am confident that under Tom's leadership, BBDC will continue to deliver strong consistent results for our investors in the years ahead. Now turning to our results. In the third quarter, BBDC delivered strong net investment income accompanied by excellent credit performance within the Barings originated portion of the portfolio. Origination activity across the platform during the third quarter reflected continued success in our core strategies. Net deployment was influenced by fund-level leverage and the third quarter reflected a period of net repayments consistent with our prior guidance. A strong portfolio combined with benign credit environment and our focus on the top of the capital structure investments in the middle market issuers has continued to serve our investors well. We focus on the core of the middle market given its lower leverage and stronger risk-adjusted returns, making it the most compelling segment for BBDC and our shareholders. Further, our emphasis on sectors that perform resiliently across economic environments provides an additional level of stability to our portfolio. This combination of senior secured financing solutions, core middle market focus, defensive noncyclical sectors and a global footprint offers our investors strong relative value and meaningful differentiation within the broader BDC landscape. Turning to the specifics of BBDC's financial performance in the quarter. Net asset value per share was $11.10. Net investment income for the quarter was $0.32 per share compared to $0.28 per share in the second quarter. Now digging a bit deeper into the portfolio, we continue to actively maximize the value in the legacy holdings acquired from MVC Capital and Sierra. We are seeking to divest these assets at attractive valuations as we did in the first quarter. As of quarter end, Barings originated positions now make up 95% of the BBDC portfolio at fair value, up from 76% at the beginning of 2022. Turning to the earnings power of the portfolio. The weighted average yield at fair value was 9.9%, reflecting a slight reduction from the prior quarter due to a reduction in base rates. Our Board declared a fourth quarter dividend of $0.26 per share, consistent with the prior quarter. On an annualized basis, the dividend level equates to a 9.4% yield on our net asset value of $11.10. We believe our portfolio is on strong footing, and we're advancing our strategic imperatives. As Matt will cover momentarily, BBDC is well positioned to navigate the current margin volatility and deliver consistent risk-adjusted returns in the quarters ahead. I'll now turn the call over to Matt. Matthew Freund: Thanks, Eric. I would like to spend a minute commenting on recent headlines and how they relate to BBDC. The private credit ecosystem has grown meaningfully in the past decade. As our investors know, we have been investing in core middle market strategies since the mid-'90s and have stayed true to strategy in terms of how we deliver compelling value to our shareholders. While this sound bite will sound familiar to those who have dialed into our prior calls, we feel that Barings repeating this quarter as the news media works to paint a private credit industry with an overly broad brush. BBDC does not have any exposure to First Brands, Tricolor and [ Broadband Telecom ]. As many on this call probably know, First Brands was a broadly syndicated loan issuer and all 3 of these issuers were out of strategy from the opportunities our direct lending business pursues. Article suggesting that these developments are tantamount to a canary in the coal mine are in our view, hyperbolic. Due to alleged in proprieties in these companies' financial statements, the core issues surrounding certain recent bankruptcy filings appears to be related more to factoring facilities than to the loans we would consider to be considered private credit. As part of our underwriting process, we proactively evaluate any factoring facilities within the issuer base. While we do not have a strict prohibition on factoring, the size and utility of factoring lines often combine to make for unattractive investments relative to other opportunities we have in our portfolio. During our prior call, we discussed our private credit managers have expanded rapidly in recent years. We declined to comment on whether recent market activity is reflective of broader trends, but we do believe that remaining consistent with the manager strategy is paramount within private credit platforms. We remain convinced that our unparalleled alignment with shareholders and our ultimate parent, MassMutual is unequaled within the BDC landscape. Now turning to the current state of the M&A environment. As you have seen from our results and those of other credit managers reporting this quarter, market activity continues to show sequential improvement quarter-on-quarter from both the new buyout perspective and add-on financings for the existing portfolio. It can be difficult to assess the broader state of private credit activity as mega deals, those defined as more than $5 billion financing packages, now dominate the reported industry data, which can reflect high degrees of volatility quarter-on-quarter. BBDC typically does not participate in transactions of this nature with a focus on the core of the middle market. For this reason, industry reported data trends will occasionally diverge from our own experience. During the third quarter, it appears that all segments of the market, lower middle market, core and a large corporate market have all shown increased activity. In early 2025, there were rumblings about pent-up M&A demand among middle market private equity firms that would likely support market increases in deployment. No such wave of transactions has materialized. Instead, we have seen steady increases quarter-over-quarter for each of the last 4 quarters in our core strategies. The competition for new assets is aggressive, but we feel the core middle market continues to experience less pressure than other segments of the direct lending ecosystem. Looking forward into the balance of 2025 and into 2026, we anticipate a measured increase in deployment opportunities that will continue to favor scaled franchises such as our own, benefiting from incumbency and deep private equity coverage. We are highly focused on the trends in both base rates and interest rate spreads. Base rates continue to gradually migrate lower from post-COVID highs, while narrowing spreads have begun to shown some level of support. The weighted average spread across assets exited during the quarter was approximately 520 basis points, while the weighted average spread on new investments was above 560 basis points. The benefit of active portfolio rotation we have previously discussed are coming into sharper focus. BBDC shareholders benefit from a largely invested portfolio that can selectively redeploy into the most attractive middle market opportunities across the Barings franchise. Given the size of the portfolio and the illiquid nature of the underlying positions, our ability to rotate the portfolio takes quarters, not months, but we are beginning to see the benefits of this effort in the current quarter. Turning to an overview of our current portfolio. 74% of the portfolio consists of secured investments with approximately 71% constituting first lien securities. Interest coverage within the portfolio remained strong with weighted average interest coverage this quarter of 2.4x, above industry averages and consistent with prior quarter. We believe strong interest coverage demonstrates the merits of our approach, focused on direct lending in defensive sectors and thoroughly underwriting an issuer's ability to weather a range of economic conditions. The portfolio remains highly diversified with the top 2 positions within the portfolio, Eclipse Business Capital and Rocade Holdings being strategic platform investments. These investments provide BBDC shareholders with access to differentiated compelling opportunities to invest in asset-backed loans and litigation funding solutions to specialized areas we believe provide attractive total return and diversification benefits. Turning to portfolio quality. Risk ratings exhibited stability during the quarter as our issuers exhibiting the most stress classified as risk ratings 4 and 5 were 7% on a combined basis and unchanged from the immediately preceding quarter. Non-accruals excluding the assets that are covered by the Sierra CSA accounted for 0.4% of the assets on a fair value basis compared to 0.5% on a fair value basis in the immediately preceding quarter. During the quarter, we removed one asset from non-accrual status that was restructured and moved one asset on to non-accruals that is covered by the Sierra CSA. As our internal marks on Sierra accounts remain below the CSA support amount, any prospective losses at the current marks will offset upon settlement of the CSA. We remain confident in the credit quality of the underlying portfolio. We expect BBDC's differentiated reach and scale, coupled with its core focus on middle market credit and unmatched alignment with shareholders to provide positive outcomes in the quarters and years to come. BBDC's portfolio is a through-cycle portfolio designed to withstand a variety of economic environments and prevailing interest rate levels. With that, I would like to now turn the call over to Elizabeth. Elizabeth Murray: Thanks, Matt. As that Eric and Matt highlighted, BBDC continues to deliver strong, consistent earnings, maintain exceptional credit quality and provide attractive risk-adjusted returns for our fellow shareholders. On Slide 16, we provided a detailed bridge of the NAV per share movement for the third quarter. As of September 30, NAV per share was $11.10, representing a 0.7% decrease quarter-over-quarter. The decrease was driven by net unrealized depreciation on the portfolio credit support agreement and foreign exchange of $0.08 per share and net realized losses on investments and FX of $0.01 per share. This was partially offset by NII per share exceeding both the regular and special dividend by $0.01 per share, reflecting the resilient earnings profile of the portfolio. . We recorded a net realized gain in the portfolio, driven primarily by a gain from the partial sale of our equity position in Accelerant. This is partially offset by the restructuring of our position in synergy which was predominantly reclass from unrealized depreciation. The valuation of the Sierra credit support agreement increased by approximately $1.6 million from $51.2 million in the second quarter to $52.8 million as of September 30. This increase was predominantly due to realized unrealized losses and a reduced discount rate driven by spread compression in credit markets, decreasing base rates and rolling maturity. During the third quarter, the Sierra portfolio had sales and repayments of approximately $3.9 million and had 16 positions remaining in the portfolio at a total value of approximately $79 million, down from 18 positions as of June 30. We reported net investment income of $0.32 per share for the quarter, an increase from $0.28 per share in the prior quarter and $0.29 per share for the third quarter of 2024. Higher earnings were primarily driven by dividends from our preferred equity investment in Flywheel and lower incentive fees quarter-over-quarter due to the incentive fee cap and unrealized depreciation on the underlying portfolio. Our net leverage ratio, which is defined as regulatory leverage net of unrestricted cash and net unsettled transactions was 1.26x at quarter end, down from 1.29x as of June 30, largely in line with our long-term target range of 0.9 to 1.25x. During the third quarter, we sold approximately $90 million of assets to Jocassee. As we at year-end, we anticipate continued sales to Jocassee and additional portfolio repayments. More broadly, our funding profile remains strong and thoughtfully aligned with our disciplined approach to asset liability management. Our liabilities are well diversified by duration, seniority and structure with an industry-leading share of unsecured debt and our capital structure at roughly 78% of our outstanding debt balances. We further increased the share and strengthened our balance sheet during the third quarter by issuing $300 million of senior unsecured notes. We are very pleased with the execution at [ T plus ] 200 basis points over and view this funding as being competitively priced and allowing BBDC to generate attractive shareholder returns. We used the proceeds from this offering to pay down our credit facility and cover the upcoming maturities of our private placement notes, further enhancing our capital structure. Subsequent to quarter end, on November 4, we fully repaid $62.5 million of private placement nets at par, including accrued and unpaid interest. Now on to capital allocation. Our net investment income for the quarter of $0.32 per share covered both our regular dividend of $0.26 per share as well as the final of 3 special dividends of $0.05 per share that was paid during the quarter. As previously mentioned, the Board declared a fourth quarter dividend of $0.26 per share, representing a 9.4% distribution yield on NAV. Looking ahead, we remain comfortable with the stability of our regular dividend. While the current shape of the forward curve does imply lower rates in the near term, our net investment income continues to demonstrate resilience. Our industry-leading hurdle rate of 8.25% provides additional protection as rates decline, reinforcing our focus on shareholder alignment. Our structure is differentiated and allows BBDC to be well positioned amongst BDC peers to deliver attractive returns. This confidence is underpinned by our diversified portfolio of senior secured investments and a well-laddered capital structure, giving us a strong foundation heading into next year. Additionally, we currently have spillover income of $0.65 per share, which equates to more than 2/4 of our regular dividend, reflecting the continued strength of our earnings and portfolio performance, taken together the durability of our earnings and the meaningful spillover provides a solid foundation as we move into 2026. To close, I'll offer a little additional color on the fourth quarter. To date, BBDC has made $73.5 million of new commitments in Q4, of which approximately $41 million are closed and funded. Our overall liquidity remains strong with over $500 million of available capital. We continue to feel that we are well positioned to navigate evolving market conditions, and we'll continue to pursue attractive investment opportunities while being a reliable capital partner to sponsors and borrowers. With that, I would like to open the call up for questions. Operator: [Operator Instructions] And the first question is from the line of Heli Sheth with Raymond James. Heli Sheth: So with repayment activity elevated this quarter as base rates come down and with the second Fed cut in October, do you expect to see repayments remain at 3Q levels? Or are you seeing any sort of moderation there? Eric Lloyd: Yes. Heli, good question. And so as we think about the activity in Q3 and how you perceive kind of the repayments, a meaningful percentage of the repayment line that you're seeing is actually sales to our joint venture within BBDC. And so I would say that we continue to utilize our joint venture really to actively manage our leverage profile as well as provide capacity for the broader BBDC ecosystem. That said, as we kind of look across the broader landscape, we do anticipate a moderate uptick in terms of repayment velocity as we move to the end of the year. That's based on kind of payoffs that were made -- that we've been made aware of through today to be candid, but do not anticipate that it's going to have a meaningful needle mover in the context of the deployed capital within BBDC as a fund. . Heli Sheth: Okay. Got it. And historically, you've had $86 million in share buybacks, so they've slowed in recent quarters. With the recent contraction in industry multiples across the board? Are there any plans to ramp up buybacks while your stock is trading at such a discount? . Eric Lloyd: It's something that we consistently evaluate. Over the course of the past quarter, we were a little bit more restricted in the context of when we could be actively in market. And so as a consequence of that, we were not able to take full utility of the share buyback program as it's been approved by the Board. It is, however, something that we consistently evaluate and you could -- it's very likely that you will see some degree of activity on that in the quarters to come. . Operator: [Operator Instructions] At this time, I'll turn the floor back to Eric for closing comments. . Eric Lloyd: Well, thank you, everyone, for joining the call, and we look forward to supporting you in the quarters ahead. Operator: This will conclude today's conference. Thank you for your participation. You may now disconnect your lines at your time, and have a wonderful day.
Operator: Greetings, and welcome to the Graham Corporation Second Quarter 2026 Financial Results Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Tom Cook. Please go ahead. Tom Cook: Thank you, Carrie, and good morning, everyone. Welcome to Graham's Fiscal Second Quarter 2026 Earnings Call. With me on the call today are Matt Malone, President and CEO; and Chris Thome, Chief Financial Officer. This morning, we released our financial results. Our earnings release and accompanying presentation to today's call are available on our website at ir.grahamcorp.com. You should be aware that we may make forward-looking statements during the formal discussion as well as during the Q&A session. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated here today. These risks and uncertainties and other factors are provided in the earnings release as well as with other documents that are filed by the company with the Securities and Exchange Commission. You can find these documents on our website or at sec.gov. During today's call, we will also discuss non-GAAP financial measures. We believe these will be useful in evaluating our performance. However, you should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of non-GAAP measures with complete -- with comparable GAAP measures in the table that accompany today's release and slides. We also use key performance indicators to help gauge the progress and performance of the company. These key performance metrics are ROIC, orders, backlog and book-to-bill ratio. These are operational measures and a quantitative reconciliation of each is not required or provided. You can find a disclaimer regarding our use of KPIs at the back of today's presentation. So with that, if you'll please advance to Slide 3, I'll turn it over to Matt to begin. Matt? Matthew Malone: Thank you, Tom, and good morning, everyone. We appreciate you joining us to review our second quarter fiscal 2026 results. We delivered another strong quarter, continuing to execute our communicated strategy and demonstrating the resiliency and diversification of our business. Revenue grew 23% to $66 million, driven by solid performance across all of our end markets. The timing of these key project milestones, particularly material receipts in our defense business as well as contributions from new programs and growth in existing platforms. Adjusted EBITDA increased 12% to $6.3 million. On a year-to-year basis, adjusted EBITDA margin expanded 40 basis points to 10.8%, underscoring our continued focus on operational execution and profitable growth. Bookings remained strong, resulting in a book-to-bill ratio of 1.3x and driving backlog to a record $500.1 million, up 23% year-over-year. Our backlog provides excellent visibility with roughly 35% to 40% expected to convert to revenue over the next 12 months. On the defense side, we continue to see strong momentum with our U.S. Navy programs. As a reminder, in July, we announced a $25.5 million follow-on order to produce mission-critical hardware for the MK48 Mod 7 Heavyweight Torpedo program. More recently, I want to highlight an important milestone for our defense business and our long-standing partnership with the U.S. Navy. In October, we commemorated our new 30,000 square foot advanced manufacturing facility in Batavia, New York, which represents a major investment in our capacity and capabilities to support key Navy programs. This purpose-built site is designed for efficiency, precision and scale and incorporates advanced technologies, including automated welding, optimized product flow and state-of-the-art machining. We expect the facility to be fully operational by the end of fiscal 2026. And once online, it will be -- it will meaningfully expand our throughput, enhance quality and strengthen our ability to meet rising demand across multiple Navy programs. As part of this, we were honored to host Captain Heath Johnmeyer, Commanding Officer of the Future [ USSS ] District of Columbia, along with several strategic partners and customers during the event. Their participation underscores the Navy's confidence in Graham and a critical role of our team and capabilities play in supporting fleet readiness as the Navy celebrated its 250th anniversary. This engagement reflects our position as a trusted supplier to some of the most important defense platforms in the world. In addition to expanding capacity, we continue to invest in advanced inspection and manufacturing technologies, including our enhanced x-ray testing and automated welding systems that are beginning to come online. These investments will further increase throughput, improve inspection precision and support production scale as we execute the Navy's long-term modernization initiatives. Moving to Energy and Process. During the quarter, we saw increased sales of $2.0 million or 11%, driven by the timing of large capital projects and continued strong aftermarket sales. Further, we are seeing meaningful momentum in small modular nuclear reactors and cryogenic applications, where customers' interest in our mission-critical equipment continues to expand as those markets slowly transition into commercial deploy. Defense -- demand fundamentals across all of our end markets remains healthy, though we are observing extended decision cycles on certain large global capital projects. Overall, our position remains strong, and we continue to execute well against opportunities in both mature and emerging applications. In space, as we have announced earlier this morning, we continue to see meaningful momentum. In the second quarter and first month of our fiscal 2026 third quarter, our Barber-Nichols subsidiary booked a series of new orders from 6 industry-leading customers in the commercial space launch market. These awards were for advanced turbomachinery and precision engineered components supporting next-generation commercial launch and in Space systems and totaled $22 million. These orders are expected to convert into revenue over the next 12 to 24 months, further strengthening our visibility and reinforcing the value we bring to these mission-critical space applications. We're encouraged by the breadth of programs we are involved in and the growing activity across customers who are scaling production to meet increased launch cadence and orbital infrastructure needs. To support this demand, we are continuing to invest in capacity and capabilities at Barber-Nichols, including additional CNC machining centers, expanded testing infrastructure and our new liquid nitrogen test stand. These investments build on our previously announced cryogenic test facility in Florida, which remains on track to come online later this year. Together, these enhancements strengthen our ability to deliver with speed and precision as our customers move from development into higher rate production. The momentum we are seeing in our space end markets reflects the strength of our technology, engineering expertise and decades-long reputation for performance in high-speed rotating equipment. As the commercial and government space markets continue to expand, we believe Graham is well positioned to support the industry's long-term growth and advance our strategy of building a diversified portfolio across high-growth, innovation-driven end markets. Finally, I want to touch on the recent acquisition announcement of Xdot Bearing Technologies, an engineering-led firm with patented foil bearing technology and deep expertise in high-speed rotating machinery. This is a highly strategic technology acquisition that strengthens our competitive position in an area where performance, reliability and efficiency are becoming increasingly critical across aerospace, defense, energy transition and industrial applications. Xdot's proprietary foil-bearing designs deliver superior performance while reducing development and production costs. And when combined with Barber-Nichols turbomachinery capabilities, significantly expand our ability to engineer and deliver advanced high-speed pumps, compressors and rotating systems. This acquisition not only broadens our product portfolio, but also positions us to move into adjacent applications and emerging high-performance markets, where we are seeing growing customer interest. Importantly, this is a disciplined, strategically aligned investment that fits squarely within our capital allocation framework. Xdot brings proven technology, a respected technical founder and team and complementary customer relationships. We expect the acquisition to be slightly accretive to our fiscal 2026 results. Overall, this acquisition underscores our commitment to investing in differentiated technology, expanding our engineered solution offerings and creating durable competitive advantages across our growth platforms. More broadly, on the M&A front, we continue to see a strong pipeline of acquisition opportunities that align with our strategic objectives and remain focused on pursuing opportunities that offer risk-adjusted returns and can help us accelerate our product life cycle strategy. In closing, our fiscal second quarter results demonstrate continued business momentum across our diversified portfolio. With our record backlog, strong market positioning and progress on key growth initiatives, we're well positioned to capitalize on the opportunities ahead. With that, I'll turn the call over to Chris for a detailed review of our financial results. Chris? Christopher Thome: Thanks, Matt, and good morning, everyone. I will begin my review of results on Slide 6. For the second quarter of fiscal 2026, sales were $66 million, an increase of 23% compared to the prior year period, reflecting broad-based strength across all our end markets. This performance demonstrates continued execution and healthy demand across defense, energy and process and space and is consistent with our full year expectations. Sales to the defense market increased by $9.9 million or 32%, primarily reflecting timing of project milestones and particularly material receipts as well as growth across new and existing programs. Sales to the energy and process market increased by $2 million, primarily driven by the timing on larger capital projects. Aftermarket sales to the energy and process and defense markets were $9.8 million for the quarter, slightly above the prior year period, but when combined with our first fiscal quarter are up 15% year-to-date and continue to reflect resilient demand for aftermarket support across our global installed base. As a reminder, our fiscal third quarter is typically our seasonally lowest revenue period due to normal holiday-related production schedules. Turning to Slide 7. Gross profit increased 12% to $14.3 million, and gross margin was 21.7% for the quarter. The lower margin in the quarter reflects the sales mix in the period, including an unusually high level of material receipts that carry lower margins. We estimate that this higher-than-normal level of material receipts impacted our gross margin by approximately 180 basis points in the quarter. As a reminder, the prior year period benefited from approximately $400,000 from the BlueForge Alliance grant income that did not repeat this year. Finally, for the first 6 months of fiscal 2026, we estimate the impact of tariffs to be approximately $1 million compared to the prior year. As we look at the full year, we have narrowed our expected tariff impact range to $2 million to $4 million, reflecting continued sourcing discipline and contract language that protects us. On Slide 8, you can see how this operating performance translated to the bottom line. Net income for the quarter was $0.28 per diluted share and adjusted net income was $0.31 per diluted share. Adjusted EBITDA was $6.3 million, up 12% from the prior year, and adjusted EBITDA margin was 9.5%. On a year-to-date basis, our adjusted EBITDA margin is 10.8%, up 40 basis points over the prior year and in line with our full year guidance. As a reminder, the Barber-Nichols earnout bonus will phase out by the end of fiscal 2026. Excluding this item, we remain confident in our ability to achieve our fiscal 2027 goal of low to mid-teen adjusted EBITDA margin. Moving to Slide 9. It was another very strong quarter for orders, which totaled $83.2 million, driven by strong demand across defense, space and energy and process. This included a $25.5 million follow-on contract for the MK48 Mod 7 Heavyweight Torpedo program as well as new orders from leading space and aerospace companies that Matt discussed and that we announced in our press release this morning. Aftermarket orders were $9.6 million, moderating from the record levels of last year, but remaining strong on a historical basis. The resulting book-to-bill ratio was 1.3x. driving backlog to a record $500.1 million, up 23% year-over-year. Approximately 35% to 40% of this backlog is expected to convert to revenue over the next 12 months and roughly 85% of the total backlog is attributable to the defense market. As a reminder, orders remain inherently lumpy given the multiyear nature of our defense programs and our large commercial contracts. To illustrate this point, since fiscal 2020, our annual book-to-bill ratio has ranged from 0.9x to 1.4x revenue. However, our quarterly book-to-bill ratio over the same time period has ranged from 0.5 to 2.8x revenue. Over the long term, we target a book-to-bill ratio of 1.1x each year in order to support our long-term growth goals of 8% to 10% per year. For the fiscal 2026 year-to-date period, our book-to-bill ratio is 1.7x. Turning to Slide 10. We remain in a strong liquidity position. We ended the quarter with $20.6 million in cash and no debt and $44.7 million available on our revolver, providing significant flexibility to support future growth investments. Operating cash flow was $13.6 million for the quarter, reflecting strong working capital conversion tied to milestone receipts and advanced payments as well as strong cash profitability. Capital expenditures were $4.1 million in the quarter, focused on capacity expansion, automation, next-generation X-ray technology and our new cryogenic testing facility in Florida, all of which Matt discussed earlier. All major projects remain on schedule and are expected to deliver returns above 20% ROIC. Turning to guidance on Slide 11. Based on our performance through the first half of fiscal 2026 and our outlook for the balance of the year, we are reaffirming our full year guidance for all key financial metrics. The recently announced Xdot technology acquisition does not materially affect our guidance for the year as our annual revenue is only about $1 million per year. Again, we would like to remind everyone that our fiscal third quarter is typically our seasonally lowest revenue period due to normal holiday-related production schedules. Overall, with strong execution, robust end market demand and a record backlog, we remain confident in our full year outlook and our ability to continue delivering consistent performance. The 20% plus ROIC investments coming online in the next 2 quarters, along with the continued momentum that is building within our company gives us confidence we are on track to achieving our fiscal 2027 targets of 8% to 10% organic revenue growth and low to mid-teen adjusted EBITDA margin. With that, we can now open the call for questions. Operator: [Operator Instructions] And our first question comes from Bobby Brooks with Northland Capital Markets. Robert Brooks: Just wanted to get a little bit more clarity. It seems like the $22 million in space and aerospace orders announced this morning, it seems like some of that was recognized in 2Q results and some of it will be recognized in 3Q results. Just is that -- am I thinking about it right? And could you parse that out for how much was in 2Q versus 3Q? Christopher Thome: Yes. No, you're spot on there, Bobby. As you saw from the release today, we had $15 million of orders in Q2 and the other $7 million came in after quarter end. So they'll be in Q3. Robert Brooks: Got it. And then so excellent results for revenue in the quarter, but guidance is maintained. So I was just curious, could you discuss why maintaining the guidance made more sense in raising? Is it just simply some stuff was scheduled to go out maybe in the back half and got pulled forward and occurred in the second quarter? Or maybe it's tied to some dynamic with the manufacturing footprint? Just hoping to get more insight there. Christopher Thome: Yes. It's just all timing, Bobby. The results for the first half of the year are consistent with our expectations. We're tracking right on plan. So we just maintain the guidance. Robert Brooks: Got it. And then it's great to hear that the cryogenic facility is on track. I saw some updates from the Barber-Nichols [indiscernible] intra-quarter. And I think I've read somewhere that you're starting to book slots there. So just curious to maybe hear an update there and how things are going. Matthew Malone: Yes. So I'll answer 2 things. The first is we did successfully commission and execute testing at the Barber-Nichols location in Colorado with the liquid nitrogen stand, which is a smaller stand that supports a critical space program. In addition is the propellant test facility, which is obviously on a much larger basis down in Florida, which is what you're alluding to. We actually expect to get the occupancy here any day, at which point we'll be commissioning with our product. So we'll be testing an internal product. Simultaneously, we do expect within this calendar year to start testing customer product. With that being said, yes, I'd say that the backlog and customer conversations are healthy. And as we pivot from actually getting the test fan operational, we are shifting full focus to booking the customers into the backlog. So it's coming along just as we expected. Operator: And moving on to Russell Stanley with Beacon Securities. Russell Stanley: Congrats on the quarter. Maybe just on orders, surprisingly strong in the quarter, given how strong Q1 was, understanding the lumpiness going forward. But can you talk to, I guess, how much of the Q2 defense orders were Navy related or specifically related to the [indiscernible] carrier programs. Just wondering what kind of opportunities you're seeing outside of those core programs you're already on. Matthew Malone: Yes. Ross, it's a great point. And I think it's worth a little bit of expansion. Actually, the bookings primarily this last quarter weren't in connection to the actual strategic platforms themselves, but in some way are connected to the larger defense scope. So as mentioned, we saw the torpedo side. We saw the -- some of the aftermarket pickup on the defense side. We saw the space bookings that were announced this morning. So it was really a host of opportunities that we've been nurturing sort of in the background connected to the strategic programs without providing too much additional color that I really can't go into. So yes, it was a nice diversified bookings, but very strong, as you alluded to. Russell Stanley: Great. Congrats on that. Maybe I can ask, obviously, excellent order numbers. The customer advances look strong, but just heard from the major shipbuilders a few weeks back. Wondering if you could talk to any sort of impacts you're seeing in your business around the government shutdown, be it in customer conversations or order flow looking a little further out. Matthew Malone: Yes. So fortunately, for us, as you followed us closely, the programs that we're involved with are extremely long-standing and have great confidence long term. So what we're seeing is in terms of impact it is pretty minimal, both in the near term and long term. What we do feel, just to break it down to a very narrow window is we obviously have quite a bit of components working their way through the factory. And so the support from government reviews and reviewing deviations and other things that are much more tactical we are taking some additional time. Fortunately, a unit like this takes years. And so days doesn't end up disrupting the outcome. So I think we're really well positioned despite the shutdown. The other area that we're feeling some impact is just appropriations and then actually sending out the sort of defined POs for what are more development-like programs. So we have gotten all indications that everything is moving forward, but just some delay in actually issuing the work. Russell Stanley: That's great. Maybe one last question just around the Xdot transaction. I understand I think you're already doing business with them. But can you talk to, I guess, what kind of customer feedback you've received around the transaction, what they've said to you? And secondarily, I guess, the tech has applications, I think, across your main business lines, but wondering where the most significant impact might be. Matthew Malone: Yes. It's another great question. So yes, we've been working with at Barber-Nichols, specifically foil-bearing technology for decades at this point on what I'll say is very focused applications. We've also been working with Xdot for extended periods of time. With that being said, we've developed a great relationship and they have analytical capability that ourselves and others do not. So in addition to this, the product portfolio, we get some additional capability. The customer conversations, our customers don't necessarily know that we're using Xdot technology up to this point, but it's an enabling technology. So I'll just say it has allowed us to enter into areas like small modular nuclear, which we're using foil-bearing technology in some other areas like, for example, fuel cell blowers and such, but our customers don't necessarily know that connection and link. What we are seeing is their bearing end user, which is essentially buying spare bearings today or production bearings are now looking to have conversations with Barber-Nichols about potentially machine upgrades or future opportunities. So I guess, Russ, that's the color I'd provide, but it really is around technology excellence. Operator: And our next question comes from Joe Gomes with NOBLE Capital. Joseph Gomes: Congrats on the quarter. On the announcement today on the space market, you did mention that orders that you're making some investments. Maybe you could just give us a little more color on the size and timing of those investments. Christopher Thome: Yes. No, you got that right on, Joe. We are going to need to buy some additional [indiscernible]. That's factored into the CapEx guidance for the year. So as you saw, there was no change to our guidance and we'll spill over a little bit into fiscal year '27. But as we've always said, we're not going to make big capital investments unless we have the orders to support them, and they all have to have a greater than 20% ROIC that we've discussed as well. So -- and we won't make those investments until we have that in hand. Matthew Malone: Yes. And one quick add, Joe, just for some additional insight. The orders really secure the investments that we've already been making. And so these orders really reaffirm a lot of our ROIC calculations that have been made in the past. So it's just really nice that it's sort of reaffirming our commitments in our budgeting process. So strategic direction, the assets like down in Florida, some of these orders impact that facility. The liquid nitrogen stand also has impacted the assembly and test area at Barber-Nichols that just came online last quarter, where this product is going through that facility. And so it's just a great [ marry ] of the current capability that we've already invested in as well. Christopher Thome: That's a great point, Matt. And said a little bit differently as well, the investments we made enable us to win these orders to a great extent. Joseph Gomes: Okay. And maybe the same -- you talked about some momentum in the small modular reactors. Maybe you could just give us a little bit more color on what you're talking about there and momentum and timing for that also. Matthew Malone: Yes. Yes. So small modular reactors is a very interesting -- we've seen ups and downs with nuclear over decades. We're clearly in a bullish position right now. Barber-Nichols is well positioned with background on rotating machine that support both cryogenics that directly applies to thermal regulation of a nuclear reactor. In this case, Joe, we're in the early phases of development on a number of, I'll say, scaling programs or the potential to scale. And so we've already disclosed, but you can sort of see that the ramp is not going to happen overnight. So we are in the development phase. We're seeing some products that will go into the Idaho National Lab dome in the next coming months/year and then have long-term potential for scale. So I'll just -- I'll state it as simple as we're in the early phases of that growth trajectory as almost aligned with what the industry is feeling. Joseph Gomes: Okay. And then just on the defense, the increase, the $9.9 million growth in defense revenues. And you mentioned there was -- one was the timing of some project milestones, new programs, growth in existing programs. I don't know if you could kind of size those for us as to what percent of that $10 million growth came from the milestones versus the new programs versus the growth in existing programs? Christopher Thome: Yes. So Joe, as you know, our revenue tends to be very lumpy. And part of what creates that lumpiness is when we receive materials on some of these programs, we're allowed to recognize revenue since we're on a percentage completion basis. We had -- in our prepared remarks, we had an unusually high level of material receipts this past quarter, which was expected in this fiscal year. And that range from about $8 million to $10 million. So the biggest -- a large chunk of that increase was because of these material receipts, which also, as stated in the comments today, do carry with it a lower margin. As we stated, it impacted our gross margin by about 180 basis points. So that's the bulk of what you're seeing there. But we have material receipts every quarter. It's just not to this high level usually. Operator: [Operator Instructions] And we'll go next to Tony Bancroft with Gabelli. George Bancroft: Great job on the quarter. As I'm looking at all your numbers here in your backlog and your balance sheet, it seems like you guys -- everything is going high and right, a lot of orders, very sticky stuff, long-term secular stuff. In 5 years, you sort of have -- it seems like sort of 3 strong markets that you're in. And as far as growth, how do you -- in 5 years, how are you going to see yourself positioned? Are you going to be focusing on the sort of the naval defense? You've got this sort of a nice space business that's growing nicely. And then you obviously have the commercial SMR business. Your funnel, what are you seeing as the best opportunities? And maybe talk about the demand there, the pricing there and sort of walk through that for me? Matthew Malone: Yes. Tony, great question. I'm going to answer this a little bit higher level, and then we can go deeper if needed. We love the 50-50 target split between sort of the commercial segment and the defense segment. And what that allows us to do is be speedy and nimble, I'll say, attuned to pricing and specifically optimizing pricing on the commercial side and then bringing commerciality where possible in technology and speed to the defense market. So we really act as that long-term provider, but also that sort of technology disruptor in the defense space. So I'll just say, fundamentally, that is our focus, is to keep that velocity from the -- in competitiveness from the commercial side and bring that to the defense side. And 5 years out, we see that same dynamic moving forward. What I will also say is, yes, there will probably be ebbs and flows to what that split looks like based on opportunities that come in the door. Operator: And we'll go next to Gary Schwab with Valley Forge Capital Management. Unknown Analyst: Yes. Great quarter, guys. I just want to go a little further into the last caller's question on -- but I want to go into a different direction. You have a proven success record so far for the MK48 Torpedo program. This is for Matt. I've got a 2-part question for you. Looking ahead for opportunities into 2027 on new torpedo programs, it has to do with the [ SCEPS ], the solid chemical torpedo propulsion system being developed for 2 new torpedo platforms. And it looks like those 2 new torpedoes will serve 2 distinctly different roles from the MK48 program. I know we're already supplying a limited production run on this propulsion system. My first question is, can you add some insight into how the Navy plans to deploy these 2 new torpedo platforms and what gaps they're trying to fill? And then secondly, given Xdot's superiority in its foil-bearing technology, do you see an opportunity that would give us a key advantage possibly of winning a role on either the propulsion side or the guidance system side of either of these torpedo platforms? Matthew Malone: Yes, Gary, and yes, there's a lot of momentum building. First, I'll start off with the torpedo topic. I'm going to decouple Xdot, and I'll cover that sort of after. Independent of bearing technology, we're well positioned to be a key supplier on the platforms that you referenced. So I'll just keep it high level and say we don't need that technology to be a key supplier. We're already engaged in doing work in that arena. Once again, I can't sort of speculate on the Navy's plans for these products. And certainly, it could be Army and other areas. But what I will say is the gaps that they cover, all the gaps that you would expect with such capability, and that's sort of range, longevity, reuse, all the things that would add additional value to the defense portfolio. So yes, we are well positioned on those new technologies in the torpedo space, and we're working with primes and the government to develop those technologies. Unknown Analyst: Can I just ask, is that going to be a much bigger program? Because I know that the problem with going after drones now, one of the programs is for multiple torpedoes, small torpedoes to go after drones. Matthew Malone: So once again, you'll have to sort of read in depth because I can't disclose too many details. But I'll just say that there's a lot of practical uses for both the MK48 Torpedo as well as the new technologies. So yes, I think they're looking to sort of deploy such similar technology to adjacent capability within the naval platform. Operator: And this now concludes our question-and-answer session. I would like to turn the floor back over to CEO, Matt Malone, for closing comments. Matthew Malone: Thank you. We are pleased with our results through the first half of the fiscal year, which were in line with our expectations and guidance. We look forward to keeping you updated on our progress. As always, please reach out with any questions. Thank you, everyone, for joining us today and your interest in Graham. Operator: And ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.