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Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the KLX Energy Services Third Quarter Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Ken Dennard. Thank you. You may begin. Ken Dennard: Good morning, everyone. We appreciate you joining us for the KLX Energy Services conference call and webcast to review third quarter 2025 results. With me today are Chris Baker, President and Chief Executive Officer; and Keefer Lehner, Executive Vice President and Chief Financial Officer. Following my remarks, management will provide commentary on its quarterly financial results and outlook before opening the call for your questions. There will be a replay of today's call and it will be available by webcast by going to the company's website at klx.com. There'll also be a telephonic recorded replay available until November 20, 2025. For more information on how to access these replay features go to yesterday's earnings release. Please note that information reported on this call speaks only as of today, November 6, 2025. And therefore, you're advised that time-sensitive information may no longer be accurate at the time of any replay listening or transcript reading. Also, comments on this call will contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of KLX's management. However, various risks and uncertainties and contingencies could cause actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener or reader is encouraged to read the annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K to understand those risks, uncertainties and contingencies. The comments today will also include certain non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures are included in the quarterly press release, which can be found on the KLX website. And now with that behind me, I'd like to turn the call over to Chris Baker. Chris? Christopher Baker: Thank you, Ken, and good morning, everyone. Thank you for joining us today. The third quarter represents the strongest quarter of the year, overcoming continued market headwinds, including commodity price volatility and a softer OFS activity environment. Tax generated revenue of $167 million, up 5% from Q2 and adjusted EBITDA of $21 million, up 14% from Q2, ahead of our prior guidance. Adjusted EBITDA margin improved materially by 100 basis points sequentially to 13% despite the average U.S. land rig count declining 6% average frac spread count being down 12% over the same time period. Our results were driven by a 29% revenue increase in our Northeast Mid-Con segment which more than offset softer activity in the Rockies and Southwest segment. KLX outperformed the industry trend once again by strategically allocating its assets across our broad footprint focusing on field execution and efficiencies and tight cost controls. Operationally, our completion-oriented product lines in the Mid-Con Northeast, along with a rebound in our accommodations and flowback businesses contributed meaningfully to this quarter's top line strength. KLX's third quarter results are a testament to our team's agility, dedication and collaboration effectively managing white space in a difficult market, all while controlling costs. The operating environment remains challenging, shaped by OPEC+ supply growth and depressed rig counts across all major basins. We believe that our diversified asset base premium customer alignment and diverse geographic footprint will continue to support consistent performance. Third quarter revenue and adjusted EBITDA per rig were $318,000 and $40,000, respectively, 20% and 227% above the levels from the fourth quarter of 2021, the last time industry activity was at similar levels. This underscores the progress we've made in strengthening our competitive standing and driving operational and organizational cost efficiencies over the past several years. Simply put, KLX is significantly more efficient today than we've been in prior cycles. Now let's look at our segment results. The Southwest represented 34% of Q3 revenue, down from 37% in Q2. Northeast Mid-Con was 36%, up from 29% in the prior quarter, and the Rockies was 30%, down from 34% in Q2. The Rockies experienced reduced completion activity in our tech services, frac rentals and coiled tubing product service lines. In the Southwest, weaker demand in directional drilling, flowback and rentals driven by the overall reduction in Permian activity and white space associated with customer M&A integration initiatives resulted in a softer top line with revenue declining 4%, albeit still outperforming the segment's average rig count decline of 9%. The Northeast Mid-Con segment was a standout in Q3 with our completions-oriented product lines delivering sequential growth for both revenues and margins, demonstrating our ability to capture incremental activity by basin, focusing on crew and equipment allocation throughout the KLX footprint and we expect continued momentum into Q4. By end market, drilling, completion and production intervention services contributed approximately 15%, 60% 25% of Q3 revenue, respectively. Based on current customer calendars, we expect a healthy Q4 despite typical seasonality and budget exhaustion. This reflects recent market share gains, the solid execution of our strategy and a steady focus on long-term value creation, all of which positions KLX for increased activity anticipated in 2026. I'll now turn the call over to Keefer to review our financial results in greater detail, and I will return later to discuss our outlook. Keefer? Keefer Lehner: Thanks, Chris. Good morning, everyone. As Chris mentioned, Q3 2025 revenue was $167 million, a 5% sequential increase but 12% lower than Q3 2024. Average rig count was down 6% over this period and frac spread count was down 12% over the same period. Our Q3 sequential results were driven largely by strong growth in the MidCon, Northeast segment, which saw a 20% -- 29% quarter-over-quarter top line increase. The outperformance was complemented by disciplined management of fixed costs, resulting in consolidated adjusted EBITDA margin expansion to 12.7% from 11.6% in Q2 and was in line with last quarter's guidance and approaching Q3 2024 margin levels of 15% despite a market environment measured by rig count that is down 7% over the same period. Total SG&A expense for the quarter was $15.6 million. Excluding nonrecurring items, adjusted SG&A expense came to $14.8 million representing a 30% reduction from the same period last year and an 18% improvement sequentially. These reductions reflect the full impact of the cost structure initiatives implemented in 2024 supported by incremental efficiency gains realized throughout 2025, reduced third-party spend and settlement of a legal claim. Looking ahead, adjusted SG&A is expected to remain in the 9% to 10% of revenue range for the year. Moving to our segment results. The Rockies segment had Q3 revenue of $50.8 million and adjusted EBITDA of $8.1 million. Sequential revenue and adjusted EBITDA decreased 6% and 22%, respectively, mainly due to a slowdown in completions activity due to discrete customer scheduling, particularly in tech services, frac rental and coiled tubing. As we move into Q4, we've seen some choppiness to customer schedules and expect typical holiday slowdowns. In the Southwest segment, revenue and adjusted EBITDA were $56.6 million and $5.1 million, respectively. On a quarterly basis, Q3 revenue decreased 4% sequentially, with EBITDA down 29%. As expected, given the 9% decline in Southwest rig count, an 18% decline in permanent frac spread count, the Southwest experienced lower activity across directional drilling, flowback and rentals which drove a corresponding downward pressure on margins during the period. For the Northeast Mid-Con segment, revenue was $59.3 million and adjusted EBITDA was $14.5 million. The sequential increases in revenue of 29% and adjusted EBITDA of 101% were largely driven by higher utilization across our completions portfolio, reduced white space in our calendar and targeted expense management across our various PSLs operating within this segment. At corporate, our operating loss and adjusted EBITDA loss for Q3 were $8 million and $6.6 million, respectively, with our operating loss improving 11% from last quarter, and our adjusted EBITDA loss was within $300,000 of Q2 2025. Turning to our balance sheet, cash flow and capitalization. We ended the third quarter with approximately $65 million in liquidity, in line with Q2, including $8.3 million of cash and cash equivalents, and $56.9 million of availability on our revolving credit facility which includes $5.3 million on an undrawn FILO facility. Total debt as of September 30 was $259.2 million, including $219.2 million in notes and $40 million in ABL borrowings and is also largely in line with Q2 levels. We remain in compliance with our debt covenants. Our bonds require a 2% annual mandatory redemption paid quarterly. We've continued to make these payments, but we did PIK $6 million of interest in Q3, and we will evaluate future PIK versus cash decisions based on market conditions and company leverage and liquidity. It's worth noting that our most recent PIK election was 100% cash paid interest. Moving to working capital. As of September 30, we had $50.1 million of net working capital and our DSO held steady at a normalized level of 61 days and our DPO increased slightly to approximately 50 days, both roughly in line with long-term historical averages. We remain focused on disciplined and proactive management of working capital to ensure flexibility and resilience in the current market environment. Our capital expenditures for the quarter were $12 million, and $7.8 million net of asset sales, down 6% from Q2, and we expect a further decline in Q4, in line with our focus on further capital efficiency. Year-to-date, capital spending trends suggest a full year gross CapEx of $43 million to $48 million with net CapEx of $30 million to $35 million when you include asset sales. As activity declined, head count was reduced approximately 2% sequentially, supporting overhead control and increased operating leverage. Also, we completed the sale of facility in Q3 expect additional asset sales to close in Q4. We continue to monitor and respond to asset performance, and our finance leases are beginning to transition as older vehicles roll off in Q4. We contributing to increased operational agility into 2026, and our portfolio of finance leased coiled tubing units will be owned outright in late 2026, which will drive a meaningful improvement and free cash flow profile going forward. I'll now hand the call back to Chris for his concluding remarks and more color on our outlook. Christopher Baker: Thanks, Keefer. While the broader market conditions remain mixed and near-term visibility is limited, we are encouraged by recent signs of stabilization and rig activity and the emergence of sustained and incremental activity in the natural gas basins. We continue to emphasize operational discipline, margin optimization and proactive capital stewardship sustained by close coordination across our operating regions to weather current market volatility. With improved overhead efficiency, a disciplined cost structure and a flexible balance sheet, we are confident in our ability to navigate the remainder of 2025 successfully and capture upside as the market strengthens. As we look ahead, we anticipate typical seasonality and budget exhaustion to moderate activity through the fourth quarter, yielding a mid-single-digit revenue decline from Q3 to Q4. This signals a less pronounced Q4 reduction than in years past. Importantly, we expect continued stable adjusted EBITDA margins, aided by ongoing cost discipline, year-end accrual dynamics vehicle turnover and regional activity mix. Our fourth quarter guidance reflects steady demand across our core product service lines, supported by new project awards from key accounts. Operationally, our diversified portfolio, prudent capital discipline and proven operating leverage continue to drive strong execution, helping to offset macro volatility in commodity noise. In addition, KLX stands to benefit as natural gas demand accelerates, underpinned by new LNG export capacity and increased data center activity. On a quarter-over-quarter basis, dry gas revenue rose 15%, building on the 25% increase we saw in Q2. Haynesville activity rebounded by 6 rigs in Q3, and we continue to monitor demand drivers on the board. with close to 11 Bcf per day of new LNG export projects scheduled to come online over the next 5 years, including key capacity additions along the Gulf Coast. The U.S. is well positioned to strengthen its role as a global energy supplier. Our internal planning highlights continued relative stability in completion-focused service lines along with a modest Q4 bounce back in drilling activity. Combined with incremental benefits from strategic cost controls already underway, these strengths reinforce our confidence in delivering profitable growth in 2026. Our strategic capital stewardship ensures we remain ready for both measured top line expansion and sustained margin strength. In summary, unused fleet capacity and minimal white space have allowed us to adapt operations efficiently and support margin expansion even in periods of softer activity. KLX is now better situated from an overhead efficiency standpoint than at any time in our post-COVID history, empowering us to strategically capitalize on future opportunities. KLX has significant operating leverage to a rebound in market activity. And similar to prior cycles, we will ensure we are best positioned from a personnel asset and technology standpoint to maximize our upside in future periods. We appreciate the ongoing dedication and commitment of our team members, the partnership of our customers and the support of our stakeholders, empowering us to deliver value and drive KLX forward. With that, we will now take your questions. Operator? Operator: [Operator Instructions] Our first question is from Steve Ferazani with Sidoti & Company. Steve Ferazani: I got to start with the Northeast MidCon, which we expected it to trend higher for you. But those numbers were way past our expectations. That your Northeast Mid-Con margin was the highest it's been in 3 years and 3 years ago, natural gas prices were over $8. Can you indicate the performance because it's impressive? Christopher Baker: No. Look, I appreciate that. Our Northeast -- if you really dig into it, our Northeast business within the Northeast Mid-Con remained relatively stable, predominantly driven by rentals and fishing. You dig into the Haynesville, we were able to capture revenue increases and accommodations and flowback specifically. And I think perhaps most importantly, we saw less white space overall in our Mid-Con PSL. And so when you think about the positive operating leverage and just being base loaded, you see a lot of margin expansion. And so I wish we were back in a market where we were at $8 gas price, we're not. I don't expect to go there anytime soon. I do think a macro theme though is KLX as a whole is just more efficient today than we were in the period you referenced. And I think that shined through in our Northeast Mid-Con performance. Steve Ferazani: Is it also fair to say you're gaining market share? Christopher Baker: Well, look, I think rig count was up, what, 6 rigs quarter-over-quarter on average in the Haynesville. So you can think about that on a percentage basis where once again, we drove quarter-over-quarter revenue just from a dry gas perspective of 15%, 25% in the prior quarter, if you recall, our Q2 discussion. And so I think within certain product lines, yes, we've gained market share. Steve Ferazani: And then flipping to the other side, which was the Rockies, we know that drilling and completions are trending down, but you did outperform our estimates. Was there anything specific going on in that market in 3Q beyond the general macro? Christopher Baker: I think specific in nature, look, rig count to your point, was really flat in the Rockies quarter-over-quarter. There were puts and takes in the various basins within the Rockies, but overall Rockies was generally flat. However, what we did see was some very episodic completion programs with an overall decline in kind of refrac activity. And we saw a lot of refrac activity in '23 and continuing into parts of '24. And so I think the episodic nature of those completion programs is back to the point with the Mid-Con, it really highlights the negative operating leverage when your cost structure is relatively fixed in the short term and at current market pricing levels. And so when you get a last-minute delay in a completion program that pushes revenue out of the schedule or maybe out for a month, it's really hard to adjust your cost structure in the short term. And so the negative operating leverage really impacts margin. Steve Ferazani: That's helpful. When you're indicating the slower year-end slowdown, you're certainly not the first company to say that during earnings season. What is it you're hearing from operators? And how does that make us think about next year when, obviously, a lot of folks are concerned about oil oversupply and pressure on WTI? Christopher Baker: Yes. I think there's really 2 questions there. First, Q4, we stated a mid-single-digit revenue decline on a percentage basis. That's materially below the 13% quarter-over-quarter decline we saw last year. The decline is largely going to be driven by holiday slowdowns. I think, less pronounced budget exhaustion versus prior periods. I would note that on a monthly basis, our October revenue was flat to September whereas if you look at 2024, we saw a 7% decline October versus September in the same period. And so we're already off to kind of, on a relative basis, a better start. On the margin side, we expect margins to hold up despite declining revenue really just due to cost controls. We've got our typical Q4 accrual unwinds relative to PTO and other accruals. And we also talked about the fleet turnover in our prepared remarks that typically occurs in Q4. And so that's how we're set up on Q4 as we sit here today. Steve Ferazani: And then...go ahead. Christopher Baker: Yes, I was going to say on next year, look, it's still too early to give firm guidance from a 2026 perspective. we've seen puts and takes with operators saying their CapEx budget for next year is going to be to slightly down. I think we're set up where the gas market is going to be very consistent, and everybody is projecting a full year-over-year increase in activity, and we would expect that to hold true for us. We continue to see consolidation. We saw a major consolidation transaction earlier this week. We know these transactions can lead to episodic white space and growing pains as they integrate their portfolios. Net-net, we are typically the beneficiaries as we talked about before of consolidation, but it still can create some puts and takes. I will say we've received some recent wins from an RFQ perspective on the award front, which we think are supportive of both Q1 and 2026 overall. And then lastly, I think the last part of your question, the EIA just posted a report earlier this week saying, and I think it was on Tuesday, saying we're going to have to ramp up U.S. activity to sustain U.S. crude production. And so it's very circular. I think it's if and when production declines take over, that is supportive of commodity prices and higher commodity prices is supportive of activity. And so it feels like it's a question of when, not if activity rebounds in the oil basins. I think there's some optimism building around the second half of '26 into '27. We'll just have to see how it plays out. Steve Ferazani: Fair enough. That's very helpful. I do want to touch on the balance sheet. $65 million in available liquidity. 4Q tends to be a strong cash flow quarter, but then Q1 is the working capital builds again more dramatically. I'm just trying to think about your flexibility. You haven't used the PIK option yet, you have that at your disposal, which can help depending on how the first part of next year plays out. Generally speaking, and you've been selling some equipment, I think you talked about some facility sales. Can you just give us a general overview about -- and you've done a great job trying to protect the balance sheet during this downturn. Just generally, how you're thinking about that without knowing exactly how activity plays out first part of next year? Keefer Lehner: Yes. Good question and lots of moving pieces, obviously, in there from a free cash flow perspective. First, on the PIK, so we did PIK a portion of our Q3 interest. We picked about $6 million of interest in the third quarter. But in the prepared remarks, we did say that our most recent cash PIK election that we submitted last week, we did do 100% cash pay there, but we will continue to evaluate PIK versus cash decisions through the wins of managing the balance sheet from a leverage and liquidity standpoint. So nothing is going to change there. As it relates to free cash flow, you're spot on that Q4 is typically a strong free cash flow quarter for us. We had $11 million or so of unlevered free cash flow in Q3. We did guide Q4 down on a mid-single-digit percentage basis. With that said, working capital should unwind. Given that decline, Q4 does not also have the extra payroll that we have in the third quarter. So those 2 things combined should lead to improved kind of free cash flow generation in the quarter largely due to working capital trends. DSO has been holding in pretty consistently around 60, 61 days. I would expect that to hold going forward. On the DPO side, we've been kind of trending in the low 50s. Again, I would expect that to hold going forward. As you think about CapEx and its impact on free cash flow, we're guiding to a much lower kind of minimal net CapEx spend in Q4. Obviously, kind of gross spending will be down, but that will be offset by some of the asset sales that we mentioned and you alluded to in your question. So I think all those things combined to Q4 being a strong quarter, and that's why we continue to reiterate that we expect liquidity to continue to improve as we navigate the remainder of this year. As you turn into 2026, I think the quarterly trends there, as you point out, will continue to play out to some extent. I will say that I expect Q1 2026 to be less burdensome from a working capital investment standpoint compared to the '24 to '25 transition just given what we know today. Operator: Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to Chris Baker for closing remarks. Christopher Baker: Thank you, operator. Thank you once again for joining us on the call today and your continued interest in KLX. We look forward to speaking with you again next quarter. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time.
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: Good day, everyone, and welcome to Elutia Third Quarter 2025 Financial Results Call. [Operator Instructions] Please note, this conference is being recorded. Now it's my pleasure to turn the call over to Matt Steinberg, with FIN Partners. Please proceed. Matt Steinberg: Thank you, operator, and thank you all for participating in today's call. Earlier today, Elutia released financial results for the quarter ended September 30, 2025. A copy of the press release is available on the company's website. Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements within the meaning of the federal securities laws, which are pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that do not relate to matters of historical facts or relate to expectations or predictions of future events, results or performance, are forward-looking statements. All forward-looking statements, including, without limitation, those relating to our operating trends and future financial performance are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and descriptions of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our public filings with the SEC, including Elutia's annual report on Form 10-K for the year ended December 31, 2024, accessible on the SEC's website at www.sec.gov. Such factors may be updated from time to time in Elutia's other filings with the SEC. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, November 6, 2025. Elutia disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements whether because of new information, future events or otherwise. Also during this presentation, we refer to gross margin, excluding intangible asset amortization, which is a non-GAAP financial measure. A reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure is available on the company's financial results release for the third quarter ended September 30, 2025, which is accessible on the SEC's website and posted on the Investor page of the Elutia website at www.elutia.com. With that, I will turn the call over to Elutia's CEO, Randy Mills. C. Mills: Thank you very much, Matt, and welcome one and all to our third quarter 2025 conference call. I'm excited to be here with you today. Matt Ferguson, our Chief Financial Officer, is also with us today on this call. We're going to be going over a couple of things. One is the basics of evolution, a couple of things that I think everyone should know about the company. We're going to talk -- I'm going to spend a lot of time talking about where we're headed and not just where we're headed, but why we're going where we're going. Matt is going to give us an update on finance and litigation status. And then lastly, we'll close and take your questions. So let's get into it with some of the basics. So Elutia, we are a mission-based company. I think that's an important thing for investors to know. And I think that's a good thing, too, because we have a great mission. Our mission at Elutia is humanizing medicine so that patients can thrive without compromise. And today, we're going to talk a lot about breast reconstruction. And I hope that you can appreciate that our work in this space is so necessary because there's a patient population right now, women experiencing and making their way through their breast cancer journey who really are faced with a lot of compromise in their care and in their treatment, and that's holding them back from thriving. And we are applying our talents, our resources, our efforts and our mission to overcome that. So these women are able to thrive without compromise. I think it's really important for a company to know what they're good at, what are their strengths. And at Elutia, we are really great at combining biological matrices with powerful antibiotics that create this sustained antibiotic release in implants that's able to prevent infectious complications from happening. We started in this with EluPro, our first antibiotic eluting product that we got on the market and really did a great job in the initial commercialization with. We sold that, as you guys know, to Boston Scientific for $88 million. And now we're taking that technology into NXT-41x, which is our next-generation matrix for breast reconstruction. So if you're new to the story, and I see there are a lot of new callers on the call today, three sort of things that are probably worth keeping in mind. One is this is a validated technology platform. What do I mean by that? Well, we've already done it. We've already developed the first FDA-approved drug-eluting bioenvelope for pacemakers, which we sold to Boston Scientific. Now there, we're talking about a much smaller market, so only a $600 million market with a much smaller unmet medical need. We're talking about infection rates on the order of about 3%. We're taking that same technology platform, and we're moving it into a much bigger market with this blockbuster 41x that we have coming. So it's the same technology platform, but applied to the $1.5 billion breast reconstruction market. And as you're going to see coming up, there, we're talking about an unmet medical need where women are facing postoperative infection rates between 15% to 20%. And then lastly, the company is now fully resourced. We have the right team in place. We have a state-of-the-art GMP manufacturing facility, and we have a commercial platform already in place with our SimpliDerm product that we already have and we're already distributing in this space. And then very importantly, we now have the cash to fund the company, not only through product development and product approval, but all the way through commercialization of this technology as well. So let's get into it and let's talk about where we're headed and more importantly, why we're headed there. So why breast reconstruction? Why is breast reconstruction such a transformational opportunity for Elutia? Well, it's really the convergence of 3 factors that make this a very special opportunity for us. One, as I've mentioned, breast reconstruction is a large market, $1.5 billion market. But two, it's an unusual opportunity in that it's this large market that still has this really significant unmet medical need, postoperative infectious complications of 15% to 20%. Despite our best efforts in this for the last 30 or 40 years, we just haven't been able to crack this. And then lastly, our technology, our proven technology platform works in this space, and we're going to be able to solve this significant problem for these patients by applying our technology to this area. So let's go through these three different parts, right? Let's start with the large market. And I get out and I talk to a lot of different investors about this. I think this is actually one of the pieces of our story that most investors already appreciate. The breast reconstruction market is a really big market. It's an addressable market of about $1.5 billion. Why? There's 162,000 breast reconstructions performed in the United States annually. These are brand-new 2024 numbers from ASPS that are out. Biological meshes are already used in 90% of these reconstruction cases. So there's not like there's a market here that has to be retrained on how to use a biological mesh. And in fact, not only are biological mesh is the dominant modality -- treatment modality in these cases, they're also incredibly expensive. So we're talking about per breast on the order of $9,000 a breast for the biological matrix alone. And if you look at that as the percentage of implant spend, right? So you take the permanent breast implant, you take the expander that has to go in there and you take the biological matrix, you put all that together, the biological mesh is 65% of the implant spend. Here's the problem. The outcomes are abysmal. Despite the high cost, the status quo here isn't addressing the problem. Now I want to be really clear. I'm not suggesting the biological matrices causing the problem. I'm not suggesting the implants are causing the problem. I'm certainly not suggesting that the surgeons are causing this problem, but they're not fixing the problem. And what we're left with here is 1 in 3 women that go through breast reconstruction suffer a serious complication after that reconstruction fully, 15% to 20% of that is driven by infectious complications. We're talking about serious postoperative infections coming out of this case. And we are probably understating this problem in this case. Ultimately, we're looking at up to 21% of the implants end up being lost. The procedure ends up being a failure and has to be abandoned. That, as you can imagine, leads to this very significant economic burden that the hospital faces. We're looking at $48,000, the average economic cost to the hospital of an infected breast reconstruction. So here's a real significant problem. So like I said, when I go out and I tell the story, I think people appreciate that the breast reconstruction market is large. I think they even appreciate that -- hey, I believe you guys are going to get this approved. You did a pretty good job with that with EluPro. You got that there. You seem like you know what you're doing. They struggle to believe that this problem could be this bad in this big of a market for so long, and they really want to know sort of why -- how could that be? Why is that? And so I want to explain to you why this is the case. So here we go. So there are some very unique challenges that are presented by mastectomy. So in mastectomy, all of the breast tissue has to be removed, and this is done by the oncologic breast surgeon that comes in and it does the removal of the breast tissue. Why is this happening? This tissue has to come out because if any of it remains, then there is still a risk for breast cancer redeveloping in that woman. And then there needs to be further monitoring. There needs to be mammograms, right? So the whole purpose of having a mastectomy sort of goes out the window. And so the breast surgeon comes in here, and they're very aggressive with this removal, right? So they need to take out all of this breast tissue all the way to the margins of the skin, all the way down to the chest wall. The problem with that is, as you can see in this diagram here, is that the vasculature for the breast runs through this very tissue that all has to come out. Again, the vasculature of the breast runs through the tissue that has to come out. And so what happens is when you remove this tissue from the breast, you have to tie off these vessels that get cut, right? And so when you tie off these vessels, then you basically create an area of hypoperfusion, right, where you don't have adequate amounts of blood flow. What's the consequence of that? Well, the consequence of that is, generally speaking, the way we deal with and the way we prevent postoperative infection is by antibiotic therapy. We can give the patient oral antibiotics or we can give the patient IV antibiotics. But the idea is that you give these patients antibiotics and they circulate all through the body. and go to the parts of the body that you're looking to protect and prevent infection. But when you remove the blood supply, you also remove the route in which systemic antibiotic therapy needs to reach the surgical pocket. So no blood supply means no antibiotic therapy can reach where it needs. And there's lots of studies that show this. The plastic surgeons refer to postoperative antibiotic therapy often as voodoo. It makes everyone feel good that they're taking these antibiotics, but it does not prevent postoperative infection. And the reason why it doesn't prevent it is this very real anatomical challenge that's created. It also, by the way, if antibiotics can't get there because there's no blood, it also makes it for a real challenge for even the patient's own immune system to get there. And our natural cellular components of our immune system have a far more difficult time. So after we've done this procedure, we've done the mastectomy, now a plastic surgeon, this is a different surgeon now, a different surgeon and a different surgical team comes into the operating room to do the reconstruction of this area where they have this really thin skin. You have this pocket of tissue that doesn't have any vasculature. And now in there, they need to put an implant of some sort, either the permanent implant or oftentimes an expander. And then the other thing they'll also put in there is they'll put in surgical drains. And these are drains, if you've never seen them, these are literally plastic tubes that port directly to the outside and they allow excess fluid that normally would accumulate there to drain out of these spaces. And so you're adding this large foreign body and you're adding these drains that communicate with the outside and create a portal for contamination to enter. Then lastly, there's a mesh, right? And this mesh then goes around this entire construct to hold the implant in place and to create a bit of a barrier between the skin and the implant. And the reason that's done is because the skin here that's left after this radical mastectomy is so thin that you need something. And so that's what -- that's what meshes are used for in these types of procedures. And this is all done in a surgical procedure that's taking somewhere on the order of 4 to 6 to 8 hours in order to do. So if you wanted to create the perfect recipe for postoperative infection, it would be difficult to come up with a better recipe than the one we have here in breast reconstruction. You have long surgical times, 4 to 6 hours, multiple different surgical teams, creating an ischemic area in the body, right, that is hypoperfuse, doesn't have as much blood flow as it would need. On top of that, you put a large foreign body and then just for good measure, you throw a drain in that ports directly to the outside. So the question isn't how do we end up with postoperative infection rates of 15% to 20%. The question is, how is it not 100%? I mean it's almost miraculous that you could do this procedure and not have more infectious complication. And I think that actually is really a testament to the surgeons and the professionalism of the surgeons and the operating teams in this case because this is just almost the perfect storm for an infectious complication. But we think about this differently. We look at this and we say, what if we flip the script here? What if we turned things over? And instead of having those antibiotics delivered systemically and hoping some trickle into this avascular necrotic space, what if instead we delivered them locally. So what would happen in that case? Well, in that case, you would have local concentrations of antibiotic that were much higher, that were at therapeutic or even super therapeutic levels. And then just to boot, you would have systemic levels of antibiotic that were essentially indetectable. So you would have antibiotic exactly where you needed it, being very effective at preventing infection and you would completely avoid side effects that can come along with prolonged antibiotic and antimicrobial use. And so this is the fundamental basis behind what we do at Elutia, this idea of drug-eluting biologics and local antibiotic delivery. And this is what we did with EluPro, and it worked very successfully there. And it's what we're doing here with 41x. And the good news is we're not alone here. It's not like we thought of this and like, hey, aren't we brilliant and I wonder and I hope this works. Really resourceful inventive, creative plastic surgeons out there who are doing the best they can for their surgeons have already been looking into this. And they've actually already demonstrated proof of concept. And what they've discovered is that local antibiotic delivery in breast reconstruction works. It effectively, it statistically significantly reduces postoperative infection. Now the problem with it is they had to borrow techniques from orthopedic surgeons in order to pull this off. And there's just 2 different examples here. This first one on the left, these are PMMA plates, polymethyl methacrylate plates. Said differently, they are a place of cement, like a bone cement, hard, big rigid disks. And basically, what they do with these plates is they're able to mix this stuff up in the operating room. And while they're mixing it up, they'll mix in a powdered antibiotic into the aggregate and make that as part of this bone cement. And they will literally put this bony plate up into the breadth. Now the problem is not permanent, it's not absorbable. -- it deforms the rib cage. It's -- but you know what it does really effectively. It prevents postoperative infection. So decreased infection, this is a study with 360 patients, right? This decreased infection of about 62% from 12.6% to 4.8% p-value less than 0.01, really beautiful statistical data that shows that if you have local delivery of these antibiotics, that they will effectively address this postoperative computation. Another version of the same thing is instead of making a big disc, what happens if you made little ease out of it and sort of sprinkle them in there. And again, the same thing. Now this was a case -- or this was a study that was -- if you're wondering why the infection rates are so high. This is actually looking at salvage cases where the patients were already being brought back to the operating room for tissue necrosis. Now normally, what would happen is that procedure, the implant procedure would just be considered a failure. Here, they wanted to see if they could salvage these cases. And so they tried with and without this local antibiotic delivery. And again, a 35% postoperative infection rate dropped to 6.3% postoperative infection rate. This is a 75-patient study, p-value 0.017. So highly statistically significant. The point of all of this is if you deliver local antibiotics, it doesn't just conceptually work, it works in practice. And so that is why we created NXT-41x. But we did it in a way that the plastic surgeons are excited about using. And so Dr. Williams and her team has made a beautiful biological matrix. It's one of the things we're really good at doing that's purpose-built for plastic and reconstructive surgery. And then on to that, they've added powerful antibiotics, rifampin and minocycline. And they've done this in a way where they formulated it so they have a greater than 30-day release of these antibiotics that's putting therapeutic levels of antibiotics into the space for greater than 30 days. Why is this 30-day number so important? Because most drains come out by day 17. And so you want to make sure that once the portal is closed to the outside, that you still have antibiotic delivery going on and they're able to address infections. So this is NXT-41x. And that's the rationale why we came up with this. That's why it was so important for us to get EluPro done and commercialized and then ultimately, in the hands of Boston Scientific, who are going to knock the cover off the ball with that product. So we can move on and bring this product to market to the women who are going through breast cancer, who are battling breast cancer and so desperately need this technology. Let's talk a little bit about the plan and how we're going to get there. Right now, we have SimpliDerm, which is our biological matrix that doesn't have any antibiotics. This is very analogous to those of you who remember, our CanGaroo product that we had on the market, before we introduced EluPro, just the biological matrix by itself. So that's our SimpliDerm product. And what it enables us to do, just like CanGaroo enabled us to do is build out our commercial infrastructure, our sales team, our contracting team, the teams that work with the value analysis or the VAC committee, build out that whole infrastructure, so it's up and functioning and ready to go when NXT-41 comes to market, right? Second step, and you'll see this in the second half of next year, you'll see the first step is approval of NXT-41. Now what we're doing here, NXT-41 is NXT without the antibiotics. So if you think about the X is Rx prescription, right? So the NXT-41 is just the base matrix. We're doing that for regulatory purposes. We want to get just the matrix cleared through the FDA before we add the combination of the drug to be able to separate a combination device drug review into its component parts. And then the last piece you'll see in the first half of '27 is the approval of NXT-41x. Then lastly, before I turn the call over to Matt, just a little bit about what's going on inside the company and when we -- when we talk next about this, what I'll be providing updates, there are already three really essential work streams going on. Obviously, the most important one is the development. And we're looking for the development and approval of a highly differentiated product that significantly improves outcomes in plastic and reconstructive surgery, that is NXT-41. But alongside all of that is our manufacturing team that are building out this robust production platform that's able to achieve really, really significantly low cost of goods through our own proprietary in-house manufacturing process. We have this manufacturing facility in Gaithersburg, Maryland. If you're ever in the area, stop by, we'd love to give you a tour about it. But we have this really great facility and this really great team there that's building out this process that will enable us to produce this at a low cost of goods. And then lastly, the commercial team. The commercial team is working on SimpliDerm and doing a great job with SimpliDerm, but also building out the clinical advocacy and the commercial infrastructure that we need to have in place so that when 41x gets approved, we're able to do as good a job, if not a better job commercializing that product as we were able to do with EluPro. So that is what we're doing. That is why we're doing it and our plan in order to get from here to there. With that, I'll turn the call over to Matt, and he'll tell you about our operations. Matthew Ferguson: Okay. Thanks, Randy. And it's a very exciting time to be at Elutia and the future that Randy just described for everyone is really built on the great work that has been done over the past several years and the work that's been done more recently to build the foundation to make this future possible that we are also excited about. And so with that, I'm going to just take us back briefly to what Randy talked about at the very beginning of the call. And the big event for the third quarter of 2025, was the transaction of the sale of the bioennvelope business within Elutia to Boston Scientific. It was a sale for $88 million in cash, sold to a Tier 1 company that really put us through our paces digging under the covers, not just for the assets that they were acquiring, but really the whole company. And we came through that process very nicely with the technology and the company validated for work that had been going on really for years. So that transaction validates the technology platform that will be transformed in the coming quarters into NXT-41 and 41x and capture this big opportunity. And it also transforms our balance sheet importantly. And so it brings in a significant amount of cash and then it also streamlines our operations. So going forward, we'll be more nimble and we'll be more efficient and will be more productive. So the assets that were sold were the EluPro and CanGaroo products, along with that, our main operational facility within Roswell, Georgia that also went with the transaction. About half of the people in the company also went with that transaction. So that is going to make a big difference in our operating expense going forward and also should lead to improved bottom lines for the company. The transaction was announced in early September, but it didn't close until Q4, but it actually closed on the first day of Q4. So while the financial results, the balance sheet that we show as of the end of the quarter doesn't yet reflect the infusion of cash and the other associated payoff of debt and that sort of thing that occurred with the transaction, that happened just the day after the end of the quarter, and we'll talk a little bit more about that in a second. So from a financial point of view, when you look at our financials going forward, the business of the Bioennvelope division, that will now be shown just as a single line in discontinued operations. So starting with Q3 this quarter, we are no longer reporting on the sales and expenses associated with that part of the business, except in that one line, which is below our operating line at this point. So just moving forward, talking a little bit about the results for the quarter of the continuing operations, really breaks down into our 2 other product lines that are commercial right now, that's SimpliDerm and cardiovascular. SimpliDerm, we saw a nice uptick from the prior quarter in revenue. We generated $2.4 million of revenue, which was up about 18% from Q2 of this year. It was down, granted from a year ago, but there are a variety of factors that caused that over time. A lot of it, we believe, had to do with the contributions from the distribution partner that we've had over time. And I can say that we've actually now ended that relationship as of October, and we now have full control over that product line, and it is unencumbered from a strategic point of view. But just as important, we now have full operational control over it. As we rebuild the commercial footprint associated with that part of the business, it will do a couple of things. One, it will lead to renewed growth of that part of the business, but we'll also very importantly, lay the groundwork, which Randy talked about a little bit for the products, NXT-41, NXT-41x, which are sold into the same customer base and into the same types of procedures that SimpliDerm is sold into. So you can think of it a little bit similar to what we did with EluPro, where we had the CanGaroo product before we had the EluPro drug-eluting version of the product. Having that sales organization and commercial footprint for CanGaroo really allowed us to hit the ground running. And by the time that we were 3 quarters into our launch, we had ramped up to about an $18 million run rate with EluPro, and we think we can likely do even better when we have NXT-41 on the market. Moving on to cardiovascular. That also had a nice quarter, again, with the theme of us regaining control over the product completely. We returned to full operational control of that product after having a distribution partner there as well in the second quarter. And in May, we started selling that directly ourselves, and we generated in the third quarter, the first full quarter where we had only direct sales, we generated just a little under $1.9 million of sales with that. And that actually compares to both the prior year and the prior quarter quite nicely. It was up 68% from the prior year, up 28% sequentially. So we're doing nicely there. That product also has very high gross margin. So the more we sell there, the more it drops to our bottom line and funds the really strategic opportunities that we have in front of us. Moving on to a few other financial highlights in our statement of operations. Overall sales were $3.3 million, comprised of those 2 product lines that I just talked through compared to $3.6 million from a year ago quarter. The GAAP gross margin was 55.8% versus about 49% a year ago. So we've seen a nice uptick in our gross margin. There, again, we're actually benefiting from the margin profile of these products that we're now selling compared to the full portfolio that we had previously. And I think we'll see continued gains there. Our adjusted gross margin, which excludes noncash amortization expense, that was even better at about 64% versus 56% in the year ago quarter. And then also, we saw improvements both from an operating expense point of view and a loss from operations perspective. So we were at $7.1 million in overall operating expense, down from $11 million a year ago, and our loss from operations was $5.2 million versus about $9 million a year ago. All of that nets out to what was probably a more important metric when you back out the noncash items and nonrecurring items, our adjusted EBITDA was $2.7 -- adjusted EBITDA loss for the quarter was $2.7 million, and I think that's a pretty good indication of where we expect to be in the near future. From a balance sheet perspective, again, as I mentioned, the transaction had not closed yet by the end of the quarter. So we ended the quarter with $4.7 million in cash. But again, 1 day later, we closed the transaction that resulted in $80 million coming in at closing, $8 million in escrow and interest-bearing escrow account that we'll receive in 2026. That $80 million was then deployed to pay off about $28 million of debt. And then after paying off deal expenses and the like, we ended up with about $49 million of actual cash that came into our account in early October. That puts us in a great position as we move forward and think about our development plans going ahead. So we believe that gives us the runway to get us completely through the development and approval of NXT-41 and NXT-41x and the actual commercial launch of those products out in 2026 and 2027. Then finally, for people who've been watching the company for some time, you know that we have been working very diligently to put behind us some legacy litigation from a part of the company that we sold off a couple of years ago. That's generally referred to as the FiberCel litigation. I can report there that we were able to resolve another 7 of those cases in the quarter. And now when we started with 110 of those cases, we're now down to only 6 remaining. So I can say we are very, very close to putting that completely in the rearview mirror for us. We're very glad to have that almost behind us. And from a financial point of view, it's a relatively small number that those remaining 6 cases account for. The estimated liability of those is less than $1 million at about $700,000. So with those highlights, just before we take your questions, I would say, if you think about it from a big picture, why as an investor, would you own Elutia? Well, it goes back to the opportunity really that we've been talking about here for the last half hour or so. We like to say that it's a biotech-like upside with the risk profile and time line of med tech. So it's something that is very unique in the marketplace. We have a validated technology platform that physicians will adopt and that strategic will value. We have a derisked path to be first-in-class in a $1.5 billion market with a significant unmet medical need. And we have the team and the capital to get there without dilution. So with that, we'll take your questions. Operator: [Operator Instructions] It's from Frank Takkinen with Lake Street Capital Markets. Unknown Analyst: This is Nelson Cox on the line for Frank. Congrats on all the progress. It's exciting to see the story developing. You walked through it during the prepared remarks, but maybe just to go a little deeper, maybe walk through some of the learnings with EluPro from a development to approval to commercial rollout perspective. Just want to give you a chance to maybe dive into that a bit more and any learnings that will translate to NXT. C. Mills: Yes. Thanks, Nelson. So first, I would say the team is everything. And that goes to development, FDA approval and commercial rollout as well. The team is really everything here. And so with EluPro, we actually had a submission of EluPro that was put in actually before my time coming back into the company. And we got some comments back from the -- we got a lot of comments back from the FDA about that. And that led actually to us getting an NSC on that. But through that nonsubstantial equivalence process, I brought in Michelle Williams, who you guys know I've worked with for 21 years now. And I would say best Chief Scientific Officer in the business for these kinds of things. And she was able to really not just respond to the NSC, but also learn from it and develop our own intellectual property around it on not just delivery methods for local antibiotic delivery, but also around testing methods and how you prove it and how you demonstrate it to the FDA. And in doing so, develop a really good relationship with the agency, giving them not just barely enough information to feel comfortable with the submission and the clearance, but actually making them feel really confident that we've made a real quality product here. So I would say that is probably the single most important thing from a development standpoint that we learned. Commercially, what we learned was it is really good to have some commercial infrastructure in place. EluPro, by the time we sold EluPro to Boston Scientific, it was running at an $18 million run rate; 9 months in, I mean, that thing shot out of a canon. And that was because we had a commercial team in place. They had a great VAC package that, again, Michelle Williams and her team had helped put together. But we also had the commercial infrastructure and the contracting in place, and we knew how to do that. And so CanGaroo helped EluPro, and we think in the same way, SimpliDerm is going to help 41x when we get out there. So I think those are 2 things that come to mind. Unknown Analyst: Then maybe just running off of that, SimpliDerm obviously gives you a big commercial presence like you're talking about ahead of NXT. Can you just frame that a bit more for us and how you plan to leverage those already existing relationships. C. Mills: Yes. So we're talking about -- when we have SimpliDerm, right, we're talking about biological mesh that's used in the same surgical procedures. It's used by exactly the same surgeons in pretty much exactly the same way we expect NXT-41x to get used, right? So we're not talking about requiring the surgeons to do anything different from their current practice. It's one of the reasons that we just -- we really love -- we love this approach. All of it's already in place. They're already doing it. The problem they have is despite their best efforts, they're left with this postoperative complication rate. And so our plans with SimpliDerm is to just keep using that product to have this direct customer interaction that we have. Nobody between us. As Matt said, we now have full control back of our SimpliDerm product line. We go out and meet directly with the plastic and reconstructive surgeons. We talk with them about how SimpliDerm is going and their problems and how we can be helpful and how we can have them get better outcomes. And then obviously, just from a commercial infrastructure standpoint, our contracting teams and our commercial teams from a customer service and distribution, all that stuff is in place and ready to go, and we'll keep building on it, right? So we think about this coming year, not in any way as an idle year for our commercial team, but it's actually one where they're going to be active as hell going out there and continuing to expand this in just the same ways that we did with CanGaroo before the launch of EluPro. Every seed we planted there ended up being very, very valuable for the launch of that product. And we learned that lesson. And so that's what we're going to do with SimpliDerm. Unknown Analyst: Maybe just sneak one more in. How are you thinking about kind of clinical evidence and data generation with NXT? Do you envision kind of needing to invest there significantly to drive education and adoption? C. Mills: So through the combination 510(k) pathway, as you know, we actually don't have a requirement for clinical data for the approval process. Now we are a science-based company. We do really exceptional quality work, and we stand behind it. When we launched EluPro, we had no requirement for clinical data. But very quickly, we were able to put together, as part of our VAC package and as part of our marketing package, a complete story that made the implanting surgeons not just comfortable but enthusiastic about putting EluPro, and that worked really, really well. Well, we're doing the same thing here. And so preclinically, there is a tremendous amount of evidence that the team is building from things like pharmacokinetics, how long the antibiotics are there, the concentrations that they hang around in surgical sites from a preclinical efficacy standpoint. One of the things you can't do with patients is you can't go back into them a month after the product has been implanted and infuse them or inject them with large amounts of pathogenic bacteria. But we can do that in the preclinical setting with animal models and demonstrate like we did with EluPro that we're able to get complete kill even at 4 weeks out. But once the product, Nelson, comes to market, one, we don't think -- we know there's strong demand for this product now from the interactions that we have from the relationships that we have now, just the same way EluPro. There is a first wave of users that are ready to be done with putting cement into breasts in order to fix this problem and have a professionally built and constructed a product that fits in with their practice and they'll adopt right away. But we're not leaving it there. We're running clinical programs on these so that we generate conclusive data. Our goal here isn't to take significant market share. Our goal here is to flip the entire market so that women have much, much better outcomes than they currently do. The current standard of practice is not okay to leave the way it is. It needs to get better. And we know we'll have to generate clinical data to get all of that done, but that is our goal, all of it. Operator: Our next question is from the line of Ross Osborn with Cantor Fitzgerald. Junwoo Park: This is Matt Park on for Ross today. So I guess starting off with 41 and 41x. Can you just go back to any manufacturing plans you need to do ahead of time to -- I guess, like are there any validation steps needed to ensure a smooth transition from SimpliDerm to 41 and then to 41x? C. Mills: Great question, Matt. So to be really clear, where we manufacture 41, 41x is a completely different facility than we manufacture SimpliDerm. SimpliDerm is a human-derived product. It has a host of regulations associated with it because human-derived products can carry human pathogens with them. And so we keep those 2 things completely separate in completely separate facilities. So the facility where we're manufacturing 41 and 41x is a GMP facility. We were really, really lucky here. You might say we were beneficiaries of the GLP-1 boon that occurred in that we were able to get a space, a great GMP space that was already built out and ready to go from a company that was acquired by Novo Nordisk. And because of that, we were able to get it at really great prices. But most importantly, it was this really high-quality facility that was ready to go looking for somebody to manufacture something in it. So we're really pleased with that facility. There's all kinds of tech transfer and process qualification, equipment qualification that goes on when you bring up a manufacturing process. We have all of -- our teams there have a schedule for all of 2026. They're running through that process right now and are underway. We don't anticipate manufacturing will hold back or be the rate limiting factor in anything that we're doing here. And by the way, facility-wise, this is all done out of our new facility in Gaithersburg, Maryland. Junwoo Park: Maybe just one more on the cardiovascular business. Now that you've transitioned it back in-house, I guess, how should we think about the current run rate and the sustainability of growth from here? C. Mills: Yes, Matt. So we've been really pleased with the bounce back that we've seen now that we've been able to devote some more attention and some direct resources to that part of the business. That is not the future of the company by any means, but it's a great little business that has a pretty significant market out there and great gross margins and some really committed physicians out there that are using the products. And so we're basically back at the $1 million a quarter revenue level. And I think there's some growth that we can achieve from there. But it's not going to be a rocket ship. It's going to be steady growth, but we're also not having to invest money upfront in order to achieve that. We've got really an exclusively contract sales organization that's out there. So it's completely variable expense. And with the high gross margins over 80% that we've been achieving there, it -- a significant amount of the revenue that we generate actually drops to the bottom line. So that's in general, how I would think about the product there -- the product and the future trajectory there. Junwoo Park: Got it. Thanks again for taking the questions and congrats on progress. Operator: As I see no further questions in the queue, I will conclude the Q&A session and conference for today. Thank you all for participating. You may now disconnect.
Operator: Greetings, and welcome to the Xponential Fitness, Inc. Third Quarter 2025 Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Patricia Nir. Thank you. You may begin. Patricia Nir: Thank you, operator. Good afternoon, and thank you all for joining our conference call to discuss Xponential Fitness' Third Quarter 2025 Financial results. I am joined by Mike Nuzzo, Chief Executive Officer; and John Meloun, Chief Financial Officer. A recording of this call will be posted on the Investors section of our website at investor.xponential.com. We remind you that during this conference call, we will make certain forward-looking statements, including discussions of our business outlook and financial projections. These forward-looking statements are based on management's current expectations and involve risks and uncertainties that could cause our actual results to differ materially from such expectations. For a more detailed description of these risks and uncertainties, please refer to our annual report on Form 10-K for the year ended December 31, 2024, filed with the SEC and subsequent filings with the SEC. We assume no obligations to update the information provided on today's call. In addition, we will be discussing certain non-GAAP financial measures in this conference call. We use non-GAAP measures because we believe they provide useful information about their operating performance that should be considered by investors in conjunction with the GAAP measures that we provide. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release that was issued earlier today prior to this call and in the investor presentation available on our website. Please note that all numbers reported in today's prepared remarks refer to global figures, unless otherwise noted. As a reminder, in order to ensure period-over-period comparability and consistent with our reporting method since IPO, we present all KPIs on a pro forma basis, meaning, for the full KPI history presented, we only include brands that are under our ownership as of the current reporting period. For the period ended September 30, 2025, this includes BFT, Club Pilates, Pure Barre, StretchLab, and Yoga6. I will now turn the call over to Mike Nuzzo, CEO of Xponential Fitness. Michael Nuzzo: Thanks, Patricia, and good afternoon, everyone. First, I'd like to thank the entire Xponential family for welcoming me on board. As I said when I started, Xponential is uniquely positioned to thrive as a successful consumer business. Having completed my first 90 days, I've had the opportunity to deep dive into our business, connect with many of you and gain a clear understanding of both our strengths and the areas where we can improve. This period has reinforced my belief in the power of our brands and the dedication of our franchisees. I want to again highlight 3 foundational elements: First, Xponential is in a great space. Boutique fitness has substantial momentum and long-term growth potential as consumers continue to invest more in their health and wellness routines. Second, Xponential has strong studio brands, which are loved by members and led by passionate and committed franchisees. Third, Xponential has made progress in building a team and a supporting foundation to start driving stronger growth and financial returns. Importantly, given the 3 recent divestitures, we have a more optimized brand portfolio. With this, I am convinced we can provide better franchisee support with a more appropriate level of infrastructure consistent with our smaller brand portfolio. I'll discuss recent actions we have been taking to address this. Let me walk through these elements in more detail. First, the industry. It is estimated that a record 247 million Americans engage in an exercise routine in 2024, up by over 25 million from just 2019 and representing the 11th consecutive year of growth. Within the space, the global boutique fitness market is expected to reach $60 billion by 2030, fueled by a growing demand among all age groups for specialized community-focused experiences. The sector's emphasis on holistic health and strong engagement will likely continue to fuel growth that outpaces the overall fitness industry. These trends bode well for Xponential. Secondly, we have strong brands and an excellent network of franchisees. I have spent time with many of our franchisees over these past few months and their commitment to driving their local businesses, ultimately fueling our success is clear. Each of our brands has unique attributes that contribute to their performance. Club Pilates with over 1,200 locations across North America and over 150 locations internationally is our flagship brand and the scaled leader in the category. Club Pilates studios generate the strongest new unit economics I have ever seen. For example, our recent 2 vintages of Club Pilates openings, the 2023 and 2024 cohorts have shown record year 1 revenue ramps, exceeding the previous 3 vintages at month 12 by an average of 27%. This demonstrates the brand's continued popularity and significant growth opportunity ahead. Yoga6 and Pure Barre are complementary studio concepts that have a healthy owner-operator franchisee structure and continue to generate impressive sustained organic growth. They both also exhibit strong retention driven by an almost obsessive member base, which we love, of course. StretchLab and BFT have all the attributes to return to and exceed their historical levels of performance. BFT, born in Australia, has a compelling offering in the high-intensity interval training space. Currently, we have a cross-functional team focused on refining our go-to-market approach in the U.S. to drive better individual studio economics, member awareness and market density. StretchLab's assisted stretch model is a great complementary addition to a weekly workout routine. I've experienced the benefit firsthand. After exhibiting solid AUVs a few years ago, recent StretchLab revenue trends have been pressured as Medicare Advantage plans, a strong source of member flow, have scaled back on stretch as a covered benefit. Based on what I've learned, there are meaningful opportunities to improve every element that impacts member acquisition and retention. I expect us to make steady progress across both brands as we position for 2026. Importantly, following the recent divestitures of CycleBar, Rumble and Lindora, we now have a more streamlined brand portfolio, which brings me to my third key area of focus and probably the most significant opportunity for the company. While Xponential has a foundation in place to support franchisees and members, there is substantial opportunity to improve without adding additional cost. The 5 major areas of focus are: marketing, operations support, unit growth and licensing, innovation and efficiencies and cost savings. I have been dedicating significant time to strengthening each of these core functions within a more streamlined portfolio. This is not about adding additional cost. Rather, it's reallocating and refining how we operate to drive greater focus and efficiency. Let me walk you through each aspect of our tactical approach. First, in the area of marketing. Our new leadership team in marketing is enhancing our corporate capabilities in digital media, CRM, search and social to augment franchisee local marketing efforts. We have launched a pricing study focused first on Club Pilates, which will serve as a framework for our other concepts. All our corporate brand websites are being refreshed to improve our member journey from initial contact to conversion and retention. We are also addressing lead management system and process deficiencies to help strengthen our top-of-funnel KPIs across our portfolio. In the fourth quarter, we are making additional marketing fund investments to launch a national brand campaign for Club Pilates, expanding our reach through new performance channels like podcasts, YouTube TV and CTV. Overall, we are improving our corporate marketing engine with a clear focus to drive organic growth. These improvements are designed to help support our brands optimize performance and strengthen our connection with both prospective and existing members. Second, operations support. We launched our initial field support teams with a laser-focused mission to provide best practices to studios and franchisees on all the ways to enhance local studio financial performance. We are working closely with franchisees to gather feedback, improve processes, refine our approach and ensure these teams are effectively supporting our studios. On the retail front, the transition to the outsourced model is well underway. We expect the implementation to be largely complete by year-end, and we are looking forward to delivering a much more efficient retail experience for both our corporate teams and franchisees. In the area of unit growth and licensing, we've made swift progress in ramping up our improved real estate and license sales support capabilities. We are working closely with a leading outsourced partner in franchise real estate to implement best-in-class site selection practices, including leveraging the latest AI-powered market assessment tools. These improvements are designed to ensure we're making smart, data-driven decisions that support long-term success. In addition, we are taking steps to attract more established operators, along with private equity into the existing franchisee base, particularly for Club Pilates. I'm also excited to share that during Q3, we successfully completed the franchise disclosure documents registration process across brands and states. In international markets, we continue to add locations focused on Club Pilates and BFT, and I look forward to working with the team on ways to accelerate our growth within key strategic geographies in both Europe and Asia. On the innovation front, we are focused on generating new class content and member engagement within our current portfolio and see substantial upside within each of the brands. For example, in Club Pilates, we recently launched our first new class in several years, Circuit, which incorporates more intense athletic movements while still being accessible to even beginners. In Yoga6, we are refining our class offering menu for 2026. Both Circuit and new planned classes in Yoga6 will have appeal across age groups and feature strong social media attributes. This month, we also defined a new Club Pilates studio design, a big request from our franchisees. At a corporate level, we are making sure that our innovation and marketing teams are closely aligned, such that new content continuously fuels the marketing engine, driving engagement and retention. I believe we are just scratching the surface with our abilities to bring innovative leadership to the space. Finally, efficiencies and cost savings. One of my key learnings these past 90 days was that we needed to move quickly to rightsize our corporate organization, both as a result of the divestitures and in an effort to more broadly streamline the organization. As a result, in October, we executed a reduction in force across most of our corporate departments, which was a difficult but necessary task. This is expected to result in annualized SG&A savings of about $6 million. We will continue to identify ways to optimize our operations while upholding our commitment to providing the best service to our franchisees and members. I want to be clear that the initiatives here are clearly multifaceted. While we are acting with the requisite immediacy, the full impacts will unfold over the ensuing quarters. We intend to measure progress and adjust as needed, ensuring that the changes we implement are both effective and sustainable. With that, I'll turn the call over to John. John? John Meloun: Thank you, Mike. Good afternoon, everyone. We ended the quarter with 3,066 global open studios. This quarter, we opened 78 gross new studios, 57 in North America and 21 internationally. There were 32 global studio closures in the third quarter or about 1%, representing an annualized closure rate of 4%. In the third quarter, the company sold 49 licenses, of which 16 were in North America and 33 were international. Our base of licenses sold and contractually obligated to open is over 1,000 studios in North America, and we also have over 700 international master franchise obligations. Approximately 40% of our global licenses are over 12 months behind their applicable development schedules. Third quarter North America system-wide sales were $432.2 million, up 10% year-over-year. This was driven primarily by growth from net new studio openings. Notably, about 90% of system-wide sales growth came from a higher mix of actively paying members with the remainder driven by higher pricing and mix shifts. Same-store sales were down 0.8% for the quarter and up 5.4% on a 2-year stack basis. Same-store sales trends in Q3 were driven by a confluence of factors, and we are in the process of examining them in detail. At a high level, we've identified lead flow and member conversion issues across the portfolio that we are working to address, some of which were likely accentuated by our implementation of additional member privacy safeguards earlier this year. At a more granular level, StretchLab continues to be impacted in part by brand positioning challenges and the Medicare Advantage coverage reductions. Meanwhile, at Club Pilates, as you all know, we are benefiting from a stronger sales ramp in newer cohorts. While this is great for studio economics, it means that recent cohorts are already near capacity when they enter the same-store sales calculation, translating to lower same-store sales contributions. As Mike alluded to, we are reviewing all elements of corporate and studio-level operations to compete better and more profitably. Our North America run rate average unit volumes climbed to 668,000 in the third quarter, up 2% from $654,000 in the prior year period. The increase in AUVs was largely driven by a higher number of actively paying members and higher pricing for new members. Given the consistent level of demand for our brands and Club Pilates in particular, we believe there is an incremental opportunity to increase revenues through enhanced pricing methodologies, including new price tiers, disciplined cancellation policies and new package offerings. On a consolidated basis, revenue for the quarter was $78.8 million, down 2% or $1.7 million from $80.5 million in the prior year period. 73% of revenue for the quarter was recurring, which we define as including all revenue streams, except for franchise territory revenues and equipment revenues, given these materially occur upfront before the studio opens. Franchise revenue for the quarter rose 17% year-over-year or $7.4 million to $51.9 million, driven primarily by the catching up of franchise territory license terminations and by royalty revenues given a higher effective royalty rate driven by new studio openings. The company will continue to terminate licenses at elevated levels in the fourth quarter, noting terminations can take time given requirements around notification time lines. Equipment revenue was $7.5 million, down 49% year-over-year or $7.2 million, reflecting a 41% decline in global installation volume compared to the prior year period. Merchandise revenue of $4.8 million was down 27% year-over-year or $1.8 million, reflecting lower sales volumes. As a reminder, in Q4, we will begin the implementation of our outsourced retail strategy with FitCo, which is expected to contribute improved margin expansion in 2026 and further optimize non-core operations and reduce working capital commitments. Franchise marketing fund revenue was $8.8 million, an increase of 3% year-over-year or $0.3 million, primarily due to continued growth in system-wide sales in North America and increased average unit volumes from our installed base of studios. Lastly, other service revenue, which includes sales generated from rebates from processing studio system-wide sales, brand access partnerships, company-owned studios, XPASS and XPLUS amongst other items, was $5.9 million, down 6% or $0.4 million. The decrease was primarily due to lower brand access fees. Turning to our operating expenses for the quarter. Cost of product revenue were $10.2 million, down 41% or $7 million year-over-year. The decrease was primarily driven by the lower volume of equipment installations and merchandise sales during the period. Cost of franchise and service revenue were $7 million, up 45% or $2.2 million year-over-year. The increase was largely driven by the increased recognition of associated commission expenses from the catching up of franchise territory license terminations. Selling, general and administrative expenses were $24.7 million, down 47% or $21.5 million year-over-year. The decrease in SG&A was primarily lower due to a decrease in legal expenses driven by non-recurring insurance reimbursement and lower restructuring charges from lease liability settlements. During the quarter, we received $10 million in cash reimbursement from our professional insurance policies related to the SEC investigation that was concluded without action in July as well as other defense costs from other active inquiries. There was an additional $10 million insurance receivable recorded for SEC investigation and franchise matters as of the end of the quarter, noting that the receipt of these recovery payments in future periods will have no impact to GAAP earnings or EBITDA. At present, through the third quarter, we have entered into and paid lease settlement agreements of approximately $32.7 million. As of September 30, 2025, we have approximately $8.8 million of lease liabilities yet to be settled. We expect most of the remaining liabilities will be settled during the remainder of 2025. Depreciation and amortization expenses were $3.7 million, down 13% or $0.5 million compared to the prior year period. Marketing fund expenses were $9 million, up 40% or $2.6 million year-over-year, afforded by higher system-wide sales and associated marketing fund revenue contributions. Acquisition and transaction expenses were $3.1 million, down 16% or $0.6 million from the prior year period. This includes the contingent consideration activity, which is related to the Rumble acquisition earn-out and is driven by the share price at quarter end. We mark-to-market the earnout each quarter and adjust our accruals accordingly. Note that this earn-out will persist despite the recent divestiture of the brand. We recorded net loss of $6.7 million in the third quarter or a loss of $0.18 per basic share compared to a net loss of $18.1 million or a net loss of $0.29 per basic share in the prior year period. We continue to believe that adjusted net income is a more useful way to measure the performance of our business. A reconciliation of net income and loss to adjusted net income and loss is provided in our earnings press release. Adjusted net income for the third quarter was $19.3 million or adjusted net income of $0.36 per basic share on a share count of 35.1 million shares of Class A common stock. Adjusted EBITDA was $33.5 million in the third quarter, up 9% or $2.7 million compared to $30.8 million in the prior year period, primarily driven by increased margin from license terminations and increased royalties in our franchise revenues. Adjusted EBITDA margin was 42% in the quarter, up from 38% in the prior year period. Turning to the balance sheet. As of September 30, 2025, cash, cash equivalents and restricted cash were $41.5 million, up from $32.7 million as of December 31, 2024. For the 9 months ended September 30, 2025, net cash provided by operating activities was $17.6 million, which includes $2.8 million in lease settlements. Net cash used in investing activities was $2.3 million with $4.3 million used to purchase property and equipment and intangible assets, offset by $2 million in proceeds from disposition of brands. Net cash used in financing activities was $6.6 million, which primarily includes $5.9 million in net borrowings on long-term debt, $5.7 million in payments on preferred stock dividends, $3.4 million payments on promissory note liability and $2.3 million in payments for taxes related to net share settlement of restricted stock units. Total long-term debt was $376.4 million as of September 30, 2025, compared to $352.4 million as of December 31, 2024. The net increase in total long-term debt is largely due to the company drawing additional debt in the first quarter of 2025 for general working capital purposes and associated fees, offset by quarterly principal payments. As previously communicated, the company is actively exploring multiple work streams to refinance our term loan in advance of its coming current in May of 2026. Let's now turn to our outlook for 2025. We are reiterating guidance for net new studio openings, revenue and adjusted EBITDA. We are taking a more conservative approach to North American system-wide sales given current business conditions and to account for the divestiture of Lindora. Note that guidance and year-over-year comparisons for system-wide sales and net new studio openings exclude CycleBar, Lindora and Rumble in both periods for comparability. We now project North America system-wide sales to range from $1.73 billion to $1.75 billion, representing a 12% increase at the midpoint. We continue to expect 2025 global net new studio openings, which is net of closures, to be in the range of 170 to 190, representing a 37% decrease at the midpoint from the prior year. We expect the number of closures to be approximately 5% of the global system this year as a percentage of total open studios. Total 2025 revenue is expected to be between $300 million and $310 million, unchanged from previous guidance and representing a 5% year-over-year decrease at the midpoint of our guided range. Adjusted EBITDA is expected to range from $106 million to $111 million, unchanged from the previous guidance and representing a 7% year-over-year decrease at the midpoint of our guided range. This range translates into a 35.6% adjusted EBITDA margin at the midpoint. We continue to expect total SG&A to range from $130 million to $140 million. When further excluding the one-time lease restructuring charges, brand divestitures and regulatory legal defense expenses, we are expecting SG&A of $110 million to $115 million and a range of $95 million to $100 million when further excluding stock-based costs. As a reminder, in the fourth quarter, the company hosts its annual franchise conference, which has a net $3.7 million expense in the period. Regarding marketing fund, in the fourth quarter, we expect to see marketing fund spend exceed marketing fund revenue by approximately $5 million, largely driven by the nationwide branding campaign for Club Pilates. In terms of capital expenditure, we now anticipate approximately $6 million to $8 million for the year or approximately 2% of revenue at the midpoint. This compares to previous guidance of $10 million to $12 million or approximately 4% of revenue at the midpoint. For the full year, we continue to expect our tax rate to be mid- to high single digits, share count for purposes of earnings per share calculation to be 34.8 million and $1.9 million in quarterly cash dividends related to our convertible preferred stock. A full explanation of our share count calculation and associated pro forma EPS and adjusted EPS calculations can be found in the tables at the end of our earnings press release as well as our corporate structure and capitalization FAQ on our investor website. We continue to anticipate our unlevered free cash flow conversion to be approximately 90% of adjusted EBITDA as we require minimal capital expenditure to grow the business. We continue to expect that our anticipated interest expense in 2025 will be approximately $49 million, tax expenses to now be approximately $5 million, including the cash usage for tax receivable agreement and tax distributions to pre-IPO LLC members and approximately $8 million in cash dividend related to our convertible preferred stock, resulting in levered adjusted EBITDA cash flow conversion of approximately 35%. This concludes today's prepared remarks. Thank you all for your time today. We will now open the call for questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Chris O'Cull with Stifel. Christopher O'Cull: John, I know Club Pilates comps had moderated last quarter, I think, to the mid-single-digit range. Can you provide an update on how that played out in the third quarter and then maybe current trends you're seeing in Club Pilates specifically? John Meloun: Thanks, Chris. Yes. In Q2 of 2025, it moderated closer to the mid-single digit, which we said was around 5%. In Q3, we did see it come into the low single digit or about 1% in the third quarter. As we explained on the call, what we're really seeing is your installed base of studios now getting to what we believe is a full maturity given the current operating structure and number of members and pricing that they have, which is around about $1 million AUV. As we add new units, what we're seeing is these new units are coming on pretty efficiently and getting up to that kind of, let's call it, $900,000 to $1 million AUV very early in the first 12 months of operation, which means as they move into the 13-plus month, they're not really comping like they used to because now the whole system is almost at that $1 million AUV. That's one of the phenomenons that we're talking about is just the efficiencies of the ramp in Club Pilates. Because they're at full capacity, they're not really comping beyond the $1 million. Michael Nuzzo: Yes, Chris, and I'll add a couple of points as well. Yes, it's a great brand. Obviously, strong AUVs and a great ramp, high productivity. We should still expect to grow organically. Obviously, we're happy with where we were in the first half of the year. I would say that in an increasingly competitive space, we have to do better at helping our franchisees compete better. In the script, we talked about a lot of the areas that we're focused on. John and I also called out some of the deficiencies in our lead generation and member conversion capabilities, and we're focused on addressing those. Beyond that, we've got to up our game in marketing and studio ops support. I think the team is galvanized around that, and we're excited to support what is a really great brand. Christopher O'Cull: That leads to my follow-up question though is given that Club Pilates is at record high utilization, I guess, and that you're looking into this enhanced, I think you call it enhanced pricing strategies to drive revenue. I guess my question is 2 parts. First, how do you balance the push for higher prices with the risk of alienating members in a more unpredictable, let's say, macro environment? Then secondly, instead of focusing on pricing, how much opportunity is there to drive growth to fill the significant off-peak capacity hours that exist, I guess, outside of the morning and evening rush? John Meloun: Yes. I think you're hitting on a couple of really important topics. I think the quick answer is the best way to do it is to bring in an expert who has done pricing analyses and work and support for brands across the country. That's exactly what we kicked off in the quarter. I've worked with this group in the past. I think what they do a really good job of is really digging into the data in a way where we're getting into deep analysis around the members and the usage and the packages and the pricing structure. It's a very multifaceted approach. It's just not saying, take our tiers and increase them by a specific fixed amount. We're really getting into the science of this. We're also getting some great feedback from our franchisees, and taking their observations and their learnings at the local studio level. I expect we'll come out with a really thoughtful approach to pricing and packages and intro promotions to maximizing the use of our studios. I'm excited about this work, and I think it's definitely something that will help us in 2026. Operator: Our next question comes from the line of Randy Konik with Jefferies. Randal Konik: Mike, can you expand upon -- I think you said some sort of comment about private equity entering more into the franchisee base. Can you just give us some perspective on what that would entail, what brands, what geographies? What are you trying to -- what do you kind of envision for that? Then I know this -- you talked a little bit about in response to another question around this pricing kind of looking into it. What work is being done around density and thinking through what is the appropriate distance to have Club Pilates from another Club Pilates, specific to Club Pilates, I should say, because it just seems like there's just a lot more ground that can be covered with more units per se, maybe not just or instead of kind of tweaking some of the pricing because it sounds like, obviously, these boxes are very productive. Maybe they are reaching maturity, but that would just argue for more units to be put in closer proximity to other units. Just give us your thoughts on how you're thinking about those 2 areas, the private equity and the density question. Michael Nuzzo: Yes. Thanks, Randy. You're hitting on the 2 topics that occupy the unit growth part of our strategy and the team. As far as PE, I would say that specifically in Club Pilates, we've had some really great experiences with larger scale operators and I think in general, we are looking to grow with the operators we have and potentially look at opportunities to bring in larger scale operators to other geographies in the U.S. Private equity has done very well in this space, and so we're having really good productive conversations with them. I'm happy with what the team is doing on that front. There may still also be opportunities with the other brands around larger scale operators, and we certainly are looking into that as well. On the real estate side, this is what I was specifically referencing when it comes to partnering with an experienced third-party real estate partner and the use of pretty sophisticated location selection technologies so that we can feel good about being able to place studios in proximity to other studios, but still not having the negative impact of meaningful cannibalization. You're probably familiar, there are a lot of great systems out there. We feel like we've got one that will work really well for us and be able to allow us to maximize our network of studios within specific geographies. Randal Konik: Then last question, just give us your philosophy on portfolio construction. I think, look, investors that I speak to generally welcome the paring back of the portfolio, skinning down the number of concepts and modalities that the company has. Do you feel like this is the right set of concepts? Do you think about potential more pardowns in the future? Just kind of what -- give us your kind of sense on where we are with the portfolio and any changes that need to be made or not made. John Meloun: Yes. I won't speak to any future considerations. I'm obviously still learning about each of the brands. I do agree that having a smaller portfolio like we have today and the divestitures that we've done have helped us and will help us. It will allow us to be more focused as we ramp up a lot of the business capabilities that I was talking about. I also see a lot of complementary aspects to the portfolio that we have. I see a lot of opportunities around leveraging best-in-class things that are happening in one brand and applying them to another brand. I think pricing is a good example of that. I'm happy with the portfolio we have. I think we've done some really good work around the divestiture side, and I'm excited to dive in with each of the brands to drive growth into 2026. Operator: Our next question comes from the line of John Heinbockel with Guggenheim Partners. John Heinbockel: Mike, when you guys talk with franchisees about the Club Pilates economic model, is the assumption still sort of the old ramp as opposed to this ramp quickly to $1 million AUV? Because obviously, if that's true, in theory, I guess, you could go into -- you could pay more rent, you could absorb more cost, but there'd be no guarantee that you stay at $1 million AUV. How has the sort of the model changed or it's not, if this ramp holds, it's upside to ROI? Michael Nuzzo: Well, I think that the ramping that we've seen is a function of the brand and the strength of the brand. It's a function of having really, really strong franchisee presale activity that we have developed and refined and improved over years, right? As a scaled business, we're just -- we're getting a lot of things right on the execution around new studio build. I think that's great. I think that it's all relative, right, based upon the studio where you open it. I feel like we can show improvement with each new class of studio openings. From a modeling standpoint, the work that the real estate team is doing, especially around the new systems that we're putting in place, are adjusting accordingly and making changes to the ramp that help us make more intelligent decisions on site locations. We'll continue to refine it, and we'll continue to just get better-and-better. I still think there's opportunity around how we do our launch marketing, for example. I think -- but it's a good problem to have, right, when you have to modify your model for obviously a better start-up. John Heinbockel: Maybe as a follow-up on the retail ops field consultants. Where are you with that ramp? Then now that you've whittled down to 5 brands, obviously, they can concentrate on fewer brands, fewer issues, but where do you see -- and I guess it wouldn't be Club Pilates, but where do you see the biggest opportunity to fix execution gaps probably across brands? John Meloun: Yes. The field team right now is about 20, and we'll be doing a few more over the next couple of months. They are going to be working directly with our franchisees and our studios around a system called ProfitKeeper. The focus of that is how to improve studio level economics. I know when you start out with something, it always morphs into something that's a little different and a little better and a little evolved. I anticipate this doing the same thing. I also think there's an opportunity, and I've seen this in other retail settings and studio settings, and you've probably seen it, too, where you can identify opportunity, in this case, opportunity studios and you can focus their attention, of course, supporting all of the brands and all of the units, but around a very defined group of studios that you know has the potential to perform better and create some analysis, some feedback, even some friendly competition that makes a system like that work pretty well. Operator: Our next question comes from the line of Joe Altobello with Raymond James. Joseph Altobello: I guess first question on Club Pilates. What's the purpose of the national ad campaign? I ask that because normally, you're looking to build brand awareness, right? You've already got pretty high brand awareness, I would think, and you already have record high utilization. Do you guys see more upside to that utilization rate? Michael Nuzzo: This was talked about when I first started, and I dug in with the team, and we've modified the approach a little bit. Most of what will be hitting on the brand campaign will take place over Q4. The way I would think about it is it is us putting incremental dollars to certainly a creative part of it, but around new channels that we typically do not use in performance marketing. We identified some of those channels. Some of them are traditional media, some of them are new media, CTV, YouTube, podcasts, so what I really like about it, and I think this is going to help us as we get into 2026, is we'll be able to understand the efficacy of each of these investments in these new channels, and then what it provides for us is new ways as we get into the year, if we want to put more dollars behind a particular brand, we know the channels that have the best chance to perform. I think that's what we're really getting as a huge benefit from this work. Joseph Altobello: Just to clarify, so there are benefits to other brands. This is testing around marketing concepts behind Club Pilates, but it could have benefits for StretchLab, etc.? Michael Nuzzo: Well, this particular campaign is solely for Club Pilates. I think what I was trying to communicate was it will be testing out channels and the efficiency and the effectiveness of new channels that we currently haven't done much work in. That learning will help us if we want to apply this investment or apply these channels to other brands as we get into 2026. Joseph Altobello: Just to follow-up on that. John, earlier, you mentioned 40% or so of your backlog is still 12 months behind on a development schedule. How does the accounting work for that in the fourth quarter? Because if I look at your EBITDA guide, obviously, you're calling for a pretty sharp decline year-over-year in the fourth quarter. How should we think about that accounting impact? John Meloun: Yes. When you do a termination -- well, first, when you sell a license, the full balance of the license sale, the price goes on to the balance sheet as deferred revenue. If you pay any commissions, the commissions get deferred as a cost as well. When you terminate the license, what that does is it immediately accelerates the full amount of the license that has been deferred from a revenue perspective and commission to the P&L. In the third quarter, there was a large margin impact or margin benefit, I should say, related to the accelerated termination of licenses. As you move into the fourth quarter, the steep decline based off of the guide is really being contributed by a couple of factors. One is, there will not be a repeat level of terminations in the fourth quarter that there was in the third quarter, and that will be -- that's around about a $4 million, I guess, you can call it headwind into the fourth quarter. In addition to that, as a reminder, we have about a $4 million expense impact in the fourth quarter related to our franchise conference as spend that we do to hold that event. Then as Mike mentioned, the marketing fund dollars, which is about $5 million for the Club Pilates brand awareness, that is also a headwind into the fourth quarter. The convention in the marketing fund, you can probably consider one-time within the sequential quarters. That's about an $8 million number. As you kind of think of a $33 million adjusted EBITDA number in the third quarter, and you can kind of get to where the guide is by adding an additional $8 million of convention costs and marketing fund spend in the fourth quarter. There will be heightened elevations again -- or terminations again in the fourth quarter, but not to the magnitude that we saw in Q3. Operator: Our next question comes from the line of Jonathan Komp with Baird. Jonathan Komp: John, if I could just follow-up on the last point. I think I heard it, was it $4 million of benefit from terminations in Q3? Then if 40% are still non-current, that seems like a pretty high number, maybe like $900 million or so. Could you share any insight on sort of the outlook for those? Can you get any of those back to current? Any view of why the 40% hasn't come down? I think that's been a consistent number as you have been terminating some. John Meloun: Yes. Thanks, Jon, for that. Yes. I mean when you look at the delinquency of the backlog, one of the things that occurred during COVID was pretty much everything went delinquent, right? Because there was any licenses that was sold prior to COVID, there was about a 2-year period where franchisees were kind of waiting on the sidelines with signing new leases and such because of the fact that there was a shutdown of studios. There was a natural kind of delinquency in our backlog. Earlier this year, we stopped terminating licenses while our new COO came in and did a full assessment of franchisees by brand, where they stand. The terminations we have done are an output of that work where we have gone through with franchisees and identified which ones are not moving forward and made those terminations. When you compare the sold but not open backlog from Q2 to the ending Q3, we have significantly reduced the number of licenses that were delinquent, but the percentage that is still delinquent within the brands we still own is still around 40%. When you think about the brands where -- or the composition of the delinquent, let's call it -- the total remaining backlog is about 1,800. About 44% of that backlog is Club Pilates. We feel very strongly that those franchisees are going to move forward. The other 20% is in StretchLab. Yoga6 is about 12%, Pure Barre is about 5 and then your BFT is about 20%. We have seen a lot of growth in Club Pilates. We do believe those units will be online. They're just delinquent from the development schedule when they originally bought the license. The StretchLab is a function of AUV performance as well. As we can continue to get the AUV up in StretchLab, we should start seeing those franchisees move forward. One thing you have to remember, too, John, is we did pro forma the licenses. It is comparable with the brands that we own to the prior year, but -- or the prior period. I do believe that the backlog in addition, when we look at it at Q4, that the backlog, you'll see that there will be some more licenses terminated and that percentage over time will start to come down through terminations, but also with franchisees moving forward. Long answer, but by kind of just organic default around COVID, the backlog naturally just kind of got put into a delinquent state, but it doesn't mean that the licenses won't get open at some point. It's just that they're moving forward on a delinquent schedule. Jonathan Komp: Then maybe to follow-up, John, for the fourth quarter, any help you can give in terms of just bridging comps, system sales and revenue that you're expecting? There's still a fairly wide range on those? Then just, Mike, bigger picture, could you maybe talk about some of the key metrics that you're targeting to watch the progress initially here? Any further detail on when you would expect to start to see some progress around the key initiatives you're watching? John Meloun: Yes. As far as system-wide sales is concerned, I mean, we still guided to the $1.73 billion to $1.75 billion for system-wide sales. You can assume that the system-wide sales sequentially will be up from Q3. One of the benefits with system-wide sales in the fourth quarter is we do run promotional Black Friday marketing programs to drive package sales to drive new memberships in the fourth quarter. You will sequentially see system-wide sales up. As far as comp is concerned, with Q3 being a negative 1% comp, we are expecting to see 0 to low single digit from a comp perspective. It all depends on the successfulness of the marketing programs in the fourth quarter and how they play themselves out. As far as revenue is concerned from Q3 to Q4, there's a couple of things at play. One is, you will sequentially see overall revenue down from Q3 to Q4. The reason why, again, is the fact that you won't have the benefit of the heightened terminations in the third quarter or fourth quarter that you had in the third quarter. That's going to be the main driving force for overall revenue being down. We do expect to see royalty production up in the fourth quarter, but it's just the one-time terminations that are going to drive down revenue in Q4, but year-over-year, we do expect revenue to be up. We did about $44.5 million -- excuse me, $80 million in Q3 of '24. We're relatively in line with that for Q4 of this year. Michael Nuzzo: Yes. On the KPI question, the good news about a business like this is it's got some pretty straightforward KPIs. Weekly, we're looking at leads, new members, classes, retail sales, cancellations, average studio sales on a year-over-year basis each week, and we look at it compared to the previous 4 weeks and 8 weeks. We're getting a sense for momentum and where we stand. We're in a pretty good rhythm when it comes to measuring the business and addressing it. John Meloun: John, let me correct what I just said too. The revenue in Q3 of 2024 is around $80 million. Adjusted for the terminations, you're probably going to be down sequentially from Q3 of '24 to Q4 of '25. Operator: Our next question comes from the line of Ryan Mayers with Lake Street Capital. Ryan Meyers: First one for me, just kind of on the topic of innovation that you guys are looking to drive at some of the concepts. Is this a concept-wide nationwide thing? Is it more so just specific franchisees at certain locations maybe need help driving member growth? Just kind of walk us through some of the innovation there and how we should be thinking about that? Michael Nuzzo: Yes, Ryan, good question. When it comes to class content, we approach it from a nationwide rollout standpoint. Again, we'll test and we'll perfect and we'll get it to the point where we're ready to launch it, but we will launch it on a nationwide basis, understanding that some franchisees may not be able to implement it right at the time that we launch it. The other thing that we'll increasingly do is have that innovation work feed our marketing and driving awareness around new class content is a great way to do it. This is something that I think all the brands will benefit from, and we'll put together a schedule for each of them to dive into it next year. Ryan Meyers: Then just on the topic of pricing, I mean, how should we think about what the membership churn currently is and maybe more specifically at Club Pilates, where you guys are looking to drive price and then maybe just kind of the concept as a whole, just so we can think about sort of the membership base that potentially is turning out there? Is it elevated? Or what's kind of that historical level there? John Meloun: Ryan, I'll take that one. As far as Club Pilates is concerned, we haven't seen a shift in cancellations or churn within the brand. It's a trend that's remained fairly stable. I think what you're starting to see is just the actual total member per studio. It is up when you look at it compared to prior -- the same quarter prior year, but it's just kind of getting to that capacity where we're not adding at the same rate that we did historically. Churn overall has remained stable. Even when you look at memberships where they've been temporarily frozen, haven't seen any real shift in that either. It's more of a top of the funnel kind of just, I guess, signal that is the rate of growth has kind of slowed down a little bit. Overall members per studio has remained fairly constant. Operator: Our next question comes from the line of Richard Magnusen with B. Riley Securities. Richard Magnusen: This is regarding StretchLab. Could you provide maybe more details on your efforts to replace the loss of Medicare visitors, the money that they brought in? What has worked so far to replace that lost revenue? Then you earlier call -- earlier in the year, you mentioned looking at ways to reduce the ratio of stretch instructors to visitors because it tends to be very heavy in that particular metric. I wonder what you've done there and what success you've had? Then finally, have you looked at maybe other ways of including that modality with other modalities to maybe reduce overhead or get more people interested in it? Michael Nuzzo: Yes, Richard, good question. Yes, you're right. We touched on the Medicare Advantage issue. I would just say that we have to drive an expanded membership mix. As we looked at the current membership base, I think there's a lot of opportunity to drive younger member across more athletic pursuits, new partnerships. All these are areas where the offering as it stands today should really resonate. Also, there's a chance to -- or there's an opportunity to drive business from folks who just want to purchase individual stretches but not a full membership. I think there's an opportunity there. Then also from just overall supporting the brand better, we're looking at pricing intro packages, performance marketing, the online journey, which I think needs some work and local activation. There are a lot of things we're doing around membership expansion in that concept. From an operation standpoint, we're also testing a few operational adjustments that will lighten the demand on the labor side within the box. Not in a position to give any specific results of that work, but we are diving in for sure. Operator: Our next question comes from the line of Owen Rickert with Northland Capital Markets. Owen Rickert: Quickly, what are you hearing from franchisees about potential pressures in areas like labor, occupancy or instructor availability? If you are hearing anything from them, how are you helping them mitigate these challenges? Michael Nuzzo: I don't think we're hearing a lot more necessarily. I think that it's a constant challenge just to doing business. Most of our franchisees, I think, do a really great job of addressing it and balancing it. The availability of instructors is something that I think we've heard on an ongoing basis. One of the things that I think we do really well, especially within the Club Pilates system is we've got a pretty extensive instructor training program that helps to obviously feed our studios, which is great. We're looking for ways to potentially expand that in the future, which is really good. I also think that having the field people engage with the studios around this ProfitKeeper system, I think, can help, especially on the cost side and the profitability side. I mean, I think we'll be helping them to address it, but nothing of note that's been raised more so recently. Operator: We have reached the end of the question-and-answer session. I would like to turn the floor back over to Mike Nuzzo for closing remarks. Michael Nuzzo: Well, thanks, everybody, for joining today's call. We look forward to connecting with many of our franchisees. We have our annual convention in Las Vegas in the next couple of weeks, and we look for more opportunities to give you insight on the business. Thanks a lot. Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning, and welcome to Intercorp Financial Services Third Quarter 2025 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] It is now my pleasure to turn the call over to Ivan Peill from InspIR Group. Sir, you may begin. Ivan Peill: Thank you, and good morning, everyone. On today's call, Intercorp Financial Services will discuss its third quarter 2025 earnings. We are very pleased to have with us Mr. Luis Felipe Castellanos, Chief Executive Officer, Intercorp Financial Services; Ms. Michela Casassa, Chief Financial Officer, Intercorp Financial Services; Mr. Carlos Tori, Chief Executive Officer, Interbank; Mr. Gonzalo Basadre, Chief Executive Officer, Interseguro; Mr. Bruno Ferreccio, Chief Executive Officer, Inteligo. They will be discussing the results that were distributed by the company yesterday. There is also a webcast video presentation to accompany the discussion during this call. If you didn't receive a copy of the presentation or the earnings report, they are now available on the company's website, ifs.com.pe. Otherwise, if you need any assistance today, please call InspIR Group in New York on (646) 940-8843. I would like to remind you that today's call is for investors and analysts only. Therefore, questions from the media will not be taken. Please be advised that forward-looking statements may be made during this conference call. These do not account for future economic circumstances, industry conditions, the company's financial performance or financial results. As such, statements made are based on several assumptions and factors that could change causing actual results to materially differ from the current expectations. For a complete note on forward-looking statements, please refer to the earnings presentation and report issued yesterday. It is now my pleasure to turn the call over to Mr. Luis Felipe Castellanos, Chief Executive Officer of Intercorp Financial Services, for his opening remarks. Mr. Castellanos, please go ahead, sir. Luis Castellanos López-Torres: Thank you. Good morning, and thank you all for joining our third quarter 2025 earnings call. Thank you all for your interest and trust in IFS. We appreciate your continued support. We have continued to observe positive performance in Peru's economy with cumulative growth of 3.3% as of August. This momentum has been driven by increased activity in consumption-related sectors and sustained private investment, which is projected to grow by 6.5% by year-end. While we are maintaining a cautious outlook, given the international context and the pre-election period, Peru continues to benefit from a low inflation environment and a solid exchange rate which has appreciated close to 10% this year. The country risk remains low. Even with the latest presidential transition, we haven't seen additional volatility. These factors reinforce Peru's position as one of the most dynamic and stable economies in the region. The political transition expected in 2026 does not suggest any major changes in financial stability. Prudent monetary management and strong institutions allow us to forecast continued growth supported by the resilience of the local market and investors' confidence. This quarter, IFS has sustained strong core results and profitability with an ROE of around 16%, even after a specific investment impact related to Rutas de Lima with a provision of PEN 78 million this quarter. As you may be aware, the Rutas de Lima concession has become an ongoing issue between the municipality of Lima and the concessioner. What is currently reflected in our books corresponds to information available as of the reporting date. We're closely monitoring the situation as new developments unfold. Local and international legal proceedings will continue in the following months with final resolution not expected in the short term. Our total remaining exposure after in payments today amounts to approximately $60 million in soles equivalent, which represents less than 1% of our investment book at IFS. These results confirm our ability to adapt quickly and keep generating value in a challenging environment, reaffirming our commitment to long-term sustainability and profitability. Interbank continues to grow in higher yielding loans, particularly in consumer and small business segments, now representing 22% of our loan portfolio. Stronger net interest margin and better-than-expected cost of risk have driven a solid improvement in risk-adjusted NIM, highlighting our discipline in effective risk and profitability management. Izipay and Interbank continue to capture joint business opportunities, while PLIN deepens user engagement, fostering more primary banking relationships and driving growth. Interseguro continues to grow its core business with solid performance in private annuities and life insurance, even after the negative impact from Rutas de Lima this quarter. In addition, Interseguro continues to leverage synergies with Inteligo to expand private annuity sales and collaborating with Interbank to advance integrated bancassurance solutions that deliver greater value for our customers. Inteligo, our Wealth Management segment also continues to grow in double digit, achieving new record high in assets under management, thanks to our client, trust and consistent engagement. IFS remains committed to our strategy of focused and profitable growth, keeping our clients at the center of every decision. Our priority is to achieve digital excellence and deepen primary client relationships through comprehensive data-driven services and a differentiated experience, powered by our innovation and advanced analytic capabilities as our competitive advantage. Looking ahead, we remain optimistic about IFS' and Peru's outlook. The company has demonstrated resilience in downturns and is well positioned to continue executing its growth strategy, maintaining profitability and reinforcing our leadership in the Peruvian market. Now let me pass it on to Michela for further explanation of this quarter's results. Thank you. Michela Ramat: Thank you, Luis Felipe. Good morning, and welcome, everyone, to Intercorp Financial Services Third Quarter Earnings Call. We would like to start with our key messages for the quarter. We had a very good third quarter as business momentum remains strong. Our accumulated net income is up by 81% compared to the same period last year, accumulating 17.4% ROE, which would have been 18.3%, excluding the one-off from Rutas de Lima. Net income from the quarter was PEN 456 million with an ROE of around 16%. Second key message, higher-yielding loans accelerated, showing a 7% growth in a year-over-year basis and 3% in the last quarter. Third, risk-adjusted NIM continues with a positive strength, increasing 40 basis points in the last quarter, now at 3.8%, still with a low cost of risk of 2.1% and with some positive signs in the NIM recovering 10 basis points in the quarter. Fourth, we continue to strengthen primary banking relationships. And as a result, our retail primary banking customers grew 6% last year. Fifth, we had double-digit growth in our core business in wealth management and insurance with written premiums growing by 58% year-over-year due to the growth in private annuities and life insurance, and wealth management assets under management are at new record highs with continued double-digit growth quarter-to-quarter. Let's start with our first key message. Let me share an overview of the macroeconomic environment. Peru's GDP growth accelerated in the third quarter with the Central Bank revising its 2025 estimate upward to 3.2%, supported by strong nonprimary sector activity such as agriculture and mining. August growth reached 3.2%, bringing the year-to-date expansion to 3.3%. Agriculture grew by 6.4%, fueled by high international demand and mining remains strong. Construction services and commerce also saw growth above 5%, demonstrating solid domestic momentum. Private spending has been a key factor behind the economic growth throughout the year. Macroeconomic fundamentals remain stable with inflation contained near 1.7% for 2025. The Peruvian sol has strengthened around 10% this year and the reference rate lowered to 4.25%, maintaining favorable financial conditions for ongoing growth. Overall, with a GDP growth projection of 2.9% for 2026 by the Central Bank, Peru is establishing itself as one of the fastest-growing economies in the region despite internal and external challenges. The Peruvian economy holds positive prospects for the coming years as it is well positioned to meet the global demand for commodities. Nevertheless, risks remain, particularly those related to political uncertainty and global market volatility. On Slide 5, high prices for copper and gold continue to be one of the key drivers of Peru's economic growth, boosting export revenues, encouraging investment in mining and related sectors and supporting job creation. As a result, Peru's stance of trade are expected to remain at historic highs. In line with the positive economic environment, business expectations remain stable with seeing optimistic ranges and consumer confidence continues to improve, supporting domestic demand. The general demand projection for 2025 has been revised upward by the Central Bank to 5.1%, driven mainly by solid growth in private investment and consumption. In the first 6 months of the year, internal demand expanded by 6.2%, with private investments up 9% led by double-digit growth in non-mining investments and private consumption rising by 3.7%. Looking ahead to 2026, internal demand is expected to moderate to 2.9%, with private consumption stabilizing at 2.9% and private investment reaching 3.5%. Additionally, there is an extensive pipeline of projects in mining and infrastructure scheduled for the coming years. In this environment, while we observed an acceleration in retail lending during the third quarter, we anticipate that this pace will likely moderate during the last quarter of the year, given the expected outflows from the private pension funds. On Slide 6, during the third quarter, we achieved a 17% year-over-year increase in earnings, reaching an ROE close to 16%. That said, this ROE marked a slight decrease from the previous quarter, mainly due to 2 factors. First, the last quarter, Inteligo delivered results related to investment portfolio that surpass expectations. And second, this quarter, Interseguro registered the impact of the Rutas de Lima provision of PEN 78 million, as previously mentioned. On the positive note, the bank saw a reversal of provisions related to Integratel, previously Telefonica for PEN 20 million. If we exclude Rutas de Lima and Integratel, IFS ROE would stand at 17.5%, which brings us closer to our medium-term target. I want to particularly highlight the bank's strong performance this quarter, which is not only attributed to a lower cost of risk, but also to an improved net interest margin in line with growth of higher-yielding loans, fee income and positive results from the investment portfolio. Excluding the effect from Integratel, the bank's ROE would have been 16%, which represents an improvement both year-over-year and compared to the previous quarter. Furthermore, the core business of Interseguro and Inteligo continued to post double-digit growth. On Slide 7, I would like to highlight the positive strength of our ROE throughout the year. For the first 9 months of 2025, our ROE stands at 17.4%. And excluding the Rutas de Lima effect, ROE would have reached 18.3%. This has been a solid quarter across all IFS business lines with our core operations as the main drivers of profitability. This performance positions us well to continue advancing towards our medium-term goals. On Slide 8, our accumulated earnings are up 81% compared to the same period last year with an accumulated ROE at 17.4%. Both Interbank and Interseguro have achieved relevant growth, each posting increases of more than 60% year-over-year. Inteligo, in particular, has seen its earning more than triple, which speaks to the strength and resilience of our diversified portfolio. Another positive highlight is the growing diversification of IFS earnings. In the first 9 months of the year, the bank contributed around 70% of total earnings, showing the increasing relevance of our other segments. Now let's turn to Slide 9, where we take a closer look at IFS revenues, which grew 9% year-over-year. At the bank level, top line is growing 4% in the quarter as we are beginning to see a recovery in our net interest margin on top of good results in fee income. This is driven primarily by accelerated growth in the higher-yielding loans, which starts to positively impact our average yield. Interseguro continued to demonstrate strong revenue trends in line with high investment valuations while insurance results improved, thanks to growth in annuities. Finally, at Inteligo, fee income continues to grow and the portfolio results have returned to more normalized levels. On Slide 10, we wanted to double click on the fee income evolution, which continues to demonstrate good dynamics with a cumulative 8% increase year-over-year. At the bank level, this growth is supported by retail on one hand, given the increased debit and credit card activity and by commercial banking on the other, reflecting results from our strategy of deepening client relationships and strengthening our ecosystem. Wealth management also posted notable growth with fee income increasing 17% year-over-year as a result of the ongoing expansion in assets under management. In line with our strategy, the transformation for acquiring business model continues, positioning Izipay as a key complementary component within our commercial banking product suite. This has enabled us to strengthen client relationships and increase float balances, although it has resulted in a compression of merchant margins impacting fee income. These developments are taking place and the growing competition in the market and the fast adoption of QR codes with no fees. On Slide 11, IFS expenses increased by 6% year-over-year as we continue to make strategic investments to support our long-term growth ambitions. This includes accelerated investments in technology to strengthen resilience, enhance user experience, improve cybersecurity, expand our capacity and develop AI capabilities alongside ongoing efforts to strengthen leadership within key teams, reflecting a recognition of the pivotal role talent plays in delivering our strategy. Consequently, the cost-to-income ratio at IFS level stands at 37.7%. Now let's move on to the second key message. On Slide 13, we see a positive trend in higher-yielding loans. Our total loan portfolio expanded by over 5% year-over-year, outperforming the market. This positive momentum was driven by the acceleration in higher-yielding loans, which grew 7% over the past year and 3% in the last quarter. The robust macroeconomic activity is reflected in increased disbursement by 34% in cash loans and by 56% in small businesses. In this last case, most of our current disbursements are now traditional loans, which include sales financing, collateralized loans and unsecured loans, which have higher rates compared to last year's [indiscernible] loans. This segment continues to expand with average rates increasing by over 150 basis points in the past year. Overall, in retail banking, the affluent segment was the one which started the recovery in growth with an 8% growth year-over-year and 2% in the last quarter. But now the mass market segment has now grown for 2 straight quarters, increasing 3% in the last quarter and beginning to regain scale. On the commercial side, the decline in the quarter is mainly attributable to the corporate segment, impacted by loan maturities and by some companies turning to the capital markets. However, midsized companies continue to perform well up 5% year-over-year, and small businesses up 33% year-over-year now representing almost 4% of our total portfolio. On Slide 14, we wanted to double click on the consumer portfolio, which accelerated in the last quarter. In personal loans, we've seen a significant uplift in digital channel performance, driven by enhanced personalization of communication journeys and continuous improvements to our website. Disbursement rose 51% supported by increased lead generation and additional loans to existing customers. We also redesigned our pricing strategy with a customer-centric approach, enhancing our value proposition and driving higher conversion rates. The current mix starts to shift towards higher-yielding segments, supported by growth in the mass market clients with good risk profile. Still, the retail cost of risk is at very low levels. In credit cards, transactional activity continues to grow as turnover rose 9% year-over-year. Looking ahead, we remain optimistic about our growth prospects, although we recognize that challenges persist. In particular, pension fund withdrawals would likely affect consumer loan disbursements in the coming quarters. Nevertheless, our continuous focus on higher-yielding segments and prudent portfolio management position us well to navigate these market conditions. As part of our strategy, we continue to strengthen our payments ecosystem with PLIN and Izipay. On Slide 15, we have continued working to generate further synergies as we drive the growth of our payment ecosystem, focusing on increasing transactional volumes, offering value-added services and leveraging Izipay as both a distribution network for Interbank products and a source to increase growth. In particular, the commercial teams from both Izipay and the bank are collaborating more efficiently, allowing us to deliver integrated solutions and maximize the value we bring to our clients. PLIN transactions grew 38% over the last year, and our digital retail customers reached 83%. We introduced PLIN Corredores, extending our digital payment services to the transport sector through Metropolitano Corredores, and we recently launched PLIN WhatsApp offering a new digital experience for our clients, which allows them to pay without using the app directly from WhatsApp, both by typing the instructions and through voice, boosted by AI. This is our first example of conversational banking, and we will continue to evolve this offering with new features in the near future. Continuing with our strategy, Izipay continues to show strong momentum in the small business segment with flows from Izipay up 60% over the past year. This growth has contributed to the 20% increase in deposits which now accounts for 10% of wholesale deposits or 26% of wholesale low-cost deposits. The flow from Izipay expanded by 31% in the same period as interim share of Izipay flow is around 39%. Following with the third message, we see improvement in risk-adjusted NIM. On Slide 17, let me share a quick update on asset quality. Our quarterly cost of risk continues on a low level at 2.1% in the quarter or 2.3%, including the one-off impact related to the Integratel provision reversal, previously Telefonica. On the retail segment, the cost of risk continues to decrease, now standing at 4% representing a decline of 130 basis points compared to the prior year, still below our risk appetite. Our consumer lending portfolio is performing well with cost of risk dropping from around 9% to 7% year-over-year, supported by healthier customers with new loans, while new loans are showing a good performance in the new vintages. On the commercial side, asset quality remains robust. The cost of risk stands at approximately 0.4% excluding Integratel and performance has been stable throughout the year. Looking ahead, as our consumer and small business portfolios keep expanding, now representing 22% of our total portfolio, we should expect the cost of risk to gradually increase. Still, our nonperforming loan ratios are holding steady, and our coverage levels are solid above 140%. All in all, these results underscore an improving operating environment and demonstrate that our prudent approach to portfolio management is enabling us to deliver sustainable growth. On Slide 18, there are some good news to highlight in terms of yields and risk-adjusted NIM. Over the past quarter, our risk-adjusted NIM improved by 60 basis points with a notable 40 basis points increase in the last quarter, in line with the lower cost of risk as previously mentioned. The good news is that yields started to recover last quarter, rising by 10 basis points. This recovery was driven by higher rates in both retail and commercial banking, especially with the higher yielding loans where we observed more than a 30 basis points improvement in the average year. Additionally, part of the improvement in yield can also be attributed to the acceleration in growth of our mass market segment, which continues to gain momentum and contribute positively to our results. As a result, NIM saw a 10 basis point increase quarter-over-quarter. On Slide 19, the cost of deposits declined by 40 basis points year-over-year and 10 additional basis points in the quarter, supported by lower market rates and a health care funding mix with a focus on low-cost funds. Deposits have also become a more relevant part of our funding structure, representing around 81%. Although there is a seasonal decrease in total deposits we are expecting a recovery towards year-end as we expect to capture a nice part of the pension funds withdrawals similar with what we achieved in the previous withdrawals. Cost of deposits continues to show a clearly positive trend as we see further potential for reduction going forward as the portion of efficient funding now at 36% continues to improve. As a result, our overall cost of funds fell by 50 basis points compared to last year and 10 basis points during the quarter with a loan to deposit ratio of 96%, in line with the industry average. Moving on to our digital strategy. We continue to drive meaningful value and strengthen primary banking relationships through our digital initiatives, particularly with PLIN. Over the past year, we have grown our retail primary banking customer base by 6%, now representing more than 34% of our total retail clients. Monthly active PLIN users reached 2.5 million, each completing an average of 27 transactions for a total of 38% more transactions versus last year. P2M payments remains a core driver of engagement now accounting for 71% of all transactions. Within this segment, QR POS payments expanded to 2.6 million monthly transactions, up 44% year-over-year. Finally, we believe we have solid key performance indicators that continue to improve. For example, our inflow payroll accounts hold around 13% market share, retail deposits are at approximately 15%, and credit cards account for about 26%. All of these metrics are supported by an NPS of 56, reflecting our commitment to customer satisfaction and loyalty. On Slide 22, we continue to see good trends in our digital indicators compared to last year as we remain focused on developing solutions that meet our customers' evolving needs. As a result, we've seen steady growth in digital adoption. Our retail digital customer base increased from 80% to 83%, while commercial digital clients now stand at 73%. We've also made progress in self-service and digital sales. Our self-service indicator reached 82% and digital sales climbed to 68%. While the latest NPS reading, we have shown an improvement to 56 and our internal data reflects a clear recovery all year. This progress was reinforced by contextual and automated communications. Also, we developed predictive models with personalized outreach. Finally, we introduced a fully digital onboarding flow through interbank.pe, empowering seamless user and password creation for the app. Finally, solid results with double-digit growth in the core businesses of Wealth Management and Insurance. On Slide 24, we highlight the strong performance in our wealth management business this quarter. Inteligo continues to show solid momentum. Assets under management have grown at a double-digit pace, reaching new highs and now totaling $8.1 billion. Fee income continues to improve, up 16% year-over-year adding to the positive trend in results, and there is a slight improvement in fees over assets under management. Additionally, we would like to highlight the progress we are making in synergies with the bank. We have now launched a dedicated mine investment sections within the Interbank app, enabling clients to conveniently manage their investments directly from the same platform. This integration marks another step forward in delivering a unified experience for our customers with offerings converging within business segments. On the digital front, we continue to enhance our Interfondos app with the goal of shifting its role from a transactional platform to a true digital adviser for our mutual bank clients. As a result, we have seen a sustained increase in both the app adoption with a 5-point year-over-year increase and digital transactions, which grew by 2 points annually and represents more than half of all client transactions. Now moving to insurance on Slide 26. We continue to see good results in the contractual service margin, which grew 19% year-over-year, mainly driven by individual life. In the third quarter, reserves for individual life and annuities increased by 36% and 15%, respectively, supported by strong new business generation that more than offset the monthly amortization of the CSM. Individual life remains a key focus for us given its low market penetration. Although traditional channels keep growing at high rates, we've been also diversifying our distribution strategy to include digital ones and simplifying the product to reach new segments and keep supporting growth. Additionally, short-term insurance premiums grew by over 110% driven by disability and survivorship premiums acquired through a 2-year bidding process from the Peruvian private pension system. On the investment side, as mentioned before, results were impacted by PEN 78 million impairment from Rutas de Lima. The return on the investment portfolio decreased to 4.1%. It would have been 6.1% without this effect. There is still uncertainty around the timing and amount of recovery as legal proceedings continue to develop. As of today, we have provisioned around 40%. Hence, our exposure net of impairment is around PEN 200 million or $60 million. In insurance, we continue to focus on enhancing the digital experience as well and expanding ourselves from digital channels. The development of internal capability has allowed us to increase digital self-service to 71% from 65% of the previous year and the direct sales to grow 19% in the last year. Now let me move to the final part of the presentation where we provide some takeaways. Before we move on to our operating trends, we'd like to summarize where we are focusing our growth efforts. In commercial banking, we have seen important growth in small business, which increased by 33% year-over-year, now with a market share of around 4%. The commercial portfolio as a whole grew 7% year-over-year, gaining 30 basis points of market share. This strong performance is supported by 3 main strategies: first, deepening relationships with key midsized company clients, where we continue to gain share of wallet and unlock additional cross-sell opportunities. Second, expanding our position in sales financing where we have become the second largest player in the system. And third, leveraging synergies with Izipay to enhance our value proposition, especially in the small business segment where our digital payment capabilities set us apart. In this quarter, the consumer portfolio began to show signs of growth. At the same time, the mortgage segment continues its positive trajectory, achieving a market share of 16%. In insurance, we are maintaining our focus on long-term products as individual life has shown encouraging growth this past quarter. Finally, in wealth management, assets under management continued to grow at a healthy pace, up 13%, reaching new record levels and reflection on both market performance and continued client engagement. On Slide 30, let me give a review of the operating trends of the accumulated numbers as of September. Capital ratios remain at sound levels, with a total capital ratio of around 15% and core equity Tier 1 ratio above 12%. Our ROE for the first 9 months of the year was 17.4%, above our guidance for 2025. As mentioned before, we expect the last quarter to go back to more normal levels and year-end ROE could be closer to 17%, although it remains dependent on the impact of Rutas de Lima and its potential impact on the fourth quarter, if any. For loan growth, we grew 5% year-over-year, a bit below our guidance but still above the system. Year-end growth will likely remain at similar levels. We expect a slight recovery in NIM over the remainder of the year. On the positive side, cost of risk is expected to remain well below guidance, helping to offset lower margins. As a result, we anticipate a slight improvement in our risk-adjusted NIM for the full year. Finally, we continue to focus on efficiency at IFS as our cost income was around 37% within guidance. On Slide 31, we highlight our strong sustainability performance for the third quarter of 2025. On the environmental front, we have made significant progress. Our sustainable loan portfolio now exceeds or is around $350 million, supporting projects with a measurable positive impact, especially in the industrial and agricultural sectors. We enhanced internal capabilities by providing climate technology training to 30 executives, boosting green finance across agriculture, fishing, energy and mining. For the first time, we measure financed emissions in Interbank's commercial portfolio following the PCAF standard focusing on agriculture, fishing and energy, which represent 18% of the portfolio. On the social side, we keep promoting inclusive growth in workplace diversity. Interbank was ranked #5 in the Great Place to Work Sustainable Management ranking with Interseguro, Inteligo Group and Izipay, also among the best workplaces. Interbank's antiharassment program Voices was recognized by the UN Global Compact as a best practice. In governance, Interseguro Inteligo Group published their 2024 sustainability reports, and we strengthened our participation in key ESG assessments. Let me finalize the presentation with some key takeaways. First, the business momentum remains strong. Second, we see higher yielding loans accelerating. Third, we have an improving risk-adjusted NIM. Fourth, we continue to strengthen primary banking relationships. Fifth, wealth management and insurance, both core businesses growing double digit. Thank you very much. Now we welcome any questions you may have. Operator: [Operator Instructions] And your first question comes from Yuri Fernandes from JPMorgan. Yuri Fernandes: Hi, Michela, Luis, everybody. I have a question regarding Rutas de Lima, I think this is a broader process, right, Brookfield's total collections, concession. It's a broad topic. I would like to understand a little bit the level of impairment you did on your exposure in the insurance company. Because I think Michela mentioned in the end that this could or could not be a problem in the fourth quarter. So I'd like to understand how much of the impairment reflects your exposure already or not? And what is your outlook for that case? And then a second question regarding the growth for retail in light of the pension withdraw. How much the pension withdraw may impact the growth? What is your growth expectations for maybe like -- especially I think in retail, but if you can comment a little bit more broadly, how much that can impact your growth outlook for the year, near term? Luis Castellanos López-Torres: Okay, Yuri. Well, thanks very much for your 2 questions. I'm going to give a part of the answers, and then I'm going to pass it on to the team to complement. As Michela mentioned, our exposure right now considers around 40% of impairment already. It's tough to give you an outlook, given that this -- as you mentioned, this is broader thing between Brookfield and municipality. There's legal procedures going around. That 40% I mentioned was booked with all the information we have at the moment of the closing of the quarter, then things have evolved since then. So I think it's early to really give you an expectation. However, we are closely monitoring that situation. And regarding the retail growth, it's -- the pension has a couple of effects. It's -- not only that improved sales growth, but it has short-term positive impacts regarding funding and people bringing money from those funds to Interbank. So it has an offset, a positive offset in the cost of funds and the activity, but for number one, I'm going to pass it on to Gonzalo to see if he wants to complement anything. And then for number two, I'm going to pass it on to Carlos so he can give you a little bit more on his view on the potential specific growth impact of the pension fund release. Gonzalo? Gonzalo Basadre: Sure. Thanks, Felipe. As Felipe mentioned, we have already reduced the value of our holdings in Rutas de Lima in 40%. We're still waiting on what happens with the [Foreign Language] that Rutas de Lima has placed. We'll have more information before the end of the fourth quarter, where we'll be able to give a more precise value of those holdings. Still, the total position of Rutas de Lima represents less than 1% of the whole IFS investment holdings. Even though we take a lot of -- we take a lot of time to sort this out, its impact will be -- will not be -- it's not important in the total IFS. Luis Castellanos López-Torres: And Carlos, can you help us in the growth question? Carlos Tori Grande: As Felipe mentioned, the AFP withdrawals have several impacts. But to answer your question, and then I'll go a little bit deeper. The last few withdrawals have flattened growth or even made their consumer loans in the market decrease 1% or 2%. That has been the effect in the past. This one might be a little bit different because there's other factors going on. The first one is, in Peru, all salary workers get a double salary in December. So December traditionally is very liquid, and that helps, obviously, consumption reduces a little bit of outstandings but helps with collections. So this year, in December, we will have that, and we will have a portion -- a large portion of the AFP. So it will be a very liquid, we expect a lot of transactions. We don't know exactly if the amount of loans will increase or stay flat. But for sure, it will have a good impact in collections and cost of risk in December. The AFP withdrawals have 4 parts, right? You get it in 4 different months. But the first month is the largest in terms of the system because the people that don't have the full amount to withdraw get it in the first one. So the first one is the largest one. And in addition to all of that, in November, salaried workers in Peru also get long-term compensation, let's call it, and that has also been released. So there will be liquidity in November and December. So there's a lot of moving parts. But again, it will be liquid. That is good for collections and for funding. There will be a lot of consumption and transactions and then the effect on the amount of loans probably is flat or negative for 1 or 2 months and then we will resume growth. Yuri Fernandes: So basically, marginally negative, with asset quality, good for deposits maybe 1%, 2% down, and then we should see a recovery in retail, right? That's basically the message. Luis Castellanos López-Torres: Yes. I don't know if it's 1% or 2% or flat. So to tell you truth, we'll see. It depends on the amount of consumption. But yes, that's one part now. It's a short-term effect, though. Operator: [Operator Instructions] And at this time, we will take the webcast questions. I would like to turn the floor over to Mr. Ivan Peill from InspIR Group. Ivan Peill: Thank you, operator. The first question comes from Daniel Mora of CrediCorp Capital. Daniel Mora: Can you provide more details about the expected loan growth for 2025 and 2026? Specifically, I want to understand whether the acceleration of credit card loans this quarter should be maintained throughout 2026. What is the expected growth of credit cards for the next year and the effects on the net interest margin? Luis Castellanos López-Torres: Okay. Great. Thank you, Daniel, for your question. Let me pass straight to Carlos. Actually, he's working budget right now. I don't know if he is going to be able to answer all the questions, but probably he has more deep sense on that front right now. Carlos Tori Grande: Exactly. We're working on our budget. So bottom line is in the third quarter, we accelerated growth in credit cards and consumer finance, and we expect to continue accelerating having -- I mean having the impact of the AFPs in the short term, but in 2026, we expect to continue to accelerate. The way we look at it or the way we look at this is usually, the system grows at 2x -- 2.5x, 2x GDP. So consumer loans grow at 2x GDP, as a multiplier, and we want to gain market share. So we will probably grow a little bit ahead of that. Our risk appetite has also increased slightly due to the good performance of our portfolio over the last few quarters, but also due to the expectations of the macro environment in Peru. So that's kind of what we expect. This will not be linear as I just explained, the AFPs will have a short-term effect, probably the end of November a little bit, definitely in December and some in January but then growth should resume. And then NIM will be -- will grow in line with our growth in credit cards and SMEs, and also will be positively affected marginally by lower cost of funds. So that's kind of the expectation. Operator: The next question comes from [ Elan Colibri ]. Unknown Analyst: What is your expectation for corporate level disbursements in Peru regarding 2026 as a presidential election year? Luis Castellanos López-Torres: Okay. So if I understand correctly, the expectation is the corporate level disbursements, I'm trying to understand that corporate banking activity. Again, it's an election year activity depending on how the situation evolves, should continue to pick up, if the continued investment perspective materialize. So I guess, loan book growth and corporate activity should continue on the milestone. We don't see any big project coming in line in the coming months. So it's going to be probably more replenishment of working capital or it's more CapEx and some refinancings. So probably growth is not going to be great in that front. But let me pass it on to Carlos so he can complement to see what he's seeing. Carlos Tori Grande: No, I agree. I agree. There's no large projects coming in line. There has been some bond offerings over the last couple of weeks of Peruvian corporate. So that obviously becomes prepayment for the banks. Interest rates are more attractive for corporate, and they have been. They've evolved downwards. So there's a lot of refinancing of short-term loans to longer. We don't foresee a high growth in that segment for the next few quarters. Ivan Peill: At this time, there are no further questions from the webcast. I would like to turn the call over to the operator. Operator: And there appear to be no further audio questions at this time. I'd like to turn the floor over to management for closing remarks. Michela Ramat: Okay. Thank you very much, and thanks again, everybody, for joining the call, and we'll see each other back again to discuss our year-end results for 2025. Thanks, again. Operator: This concludes today's conference call. You may now disconnect your lines.
Operator: Good morning, and welcome to the earnings conference call for the period ended September 30, 2025, for MidCap Financial Investment Corporation. I will now turn the call over to Elizabeth Besen, Investor Relations Manager for MidCap Financial Investment Corporation. Elizabeth Besen: Thank you, operator, and thank you, everyone, for joining us today. We appreciate your interest in MidCap Financial Investment Corporation. Speaking on today's call are Tanner Powell, Chief Executive Officer; Ted McNulty, President; and Kenny Seifert, Chief Financial Officer. Howard Widra, Executive Chairman; and Greg Hunt, our former CFO, who currently serves as a senior adviser, are on the call and available for the Q&A portion of today's call. I'd like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of MidCap Financial Investment Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our press release. I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information. Today's conference call and webcast may include forward-looking statements. You should refer to our most recent filings with the SEC for risks that apply to our business and that may adversely affect any forward-looking statements we make. We do not undertake to update our forward-looking statements or projections unless required by law. To obtain copies of our SEC filings, please visit either the SEC's website at www.sec.gov or our website at www.midcapfinancialic.com. I'd also like to remind everyone that we've posted a supplemental financial information package on our website, which contains information about the portfolio as well as the company's financial performance. Throughout today's call, we will refer to MidCap Financial Investment Corporation as either MFIC or the BDC, and we will use MidCap Financial to refer to the lender headquartered in Bethesda, Maryland. At this time, I'd like to turn the call over to Tanner Powell, MFIC's Chief Executive Officer. Tanner Powell: Thank you, Elizabeth. Good morning, everyone, and thank you for joining us for MidCap Financial Investment Corporation's Third Quarter Earnings Conference Call. To begin today's call, I'll provide an overview of MFIC's third quarter results and the significant repayment from our investment in Merx, our aircraft leasing portfolio company that we highlighted on our call last quarter. I'll also share some thoughts on the outlook for our dividend. Following that, I'll hand the call over to Ted, who will share our perspective on the current market environment, walk through our investment activity for the quarter and provide a portfolio update. Kenny will then review our financial results in detail and recent financing-related activities. Yesterday after market closed, we reported results for the third quarter. Net investment income or NII per share was $0.38 for the September quarter, which corresponds to an annualized return on equity or ROE of 10.3%. GAAP net income per share was $0.29 for the quarter, which corresponds to an annualized ROE of 8%. As discussed last quarter's call, we're pleased to report portfolio company repaid approximately $97 million to MFIC during the quarter. NAV per share was $14.66 at the end of September, down 0.6% compared to the prior quarter. The decline in NAV was primarily due to a handful of positions that were added to non-accrual status, partially offset by a gain on our investment in Merx. The increase in non-accruals reflects company-specific issues, and we believe is not representative of a broader deterioration in credit quality. During the September quarter, MFIC made $138 million of new commitments across 21 transactions. We believe MidCap Financial's strong incumbent position continues to be a significant competitive advantage as evidenced by the fact that slightly more than half of our new commitments by number were made to existing portfolio companies. In a muted M&A environment, incremental commitments are an important source of deal flow. While sourcing assets is generally considered to be among the biggest challenges for many market participants in the market environment, MFIC benefits from access to assets sourced by MidCap Financial, one of the largest and most experienced lenders in the middle market, which is consistently ranked near at the top of the league tables. Our affiliation with MidCap Financial provides a significant deal sourcing advantage for MFIC. We are fortunate to have the access to significant volume of commitments originated by MidCap Financial, which allows MFIC to select assets, which we believe to have the most attractive risk-reward characteristics. During the September quarter, MidCap Financial closed approximately $5.8 billion of commitments. MidCap Financial has what we believe one of the largest direct lending teams in the U.S. with over 200 investment professionals. MidCap Financial was founded in 2009 and has a long track record, includes closing on approximately $150 billion of lending commitments since 2013. This origination track record provides us with a vast data set of middle market company financial information across all industries, and we believe that this makes MidCap Financial one of the most informed and experienced middle market lenders in the market. Key members of MidCap Financial's management team have been working together for more than 25 years, resulting in strong collaboration and an enhanced ability to navigate challenging market conditions, leading to improved credit quality and risk management. We believe the core middle market offers attractive investment opportunities across cycles and does not compete directly with either the broadly syndicated loan market or the high-yield market. MFIC's affiliation with MidCap Financial has enabled us to successfully build a portfolio of predominantly first lien loans to sponsor-backed companies. Moving on to Merx, our aircraft leasing company. As discussed on last quarter's call, during the September quarter, Merx completed a sale transaction covering the majority of its owned aircraft. In addition, Merx received additional payments from insurers related to 3 aircraft detained in Russia. Both the sale transaction and the insurance proceeds exceeded the assumptions in Merx's June valuation, resulting in a $16.6 million gain recorded during the September quarter. Merx repaid approximately $97 million to MFIC on a net basis during the September quarter. Approximately $72 million of the paydown was applied to equity and the remaining $25 million was applied to the revolver. At the end of September, MFIC's investment in Merx totaled $105 million at fair value, representing 3.3% of the portfolio, down from 5.6% at the end of June, which reflects the $97 million paydown and a net gain recorded during the quarter. As part of the sale transaction, Merx expects to receive approximately $25 million of additional consideration by the end of 2025 or in early 2026, which will be paid to MFIC and further reduce our exposure. Let me remind you about what remains at Merx. MFIC's remaining investment in Merx consists of 4 aircraft, plus the value associated with Merx's servicing platform. Merx earns income through its servicing activities from Navigator, Apollo's dedicated aircraft leasing fund, which currently owns 39 aircraft. Having fully deployed its equity commitments, Navigator is in the harvest period, and as such, the fund is opportunistically monetizing assets to optimize fund level returns. Merx receives a remarketing fee on each aircraft sale. At the end of September, the servicing business represented approximately 25% of the total value of Merx. The servicing component of Merx will naturally decline as servicing income is received. Turning to our dividend. On November 4, 2025, our Board of Directors declared a quarterly dividend of $0.38 per share for stockholders of record as of December 9, 2025, payable on December 23, 2025. Before I turn the call over to Ted, I would like to take a moment and make a few comments about our dividend, given increasing investor focus in light of the recent Fed cuts and market expectation for additional cuts and the resulting decline in the SOFR forward curve. Due to the asset-sensitive nature of our balance sheet, all else equal, declines in base rates will put pressure on net investment income. For context, the current SOFR forward curve is projected to trough around mid- to late 2026 at around 3%, which is roughly 80 to 90 basis points below current levels. As shown on Page 16 in the earnings supplement, a 100 basis point reduction in base rates would reduce MFIC's annual net investment income by approximately $9.4 million or $0.10 per share, which includes the impact of incentive fees. We are actively working on a couple of initiatives to help offset some of the impact from declining base rates. These initiatives, including pursuing additional paydowns from Merx and resolving certain non-accrual and earning assets. Post quarter end, we made a couple of enhancements to our capital structure, which will also improve MFIC's earnings power, which Kenny will discuss. With that, I will now turn the call over to Ted. Ted McNulty: Thank you, Tanner. Good morning, everyone. Starting with the market backdrop. U.S. economy has remained resilient, which has helped ease concerns about a recession. Inflation remains elevated. Consumer spending and business spending have been strong, although consumer sentiment is worsening. In response to rising unemployment risk, the Federal Reserve cut interest rates by 25 basis points in September. The Fed cut another 25 basis points in October. Torsten Slok, Apollo's Chief Economist, says private labor data suggests that the labor market is doing okay. He also sees growing upside risk to inflation driven by tariffs, a weakening U.S. dollar, a strong economy and wage pressures in certain sectors. As the significant tariff-driven volatility has eased and there's more clarity with respect to the trajectory of rates, we're seeing an increase in sponsor M&A activity. That said, given the significant capital raise for direct lending, we continue to see pressure on both spreads and OID. We believe the core middle market where we are focused, does not compete directly with either the broadly syndicated loan market or the high-yield bond market. Regardless of recent M&A activity levels, we see that many of our borrowers continue to have add-on financing needs, which is an important source of deal flow. Next, I'm going to spend a few minutes reviewing our third quarter investment activity and then provide some detail on our investment portfolio. In the September quarter, we continued to deploy capital into assets with what we believe to be strong credit attributes. As mentioned, MFIC's new commitments in the September quarter totaled $138 million with a weighted average spread of 521 basis points across 21 different companies. Despite the competitive environment, MidCap Financial has remained disciplined in its underwriting. The weighted average net leverage on new commitments was 3.8x in the September quarter, down from 4x in the prior quarter. Our fee structure, which is one of the lowest among listed BDCs, allows us to generate what we believe to be attractive ROEs even at current spreads. Gross fundings, excluding revolvers and Merx totaled $142 million. Sales and repayments, excluding revolvers and Merx totaled $197 million. Net revolver fundings were approximately $3 million. As previously mentioned, we received a $97 million net paydown for Merx. In aggregate, net repayments for the September quarter were $148 million. Excluding the $97 million net repayment from Merx, net repayments for the quarter totaled $51 million. Shifting now to our investment portfolio. At the end of September, our portfolio had a fair value of $3.18 billion and was invested across 246 companies across 48 different industries. Direct origination and other represented 95% of the total portfolio, up from 92% at the end of June, primarily driven by the Merx paydown. Merx accounted for 3.3% of the total portfolio at the end of September, down from 5.8% at the end of June. At the end of September, the non-directly originated loans acquired from the closed-end funds represented approximately 2% of the portfolio. All of these figures are on a fair value basis. With respect to recent headlines, we have no exposure to either First Brands or Tricolor. Specific to the direct origination portfolio, at the end of September, 98% was first lien and 91% was backed by financial sponsors, both on a fair value basis. The average funded position was $12.9 million. The median EBITDA was approximately $51 million. Approximately, 95% had one or more financial covenants on a cost basis. Covenant quality is a key point of differentiation for the core middle market as substantially all of our deals have at least one covenant. The weighted average yield at cost of our direct origination portfolio was 10.3% on average for the September quarter, down from 10.5% for the June quarter. At the end of September, the weighted average spread on the directly originated corporate lending portfolio was 559 basis points, down 9 basis points compared to the end of June. Underlying portfolio company credit metrics showed a slight improvement quarter-over-quarter, although we saw an uptick in investments on non-accrual status. We observed a modest decrease in borrower net leverage or debt to EBITDA, with the weighted average leverage decreasing to 5.29x at the end of September, down from 5.32x at the end of June. This trend reflects the lower leverage on new commitments, which helped offset increases in certain existing investments. Additionally, the weighted average interest coverage ratio improved slightly to 2.2x, up from 2.1x last quarter. Looking ahead, all else equal, if base rates decline as currently expected, we anticipate a positive impact on portfolio company credit quality through even higher interest coverage ratios. These metrics are generally based on financial information as of the end of June 2025. We believe the steady revolver utilization rate we see from our borrowers is an indicator of greater financial stability and provides us with incremental and more frequent financial information. Revolving facilities provide insight into a company's liquidity position through draw behavior. At the end of September, the percentage of our leverage lending revolver commitments that were drawn was essentially flat compared to the prior quarter. During the quarter, we reinstated a portion of our investment in Nuera to accrual status following a restructuring, which converted our first lien debt position into a combination of first lien debt and preferred equity. Conversely, we placed 5 investments on non-accrual status due to company-specific challenges, noting that one of these investments was acquired in last year's mergers. A portion of our investment in LendingPoint was moved to non-accrual status in anticipation of a forthcoming restructuring. In total, investments on non-accrual status represented 3.1% of the portfolio at fair value, up from 2% at the end of the prior quarter. Subsequent to quarter end, we were repaid on our position in Global Eagle, a position acquired in the mergers, which was on non-accrual. Toward the end of October, we became aware that one of our portfolio companies, Renovo, would be filing for bankruptcy. The company filed in early November. As of September 30, MFIC had a $7.9 million exposure to the company. PIK income declined to 5.1% of total investment income for the September quarter and 5.8% over the LTM period. Our PIK income remains relatively low compared to other BDCs, which we view as a positive indicator of portfolio health and reflects our focus on cash pay investments. With that, I will now turn the call over to Kenny to discuss our financial results in detail. Kenneth Seifert: Thank you, Ted, and good morning, everyone. Total investment income for the September quarter was approximately $82.6 million, up $1.3 million or 1.6% compared to the prior quarter. The increase in fee income, partially offset by a decline in recurring interest income, which is due to a tightening of base rates, a modest uptick in non-accruals and a slightly lower average portfolio size. Prepayment income was approximately $3.2 million, up from $1.2 million last quarter. Our fee income was $458,000, up from $220,000 last quarter. Dividend income was $200,000, flat quarter-over-quarter. The weighted average yield at cost of our directly originated lending portfolio was 10.3% on average for the September quarter. This is down from 10.5% last quarter due to the aforementioned tightening in rates. Net expenses for the quarter were $47.3 million, up from $44.9 million in the prior quarter. This increase was primarily driven by higher incentive fees. MFIC stated incentive fee rate is 17.5% and is subject to a total return hurdle with a rolling 12-quarter look back. Given the total return hurdle feature and the net loss incurred during the look-back period, MFIC's incentive fee for the September quarter was $5.8 million or 14.1% of pre-incentive fee net investment income. Other G&A expenses totaled $1.6 million for the quarter and administrative service expenses totaled $1 million. Both figures are essentially unchanged from the prior quarter and in line with our previously communicated expectations of $1.6 million and $1 million, respectively. For the September quarter, net investment income per share was $0.38, and GAAP earnings per share or net income per share was $0.29. These results correspond to an annualized ROE based net investment income of 10.3% and an annualized return on equity based on net income of 8%. Results for the quarter included a net loss of approximately $7.9 million or $0.08 per share, primarily due to losses on a handful of investments, as previously mentioned. Turning to the balance sheet. At the end of September, the portfolio had a fair value of $3.18 billion. Total principal debt outstanding of $1.92 billion and total net assets stood at $1.37 billion or $0.1466 per share. Company ended the quarter at net leverage of 1.35x with average net leverage, excluding the impact of Merx equating to 1.37x. This was up slightly from the prior quarter's average of 1.35x. Gross fundings for the quarter, excluding revolvers totaled $142 million. Debt repayments for the quarter were $148 million. Excluding the $97 million repayment from Merx, net repayments for the quarter would have been $51 million. Turning to the liability side of the balance sheet. We have been focused on extending our debt maturities and reducing our financing costs. On October 1, we amended our revolving credit facility and extended the final maturity to October 2030. Part of this amendment, the funded spread on the facility was reduced by 10 basis points from 197.5 basis points to 187.5 basis points. Just a reminder, this includes the 10 basis points of credit spread adjustment. The unused fee was reduced from 37.5 basis points to 32.5 basis points. Size of the facility was reduced by $50 million to $1.61 billion. The remaining material terms of the facility were unchanged. As a result of this amendment, we expect to recognize a one-time expense of approximately $1.5 million in the December quarter due to the acceleration of unamortized debt issuance costs associated with one lender whose commitment was reduced. In addition, in October, we upsized and repriced MFIC Bethesda 1 CLO, which originally priced in September 2023. We increased the size of the CLO collateral from $400 million to $600 million. As part of this reset, we sold through the single A tranche generating approximately $456 million of relatively low-cost secured debt, which equates to a blended advance rate of 76%. The blended cost of the notes sold was 161 basis points. Spreads on middle market CLO debt tranches have tightened considerably since the CLO originally priced. Spread on the senior AAA tranche on the CLO reset was 149 basis points compared to 240 basis points when the CLO originally priced, tightening of 91 basis points. CLO has a reinvestment period of 4 years and the net proceeds from the CLO transaction were used to repay borrowings under our revolving credit facility. As discussed on prior calls, we continue to view CLOs as an attractive source of term financing. We will recognize a one-time expense of approximately $1.8 million in the December quarter related to the reset, which reflects the acceleration of unamortized debt issuance costs for the original CLO. As always, MFIC benefited from MidCap Financial and Apollo's experience and expertise in CLO management and structuring this transaction. While these financing transactions will result in approximately $3.3 million of one-time expenses in the December quarter, the expected reduction in financing costs is expected to lead to a rapid payback period. Weighted average cost of debt for the September quarter was 6.37%. Weighted average spread on our floating rate liabilities will decline from 195 basis points as of September 30 to 176 basis points, a 19 basis point reduction. This decrease is driven by both the amendment of the revolving credit facility and the CLO reset. This concludes our prepared remarks. Operator, please open the call to questions. Operator: [Operator Instructions] We will take our first question from Arren Cyganovich with Truist Securities. Arren Cyganovich: I'd just like to discuss the increases in non-accrual. It wasn't a lot, maybe 1% or so on cost, but there were several companies. Maybe you could just talk a little bit about what is driving this? Is there any kind of theme between them? Are they tariff related? Maybe just a little bit more detail around the issues that were affecting those companies? Ted McNulty: Yes. Sure, Aaron. This is Ted. Thanks for the question. If you look at the companies that went on non-accrual, there's not really a theme that ties them all together. We have one that was impacted by tariffs. We have one that does have some pressure from weakened consumer sentiment. Overall, not a real theme, very idiosyncratic across each one. Arren Cyganovich: In terms of the increase in M&A activity that you're seeing in the marketplace, is this something that you feel like will be sustainable through 2026? Maybe just a little more of your thoughts on the outlook for investing environment. Ted McNulty: Yes. I mean, Arren, I think there's a couple of factors at play. One, you have some private equity companies or held companies that have been in the portfolio for a long time. You also have dry powder, and so you need a combination of putting money to work as well as returning capital back to the LPs. From that perspective, there should be ongoing demand. You also have with kind of tariffs not going away, but at least some of that volatility being muted as we talked about, a little more certainty, which can narrow the bid-ask spread between buyer and seller. Then with rates starting to come down and kind of some consensus around where the curve is going to shake out. I think Tanner mentioned troughing mid next year around 3%, you start to see the financing costs come down and the financing -- the cost, the certainty of that financing and the cost starts to stabilize. All those factors should lead to ongoing activity. Operator: We will take our next question from Melissa Wedel with JPMorgan. Melissa Wedel: I wanted to revisit the comment you made about some of the mitigating actions that you're taking to help offset the impact of lower base rates. I realize that those things can take a while to ramp up and it can take some time to rotate assets. I'm curious how your team is evaluating the timing difference there and how that could impact dividend decisions? Essentially, how long might you wait to give those efforts time to kick in? Tanner Powell: Yes, sure. Thanks, Melissa. When we look at deployment, as we've alluded to quite a bit, we're very lucky to be roughly $3 billion of a sourcing engine for $50 billion and so have a lot of opportunities for deployment in an improving M&A market. Importantly, when we look at deployment, and I think this rhymes with our approach with respect to the proceeds we generated from the sales of the broadly syndicated and high-yield loans, we want to do it in a deliberate manner. Importantly, instead of just getting right back to target leverage from the Merx proceeds immediately, we want to continue to, one, not over-indexed in any one market and then also take the opportunity, which we're afforded by virtue of that really wide origination funnel to be very granular in what we're doing. Importantly, all things being equal, you'd love to get right back up to target leverage. In the case of Merx, we've gotten $97 million back, and we anticipate another $25 million, which was otherwise only earning 2.5% on our balance sheet, so clearly, a nice accretion opportunity. When we go to deploy, it's got to be balanced by -- and even if it does take a little bit of time. We want to err on the side of creating a really, really granular portfolio. Importantly, the other aspect of that is, of course, now as Kenny alluded to, having reset our first CLO down 90 basis points and upsized our all-in secured cost of capital, which is our financing strategy to become more secured heavy in our liability side is roughly 1.75% and putting us in a good position to be able to still generate nice NIM in what is very clearly a tightening spread environment or a tight spread environment. The conclusion is we can do it quickly. We want to be measured, and we want to do it consistent with how we've deployed across a really diverse pool of 244 obligors in our portfolio. Melissa Wedel: Appreciate that detail. You mentioned portfolio leverage as part of your answer. Can you give us an update on how you're thinking about portfolio leverage in the context of this environment given where spreads are right now? Tanner Powell: Yes. Our target for leverage is unchanged, and we would endeavor over the next period of time to get back to the 1.4 level. We do think, as we've said in the past, that the execution through very, very attractive levels of investment grade within the CLO is indicative of our confidence in being able to run at a little bit higher leverage level. We would endeavor to get back to that 1.4 level, again, drawing on the comment to your previous question, again, but doing it in a measured way. Operator: [Operator Instructions] We will take our next question from Paul Johnson with KBW. Paul Johnson: I only have just one. I mean with the recent liability amendments and I guess, addressing kind of -- it looks like you're making room to kind of address the upcoming bond maturity, but kind of getting your ducks in a row, I guess, on the liability side, does that change anything around your interest in potentially repurchasing shares? Tanner Powell: Yes. Thanks, Paul. I think when we look at share repurchases, which are obviously very topical now in light of where BDCs have traded as of recently. We have been an active repurchaser historically. It is a very compelling tool for driving shareholder value, which, of course, needs to be weighed against liquidity and where we stand in terms of leverage and outlook, importantly, of course, weighed against the opportunity to deploy into new loans. That said, we do believe, as we have in the past, that it is a compelling tool. Would note also on share repurchases, Paul. Historically, it has been our view that instead of implementing the 10b5, we would prefer to utilize share repurchases when the windows open and thus, we can have the latest and greatest information, which obviously limits the amount of time you can be repurchasing. Notwithstanding, we do believe it's compelling, and we have a nice room under our current authorization. Operator: [Operator Instructions] We will take our next question from Kenneth Leon with RBC Capital Markets. Kenneth Leon: This may have been already covered, unfortunately, I'm indulging a few calls. What's the latest and any updated thoughts around dividend coverage just given the current rate outlook there? Tanner Powell: Yes, sure. When we look at the dividend, Ken, we were able to meet $0.38, benefiting from a slightly lower incentive fee in the current quarter. Then as we mentioned in the prepared remarks, we do have considerable proceeds from Merx that were yielding on our books a significantly lower yield. That's a nice accretion opportunity for us. Then we've also undertaken an opportunity in the current market environment, which is as those spreads on our assets have come down, we've been able to remark our liabilities. As that plays through our numbers between those dynamics and then in addition to the fact that there is an opportunity to work through our non-accrual positions, those 3 drivers give us an opportunity to mitigate the effects of lower base rates. The Board has made a decision at the current moment to leave the dividend intact. Then as we see those 3 levers that we have playing through and we assess importantly, the actual trajectory of rates versus what's anticipated, we will continue to reevaluate. We also did call out a 100 basis point decline in rates would be about $0.10 of annual NII and thus, taking into account what the actual trajectory of rates is against those 3 levers will enable us to make kind of a more informed decision as we move forward over the coming quarters. Operator: At this time, there are no further questions in queue. I will now turn the meeting back to Tanner Powell for any closing remarks. Tanner Powell: Thank you, operator. Thank you, everyone, for listening to today's call. On behalf of the entire team, we thank you for your time today. Please feel free to reach out to us with any other questions, and have a good day. Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Good afternoon, and welcome to loanDepot's Third Quarter 2025 Earnings Call. [Operator Instructions] I would now like to turn the call over to Gerhard Erdelji, Senior Vice President, Investor Relations. Please go ahead. Gerhard Erdelji: Thank you. Good afternoon, everyone, and thank you for joining our third quarter 2025 earnings call. Before we begin, I would like to remind everyone that this conference call may include forward-looking statements regarding the company's operating and financial performance in future periods. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including, but not limited to, guidance to our pull-through weighted rate lock volume, origination volume, pull-through weighted gain on sale margin, strategies, capabilities and financial performance. These statements are based on the company's current expectations and available information. Actual results for future periods may differ materially from these forward-looking statements due to risks or other factors that are described in the Risk Factors section of our filings with the SEC. Our presentation today contains certain non-GAAP financial measures that we believe provide additional insight into analyzing and benchmarking the performance and value of our business and facilitating company-to-company operating performance comparisons. For more details on these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP measures, please refer to today's earnings release, which is available on our website at investors.loandepot.com. A webcast and a transcript of this call will be posted on our website after the conclusion of this call. On today's call, we have loanDepot's Founder and Chief Executive Officer, Anthony Hsieh; and Chief Financial Officer, David Hayes. They will provide an overview of our quarter as well as our financial and operational results and outlook. We are also joined by Chief Investment Officer, Jeff DerGurahian; and Dominick Marchetti, Chief Digital Officer, to help answer your questions after our prepared remarks. And with that, I'll turn things over to Anthony to get us started. Anthony? Anthony Hsieh: Thank you, Gerhard. I appreciate everyone joining us on the call today. During the 5 months since I returned to loanDepot as CEO, we made significant changes to our business that align with our objective of growing our market share profitably. Before I speak to these achievements, let me first talk about our strategy and positioning in the marketplace today. We continue to believe strongly in our diversified business model with best-in-class origination capabilities across multiple channels that provide access to purchase, refinance and home equity lending opportunities across market cycles. These origination capabilities are complemented by our in-house servicing platform and recapture capabilities, all of which are enhanced by our technology assets and our nationally recognized brand. This diversified strategy enables loanDepot to grow from a de novo start-up in 2010 to at one point become the second largest retail lender in the country. We are confident this strategy will win in today's highly fragmented market and are committed to profitably regaining share. The key is execution, and our team is laser-focused on our plan. Our actions in the third quarter reflect this focus. In the third quarter, we initiated a business transformation that included naming new leadership across all of our origination channels, consumer direct, retail and partnership lending as well as our in-house servicing platform. We also transformed our technology and innovation functions under new leadership. In our consumer direct channel, we realigned our sales leadership team to catalyze new sales strategies under our next-generation lending initiatives. We also announced the formation of a revenue operations and strategy function to be led by our returning Chief Strategy Officer, Rick Calle. On the marketing side, in October, our brand lit up on the national stage during the MLB post season, which through the League Championship Series enjoyed the highest viewership since 2017, including the ALCS and NLCS post-season viewership averaged 4.5 million views per game. Looking beyond the baseball season, loanDepot Park will soon host some of the biggest events in professional sports, including the NHL Winter Classic and the World Baseball Classic, providing our brand with continued strong national exposure. In our retail and partnership channels, we announced new channel presidents, Tom Fiddler and Dan Peña, respectively. Tom is reigniting the energy of our retail channel, emphasizing profitable organic growth and helping ensure our loan officers have access to the best-in-class products, tools and operations in the industry. Dan is doubling down on our commitment to providing value to our homebuilder partners, most recently leading a new relationship with Betenbough Homes. In September, we announced the addition of Adam Saab to lead our servicing business. Our servicing capabilities and portfolio of customers are key parts of our strategy, particularly the flywheel effect of recapturing our existing customers for refinancing or purchase at no additional acquisition cost. In terms of innovation, our Chief Digital Officer, Dom Marchetti, and Chief Innovation Officer, Sean DeJulia, who rejoined the company in August, have already made an impact by introducing AL capabilities to some of our most repeatable and scalable call center functions, both improving performance and driving down cost. Right now, we are pivoting the use of new and emerging technologies across sales, operations and software engineering with an expectation that these innovations will improve the customer experience while driving improved productivity and lower our cost of production. We are just scratching the surface of what this team can do. And last, but certainly not least, in terms of leadership talent, just yesterday, we announced Nikul Patel as our Chief Growth Officer. He will be responsible for growth opportunities, acquisition activities and customer engagement, helping the company capitalize on AL disruption and accelerate our momentum. Nikul is a significant hire that brings a proven track record of success, deep fintech expertise and a strategic mindset, completing the company's leadership transformation. To recap, the third quarter was a period of significant change for our organization, focused on establishing the leadership team that will execute our plan for profitable market share growth. We believe in our strategy and the positioning of our assets in this highly fragmented market. Our focus is on execution, which we look forward to sharing our progress along the way. With that, I will now turn the call over to Dave, who will take us through our financial results in more detail. David? David Hayes: Thanks, Anthony, and good afternoon, everyone. The third quarter reflected the benefits of higher revenue and contained expense growth from positive operating leverage. We reported an adjusted net loss of $3 million in the third quarter compared to an adjusted net loss of $16 million in the second quarter of 2025 due primarily to higher lock volume, higher pull-through weighted gain on sale margin, higher servicing revenue, offset somewhat by higher expenses. During the third quarter, pull-through weighted rate lock volume was $7 billion, which represented a 10% increase from the prior quarter volume of $6.3 billion. Pull-through weighted rate lock volume came in within the guidance we issued last quarter of $5.25 billion to $7.25 billion and contributed to adjusted total revenue of $325 million, which compared to $292 million in the second quarter of 2025. Our pull-through weighted gain on sale margin for the third quarter came in at 339 basis points, within our guidance range of 325 to 350 basis points and compared to 330 basis points in the prior quarter. Our higher gain on sale margin primarily reflected a channel mix shift with a higher contribution from our direct channel and a lower contribution from our joint venture channel compared to the prior quarter. Our loan origination volume was $6.5 billion for the quarter, a decrease of 3% from the prior quarter's volume of $6.7 billion. This was also within the guidance we issued last quarter of between $5 billion and $7 billion. Servicing fee income increased from $108 million in the second quarter of 2025 to $112 million in the third quarter of 2025, and primarily reflects the increase in our unpaid principal balance of our servicing portfolio and interest earned on the seasonal increase in custodial balances. We hedge our servicing portfolio, so we do not record the full impact of the changes in fair value and the results of our operations. We believe this strategy helps protect against volatility in our earnings and liquidity. Our strategy for hedging the servicing portfolio is dynamic, and we adjust our hedge positions in reaction to the changing interest rate environment. Our total expenses for the third quarter of 2025 increased by $19 million or 6% from the prior quarter. The primary drivers of the increase were due to onetime benefits in salary and general and administrative expenses recognized in the prior quarter. Recall that during the second quarter, salaries benefited from approximately $8 million in lower stock-based compensation from equity surrenders and G&A benefited from $5 million insurance recovery of legal fees related to the successful outcome of litigation. Excluding these nonrecurring items, our total expenses would have increased by approximately 2%, demonstrating the positive operating leverage we are striving for as volumes and revenues increase. Looking ahead to the fourth quarter, we expect pull-through weighted lock volume of between $6 billion and $8 billion and origination volume of between $6.5 billion and $8.5 billion. We expect our third quarter pull-through weighted gain on sale margin to be between 300 and 325 basis points. Our guidance reflects market volatility, seasonality in purchase volume, affordability and availability of new and resale homes and the level of mortgage interest rates. Our total expenses are expected to increase in the fourth quarter, primarily driven by higher volume-related expenses from the increase in funded volume as we close the pipeline that started growing through the third quarter. We remain laser-focused on our commitment to profitability and continue to work with a discipline to grow revenue and manage costs while maintaining ample cash and a strong balance sheet. We ended the quarter with $459 million in cash, increasing by $51 million from the second quarter. With our reshaped management team focused on leveraging loanDepot's unique collection of assets, high-quality in-house servicing, scalable origination capabilities and operating leverage, we are positioned to profitably grow volume and market share in the current environment. Assuming a sustained decrease in mortgage rates, we believe we will materially improve our bottom line as the benefits of our scaled branded direct origination platform comes to bear while our investments in technology-enabled efficiency-generating initiatives will provide the foundation for additional momentum into 2026 and beyond. With that, we're ready to turn it back over to the operator for Q&A. Operator? Operator: [Operator Instructions] Your first question comes from the line of Doug Harter with UBS. Douglas Harter: I was hoping you could talk about your outlook for the ability to fund the growth with capital given the upcoming debt maturities and kind of the upfront capital that some growth might take and just how you're thinking about that in the current environment? David Hayes: Doug, David Hayes. Yes, we feel really good about the opportunity to fund additional growth opportunities. We largely have already worked our way through sort of our renewal season for warehouse lines. We've got a great lender group there that have been very supportive of the business. And we also think there's opportunities to upsize as needed. So from the daily funding of the warehouse lines, we're in great shape from our perspective. From a capital structure perspective, we do have an -- the need to take a look at that capital structure in the coming 12 to 18 months, and that's something we're focused on, but nothing that's really going to impact how we operate day-to-day as we sit now. Anthony Hsieh: Yes. Doug, it's Anthony Hsieh. Let me just add to what Dave is saying, and that is once we return to the standard of operations that has led this organization since 2010, we're very confident that we'll be able to grow market share profitably. I just want to remind the audience that we started this company with $70 billion of capital and have grown 38% year-over-year for the first 11 years of our life. So we understand what it takes to grow market share and grow profitably. This market is still highly fragmented. There is a ton of room chasing the leader in the space. So we're very enthusiastic, and we are laser-focused to stay on plan to get back into a standard of operations that allows us to be an industry-leading mortgage bank. At which point the mortgage IQ here and the origination IQ here and then having a fully diversified origination muscle in both builder, joint venture, in-market retail and direct lending, direct-to-consumer model really gives us an edge to scale up, particularly as we all hope that there'll be some growth in volume due to a more favorable interest rate cycle next year. Douglas Harter: And I guess how do you think about the size of the MSR servicing book in that context? Is that something that you would look to grow over time -- regrow over time? Anthony Hsieh: Yes. This is one of our strategic advantages, Doug. The fact that we made an investment to bring servicing in-house. And my mind desires what that was 5 years ago. So we made that investment to bring it in-house because having a direct-to-the-consumer model, our retention recapture is at an industry-leading number. So any time we put a loan in our servicing portfolio, there's an opportunity for us to double dip or have a second bite of the apple without any marketing costs or acquisition cost. So our desire is to continue to mount and increase our MSRs. But at the same time, that is -- that puts pressure on cash. So in order for us to do so, we're going to have to be able to drive down the cost of our production while waiting for the volume of this market to return. Operator: [Operator Instructions] Your next question comes from the line of Eric Hagen with BTIG. Eric Hagen: Maybe following up on that last point because there's all these moving pieces. Have you guys sensitized the portfolio to what the minimum level of originations might be in order to return to profitability? Anthony Hsieh: So let me just make sure I have your question right. Can you rephrase your question again, please? Eric Hagen: Yes. Have you guys sensitized the portfolio or your business to what the minimum level of originations would be in order to return to profitability? Anthony Hsieh: Well, a lot of that has to do with margins, right? Margins are highly dynamic. And in our industry, as soon as that volume returns, then your margins will widen out. So if you look at our Q3 performance, it doesn't take much. So not only does when margins return, when volumes return, we're going to get both the benefit of increased volume and increased margin. So it doesn't take much at all. So we are well positioned for any sort of return. Eric Hagen: Yes. Okay. That's helpful. When the stock got up to $4.50 back in September, did you guys consider any sort of capital raising to help maybe stabilize the capital structure a little bit more? And then if the stock got back up to that level in the future, I mean, are you prepared to put an ATM in place? Or how would you think about potentially raising capital in order to, again, stabilize the capital structure a little bit more? David Hayes: Eric, it's David Hayes. So yes, of course, when the stock traded up, the valuations were at those levels, it was obviously an attractive place to look at raising capital. So we're actively looking at all sorts of ways to shore up the capital structure from potential debt refinances down the road to opportunities for an ATM or follow-on. But those discussions are in flight. So nothing we can share at this point. Anthony Hsieh: Yes. It's Anthony Hsieh. So I mean the best way to combat that is with profitable market share growth. We're just going to get back to our level of comfort and what we've done in this company since 2010. So the market is well positioned for loanDepot to continue to capture market share. And we are obviously always looking at opportunities for capital. But as we continue to reposition our organization for increased originations, I think that will solve a lot of our issues going forward. Operator: [Operator Instructions] There are no further questions at this time. I will turn the call back over to Anthony Hsieh for closing remarks. Anthony Hsieh: Thank you. On behalf of Dave, Jeff, Dom and the rest of our team, I want to thank you for joining us today. The pieces are in place. We're executing a bold strategy to compete at the highest levels by returning to our core strength. Our approach is centered on retaining top talent with exceptional attitudes, deploying leading-edge technology and drive operational efficiency and innovation, delivering superior product and service levels to our customers and leveraging these assets to drive profitable market share growth. This is how we win. The disciplined focus positions us to create sustainable value for our shareholders while accelerating growth in a competitive landscape. So thanks again, everybody, and I appreciate your support. Operator: This concludes today's conference call. You may now disconnect.
Operator: Good day, and welcome to the Kingsway Third Quarter 2025 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. With me on the call are JT Fitzgerald, Chief Executive Officer; and Kent Hansen, Chief Financial Officer. Before we begin, I want to remind everyone that today's conference call may contain forward-looking statements. Forward-looking statements include statements regarding the future, including expected revenue, operating margins, expenses and future business outlook. Actual results of trends could materially differ from those contemplated by those forward-looking statements. For a discussion of such risks and uncertainties, which could cause actual results to differ from those expressed or implied in the forward-looking statements, please see the risk factors detailed in the company's annual report on Form 10-Ks and subsequent Forms 10-Q and Form 8-Ks filed with the Securities and Exchange Commission. Please note also that today's call may include the use of non-GAAP metrics that management utilizes to analyze the company's performance. A reconciliation of such non-GAAP metrics to the most comparable GAAP measures is available in the most recent press release as well as in the company's periodic filings with the SEC. Now I would like to hand the call over to JT Fitzgerald, CEO of Kingsway. JT, please proceed. John Fitzgerald: Thank you, Morgan. Good afternoon, everyone, and welcome to the Kingsway Earnings Call for Q3 2025. Let me start by saying that to our knowledge, Kingsway is the only publicly traded U.S. company employing the Search Fund model to acquire and build great businesses. We own and operate a diversified collection of high-quality services companies that are asset-light, profitable, growing and that generate recurring revenue. Our goal is to compound long-term shareholder value on a per share basis. And we believe our business can scale due to our decentralized management model and our talented team of operator CEOs. We also continue to benefit from significant tax assets that enhance our returns. In short, Kingsway is uniquely positioned to capitalize on the Search Fund model at scale within a tax-efficient public company framework. I'm pleased to report an excellent third quarter for Kingsway. Revenues were up 37% year-over-year, and the company reached an important milestone as our high-growth KSX segment represented the majority of our revenue for the first time. Our KSX segment achieved stellar results with revenue growth of 104% and adjusted EBITDA growth of 90%. Our stable cash-generating Extended Warranty segment also performed well in the quarter, producing top line growth of 2% with robust cash flow and resilient modified cash EBITDA. While these headline numbers are impressive, there is reason to believe our underlying operating performance may have been even better than the reported figures show. First, in the quarter, there were 2 onetime expenses in our KSX segment that were mostly noncash and should not repeat. Late last year, a hospital system filed for bankruptcy that was a client of our SNS nurse staffing business. Based on new information received in the quarter, we fully reserved the remaining $325,000 receivable from that client, which ran through our P&L as a noncash item. In addition, we had roughly $180,000 of mostly noncash expenses recorded in our Kingsway Skilled Trades segment as we converted recent acquisitions from cash accounting to accrual accounting. Had we excluded these expenses from our adjusted EBITDA calculation, KSX adjusted EBITDA would have been roughly $500,000 higher in the quarter or $3.2 million instead of $2.7 million. Second, we made 4 acquisitions during the quarter with 3 completed mid-quarter. We look forward to having a full quarter of benefit from all of these businesses beginning in Q4. Third, we are seeing tangible business and financial momentum in a number of our operating subsidiaries. Roundhouse and Kingsway Skilled Trades have performed well since day 1 and are ahead of our underwriting case. Just in the month of September, Roundhouse achieved EBITDA of roughly $500,000, and the Roundhouse team is actively recruiting for open roles to meet strong customer demand. Image Solutions saw EBITDA grow sequentially by $100,000 from Q1 to Q2 and another $150,000 from Q2 to Q3. DDI also saw a notable improvement in EBITDA from Q2 to Q3. The impressive performance at Roundhouse and Kingsway Skilled Trades and the clear evidence that Image Solutions and DDI may be exiting their J-curves provide confidence that organic growth is likely to play an increasingly key role in driving Kingsway's success going forward. In short, we are seeing real business momentum across our portfolio that sets us up well as we go into Q4 and 2026. Turning now to some of the strategic developments in the quarter. On our last earnings call, we discussed our acquisitions of Roundhouse, Advanced Plumbing and Drain and the HR team. And we're excited to welcome all 3 to the KSX segment and to the Kingsway family. On August 14, we completed our 12th KSX acquisition with the purchase of Southside Plumbing for a purchase price of $5.625 million, plus a potential earn-out of up to $1.125 million for a total maximum purchase price of $6.75 million. At the time of acquisition, Southside Plumbing's unaudited pro forma annual revenue was $4 million and its unaudited pro forma annual adjusted EBITDA was $900,000. Based in Omaha, Nebraska, Southside Plumbing is a leading provider of commercial and residential plumbing services. This transaction, which was sourced and led by Rob Casper, President of Kingsway Skilled Trades, marks the third addition under our Kingsway Skilled Trades platform in 2025. We believe that Southside Plumbing has significant potential to accelerate growth through expanded marketing efforts and new service lines and to increase the proportion of sales that are recurring or reoccurring given the strong momentum in its service and repair operations. The Southside team has earned an exceptional reputation in its market for quality and service, driving consistently robust growth in its core business. We are thrilled to partner with Josh Gruhn, who is remaining with the company as President and maintaining an economic interest, ensuring an alignment of incentives and continuity of leadership. We look forward to supporting Josh and his team and upholding Southside Plumbing's long-standing legacy of excellence and reliability. Subsequent to quarter end, on October 20, we welcomed Colter Hanson as our newest Operator-in-Residence, or OIR. His combination of military leadership, strategic consulting experience and a passion for entrepreneurship make him an exceptional fit for our platform. Colter will conduct his search out of Minneapolis, where he intends to pursue an acquisition in the testing, inspection and certification sector with a focus on the Midwest. Year-to-date, we have now acquired 6 high-quality asset-light services businesses, exceeding our target of 3 to 5 per year. While that range remains an important benchmark, it is worth noting that it serves as a target, not a cap. Our primary objective is to remain disciplined investors, focused on quality opportunities that meet our strict acquisition criteria, and we continue to see a robust pipeline of attractive opportunities. With the addition of Colter, we currently have 3 OIRs actively searching for our next platform acquisitions in addition to our other KSX businesses, which are, in many cases, evaluating potential tuck-ins and inorganic growth opportunities themselves. We are energized by the pace and quality of acquisition activity. Finally, as of quarter end, our trailing 12-month adjusted run rate EBITDA for the businesses we own stands at approximately $20.5 million to $22.5 million. This metric provides a view of how the company would have performed over the last 12 months if Kingsway had owned all of our current businesses for that entire time. GAAP results in contrast only capture the performance of acquired businesses from their respective close dates onward. We believe this metric is particularly relevant during periods of high M&A activity like the past few years and better reflects the run rate earnings power of our current portfolio of businesses. It's important to call out that in calculating this metric, we are not using modified cash EBITDA for our Extended Warranty businesses. As we have discussed in previous earnings calls, many in the Extended Warranty industry, including our management team here at Kingsway, prefer to use a metric called modified cash EBITDA when assessing and valuing Extended Warranty businesses. This is because under GAAP accounting, growing Extended Warranty businesses often see their EBITDA penalized, while shrinking Extended Warranty businesses often see their EBITDA boosted due to timing differences in how revenue and expenses are recognized. Kingsway's Extended Warranty businesses are in growth mode. Cash sales in our Extended Warranty businesses accelerated from up 9.2% year-over-year in Q2 to up 14.2% year-over-year in Q3. However, due to these timing differences, a gap has opened up between adjusted EBITDA and modified cash EBITDA, which widened further in the third quarter. This can be seen in the company's financial statements where deferred service fees from Extended Warranty are up $2.8 million year-over-year. In addition, hundreds of thousands of dollars of commission expenses associated with issuing new warranty contracts have been booked upfront. Over time, these timing differences even out and adjusted EBITDA and modified cash EBITDA converged. We expect the same to occur for Kingsway. Our management team at Kingsway assesses the company's earnings power by looking at adjusted EBITDA for our KSX segment and modified cash EBITDA for our Extended Warranty segment. Using this framework, Kingsway today has the highest earnings power from its operations during my tenure as CEO. It's a remarkable place to be, though in many ways, it feels like we're just getting started in our journey. To conclude, this was an excellent quarter for Kingsway. We grew overall revenue by 37%. Our KSX segment roughly doubled its revenue and adjusted EBITDA relative to last year, and our Extended Warranty segment once again performed well with resilient cash flow and accelerating cash sales. We remain focused on disciplined execution, scaling our KSX portfolio and supporting our operator CEOs to deliver sustainable long-term growth. With that, I'll turn the call over to Kent for a closer look at our third quarter financial performance. Kent, over to you. Kent Hansen: Thank you, JT, and good afternoon, everyone. For the third quarter, consolidated revenue was $37.2 million, an increase of 37% compared to $27.1 million in the prior year. Adjusted consolidated EBITDA was $2.1 million for the 3 months ended September 30, 2025, compared to $3 million in the prior quarter. In our KSX segment, revenue increased by 104% to $19 million in Q3, up from $9.3 million in the same quarter a year ago. Adjusted EBITDA for KSX increased 90% to $2.7 million compared to $1.4 million in the year ago quarter. Moving to our Extended Warranty segment. Revenue increased by 2% to $18.2 million in the quarter, up from $17.8 million in the prior year period. Adjusted EBITDA for Extended Warranty was $800,000 in the current quarter compared to $2.1 million a year ago. As JT discussed earlier, however, the Extended Warranty segment's modified cash EBITDA, a key industry metric that more closely reflects the cash flow dynamics of warranty businesses, was resilient as our Extended Warranty businesses continue to perform well. The improvement in cash sales in our Extended Warranty segment reinforces our confidence that GAAP earnings will recover over time as deferred revenue from our recent cash sales was recognized. Overall, the Extended Warranty segment remains cash generative and well positioned for continued success. Turning now to the balance sheet and the capital structure. As of September 30, 2025, the company had $9.3 million in cash and cash equivalents, up from $5.5 million at year-end 2024. Total debt was $70.7 million at quarter end compared to $57.5 million as of December 30, 2024. Our September 30 debt is comprised of $55.8 million in bank loans, $1 million in notes payable and $13.1 million in subordinated debt. Net debt or debt minus cash at quarter end was $61.4 million, up from $52 million at year-end 2024. The increase in net debt is primarily related to additional borrowings related to the recent acquisitions of Roundhouse and Southside Plumbing. I'll now turn the call over to JT for a few final thoughts before we open the line for questions. JT? John Fitzgerald: Thanks, Kent. To close, I'd like to express my thanks and appreciation to Kingsway's employees, partners and shareholders. We have an amazing team, a wonderful set of operating businesses and both KSX and Extended Warranty are performing well. This really was an exceptional quarter. The business and financial momentum is tangible, and we are positioned to finish the year strong. I'll now turn the call back over to the operator to open the line for questions. Morgan? Operator: [Operator Instructions] Your first question comes from Mitch Weiman with Sumner Financial. Mitchell Weiman: JT, congrats on a great quarter. So a question for you. With the current environment with all the uncertainty regarding Medicare and reimbursements and everything, how is that going to affect secure nursing and digital diagnostics? Because you hear a lot of anecdotal evidence that hospitals are going to be having some issues going forward here. John Fitzgerald: Yes, I think we've seen that. Certainly at SNS, we mentioned that customer bankruptcy at the end of last year. I think some of that has to do with the pressure that they're feeling from kind of reimbursement pressure. And so I think it's kind of looking at each one of those businesses independently, if you start with SNS. I think a real focus on the types of hospitals where we're placing nurses, right? So I think that the most sensitive would obviously be where the predominant number of your patients are Medicare, Medicaid. And I think that, that's even more acute in some of the more rural hospital settings. I think we feel pretty good about our hospital mix at SNS in terms of both the payer mix and sort of geography and the type of profile of the people that are coming in and their balance sheets and budgets. And a lot of that stuff is publicly available. I think that these hospitals have to file their financials. And so Charles, when he's thinking about new hospital relationships or existing relationships is sort of acutely aware of that and checking the financial positions of his hospital customers. So certainly something to monitor. But I think, yes, I think hospitals are under quite a bit of pressure. With DDI, I think these are outpatient rehab and long-term acute care hospitals. I think a little bit less exposure to Medicare and Medicaid and certainly something after the experience at SNS, something that Peter is very focused on as well in terms of customer selection and credit extension, right? So it's something we'll continue to keep an eye on. Operator: [Operator Instructions] Your next question comes from Scott Miller with Greenhaven Road Capital. Scott Miller: JT, congratulations on all the progress. Basically, it seems like the key to this business is buying at reasonable multiples, doing it repeatedly and then driving organic growth. And the first 2 pieces, you've been buying at reasonable multiples. You've I think done 7 deals this year. So the repetition seems plausible. The organic growth, you called it out, I think, in the press release. Can you talk a little bit about kind of the type of organic growth you're seeing, what you think is possible, how it might differ across businesses? John Fitzgerald: Yes, great question. Certainly, organic growth is a key component of the flywheel, right, that you grow -- the cash flows of the businesses you own organically and then redeploy that capital to do more acquisitions, either at that business or in some of our activities. And I think that you touched on. I would add that your ability to attract talent is a key part of the equation as well. But... Scott Miller: And by the way your latest guy is -- I mean, whatever, yes. John Fitzgerald: Yes. And so organic growth is a key part of the thesis, and it goes into our underwriting as we go into these things, trying to buy businesses in industries where there is long-term secular trends and wind at your back. And we also recognize that you're buying small businesses that need to be professionalized. They need to come into a public company context and filing and all of those things. And so for the first many quarters, there is a significant investment in operating expense and those kinds of things to bring the talent, the systems, the technology into those companies to build a platform to support organic growth, right? A lot of times, these things -- these businesses are operating on the margin and aren't scalable effectively because they don't have the robust systems and processes and people in place to allow that to happen without making mistakes, right? And so we go in, and this is that whole J-curve concept, right, that we bring in an inexperienced operator, they have to get up their own experience curve, and we invest in these businesses, bring in new people, invest in the companies and their accounting and their HR and their technology systems, in sales and marketing, et cetera, depending on the business to prepare them to grow. And so as we mentioned with DDI and Image Solutions, like they've been on that journey and now are starting to emerge and accelerate growth. And I think that we would expect to see that pattern play out in every instance. I think in terms of individual company sort of potential, I think it depends on the industry and kind of underlying industry dynamics. But I would say that we would -- we ought to be targeting high single-digit organic growth potential at all of the businesses we acquire. Scott Miller: Got it. That's very helpful. And can you talk a little bit about Image Solutions and what's driving the progress there? And yes. John Fitzgerald: Yes, sure. I mean, obviously, Image Solutions had a very steep early J-curve because in addition to all of the things that I talked about, they had to weather a pretty significant hurricane and the disruption to the business across all of Western North Carolina and things. But Davide has done an awesome job. He got in there, got his hands around that, built real trust and support with the team, has added to the team, brought in some exceptional people to really professionalize their IT MSP platform, new technology, et cetera, and is now investing in sales leadership to drive new account, recurring revenue accounts in the IT MSP and get that business growing. And so we kind of got through business disruption, onboarded some great people, built an operating plan, assigned accountability to the various people to execute that plan and you're starting to see the benefits of that coming through the business now. And so he's sort of exiting his J-curve and in growth mode. Scott Miller: And how big could a business like that be? Are there any like -- what's the ceiling on something like that? John Fitzgerald: Sorry, you broke up kind of halfway through. I got that... Scott Miller: How big could a business like that be? Like what's the ceiling on a business like Image Solutions? John Fitzgerald: Well, look, I mean, I think that one of the things in each one of these businesses, each also has the potential to be their own grower inorganically as well, right? And so IT MSP, very large industry in North America, growing at high single-digit secular growth rate, but also very fragmented. And so as Davide has gotten through his J-curve, he's been delevering and building cash. And so I think in addition to just organic growth that there will be a potential there to do additional capital allocation things like inorganic growth and buying tuck-ins and really scaling that business. And so I think there's a big opportunity, but we want to do it in a very equity capital-efficient way. Scott Miller: Got it. I think my last question is actually in vertical market software. Can you talk a little bit about the acquisition you guys made there? It seemed like it was an interesting setup in terms of -- there aren't a lot of players in the industry. I think you just took one out. I think you bought well. Can you talk a little bit about like kind of how that deal came to be and what you think it looks like going forward? John Fitzgerald: Yes. So the original acquisition, so it's run by a young guy named Drew, and Drew acquired the business from the widow of the founder, built a relationship with her and we were able to buy a great business with a long history and super loyal customers, mission-critical software kind of operating system of record for their customers and was able to structure a deal that was attractive for us and attractive for the sellers as well, continuity and continued legacy, et cetera. And then more recently, he did a small tuck-in acquisition of a small competitor in Australia, which gave him access to that region and some customers. And so Drew is pulling on all of the levers, right? He's improving the application layer and the technology. He has rolled out a couple of significant upgrades to the core software product and is investing in sales and marketing for new customer acquisition to continue to grow ARR. So he's done a really nice job growing that business and ARR and did one small tuck-in acquisition, and he's really focused on sort of the organic execution, but also becoming a solid operator in vertical market software with like a longer-term view that, that could be a platform to do other interesting niche VMS acquisitions. Operator: Your next question is a follow-up from Mitch Weiman with Sumner Financial. Mitchell Weiman: Two more quick questions. On the OIRs, with the current infrastructure, what is the ideal number in your mind to have on board searching? John Fitzgerald: Yes. I mean, I think we're trying to balance being super selective with respect to the attributes and background of the people, right? And I think we can be. Our ability to support them to run an effective search and our capital constraints to deploy capital, right, and pacing. And so I would suspect that with this kind of talent flywheel that we're building here, as we continue to demonstrate success, we will have access to even more and higher quality OIRs over time. And concurrently, we're building those systems to support more and the cash flow generation of the businesses hopefully will grow and we can deploy even more capital. So right now, we'd like to say 3 to 5 at any given time, but I would expect that we could scale that over time as well. Mitchell Weiman: Okay. And then one last question. On the skilled trades platform, we've come out of the gates pretty quick here and made 3 acquisitions. How do we look at that going forward? Is it going to be -- it's safe to assume a couple a year? Am I low in assuming that? John Fitzgerald: I don't want to give any guidance on like -- how many acquisitions we're going to do. But I would say, Mitch, I'm not trying to be cute or dodge the question, but I would say in Rob, we have like high attribute OIR qualities, coupled with like deep industry experience. And so we're comfortable really leaning in and doing acquisitions at maybe a faster pace than we would with an Operator-turned President who's getting up the experience curve. And so I think the pacing is just a little faster there. I think kind of all of those things coupled with what we see as like a really interesting and exciting opportunity set. Yes, I think we'll go a little faster than we otherwise would. Operator: This concludes the audio question-and-answer portion. I'd like to turn the call over to James for further questions. James Carbonara: Thank you, operator, for the e-mailed questions that came in. We'll try to move past ones that may have already been asked. Seeing one that says, can you please discuss how Roundhouse and the plumbing businesses are doing in the first quarter or 2 since acquiring them? John Fitzgerald: Yes. I mean, I think I spoke to that a little bit in the prepared remarks, but it's early days, but both of them are doing great, right? I think they're both operating at or above our underwriting plan. We've got really talented young guys in there running the business, Roundhouse Miles plus the management team that was there. So we're really excited about the combination of Miles plus Lee, who stayed and rolled equity in the business and that -- their ability to continue to truck right along without a J-curve because Miles has the support of Lee, who's been an owner and an operator in that business for a long time. And then obviously, with Kingsway Skilled Trades, I just was talking about that with Mitch. We've got a very experienced operator. We think we bought great businesses. He's got his playbook and benchmarks, and he gets right to work. There's no kind of learning curve there. So yes, so early days, but certainly at or above our original underwriting plan, which makes us happy. James Carbonara: Great. And the next one is cash sales are up a lot in Extended Warranty. Can you speak to what is leading to this growth? John Fitzgerald: Yes. I mean sort of 3 different businesses and maybe just kind of take them in order. I'll start with Trinity. I would say that Trinity is up modestly, but has higher growth within its ESA segment, which is the warranty segment. So that's encouraging. Peter has invested in a new sales team on the national account side, the vendor managed service side. And he had some large customers that are going through -- one of their largest customers is Leslie's Pools. I think many of you probably know what's going on there. So he's been working hard to replace that. And so to still have modest growth in light of some of that sort of customer turnover is great. And he's got a great team, and they're out executing and adding new customers and new accounts and the underlying warranty business is starting to really truck along as well. So doing great there. The next is IWS. That's our credit union-focused business. IWS is doing great. It's a really good business. Six consecutive quarters of growth in cash sales. I think that's a combination of both units and pricing. And the unit -- the kind of the unit driver is they've been adding new credit union partners ticking over every month. They're adding new credit union partners and then they onboard them and get more opportunities to sell extended warranty at those credit unions when their credit unions are doing direct loans. So just really nicely chugging along. Great team, been at that business for a long time, have a lot of deep industry expertise and knowledge. And like I said, 6 consecutive quarters of growth in cash sales after coming off of the pandemic high in 2022, bottomed out probably kind of mid-'23 and then been chugging along ever since. And then finally, PWI and Geminus, which has seen some significant growth in the third quarter. As many may recall, we transitioned management in -- at the end of the first quarter and brought in Robbie Humble, who is -- he is a search accelerator-type President, but also has extensive auto warranty experience. So kind of a 2 for sort of a Rob Casper, but for auto warranty. And that business had been declining even in Q1 and almost immediately with Robbie's energy, enthusiasm, he brought some great new people to the team that he had relationships prior to coming over to Kingsway. And that business inflected quickly in Q1 and that cash sales growth actually accelerated pretty significantly in Q2 and Q3. So yes, I think 3 different stories there to get all the way back to the original question, but you add all of those up, and we're seeing really nice sales growth. James Carbonara: Excellent. And the next one is Kingsway has an interesting structure. Why do you think search works in a public vehicle? And what are the advantages versus traditional search? John Fitzgerald: Okay. Kind of a 2-parter here. Why does search work in a public vehicle? I think that there are a lot of -- maybe not a lot, but there are certainly several public companies that you would describe as serial or programmatic acquirers. I think that our model shares a lot of the DNA of other programmatic acquirers, a focus on buying small businesses at reasonable valuations and those businesses have sort of enduring profitability. I think that marrying that model with search is super compelling. One, it sort of gives you access to a very long runway to redeploy capital using this model. I think some of that's demographic. I think -- but a lot of it is this exceptional talent that can go and source opportunities, right, really taking advantage of our OIRs as sourcing engines themselves. And then like I was talking about with Scott, many of these searcher-led acquisitions themselves become platforms to do their own organic growth. So flywheel within a flywheel type concept. So I think it's very compelling. I think it has -- programmatic acquisitions have worked. It shares a lot of that sort of common DNA with the added benefit of this talent flywheel concept that I was mentioning when I'm talking to Scott. So I absolutely think it works. Second part -- with the advantages of -- versus traditional search, I think advantage -- differentiations, I think, than traditional search where searcher raises capital from LPs. I think one is -- and sort of breaking it into the different phases of search. So you've got the sourcing, the diligence and closing and then the operating. I think the first would be just sort of trust and track record and that builds like significant credibility for an OIR when they're talking to business owners who might be sellers. I think it builds tremendous credibility with lender partners during the deal phase to get attractive debt terms and capital. And I think that track record and trust builds a lot of credibility in our ability to attract new OIRs to the platform as well. So talent selection. And then we combine that with like really great sourcing tools. That's not unique to being in a public company. It's more like incubated. But in traditional search, you kind of have to start from scratch and build all of this stuff from the ground up. And we have great sourcing engine and a tech stack to support that. We've got due diligence and lending relationships and lawyers and all of those things that help in the closing and so speed the time to search and close. And then obviously, we're very proud of how we support our operators once they become the President of the business, the operating scaffolding, if you will, of the Kingsway Business System plus our advisory board. And then this expanding peer network of presidents who are all going through these -- the same thing together and sharing best practices across the group. And then finally, I think the permanence of the capital is super unique vis-a-vis traditional search. There's no kind of forced exit for fund life or liquidity motivations. We can own these businesses and compound capital for a very long time. And that's like a unique distinction, I think. James Carbonara: Excellent. Next one is you mentioned Roundhouse and Kingsway Skilled Trades have performed well since day 1 and are ahead of budget. What do you attribute that to? And is there a key learning that can be applied to the M&A process going forward? John Fitzgerald: Yes, sure. There's learnings and everything. I usually take most of -- maybe my learnings from failure. But it's good to learn from the good ones, too. First of all, I'd say it's early days, right? But I think that kind of the unique differentiator of these businesses relative to the other businesses that we've acquired is the operator doesn't have to get up the experience curve. These are -- Rob, we've talked about that, like he's done this before. And so he can get in and start moving day 1. There's not this 100-day learning campaign and a little bit of trial and error and a few mistakes, like he can get in and start making an impact immediately. And I think that same concept holds at Roundhouse, where Lee stayed on. He was the VP of Ops and President, and he's staying on to help and support Miles. So Miles is just truly additive there. And so I think that, that kind of not having to go through the experienced J-curve is a big part of it. I think those are somewhat unique. I don't think that, that's a requirement for ETA or search to work. In fact, it's kind of rare, but it certainly helps. And to the extent that we can partner with OIRs who have deep industry experience and a thesis around buying a business in that industry, we'll definitely do that. And I think that it will -- as we think about industries that we're interested in, we're also looking at that as we're talking to potential OIRs to try to match experience with industries we're interested in. James Carbonara: Excellent. Next one is if Image Solutions and DDI are exiting their J-curves, how do you manage that positive scenario, let them continue to perform, look for tuck-in M&A, increase the investment for organic expansion? John Fitzgerald: Yes. I mean they're 2 totally different businesses, right? I talked about Image Solutions with Scott. I think that as Image Solutions has gone through its J-curve and is exiting, Davide, the company has been delevering and building cash. They're in a fragmented market. I would expect that a big part of that story in the coming quarters will be the opportunity for tuck-in M&A, just a function of the dynamics of the industry. DDI is different. I think that J-curve was around like this high-growth business that needed to be stabilized and professionalized in order to then go invest in sales and marketing to grow organically. It's kind of a one of one in their industry and a large addressable market that has really barely been penetrated. So no other -- it's not fragmented. It's kind of a one-on-one and there's a huge organic growth opportunity and that J-curve was just around stabilize, professionalize and prepare for scale. James Carbonara: Great. And I see just 2 more. The first one is, can you speak to the testing, inspection and certification sector that Colter will be pursuing? Any market sizing and dynamics that you can share? And in success, do you envision that being a platform or non-platform-based strategy? John Fitzgerald: Yes. So TIC, large and fragmented with a long tail, probably growing mid- to high single digits as an industry, lots of little niches in subsectors. And that growth supported by really nice secular trends, aging infrastructure, regulation. And then there's an element of criticality. These are mission-critical, nondiscretionary testing inspection certification requirements that are often required by law or insurance. And it's also like a small thing into a big thing, right? Low cost of the service relative to high consequence of failure of the asset. And so that is all a very nice setup. And I think certainly, the industry has the hallmarks for this -- for anything that we do there to be a platform. But ultimately, it would depend on the target we identify and the niche that it's in. I think we go into these things being open to the idea that they become platforms, but you need the operator to find the right opportunity, build the operating muscle and then delever a bit so that we can be equity capital efficient and then explore that. But yes, I think we would be open to it. James Carbonara: Excellent. And the last one is related, and you may have just answered it, is how do you view KSX's search strategy moving ahead to pursue more aggressively platform opportunities or non-platform opportunities? Or do you even view them all as platforms? John Fitzgerald: Yes. I mean, I think with the exception of KST, which we went in with a very specific thesis around platform and pacing of acquisitions, we have always looked first at the industry dynamics and the business quality, right, to buy a great business, but also with the view that they could become platforms to do inorganic growth. And so if you look at what we've done at vertical market software, we've done a tuck-in acquisition there and potential to do more. IT MSP, as we've talked about with Image Solutions, potential to be a platform. And then Timi, obviously, with outsourced accounting and HR, has done a couple of tuck-in acquisitions and then there's an opportunity there. So coming all the way back, like first underwrite to like great industry dynamics and a great business with the optionality of it becoming a platform over time. James Carbonara: Excellent. I don't see any more questions. JT, I'll throw it back to you. John Fitzgerald: All right, James. Thank you. Well, thanks, everyone. I really appreciate it. Great third quarter, and I appreciate you being with us here this afternoon and this evening. That's it for me. Operator: This concludes today's call. Thank you for attending. You may now disconnect, and have a wonderful rest of your day.
Operator: Greetings, and welcome to the Willdan Group Third Quarter Fiscal Year 2025 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Al Kaschalk. Please go ahead, Al. Al Kaschalk: Thank you, Kevin. Good afternoon, everyone, and welcome to Willdan Group's Third Quarter 2025 Earnings Call. Joining our call today are: Mike Bieber, President and Chief Executive Officer; and Kim Early, Executive Vice President and Chief Financial Officer. Our conference call remarks will include both GAAP and non-GAAP financial results. Reconciliations between GAAP and non-GAAP measures can be found in today's press release and in the presentation slides, all of which are available on our website. Please note that year-over-year commentary or variances on revenue, adjusted EBITDA and adjusted EPS discussed during our prepared remarks are on an actual basis. We will make forward-looking statements about our performance. These statements are based on how we see things today. While we may elect to update these forward-looking statements at some point in the future, we do not undertake any obligation to do so. As described in our SEC filings, actual results may differ materially due to risks and uncertainties. With that, I hand the call over to Mike, who will begin on Slide 2. Michael Bieber: Thanks, Al, and good afternoon. The third quarter of 2025 marks another milestone in Willdan's growth. In the third quarter, we continued to execute very well, delivering results that exceeded the Street expectations and our own forecasts across all key metrics. Against a strong Q3 last year, net revenue grew by 26% year-over-year, driven by an outstanding 20% organic growth rate. 2025 will mark the fourth consecutive year that we've produced double-digit organic growth. Margins also continued to expand in Q3, concurrently with significant investments for our future, with electric load growth expected to increase over the next decade, driven by data centers and electrification. Willdan's unique capabilities and execution position us well to sustain long-term growth. As a result, we are again raising our full year financial targets, which Kim will present a little later. Turning to Slide 3. Willdan delivers a broad range of energy and infrastructure solutions to utilities, commercial customers and state and local governments. On the left side of the slide, the Energy segment makes up about 85% of our revenue, while our Engineering and Consulting work makes up about 15%. On the right side, demand remains healthy across all customer groups. The 15% of work for commercial customers is mostly centered around electricity usage at data centers, where AI-driven load growth is creating significant demand. Willdan is helping technology clients navigate energy constraints, optimize infrastructure and meet aggressive power requirements. Our Utility business makes up about 41% of revenue and continues to perform well. Most of our utility contracts are 3 to 5 years in duration, funded by rate payer fees and continue to provide a strong foundation of recurring revenue. The size of our long-term utility programs is generally increasing across the country as energy efficiency can be viewed as a power resource. Work for state and local governments makes up 44% of revenue and continues to grow organically at a double-digit pace. Demand from our government customers remains solid, and the outlook is positive. Most of our government work is funded through user fees and municipal bonds, which have remained healthy. On Slide 4. Our upfront policy, forecasting and data analytics work informs our strategy and helps us navigate market change. In our upfront work, we see particular demand for studies on the impacts of electricity load growth, and that work is growing at about 50% organically year-over-year. Those market changes led us to the APG acquisition that provides Power Engineering solutions to data center clients, hyperscalers and other commercial customers. I'm pleased to report that APG is collaborating very effectively with the rest of Willdan and has already won record backlog that we expect will propel more than 50% growth by APG in 2026. In other parts of Engineering, we saw strong execution and growth with both commercial and municipal customers. In Program Management, we performed above our plan on utility programs and building energy programs for cities. Demonstrating this model in an example, we are hired by technology hyperscalers to identify the optimal sites for data centers. We then provide clients, consulting, engineering and project management to supply the electricity that powers those centers. The new generation of data centers usually requires high-voltage power, often hundreds of megawatts with a dedicated utility scale substation and utility interconnect. After a data center is built, Willdan provides energy optimization inside the data center as we have done for many years. Each step with the customer informs the next step. This model extends across all of our service lines. On Slide 5. We have a strong pipeline of opportunities that we are converting into contracts, and the pipeline remains solid heading into 2026. Here are just a few examples we converted since our last conference call. For Alameda County, California, we won a 2-year $97 million project to design and implement energy and infrastructure upgrades at county infrastructure throughout San Francisco's East Bay. For a confidential client, we won 2 substations for solar storage projects worth a combined $21.7 million in Oregon and Georgia. For a confidential client in Texas, we won a $14 million substation project for a solar energy storage system and a $7.8 million greenfield substation project. In Utah, we won a $3.6 million project to expand an existing substation. And I'll note that projects 2 through 5 on the table were all led by our recent APG acquisition. They're doing very well. On Slide 6. In early October, Willdan's E3 subsidiary published new research on electricity load growth. This research forecasts between 0.7 terawatt hours and 1.2 terawatt hours of U.S. electricity load growth over the next 10 years. The drivers are broad-based and extend well beyond the data center load growth now often talked about to include new industrial demand, electric vehicles and the electrification of building systems. The colors on the bar chart depict the relative proportions of load growth drivers. This load growth is transforming electricity markets from a one static landscape into a dynamic long-term growth market. On Slide 7. Looking globally, this map demonstrates that current data center electricity load expressed in gigawatts is by far the greatest in the United States right here. The map also puts into perspective just how large Northern Virginia data center electricity load is compared to anywhere else in the world. We've previously talked about our landmark study for Virginia on the impacts of this load, which has led to several more similar studies for data center developers and utilities. Willdan is in the right market at the right time and is building the right set of capabilities to help clients navigate electricity load growth. Utilities are also investing to enhance reliability and flexibility as more distributed resources come online, requiring significant modernization of aging infrastructure. Together, these forces are driving one of the largest infrastructure investment cycles in decades, and Willdan is well positioned to help utilities and communities navigate this transformation. I'm very pleased with the way our team is performing. Now Kim, over to you. Creighton Early: Thanks, Mike, and good afternoon, everyone. Our Q3 results reflect another quarter of significant year-over-year improvement, continuing a trend that began in early 2022. Turning to Slide 8. For the third quarter of 2025, contract revenue increased 15% year-over-year to $182 million, while net revenue grew 26% to $95 million. The recent acquisitions brought 6% of that growth, yielding an organic growth rate of 20% for the quarter. Growth was broad-based across both segments, led by continued strength in utility programs and double-digit gains in planning and construction management as well as continuing municipal demand, geographic expansion and new contract wins. Gross profit for the quarter grew 30% to $67.1 million, up from $51.6 million last year, driven by the revenue growth and solid project execution. Altogether, higher revenues, favorable gross margin and effective cost control drove a 91% increase in pretax income to a record $14.3 million for the quarter. We reported a 4% income tax rate for the quarter compared to 2% for the same period last year. So net income thus rose to $13.7 million, up 87% from the $7.3 million we reported in Q3 of 2024. Adjusted EBITDA reached another new quarterly record of $23.1 million or an adjusted EBITDA margin of 24% of net revenue and up 53% from what was an excellent performance in the quarter a year ago. GAAP diluted earnings per share increased 77% to $0.90 per share while adjusted earnings per share was up 66% to $1.21 for the quarter compared to $0.73 a year ago. Broad-based growth and excellent execution drove a record quarter. Now to Slide 9. For the 9 months of 2025, contract revenue was up 20% year-over-year to $508 million, while net revenue increased 27% to $275 million. $14 million of the net revenue growth came from acquisitions over the past year, yielding organic net revenue growth of 21% year-to-date. Gross profit increased 31% to $193 million, up from $148 million last year. Pretax income grew 77% to $29.7 million. The discrete tax benefits from stock option exercises and 179D energy efficiency deductions allowed for a $4.2 million tax benefit year-to-date and thus a net income of $33.9 million or $2.26 per diluted share through the 9 months. Adjusted EBITDA rose 52% from $39.1 million in 2024 to $59.5 million or an adjusted EBITDA margin of 21.6% of net revenue, and adjusted earnings per share nearly doubled to $3.34 per share. All are record numbers for a 9-month period. We are on track to exceed our goal of 20% adjusted EBITDA margin in 2025. Slide 10 outlines our balance sheet and cash flow metrics. We ended the quarter with only $16 million in net debt after deploying $33.4 million cash for the recent acquisitions. This brings our trailing 12-month leverage ratio down to 0.2x adjusted EBITDA compared to 0.3x at year-end 2024. Free cash flow for the first 9 months was $34 million, consistent with the $33 million generated for the same period in 2024. On a trailing 12-month basis, our free cash flow was $65 million or an impressive $4.34 per share. We had all $100 million available to draw under our revolving credit facility and an available but undrawn $50 million delayed draw term loan plus $33 million in cash on the balance sheet, giving us $183 million in total available liquidity at quarter end. Our healthy balance sheet, expanded credit facility and consistent operating performance provide us with the financial flexibility to pursue targeted acquisitions and expand capabilities in strategic markets, all while maintaining prudent leverage. Turning to Slide 11. This slide reflects the 20-plus-percent compound annual growth in revenue we've been able to achieve over the past 15 quarters and the even more enviable growth in the adjusted EBITDA over the same period. The lines reflect the ebbs and flows of our diversified portfolio of projects across sequential quarters, but the clear trend across the nearly 4-year period is up and to the right. This record of sustained improvements has been enabled by the strong execution by our management team in a growing market. We've been able to grow and diversify our service offerings to satisfy the increasing demand from utilities, governments and commercial clients to adapt to the new environment. On Slide 12, building on this multiyear record of performance improvements, we're raising our financial targets for 2025. Net revenue for the full year 2025 is now expected to be between $360 million and $365 million, and adjusted EBITDA is now expected in the range of $77 million to $78 million. Adjusted diluted earnings per share is projected to be between $4.10 and $4.20 per share based on an estimated tax benefit of 10% and 15.2 million shares outstanding. These targets do not include the impact of any future acquisitions. Wrapping up on Slide 13. We're proud of the results we've been able to deliver, and we're excited about the potential for the future as we continue to win new contracts and expand existing ones. Organic net revenue growth of 20% for the third quarter, the successful completion of recent acquisitions and excellent free cash flow conversion attest to the record-setting performance for the quarter and the year-to-date. Our performance and confidence in the future support raising our 2025 financial targets. With low leverage and an experienced and motivated management team, we are well positioned in dynamic and growing markets, and we have an active pipeline of strategic acquisition opportunities. Operator, we're now ready to take questions. Operator: [Operator Instructions] Our first question is coming from Craig Irwin from ROTH Capital Partners. Craig Irwin: So I should start by saying congratulations, another really just amazing quarter. Mike, in the last few quarters, you've been growing close to double the targeted growth rate that you've had for the last several years. I wanted to ask if you could maybe talk a little bit about what's lifting this customer demand. How do you plan for the capacity to serve these opportunities? And the profitability is clearly there. Do you get more picky or more choosy about how you service these customers? Or do you see this as something that can maybe be an opportunity for you to continue over the next number of quarters? Michael Bieber: That's a big question, Craig. Thanks. Well, first, the market is good. You know that. Electricity prices are rising. Demand for electricity is increasing. So the market is good. But there's something else going on. Our own performance within that marketplace has improved pretty substantially over the last couple of years, as you mentioned. We're more effective at cross-selling, especially with new acquisitions that we bring in than we ever have been before, and that has led to tens of millions of dollars of new revenue that we had never seen before in our cross-selling evolution, I'll put it. Culturally, we've become much better at that. And APG and the list of their wins sort of epitomizes that. They've been excellent collaborators. We've got a great pipeline. And they're hoping to accelerate and catalyze our growth into 2026. You saw that on the new wins. So that's what's going on. I can't provide you a detailed forecast for 2026. We won't do that until March of this year, but we have been -- we normally guided the Street towards high single-digit organic growth rates. And you're right, we've been about double that now for a little while. We're going to do our best to make it as reasonably high as we can. You mentioned becoming selective. And in certain instances, we have become selective with those projects. We can afford to do so at this point, especially in our commercial work for data centers, where we're choosing to work with certain mid-tier developers that we have very close relationships with, we're working effectively with and it's a good business environment. It's not competitive. It's directly negotiated work, and we are becoming more selective in that area. Craig Irwin: Understood. And I'm guessing that you might be referring to APG, which bridges into my next question. So the work that APG is executing the work they're winning -- the data center work is some of the most exciting projects that Willdan is completing right now. Can you maybe talk about the ability for other areas of Willdan to supplement the capabilities at APG and the execution capacity there? And is this something that is improving employee utilization and just general resource utilization for the company? Michael Bieber: Yes, sure, Craig. Well, first, our upfront consulting work that we do, particularly for the hyperscalers is feeding into our information that we know where the new data centers are going into. That's useful. And on the back end of that, the work that we had been doing to make energy efficient or make data centers more energy efficient, we've been doing that work for a long time is useful in our knowledge of working around that environment. So all of those groups are collaborating pretty well. We're also even getting our civil engineering group involved in certain projects. So that's sort of what the landscape looks like right now. Craig Irwin: Okay. And then last question, if I may. Other companies in the service sector are talking about difficulty sourcing employees. Can you talk about the Willdan workforce? How flexible is the workforce that you've assembled over the last several years? Are you able to develop people up to fill these needs, these opportunities? And do you see this as an impediment to your growth? Michael Bieber: We don't see it as an impediment to growth. Actually, we see ourselves as the employer of choice. We have not had major impediments in hiring employees. And I just saw today that our employee count for the first time has reached over 1,800. We're hiring. And I think we're doing a very effective job of hiring and retaining key employees. I'll note that we [ have ] had 0 turnover in our senior management team over the last more than 2 years. We haven't lost a single person. So no, it's not a major impediment. Look at our website if you're interested. Craig Irwin: Well, congrats again on another really solid quarter. Operator: [Operator Instructions] Our next question is coming from Tim Moore from Clear Street. Timothy Michael Moore: Mike and Kim, congratulations on the continued execution and optimizing your funnel to really cross-sell and benefit from this low-power secular theme. So my first question is really more about risk management and balancing that. It's a good problem to have to be growing organically as fast as you have in the last few quarters and seemingly for next year. So can you maybe just give us a little color on -- we know you hired a lot more consultants this year. We know the employee count is up a lot. You're getting inbound inquiries also through your project managers. But just wondering how you kind of think about accepting larger projects and program management and just making sure that you're staffed without maybe having to pay overtime or on-site costs or actual travel and hotels for maybe a project that if you're jumping around. Just -- can you give us some color on that to really keep the margin up there? Michael Bieber: Sure. Great question. We don't often get it from investors, but it's what we spend most of our time on day in and day out, Kim and I, on this risk management idea. You're right that you need to look -- when you're growing organically at 20-plus-percent, you need to look at the leading indicators to make sure that you're delivering effectively for those clients. And we look at everything from quality to health and safety to other factors, and we review them every week with every operating unit. The leading indicators look good, and we're not seeing issues that might say that we're taking on too much risk or growing too quickly. But we are growing quickly, and we're keeping our eye on that and keeping our eyes wide open. That's how I would describe it. Kim, do you have anything to add? Creighton Early: Yes. The only thing I would add to that, Tim, is that these larger scale projects take a while to develop. And it's not necessarily a big surprise to us when we finally get awarded a project. It's not like we're waiting for some envelope to be opened at the end of a process, and we don't know what's going to happen there. We are working on these -- developing these projects for quite a long period of time, and we can see them coming and we can get a pretty good feel from these clients that we may be in position to win. So we're able to look ahead and plan effectively as well as to what those risks are and how can we get those staffed and how can we make sure we're prepared to execute when the project finally does get awarded. Michael Bieber: Yes. Kim is right and points out correctly that a lot of these start out as T&M consulting projects. We're developing the project for months in advance. We're doing all of the engineering, and we may, with the client decide to, convert it to a fixed price or fixed unit price contract later on, but we're mitigating our risks significantly by working closely with the client upfront in planning. Timothy Michael Moore: That's terrific color. I'd realize that a big renewal like the Los Angeles Water and Power Department won, it's pretty well planned out. Just curious about the new first-time ones, and that's really helpful. My only other question is, as you cross-sell APG more that's early innings, E3 software, civil engineering cross-selling, I'm just wondering, does your team -- and maybe Kim you can speak to this, do you prefer smaller bolt-on acquisitions? Or can you really tackle something that's maybe $100 million-plus target and integrate it well and still be able to cross-sell it well without maybe taking some staff power off of the cross-selling team that's in the rest of the business as you kind of really look at commercial electrical engineering or maybe interconnection? Creighton Early: Yes. I think we've got a pretty effective systems and communication devices, I guess, that we use for the cross-selling activity. And so it's pretty efficient for us as we bring in these bolt-on acquisitions to establish that kind of cross collaboration. But we're definitely prepared to be able to handle $100 million kind of size group. Just culturally, we fit that way. Our tools are kind of designed to make sure that we'll be able to cross-collaborate without significant barriers on those projects. So we definitely keep our eye open for those kinds of opportunities, and we plan for that kind of potential acquisition as well. And whenever you make acquisitions of those size, the leadership on both sides of the fence, our side and the company that's being acquired, the management teams are usually pretty anxious to get to know each other and to find out what the others are doing and how can we work together on that. And that's probably the most exciting piece to most of our team. So we're prepared to do that for sure. Operator: Our next question today is coming from Richard Eisenberg, a private investor. Richard Eisenberg: Yes. Congratulations on a great quarter. On the last call, you talked about a potential $100 million contract with the State of New York. Is that still in negotiation phase? Do you expect to close that? Michael Bieber: We have several large contracts in New York that we're pursuing. And yes, we remain very optimistic that we're going to be successful on one, if not several of those opportunities. And I think they're going to help drive 2026 growth. Operator: Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments. Michael Bieber: Well, thank you all for attending, and we look forward to speaking with you soon. Thank you. Operator: Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.
Operator: Good day, everyone, and welcome to the Eventbrite, Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] It is now my pleasure to hand the floor over to your host, Finance Manager, Paul Bach. Sir, the floor is yours. Paul Bach: Good afternoon, and welcome to Eventbrite's Third Quarter 2025 Earnings Call. With us today are Julia Hartz, our Co-Founder and Chief Executive Officer; and Anand Gandhi, our Chief Financial Officer. As a reminder, this conference call is being recorded and will be available for replay on Eventbrite's Investor Relations website at investor.eventbrite.com. Please also refer to our Investor Relations website to find our press release announcing our financial results, which was released prior to the call. Before we get started, I would like to remind you that during today's call, we'll be making forward-looking statements regarding future events and financial performance. We caution that such statements reflect our best judgment as of today, November 6, based on the factors that are currently known to us and that actual future events or results could differ materially due to several factors, many of which are beyond our control. For a more detailed discussion of the risks and uncertainties affecting our future results, we refer you to the section titled Forward-Looking Statements in our press release and our filings with the SEC. We undertake no obligation to update any forward-looking statements made during the call to reflect events or circumstances after today or to reflect new information or the occurrence of unanticipated events, except as required by law. During this call, we'll present adjusted EBITDA and adjusted EBITDA margin, which are non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles and have limitations as an analytical tool. You should not consider them in isolation or as a substitute for analysis of our results of operations as reported under GAAP. A reconciliation to the most directly comparable GAAP financial measure is available in our investor presentation, which is available on our Investor Relations website. We encourage you to read our investor presentation, which contains important information about GAAP and non-GAAP results. And with that, I'll now turn the call over to Julia. Julia Hartz: Thanks, Paul, and thank you all for joining today's call. In Q3, we delivered revenue in line with our outlook. Net revenue was $71.7 million, and we saw a solid sequential improvement in paid tickets, down 3% year-over-year versus down 7% last quarter. Eventbrite Ads revenue grew 38% year-over-year and paid events grew while paid creators were essentially flat, reflecting meaningful stabilization after several quarters of volatility. We also executed with discipline. The adjusted EBITDA margin was 11.7%, well above our 7% guidance as structural cost actions flowed through while we continue to invest in line with our growth plan. The cost actions we took this year are structural, and we're allocating a portion of that benefit to areas where Eventbrite has clear advantages, including creator acquisition, event discovery, and key verticals to set up both revenue and margin expansion in 2026. As we enter the fourth quarter, our outlook reflects the steady operational progress we've made this year, balanced against a few near-term factors that modestly temper top line growth. The ongoing mix shift towards smaller creators continues to serve as a modest revenue headwind. Even so, engagement, paid creator acquisition and paid event activity are strengthening, underscoring the improving health of our marketplace. We remain focused on disciplined execution and expect this foundation to support renewed revenue growth and margin expansion as we move into 2026. Turning back to this year. We entered 2025 with a clear objective to stabilize paid ticket volumes and creator activity. Our third quarter results show the progress we've made. We've strengthened reliability, reporting, and foundational systems, and we've made real gains in creator retention by improving user experience, support, and success tools. At the same time, we've launched a refreshed consumer app and brand, advanced trust and safety through stronger authentication and fraud protection, and reignited our sales engine with a larger category-focused team. Encouragingly, the work we've done over the course of this year has resulted in a nearly 4% increase in new paid creator acquisition in Q3, while meaningfully improving creator retention over the same time frame. Together, these efforts form a strong foundation that positions Eventbrite to capture even more of the opportunity ahead as we move into next year. To build on the momentum we are generating in the second half, we're shifting from rebuilding to laying the groundwork for growth. On the consumer side, we're making Eventbrite the go-to destination to discover live experiences by improving discovery and search and by connecting more consumers with the creators they love. For creators, we're simplifying our event creation tools, so it's easier to publish and promote events. We believe these initiatives reinforce our position at the center of the experience economy and set us up for success in the year ahead by delivering for creators, offering experiences consumers love to attend and continuing to bring people together through live events. Eventbrite sits at the heart of the thriving experience economy where generations of event goers are choosing connection, creativity, and community. With 92 million average monthly users in Q3, consumers and creators across 180 countries and nearly 5 million events each year. Eventbrite is the platform that democratizes live experiences at scale. As our communities continue to grow, we will continue to invest in our platform to ensure that Eventbrite remains the go-to global marketplace, empowering millions of creators to transform their passions into real-world experiences from wellness and culinary gatherings to music and cultural events, fueling a movement that celebrates belonging and discovery. To reaccelerate growth in the year ahead, we plan to build upon the foundation we've laid this year by executing targeted strategic initiatives designed to empower creators, engage consumers, and expand our market. For years, we've been recognized as a powerful and innovative platform for creators, and we're continuing to raise that bar by investing in our platform. Our work focuses on helping creators sell more tickets, operate more efficiently and grow their businesses by improving the conversion of their listings and leveraging our deep insights to inform how they market their events on our and our partners' platforms. In 2026, our product road map is designed to drive creator success by increasing visibility, enhancing conversion, and achieving better outcomes across the Eventbrite marketplace. For example, we'll integrate AI-powered recommendations throughout the event creation journey, leveraging our unique insights into consumer purchase behavior to help creators craft more impactful listings that drive higher ticket sales. We're also applying AI to our rich data set to deliver deeper insights and expand analytics that improve marketing performance and ROI for our creators. Expanding our offerings for our larger and most prolific creators will be a top priority for 2026, and the reason is simple. Today, 13% of paid creators drive nearly 60% of paid tickets and about half of gross ticket fees. Importantly, these creators have the potential to meaningfully improve tickets per creator in the year ahead. To strengthen our product market fit for this segment, we're investing in a more cohesive, modern Eventbrite experience, simplifying product flows, unifying design and navigation and improving mobile ticket access. We're enhancing support through AI-powered automation and reinforcing security with advanced authentication, and we're continuing to enhance core features like waitlist, reserve seating, and timed entry to help large creators operate seamlessly at scale. These initiatives will help high-volume creators sell out faster, expand audiences, and deliver exceptional attendee experiences, further positioning Eventbrite as the trusted platform for their biggest and most ambitious events. And as these creators grow, they power the marketplace flywheel, fueling growth in key categories like music, immersive events, food and drink and festivals. That leads directly to how we plan to engage consumers in the year ahead. Our consumer initiatives are designed to leverage our marketplace flywheel and drive consumer lifetime value by efficiently attracting new attendees and increasing repeat ticket purchases. To grow our consumer audience, we're refining our performance marketing strategy to focus on smarter targeting, stronger campaign optimization and higher quality acquisition. Early results this quarter are encouraging, showing that we can achieve both efficiency and growth. Consumer paid orders driven by performance marketing grew 28% quarter-over-quarter while optimizing for our acquisition cost to keep a positive ROI. Together, these efforts will expand our reach, deepen loyalty and increase the lifetime value of consumers on our platform. To drive repeat purchases, we're taking the consumer experience to the next level. Building on the discovery features we introduced this year, we'll deliver more personalized recommendations and make finding and engaging with relevant events and creators faster and easier. We're also working to optimize our unique event inventory for Agentic tools, paving the way for smarter, more dynamic ways for consumers to connect with the events they love. As our strategy continues to gain momentum, we're identifying and pursuing opportunities to further expand our market share. Our ambition is to achieve this by expanding the power of Eventbrite globally. In the year ahead, we plan to strengthen our foothold in markets with strong creator and consumer demand while increasing localization and monetization in our existing regions through the addition of more payment options and expanded creator tools. We will also continue to expand the reach of our successful Eventbrite ads offering to more countries while enhancing its effectiveness and return on investment for creators. As we advance our strategy, we'll continue to execute with focus and discipline. In the year ahead, every dollar we spend will be intentional, aimed at strengthening leverage, efficiency and our long-term financial foundation. Our significantly improved structural economics will better enable us to drive lasting value for our creators, consumers, and shareholders as we capitalize on the momentum ahead. We're entering an exciting year with building momentum and a solid foundation. Our core business continues to demonstrate resilience and opportunity, and we're executing with focus in the areas where Eventbrite has clear advantages. The work we've done this year positions us to scale our strength and accelerate growth, supported by a clear road map for 2026 that will drive both expansion and efficiency. I would like to thank our Brightlings and shareholders for your continued commitment and confidence. Together, we're shaping the future of live experiences, and I look forward to sharing more as we build on this momentum in the year ahead. And now I'll turn it over to Anand to review our financials. Anand Gandhi: Thanks, Julia. In the third quarter, we delivered top line results in line with our outlook and once again exceeded expectations on the bottom line. We delivered meaningful trending improvements in paid tickets, paid creators, and paid events. At the same time, we made solid progress on our key strategic initiatives, which position us well for growth in the year ahead. I'll walk you through our Q3 results and then discuss our outlook. Note that all comparisons refer to year-over-year changes unless otherwise indicated. In Q3, we delivered net revenue of $71.7 million, down 8% as expected, driven by lower ticketing revenue as well as the continued impact from the elimination of organizer fees. These were partially offset by a 38% increase in revenue from Eventbrite ads. Paid ticket volume totaled $19.1 million, down 3%, reflecting a 400 basis points improvement from the 7% decline in Q2. This represents our fourth consecutive quarter of year-over-year trending improvement. We also saw meaningful inflection points this quarter with new paid creator acquisition and total paid events both returning to year-over-year growth. Gross margin was 67.9%, down 60 basis points year-over-year as expected due to the elimination of high-margin organizer fees. Sequentially, this was a 40 basis points improvement from Q2, driven by the growth of high-margin Eventbrite ads. On the cost side, operating expenses were $49.6 million, down 20% year-over-year. Note that the prior year included $5.4 million of reduction in force costs. Excluding this, on a non-GAAP basis, operating expenses were down 13%. Notably, Q3 operating expenses were our lowest in 4 years with double-digit reductions across the board. Product development expense was down 26% sales, marketing and support down 17%, and G&A down 16%. Overall stock-based compensation was down 42% year-over-year due to disciplined management of equity awards. As Julia noted, these expense reductions have improved the structural economics for the business going forward and also serve as a source to fund growth investments for the future. Q3 net income was $6.4 million, up from a net loss of $3.8 million last year. Note that Q3 benefited from a gain of $5.8 million on the early paydown of $125 million of our 2026 converts. We delivered adjusted EBITDA of $8.4 million, up 58% year-over-year, representing an 11.7% margin. The current and prior year quarters included adjustments to annual incentive compensation. This provided a $1.5 million benefit this quarter and a $3.7 million benefit in Q3 last year. Now turning to the balance sheet. We ended the quarter with $511 million of cash, cash equivalents and restricted cash. Available liquidity was $196 million compared to $248 million at the end of Q2. $60 million related to our term loan will be held in escrow until we retire our remaining converts outstanding. The quarter-over-quarter decrease in available liquidity reflects the repurchase of $125 million of our 2026 converts, reducing our total debt to $175 million, down from $241 million at the end of Q2. We plan to retire the remaining $30 million of our 2025 converts this December and the remaining $88 million of our 2026 converts by next September, at which point, our only debt outstanding will be the $60 million term loan maturing in 2029. Now turning to our financial outlook. We have delivered meaningful trending improvements over the past 4 consecutive quarters. And in Q3, as Julia noted, we made strong progress in acquiring new creators and improving creator retention. These clearly demonstrate the operational momentum we're building, and we expect the revenue and retention of these new cohorts to continue to build over the coming year. At the same time, as we noted in Q2, average tickets sold per creator has been slower to recover. Hosts of smaller events and lower volume creators are still growing faster than larger ones, and the resulting mix shift continues to serve as a modest headwind relative to our expectations. Accordingly, we're slightly adjusting our guidance for the remainder of 2025. For Q4, we expect to deliver net revenue between $71.5 million and $74.5 million and adjusted EBITDA margin of 8% to 9%. Based on this Q4 guidance, for fiscal year 2025, we anticipate net revenue between $290 million and $293 million and adjusted EBITDA margin of 8% to 9%. We now expect to return to monthly year-over-year paid ticket volume growth within the first few months of 2026. And by Q2 of 2026, we project to return to quarterly year-over-year growth for paid tickets, ticketing revenue, and total net revenue. With 4 consecutive quarters of solid recovery and strong execution across the business, we're well-positioned to drive durable revenue growth and margin expansion in 2026 going forward. And now the operator will open it up for questions. Operator: [Operator Instructions] Your first question is coming from Justin Patterson from KeyBanc. Justin Patterson: You've made some really nice progress this year with stabilizing creators and improving the cost structure. As you look ahead, how are you thinking about the right level of investment to build upon that and drive that return to growth you just outlined in 2026? Anand Gandhi: Thanks, Justin. I appreciate the question. As we're looking at the year, we're -- as you know, we're focused on bringing down OpEx in a very disciplined and consistent way. And part of that is really to focus on getting the most return on where we choose to allocate those dollars. So the goal isn't purely just to continue to bring down OpEx by itself. It's also to reallocate some of those funds in areas that we find can drive growth. So part of this is through experimentation, like Julia mentioned, performance marketing, we've seen some strength and others are tied to product features in different areas that we have a lot of faith that meet what consumers, creators are looking for. So overall, it's a balance, and we do believe that we can continue to keep operating expenses in line and potentially continue to reduce them over time while still having enough to fund areas for growth. So it's a balance. It's something that we're focused on closely, but we'll continue to always be focused on that balance, but we feel pretty good about right now where we're positioned. Justin Patterson: Got it. That's helpful. And if I could squeeze in one more, just a product question for Julia. You outlined some really compelling initiatives for 2026. If you just step back and consider a lot of the changes we've seen around GenAI, how do you think that influences just the pace of product innovation you're doing for both creators and consumers? Julia Hartz: Great question. Thank you so much. When we think about the investments for 2026, they're really in four different areas. The first is premium tools for larger creators. We think that the market is shifting, and there's an opening for us in 2026 in particular, to go upmarket and actually address the needs of these creators that are either not being well served by technology platforms today or aren't able to access the transparency and independence that a tool in a marketplace like Eventbrite can offer them. So it's a pretty hefty undertaking for us to think about how we can help these creators expand their market share, but we're really excited to do that. So things like, first and foremost, helping them run their businesses more efficiently, increasing the functionality of the ticketing tools that we offer today, but also introducing some really interesting tools for them to be able to make smarter choices like dynamic pricing, for instance. The second thing is that we're thinking about how we can help use AI to drive creator success. So where they're spending their marketing dollars, how can we help them lean in even more to create greater success from any type of marketing budget. Today, our largest creators that are using our ads product are seeing an over 200% ROAS through Eventbrite ads. And we want to lean in and make them even better and smarter and more effective. So we're looking at marketing performance. We're looking at listing quality and conversion, all areas ripe for innovation through our product and the use of AI. The third thing that we're looking at is consumer engagement and personalization. So advancing discovery of the great inventory that's in our marketplace and making sure that we're putting the right event in front of the right person at the right time and really balancing both sides of that marketplace. So we're helping not only consumers find the exact right event and suggesting those events to them, but also helping our creators increase the conversion of their events through content coaching and really helping in a way to create a better event listing in a very interactive way as they're building out their events. And then the fourth area is really around global and monetization expansion. We know that Eventbrite is used in 180 countries every year. We want to lean into the globalization opportunity once again and really help elevate the experience within markets that we're really not focused on today. And we know that AI has given us this wonderful breadth of tools to use to efficiently be able to expand our offering, but then also be able to go deeper in really important markets and make sure we're meeting our creators where they are to help them expand their businesses and be able to create more events. So I think we're able to make these investments because our cost structure is stronger and more efficient than it's ever been. I'm sure you've noted that our operating expense is the lowest it's been in 4 years, and that's structural. That's really focused on helping us be the strongest, most sustainable business, but also be able to innovate in both product and service and operate with discipline and leverage. Operator: Your next question is coming from Cameron Mansson-Perrone from Morgan Stanley. Cameron Mansson-Perrone: Julia, there's been obviously a lot of discussion this week about the ticketing industry, the last couple of months around the ticketing industry following the FTC lawsuit, which obviously focuses more on secondary ticketing, so a little bit of a different area of the industry. But I'd still appreciate your thoughts on kind of where you see Eventbrite fitting into this conversation around the ticketing ecosystem and whether some of these potential changes have any knock-on effects for your business that investors should be aware of. And then as part of that, just wondering kind of how you approach Eventbrite's philosophy around balancing monetization of the platform and also being transparent and consumer-friendly. Julia Hartz: Absolutely. Thanks so much for the question. At Eventbrite, our founding principle is to democratize the ticketing industry. And over the last 20 years, we have shown that we can be the most broad-reaching accessible, transparent, and fair ticketing partner that is out there, just full stop. So when we look at the market across the board, we think that the consumer deserves fair prices. They deserve transparency, and we work with our creators to make sure that we're helping them bring to market unique live experiences that are priced fairly and transparently. So we have been a part of different movements to drive transparency in ticketing fees and have advocated for fair pricing practices across the board in the primary ticketing space. In terms of the future, I think that our customers, especially on the creator side, they deserve to have fairness and choice. They deserve to have flexibility and transparency. And they deserve to have the best technology that will help them build their businesses over time. And that's really what we're focused on. So as the industry evolves and the market becomes more fair in competition, we look forward to really being able to go into bigger venues where we've previously played and helping those business owners grow their audiences, fill their rooms and be able to continue expanding their businesses through adjacent revenue opportunities. And regardless of outcomes of different lawsuits, our strategy doesn't change. We are going to invest in premium creator tools. We're going to be continuing to push transparent high conversion checkout for our creators and consumers. And competitive openings is really for us an opportunity to be able to better serve customers that we know will thrive on Eventbrite. Cameron Mansson-Perrone: I appreciate the thoughts. And one housekeeping one for Anand, if I can. On the sequential gross margin improvement this quarter, you called out the ads benefit. I was wondering if you could provide some color around kind of sequentially thinking through the end of the year and whether that momentum can continue and just whether we should think that the guidance reflects the opposite. So trying to marry the unit economic improvement with the adjusted EBITDA guidance for next quarter. Anand Gandhi: Thanks, Cameron. Good to chat again. So just to clarify, for the -- it sounds like two pieces, the gross margin piece and then the OpEx piece. Is that right? So growth... Cameron Mansson-Perrone: No, just -- yes, I mean if you're -- I don't know if 40 bps is like if there's other stuff going on there. And so maybe extrapolating that sequential momentum is not what we should do. But if you were going to get another 40 bps of gross margin, it just trying to make sense of that with the downtick in adjusted EBITDA margins. Anand Gandhi: Got you. Got you. I think that's a good question. So we do expect to have, I guess, modest continued improvement sequentially on gross margin, particularly just as you call out, as the ads revenue increasingly ticks up and drives a greater share of our overall revenue, that is higher margin. So I would say that we do expect that trend to continue. We're not guiding exactly on how many basis points that is. But yes, it's going to improve proportionately as ad revenue proportionately contributes more and more of our total revenue. Operator: [Operator Instructions] There are no further questions in the queue. And thank you, everyone. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.
Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the EcoSynthetix 2025 Third Quarter Results Conference Call. [Operator Instructions] Listeners are reminded that portions of today's discussion may contain forward-looking statements that reflect current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. For more information on EcoSynthetix risks and uncertainties related to these forward-looking statements, please refer to the company's annual information form dated February 18, 2025, which is posted on SEDAR. This morning's call is being recorded on Friday, November 7, 2025, at 8:00 a.m. Eastern Time. I would now like to turn the call over to Mr. Jeff MacDonald, Chief Executive Officer of EcoSynthetix. Please go ahead, sir. Jeff MacDonald: Thank you. Good morning, and thank you all for joining us. Yesterday afternoon, we reported our third quarter results. We're seeing good momentum across our core end markets. Sales were up 11% year-over-year. But more important in my view, is the strong demand we're seeing in our key end markets, specifically pulp, tissue, wood composites and personal care. In our view, it has led to higher quality revenue and an evolution in the composition of our book of business. We've largely diversified away from legacy graphic paper into these new end markets that can have a meaningful impact on our growth. Each of pulp, tissue and wood composites drove significantly stronger volumes in Q3 than the same period last year, well beyond 11%. We're making good progress with the account that is a leading global pulp manufacturer. They continue to invest resources to support the product that uses our SurfLock strength aids. They're also increasing the promotion of their product with end customers, driving awareness of its benefits through publications and social media as well as direct promotion and support around the world by their team members. Key players in their market are trying the new product. The broader market dynamics also support its adoption. The market price differential between more expensive softwood fiber remains well above $200 a ton globally compared to the lower-cost hardwood fiber. That is driving the use of hardwood pulp to be a top priority for any manufacturer that uses pulp in their products, and that's exactly where we help. Softwood fiber has greater strength than hardwood fiber or recycled fiber. Our strength aids enable the production of pulp with superior mechanical properties or the production of paperboard and tissue with lower-cost fibers while retaining the required strength. At the beginning of the year, demand for our strength aids from the global pulp manufacturer was approximately $1 million on an annual basis on their first line. They've now increased their run rate to more than $3 million a year on that line. They operate multiple lines, and we're on one today. We believe the market potential for Surflock could exceed $50 million at this customer. And while they are a leading global player, they have less than a 20% share of the global pulp market today. We believe the pulp end market is set to be a major component of our growth. On the tissue front, we won 2 new tissue accounts during the quarter. These wins were a result of our work with a European distributor, the R&M Group. R&M is one of several distributors that we're working with as part of our go-to-market strategy in the tissue and packaging end markets. R&M is a great example of the type of high-quality partners we've identified. They have a long track record of success in this industry and others of growing new chemistries and driving adoption based on the product's benefits to manufacturers and the strong support they provide. They're an impressive organization, and we believe there's more runway with them while we work to replicate this success with others as well. One of the key measures of our success to date in the tissue end market is our ability to drive repeat wins. Every one of our wins this year in tissue is a repeat win with an existing customer or a new customer that has already moved to a second line. Every account that we're commercial with in tissue now has multiple lines using our strength aids. They've proven it once and repeated it at additional mills. In the case of one smaller regional tissue manufacturer, we are now commercial across all of their mills as a result of another distributor relationship we work with in Europe. That repeatability with accounts that have really dug in and invested to drive it across their organization is a telling sign of how well our strength aids are working in the tissue end market. In the paperboard and specialty end market, we are running ongoing trials and volume expansion programs with existing accounts. Paperboard is a more complex trial program, which takes longer than tissue. But once commercial, the lines use more product than a tissue line, so the opportunity per line is larger. Just before turning to wood composites, one dynamic we're seeing play out in the broader pulp and paper market is consolidation. There have been a number of interesting and significant transactions this year. Large integrations can be complex and distracting, but we believe some of these consolidations could be a benefit to us in the longer term with the potential for broader adoption of our technology with players that already use our strength aids or binders, which once again speaks to the repeatability theme. In wood composites, progress continues at our key strategic account that is an international retailer, which is backward integrated into wood panel production. We experienced increased demand from them, both during Q3 as well as on a year-to-date basis compared to the prior periods. They've driven usage of our binder across more SKUs at the first mill. Part of the reason for that growth has been our continued push for innovation and improving the value of our product even over the course of this year. We've reached a stage now where we know we're very competitive on a cost basis, even cost advantaged over the incumbent solution at certain points this year. They're conducting regular runs of our product at a second mill now, but they're starting from a very small base. We believe their intent is to grow their usage at the second mill step by step as they build success and confidence just as they did at the first mill. I recently participated in a group panel discussion at an industry conference where our key customer was also present. They continue to act as thought leaders in the sector with a clear commitment to drive down their carbon footprint through the use of bio-based glues in panel production. They remain as committed as ever to reaching their 2030 targets, and that will require the other players in the market that produce wood panels for them to pursue bio-based solutions that are cost competitive and deliver the required performance. And we're a proven enabler of that change based on our work with the international retailer. Moving over to Personal Care. I often refer to this end market as a warrant on our growth. I still believe that today, but I'm becoming even more confident in it. We're seeing an uptick in demand from our marketing and development partner, Dow. It's still off a small base relative to our other end markets, but it's encouraging. Dow is building momentum with some of the smaller brands at top 10 players in the space. It's a positive sign that Dow's all-natural formulations are being proven in new niche products, but with big players gaining exposure to them. Lastly, a quick update on our work here in Burlington at the center of innovation. The productivity improvement that we've seen since internalizing our North American production base here at the COI has been great. Having the full team and production under one roof has increased the cycle time on both the commercial production and the research and development side. We believe the footprint we have today with a tolling operation in Europe, serving Europe and Asia and the COI serving the Americas provides greater flexibility and optionality for both sourcing raw materials and serving our accounts most effectively. And with that, I'll turn it over to Rob to review the financials. Rob? Robert Haire: Thanks, Jeff, and good morning. Net sales were $5.8 million in Q3 ' 25, up 11% or $600,000 compared to the same period in 2024. The improvement was primarily due to higher volumes of $500,000 or 10%. As Jeff mentioned, we're seeing higher volumes at our strategic accounts in tissue, pulp and wood composites. Net of manufacturing depreciation, gross profit as a percentage of sales was 34.2% in the quarter compared to 36.8% in the same period in 2024. The change was primarily due to higher manufacturing costs due to product mix. Gross profit was $1.7 million in the quarter, unchanged from the same period last year. SG&A expenses were $1.8 million in the quarter compared to $1.5 million in the same period in 2024. The change is primarily due to higher salary and benefit costs as well as higher repairs and maintenance costs during this quarter. R&D expenses were $390,000 in the quarter compared to $560,000 in the same period in 2024. The change is primarily due to higher product scale-up costs, which we incurred in the prior year as well as lower asset depreciation. R&D expense as a percentage of sales was 7% in the quarter. Our R&D efforts continue to focus on further enhancing the value of our existing products and expanding our addressable opportunities. Adjusted EBITDA was $200,000 in the quarter compared to $360,000 in the same period in 2024. The change was primarily due to higher operating expenses, partially offset by higher gross profit when adjusted for noncash items. We've reported positive adjusted EBITDA in 4 of the last 5 quarters, and we are adjusted EBITDA positive on the last 12-month basis. While we still expect some lumpiness in our results from period to period, we are very close to consistently reporting positive EBITDA on a go-forward basis. As of September 30, 2025, we had $30.4 million of cash and term deposits compared to $32.2 million as of December 31, 2024, representing a change of $1.8 million. During the first 9 months of 2025, we invested $1 million to purchase and retire 346,000 shares. We also increased our working capital investment, primarily due to $1.2 million higher inventory compared to December 31, 2024. We have demonstrated our ability to responsibly manage our cash reserves through multiple cycles while continuing to invest in our long-term growth strategy. With that, I'll turn it back to Jeff for closing comments. Jeff MacDonald: Thanks, Rob. Through the course of 2025, we're seeing significant demand growth in our key end markets, pulp, tissue, wood composites and personal care. Our ability to successfully diversify into new strategic markets through innovation and strong customer support has set the stage for sustainable and profitable longer-term growth. The composition of our revenue base is of a higher quality today. Our improving gross margin profile demonstrates that. It's indicative of the shift in our book of business to more strategic and higher-value applications of our technology. The demand outlook from our key accounts in pulp and wood composites underpins our confidence. Each account continues to publicly highlight targets that align directly with increased usage of our strength aids and binders. In pulp, the strategic account has identified a multimillion metric ton opportunity for the increased use of hardwood fiber to offset pricing and capacity constraints of softwood fiber. In wood composites, it's the strategic accounts 2030 plan to reduce its carbon footprint through the use of bio-based glues. Successfully supporting the demand profile for these 2 accounts and their supply chains position us for a significant step-up in growth over time. These opportunities are augmented by our momentum in the tissue end market and personal care. We're engaged with the right players in our core end markets to deliver for shareholders. And with that, I'll ask the operator to open up the call to your questions. Thank you. Operator: [Operator Instructions] Your first question comes from Brian McIntyre. Unknown Analyst: Let's start with Surflock on the pulp side. Last quarter, you had a second purchase order from a major pulp client. And then you said in the release that they're adding additional resources. Can you maybe just define what that means and what feedback you're getting with respect to the client reception to their product? Jeff MacDonald: Yes, sure. So we're seeing an increased number of people simply in major centers around the world that are educating customers on their ability to use more hardwood fiber. And those teams are actually online helping customers to implement their enhanced hardwood fiber solution. That team has expanded over the course of this year. And I guess in parallel to that and part of how we see this is they're putting out some really interesting publications in some of the technical journals in the market on the use of their hardwood fiber and lots of social media hives and explanations of how well this is going from their side. So that's what gives us some confidence that their end marketing efforts are going well. We're seeing and hearing about them more and more out in the market in the broader pulp use space. Unknown Analyst: Jeff, have you seen any additional players take note and start to accelerate their interest in the product? And on that front, are you seeing -- what can you say with respect to the cadence of trials or service providers? Is that increasing in terms of the number and volumes? Jeff MacDonald: Yes. So I guess we should probably separate those. So on the pulp side, our first customer has been at this now for a while, and it is a major undertaking when you consider the scope of a pulp mill. Absolutely, others in that same space have taken interest and have, let's say, an early start in that work. Our initial customer clearly has a lead. In the end markets of tissue and paperboard, we have continued to expand through the course of this year, the distributor relationships that have proven to work really well. We did a press release together with the R&M Group of their success. And I really consider them to be a model of the kind of partners we need to be looking for in their capabilities, their approach to business, their -- including their financial strength, their ability to support their customers. So we're really happy with that one, and that becomes a model for replicating it elsewhere. We're actually -- we're seeing distributors where we had to search them out at first. Some that even we may have had some initial discussions with have recently come back and said, "Hey, that thing you told us about, we're hearing more about it. Can we reopen those discussions. So I think that's going really well, and it shows that the market is really taking notice of what we're doing. Unknown Analyst: Okay. So in your press release, you say that pulp could be a major component of long-term growth. I'm just wondering, to the extent you have visibility, how should we think about maybe a cadence in terms of volume growing here? Jeff MacDonald: Yes. I guess that's probably the most challenging part of where we are right now. We're excited. It's showing up in our numbers. Our customer is clearly investing a lot. I'll put it in the tens of millions of dollars in their efforts to push this forward. But I'd also say, like for them as such a large entity and this being such a major undertaking, I think it's still pretty early for them. So our visibility is not great today. What we're relying on is the ramp-up, the consistent ramp-up in the need for our product to say that it's going well and maybe what we might need to be prepared for 6 months out. The good news is that our operations, both of them are fully capable of delivering this product, and we've added some suppliers within our supply chain to make sure that, that doesn't become a constraint. We're actually also making a pretty significant investment right now in Europe in putting some more tools in place within the operation to be able to flexibly use more raw materials and have raw materials on hand that we need to support this. So we're ready to go. The press release we put out was -- the whole thing was in pretty short term. So things were going really well, and they placed a quick call to us requiring more product in fairly short order. And what we did was demonstrate to them that we can unlock both operations simultaneously and get them what they needed in the rapid time frame they had asked for it. So that gave them confidence. It also showed ourselves just what we can do to make these operations work to serve a big opportunity. Unknown Analyst: In your prepared remarks, Jeff, you mentioned -- I thought it was very interesting, you mentioned vertical integration of pulp producers into the tissue market. Wouldn't it be a natural evolution for potential pulp producers moving into tissue to utilize your product as well? Jeff MacDonald: I don't think I quite put it in that detail, but there is some interesting consolidation going on. And there are players that in history, in their history as organizations are backward integrated to pulp. And certainly, their understanding of hardwood pulp flowing all the way through to tissue has helped with our efforts in one customer in particular, at both ends of the business where we're working with them in tissue and also working with them back upstream in the pulp end of their business. There have been some other -- I think what you're probably referring to some interesting ventures between pulp manufacturers and tissue manufacturers where, in my view, if it's been proven in tissue for one of the players, it seems to be a no-brainer to then roll out those results at some of the new operations you have under your fold. So I think stuff like that can be an accelerator for us. Integrations can sometimes be sort of messy and distract people, but the savings we offer, I think, can play right into like the synergies that these companies are reporting in coming together under new consolidated entities. So we see it as a net positive for sure. Unknown Analyst: Okay. Just I want to go back to one of the questions I asked just in terms of the range of trials ongoing, your progress with service providers. Can you give us maybe a ballpark in terms of the percentage increase or number of trials that are ongoing just to get a range of how much momentum you have? Jeff MacDonald: I can't give you an exact percentage, no. But like our trial activity is well up again over the course of this year. And that's partly with existing service providers having more experience and fanning that out. but it's also through the addition of some new service providers as well. So momentum continues to build. We're actually seeing tissue wins come through on a quarterly basis now. So that's the best direct indicator we have. I noted them in my comments, and we also did a press release to highlight 2 of them that just came in through the R&M Group. So that momentum is definitely building and the pipeline behind it is building as well. Unknown Analyst: Okay. I'm going to switch gears here for a second. I think maybe the most exciting new news in the press release was what you alluded to with respect to Dow. And maybe can you elaborate on what's progressing so well there? And I guess with respect to that, should we anticipate some potential news here and the potential for it to hit the bottom line in 2026? Jeff MacDonald: I mean they're certainly sounding like they see bigger things ahead, which has got us excited. But what we see that we can count so far is just a steady increase in their business to the point where the results you see in this quarter has an impact from their contribution, a meaningful impact in the direct results as well as the growth, the profitable growth. I think the biggest indicator, as I referred to, is that while the wins that they've had leading up to today have been niche brands that maybe haven't been tied to a major brand in many cases. But what we're seeing within this year is some of those smaller brands within the portfolio of large personal care companies. So think about kind of the top 5 personal care companies, we're seeing some wins within their portfolios. And what that says to us, and it's backed up by discussions with our partner is that there's more trialing activity in those kind of products and in larger products as well that's progressing quite well. So it's showing up in the numbers more and more, building off like a very small base at first to the point where it's a meaningful contribution now to our bottom line and some good signals of good stuff to come. Unknown Analyst: And just remind us the margin profile, why it's such an attractive margin profile in that business? Jeff MacDonald: Yes. It's -- I'll just put it in -- it's roughly 3x what our normal margin profile would be. Unknown Analyst: Okay. Wood products, maybe just -- you talked about it a little bit in terms of progressing with Line 1 and 2 now, I guess. Maybe update us with respect to the external clients? Is there a progression on that front? Jeff MacDonald: I would say there's progression in terms of being ready. It was interesting to be at the Wood industry conference a few weeks ago with the end customer and some of their supply chain and to see some of those discussions and that push happening. I think at the beginning of that conference, and I do think there was maybe a bit of a turning point in thinking at that conference. I think at the beginning of the conference, you had some skeptics as to whether the big market leader was going to stick to its 2030 commitments. But they made it super clear that they're not coming off those commitments and that they feel the solutions are already in place for them to get there, and it's just about driving them forward and those that are with them are going to be with them and those that aren't going to be with them. And they were already encouraging the industry not to look at who else could squeeze in there for that 2030 goal. They called that a done deal. They were already talking about how can you help us for our goals beyond 2030 now because that's the time frame we're thinking of. So they consider this now operational. They consider it proven, and they're clearly pushing their supply chain to get on board as well, along with their continued implementation of the solution. So that was encouraging. Unknown Analyst: Yes, for sure. So if they maintain their 2030 emission targets, should we not start to see things ramp up quite meaningfully in the next year or so? And what does that mean in terms of the potential addressable market for you? Jeff MacDonald: Yes. It's not a long time now for such a level of industrial change out to 2030. And so the needs of that one customer equate to roughly 17 lines of production. And for us, that would require somewhere between $50 million and $60 million worth of DuraBind products to support. So that's kind of the time frame and the magnitude that we're faced with today. It's a lot of change, but we're ready to support it. And I think they've now got the teams in place. And I think they've done enough with a few suppliers that the readiness is there in their supply chain to get there as well. So it was just -- it was great to hear that they are so emphatic about sticking to that goal. Unknown Analyst: For sure. So we have $50 million in pulp, we have $50 million in wood products. I guess I see where you're confident lies in terms of hitting this $100 million top line target. What needs to happen for you to really go out there and put a time frame on this? Jeff MacDonald: Seeing the trajectory in getting there. So far, it's been about replacing the legacy business getting things happening in a commercialized way with these key leaders in each of these segments, which I think we've done now. I don't think any company our size could hope for a set of first adopter customers like we have to drive this success. And now it's just -- it's really seeing the momentum step by step that puts us on that path toward $100 million. And as soon as we can see that trajectory, then we'll stick a pin on it again. Unknown Analyst: Okay. And you feel like -- it really feels, Jeff, like we've hit this inflection point now that we should start to see that trajectory start to move up in 2026. Is that fair? Jeff MacDonald: Yes, it is for sure. And I think you said it's $50 million to $60 million with one opportunity, $50 million to $60 million with another. Keep in mind, like that's serving one customer in one segment and one customer in another segment. And I think what makes us even more excited is that those are the thought leaders in those spaces. And if they really go, then the rest of the market follows them. And that's historically proven over changes with the leading retailer. And certainly, from a cost perspective, if the leading pulp manufacturer goes in that direction, others have to follow. Unknown Analyst: No, I agree. Operator: [Operator Instructions] There are no further questions at this time. I will now turn the call over to Jeff for closing remarks. Jeff MacDonald: Okay. Thanks very much again to everybody for joining us, and we look forward to checking in with you again soon. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to Grindr's Third Quarter 2025 Earnings Call. My name is Janine, and I will be your lead operator for today. [Operator Instructions] I would now like to turn the call over to Tolu Adeofe, Grindr's Head of Investor Relations. Please go ahead. Tolu Adeofe: Thank you, moderator. Hello, and welcome to the Grindr Earnings Call for the Third Quarter 2025. Today's call will be led by Grindr's CEO, George Arison; and CFO, John North. They will make a few brief remarks, and then we'll open it up for questions. Please note, Grindr released its shareholder letter this afternoon, and this is available on the SEC's website and Grindr's Investor page at investors.grindr.com. Before we begin, I will remind everyone that during this call, we may discuss our outlook, future performance and future prospects. You should not rely on forward-looking statements as predictions of future events. These forward-looking statements are subject to risks and uncertainties, and our actual results could differ materially from the views expressed today. Some of the risks that could cause our actual results to differ from views expressed in our forward-looking statements have been set forth in our earnings release and our periodic reports filed with the SEC, including our annual report on Form 10-K for the year ended December 31, 2024, or any subsequently filed quarterly reports. During today's call, we will also present both GAAP and non-GAAP financial measures. Additional disclosures regarding non-GAAP measures, including a reconciliation of these non-GAAP financial measures to their most closely comparable GAAP financial measures are included in the earnings release we issued today, which has been posted on the Investor Relations page of Grindr's website and in Grindr's filings with the SEC. With that, I'll turn it over to George. George Arison: Thanks, Tolu, and hello, everyone. The Grindr team delivered another awesome quarter with revenue up 30% year-over-year and adjusted EBITDA margin of 47%. The results put us in a great position as we finish the year. Today, we are increasing our expectation for full year 2025 adjusted EBITDA to a range of between $191 million and $193 million, implying a margin of greater than 43%, and we are reaffirming our revenue growth outlook of 26% or greater. Our new CFO, John North, will walk you through the results in a moment. We're thrilled to have him join Grindr. He's led high-performing finance teams at Fortune 500 and S&P 500 companies and served as a public company CEO. He's already become an invaluable partner to [indiscernible] as we execute on our long-term vision. Over the past 3 years, we focused on expanding Grindr's product service area, delivering more capabilities and high-quality experiences for free and paid users alike. On Page 4 in my shareholder letter, you will see a chart showing that our product expansion has been tremendous, creating enormous value for users and driving higher conversion, more revenue capture and an increased revenue per pair. Grindr now offers a richer, more effective experience powered by strong technology and a broader feature set. Users endure products like Albums, Boost, Travel Boost, Viewed Me and Right Now. Through Gen AI, we are giving users access to powerful features like chat summary, discovery and profile recommendations. All in, we've made the Grindr app more magical, dynamic and rewarding than it was just a few years ago, and we're only getting started. Expanding both our product surface area and the value we've created for paying users has put us in a strong position to test subscription price changes for the first time since 2018. We asked new subscribers in a large set of test markets to pay slightly more and experienced a de minimis impact on our paying user base with retention exceeding even our most optimistic projections. We're deeply grateful for our paying users' vote of confidence in our direction, demonstrated by their willingness to invest more for the new value and capabilities we've built. Over the next few months, we'll continue gathering data and prepare for a global rollout early next year. Concurrently, in one country, we've begun offer testing a new AI-powered premium tier designed for power users for one of the most advanced and magical experiences. Think of it as a flagship first-class cabin of Grindr with features that simply weren't possible 2 or 3 years ago before Gen AI. This tier targets a smaller segment interested in higher-value products, offering distinctive user benefits and a meaningful revenue opportunity beginning in late 2026 and accelerating in 2027. Our rich, free experience remains central to Grindr's power, fueling the unmatched scale and vitality of our network. Capturing revenue through exceptional value-added features enable us to continue bolstering an already rich, free experience and to maintain the open conversational architecture that makes Grindr unique among any gay or straight platform that will always remain our top priority. A defining strength of Grindr is its ability to renew itself with new users. Every year, Gay and bi men all over the world join as they become adults. Grindr is often the first place they learn about the engage, explore gay culture and find all types of connections from casual dates and hookups to love, to workout mates to friendships. This generational influx keeps the platform vibrant, relevant and ever growing with younger cohorts driving engagement across the network and older ones driving monetization. To help illustrate this characteristic, which is very unique to our platform, we've included a onetime demographic disclosure with our shareholder letter. It highlights why Grindr's strong, consistent engagement, especially among users aged 18 to 29, who make up a majority of our global user base, positions us for durable long-term growth. We recognize that many of our investors are Grindr users and hope these insights make our user dynamics and community more tangible to you. Overall, the products and business are performing exceptionally well, and the team remains laser-focused on delivering more value and more success to our users every day. Before I wrap up, I'm sure everyone has seen the filings from 2 of our large shareholders, Ray Zage and James Lu proposing to take Grindr private. The Board has formed a special committee of independent disinterested directors to evaluate the proposal. The committee is working with its own independent financial and legal advisers. From the company standpoint, that process will run its course. Our team remains unwavering focused on execution. We are fortunate to work every day on things we love that bring happiness to millions of people and make a world that is more free, equal and just. Grindr has enormous potential to create value while continuing to deliver a product of deep importance to its users, and our job is to keep driving towards that. That's all we'll say on this matter at this time, and we won't be taking any questions about it on today's call. Thank you to the Grindr team for delivering outstanding results we are reporting today. We're proud of what we've achieved, excited for a strong finish to the year, setting the stage for another standout year in 2026. Now here's John to cover the results. John North: Thank you, George, and it's great to be here with all of you. I look forward to meeting many of you in the near future. I'm excited to be a part of Grindr and what the incredibly talented team is building. I've known and respected George for a long time, and the Grindr business model is among the most powerful I've ever seen. I see my role as further strengthening the finance organization, expanding our capital markets relationships and ensuring the company scales efficiently and profitably as we deliver on our vision. As George highlighted, we had a phenomenal Q3. Total revenue was up 30% year-over-year to $116 million. Adjusted EBITDA of $55 million was up 37% year-over-year, resulting in 2 points of margin improvement to 47%, a record for Grindr. Our direct revenue grew 25% year-over-year, while indirect revenue was up 56%. Our ads business was the primary driver of outperformance in the quarter as we saw strong results from international third-party advertising partners. In the core app, revenue growth was driven by our strength in our unlimited tier, which this year saw the introduction of additional duration options and feature updates alongside the ongoing success of our weeklies product across subscription tiers. Our user KPIs were strong with an average of 1.3 million paying users in the quarter for an improved penetration rate of 8.6%. Average MAU totaled $15.1 million and ARPU was $24.70. Our adjusted EBITDA margin performance reflected the strong flow-through of our revenue outperformance to the bottom line as well as higher capitalized product development costs. Operating expenses, excluding cost of revenue, were up 9% year-over-year, largely related to people costs as we execute on our innovation road map, including our AI initiatives. Grindr's net income for Q3 was $31 million or $0.16 per diluted share compared with $25 million or $0.09 per share a year ago. We generated approximately $51 million in free cash flow in the third quarter. Year-to-date, we've repurchased 25.1 million shares of our common stock for approximately $450 million, leaving us with $50 million remaining under our current authorization as of September 30. Our Board regularly reviews capital allocation plans, including options for returning excess cash. Turning now to our guidance. Our strong Q3 results give us increased confidence in our 2025 outlook. And as George mentioned, we now expect our full year 2025 adjusted EBITDA will be between $191 million and $193 million, implying a margin greater than 43%, and we are reaffirming our revenue growth outlook of 26% or greater. As I noted in the P&L review, our 30% total revenue growth in Q3 was largely driven by outperformance in our ads business, which we do not expect to repeat in Q4. Recall that in our 2024 fourth quarter, we benefited from a large onetime brand campaign. In conclusion, Q3 was a very strong quarter that reinforces Grindr's powerful business model. We're in a great position to deliver on our annual guidance, which we increased earlier this year and are revising upward today. And with that, we'll open the call up for some questions. Operator: [Operator Instructions] Our first question comes from the line of Andrew Marok from Raymond James. Andrew Marok: I wanted to talk quickly on pricing first. So I think you've mentioned in the past and your payer conversion rate kind of points to this that given that Grindr had a little bit farther to go in terms of product breadth that getting users to pay at all was one of the biggest milestones that you would make as a user. So I guess in light of that, how do you balance that philosophy of raising prices versus getting people to pay at all? Like is the increased price a potential higher barrier to make that first purchase? George Arison: Andrew, good to talk to you. We are obviously excited for users to pay if they've not paid before, but we also believe it's important for users who are getting a lot more product in the paid tiers and a lot more value to pay a little bit more for that value. And the price changes are, I think, fairly minor in the large scheme of things, given the amount of value that we've added to the product. We have seen significant growth in our number of paying users. The change over the last 3 years has been pretty significant. As you know, I think we went from something like 6.5% to 8.5%. And that, I think, speaks for a lot, especially given that MAU has also grown dramatically in that time period. And secondly, we want to maintain a very robust free offering. I think one of the things you'll see in the shareholder letter in the disclosure that younger users who constitute a vast majority of our user base worldwide and nearly a majority of our user base in the United States and the U.K. tend to pay at a much lower rate than slightly older users. So on Page 8 of the letter, you'll see that 18- to 22-year-olds have the lowest penetration and then that kind of increases dramatically as they go to 30, 39 or 40, 40, 49, et cetera. And so we kind of have a 2-parted strategy, right? On the one hand, we want as many young users coming into the product and having a really awesome experience through a very robust free offering where they can use all the features that we offer, including being able to talk to anybody for free with no limits. We're the only product of our kind that has that, whether gay or straight. And then from there, we want people to be able to pay for the value-added services that we offer them. And what we are learning is that people who -- as they age and get older, they end up getting more value from the features that we offer in paid tiers, and they're willing to pay for those. What we've seen in our price testing as prices have changed is that we have had very little to de minimis change in our conversion rates when you compare new prices versus old, which is really great and it speaks to the fact that people value the products they're getting in those paid tiers. And then a couple of more things on that. Number one is we do monetize our free users through ads. Obviously, we had a significant increase in our ad revenue over the last 3 years as well, and we continue to do very well there. And I think that's an important component of that equation as well. We have thought about whether we should offer a cheaper tier as well for users who might want to not have ads at all, but are not quite ready to pay for XTRA because they don't need the value that XTRA includes in terms of features and products. And that's something we're still thinking about. I don't want to promise either way that we'll do that, but that's certainly a possibility as a way to get more people to potentially be payers. But if you do that, you actually won't have that big of a revenue impact because the price point on that would be fairly low. And then lastly, I think the important thing for us is by creating a lot more product value, we are now asking people to pay a little bit more for that. This isn't just a price raise for the sake of a price raise or because we want to make more money. It's to ensure that users who are enjoying a lot more value in the experiences because the XTRA and the Unlimited tiers are way more robust today than they were 3 years ago as a result of a lot more product area that we've created in those tiers are actually paying for the value they're getting from those tiers. Andrew Marok: Got it. Really appreciate that. And then maybe if you could just give us a quick update on how some of the newer products, especially thinking of something like Right Now is trending in terms of things like engagement metrics and to the extent that you can measure them, things like user satisfaction or outcomes. George Arison: I don't really have much new to say on that beyond what we've said before, which I'll be happy to repeat. I think the way we tend to think of our products is launch a lot of product surface area. Some will be free, some will be paid. We want to have a robust free offering and some things that are more special might be offered to paying users only. With Right Now, our objective was to dramatically increase the surface of a free product. So everybody who is on Grindr, whether paid or free can utilize Right Now and enjoy it. Somewhere between 20% and 25% of our users post in Right Now, at least once a week. And over 75% of our users look at Right Now postings within -- once people are in Right Now, which I think shows really high engagement, and we are very happy about that. But obviously, there is a lot more that you can do with Right Now. I was in New York a couple of weeks ago, where we have the mapping feature in Right Now on as well. I'll be totally honest. I was not sold on the idea of mapping in Right Now when the team first went after it. But when you're in New York and are seeing the product kind of in your hands, it's a really incredible magical experience and looks really, really nice. And I think people really like that. And so we're really happy with where the product is trending. And normally, we don't really share a lot of product metrics, but I do want to call out, again, in the shareholder letter, we did share a very extensive disclosure on our user base and kind of how that is split out. The fact that we have -- in the U.S., for example, 15% of our users are ages 18 to 22, 31% of our users are ages 23 to 29 that 46% of all Grindr profiles are kind of in that age range of 18 to 29. And that to me is something that kind of speaks to the uniqueness of Grindr as a business and a product and the fact that users -- the younger generation really likes what they're getting in the product, and it's very much working for them. So as long as our products are accomplishing the idea of bringing young people into the product as they become adults as a right of passage like it has for the last 15 years, I think we're in a very strong position. Operator: Our next question comes from the line of John Blackledge from TD Cowen. Logan Whalley: It's Logan Whalley on for John. So just looking at top of funnel, MAUs grew nicely again in 3Q. Could you discuss any trends which drove the top of funnel users higher in the quarter? And then also in 2Q, you called out some significant removal of bad actors in a certain region. Could you just update us on any similar efforts globally in 3Q and then looking forward just based on health of the platform? George Arison: Thanks for the questions. So first, let's start with what it is that we actually report. We report monthly active devices, not users and not profiles. A lot of Grindr users have more than 1 profile, and those are pretty hard to debug in terms of are they 1 individual or 2. That happens for many different reasons. Some people might have a profile that is more friendship focused and then they might have a profile that is more casual dating focused, and they have different information on those profiles, and we definitely don't discourage that and are happy with users having more than 1 profile. So the best way for us to debug what we report is monthly active device, not user. And I think it's really important for people to understand, especially when I try to compare it to external data, which, as we have spoken before, tends to be perpetually wrong about Grindr information. I think in part because people don't pay attention to what it is that Grindr actually reports. Secondly, our ecosystem is really -- the health of the ecosystem is really important to us. And so as we see bad actors come into the ecosystem, whether those are stammers or other types of bad actors, we take actions to remove them. Over the last 2 to 3 years, I think all social networking companies would validate this. Scammers have become more sophisticated with Gen AI, and that means that you have to become more sophisticated in fighting them. And as we do that, it can impact MAU. In Q2, in the first half of the year, there were a significant impact on MAU, and we've spoken about that. It doesn't always impact MAU when we go after bad actors because some bad actors have profiles that don't have a device ID associated with them. They do that by spoofing Android devices. That's a known kind of flaw with the Android ecosystem that you can do. And so when we remove actors that are bad, that don't have a monthly active device, they don't get associated with MAU one way or the other because they were never in our MAU in any way. But when we remove bad actors that do have devices, they do. Thirdly, we have never really done much to drive MAU growth. Our MAU grows almost completely organically through word of mouth. As I said earlier, Grindr is a rider passage for people as they turn 18. And if they are gay, they come to Grindr as a way to figure out who they are, what it's like to be to start meeting people for any number of types of connections. And so organically, our MAU tends to grow really nicely. We are very happy with our MAU growth. And frankly, the numbers that you're seeing in terms of growth are very much in line with our long-term guidance assumptions that we shared at Investor Day 1.5 years ago. And then lastly, I'll call out again the disclosure towards of our user demographics. You couldn't have the demographics that we have in our profile set that we share on Page 7 and 8 unless you're attracting a lot of new users. It would be impossible to have 50% of the user base be 18 to 22 in the United States when only 9% of the U.S. adult male population is in that age cohort unless you're constantly attracting people who are young and attracting them at very high rates. And that's even more true internationally in places like India and Philippines, et cetera, where older users are still stigmatized and might not so comfortable being a [indiscernible] while younger users are coming out and more comfortable. So in those places, our user base is even more heavily young. And a lot of our focus is ensuring that we continue doing that through the right product initiatives so that we serve this younger adult male cohort as well as we possibly can. Logan Whalley: Great. Maybe one other question just on the premium tier. You mentioned that would be designed for power users. Like could you give us any kind of an idea of what how many power users are on the Grindr platform? Like what percentage of overall users might kind of fall into the bucket that you're designing the subscription for? George Arison: Yes. So the premium tier was a significant component of what we envisioned in terms of the long-term strategy that we shared at Investor Day because we knew that a lot of our investments would be around AI features, which are really magical and previously were not possible to build. We are building those and making them available. And we just think that the amount of value that we will be generating through those features and products for people, we will see -- I think people need to be prepared to pay for the value they'll be getting from that. That tier is meant for our power users and for a very select set of people. We don't expect a huge number of people going into that, but it will be priced appropriately for that. We have something like, I think, 350,000 Unlimited subscribers. So if you imagine that 20% of those subscribers switched over to Unlimited, I think you'd have -- sorry, to the premium tier, you'd have a very nice kind of growth in our revenue because it's a significant dollar amount at the price points that we are thinking about. And I would call that like a good home run. If 30% or 40% or 50% of our Unlimited users switch to the premium tier, then you'd have like a grand slam because it'd be like an incredible result. I don't know which one of those is going to happen. That's why we need a few quarters of testing and learning to understand what happens. But I do know that the kinds of features that we offer in this new premium tier are pretty magical. And I think a lot of people will be very happy with them. But at no point have we thought about as something that a very large percentage of our overall user base will utilize. This is very much meant for our power users who can benefit from the unique features that will be put into that tier or that have already been put in that tier. And quite frankly, I think 1 of -- maybe 5 people in the United States who is in the beta because the beta is starting somewhere else. And when you use Grindr with these features, it is a very, very different experience. We were entering a fairly senior product candidate about 2 weeks ago and kind of walked them through what it's like on the app and he's like, wow, that's really, really special. And I really very much hope that everybody else feels the same way as this tier kind of expand more broadly to be available to more people. But I would not expect to have a global rollout until at the earliest sometime in H2 of next year. John North: Yes. And maybe, George, if I can just jump in and add on to that. The one thing I want to triangulate back to is that we are looking at continued investment in these enhancements that are going to bring new and exciting features and differentiation as we move forward. And that's been contemplated in the 3-year plan that we put out in the summer of 2024. We're going to finish the year at better than a 43% EBITDA margin, but I want to make sure we remind everyone that in that plan, we anticipated many of these investments. And so we still think triangulating to the EBITDA margin range we gave at the time of 39% to 42% as you think about years '26 and 2027 is an important point to keep in mind and that you can't just roll forward what we may finish this year at as you think about next year and beyond. Operator: Our question will come from the line of Andrew Boone from Citizens Bank. Andrew Boone: Three for me, if I could. I would love to get an update in terms of international. Just how did that trend in the quarter? And then any new initiatives you guys may have in terms of localization or anything else we should think about there? gAI, George, can you just talk about the bigger opportunity with that product in the quarter? And kind of what's your vision in terms of bringing more AI tools in terms of incorporating AI into the Gayborhood? And then lastly, just on advertising. Can you guys just help us understand, it sounds like it was very strong in the quarter. What was the driver of that growth? Is there anything to call out? And then how do we think about that going forward? George Arison: Great. Thank you for all that. I wrote it down, but hopefully, I don't forget, if I do, please remind me, I'm not ignoring any of the questions. They're all fun things to talk about. So on international, what we said at Investor Day is that international is a very large opportunity for Grindr. And I'll walk you through kind of how we think about that. But first to kind of preface, I think one of the main jobs of the CEO is twofold, right? Number one is to paraphrase another very prominent CFO, CEO whom I really admire is to amp things up, meaning to put pressure for things to happen as fast as possible and as many things to get done as possible. And I think everyone who knows me knows that I'm costly amping it up on the team. But concurrently with that, another really critical place is to prioritize things properly. If you try to do everything, you'll get nothing done well and finding the right prioritization on things is really important. There was a lot to do at Grindr when we got started 3 years ago, and we've been prioritizing things based on what we thought was most critical. And in total fairness, I think going after our international opportunity was not as top of a priority as some other things have been so far because those were more important even for the user base or from a perspective of what we wanted to achieve over the long term, which still means that international is a huge opportunity and is something that should be viewed as upside when you think about it from the long-term modeling perspective rather than something that we assumed would be the case in our 3-year plan that we shared June 2024. The way we think of international is in 3 buckets. So first, in countries where we already have a pretty significant presence and those countries are economically advanced, we believe that there is opportunity to continue driving more users to become paying customers and to pay for the extra value they're seeing from the added new features that we're building. So we -- our payer penetration in Europe, for example, is lower than our payer penetration is in the United States. And we'd love to do things that would help us drive payer penetration to be more akin to the U.S. in Mainland Europe, which we think is possible. Obviously, U.S. will continue to grow as well. I'm not saying U.S. is going to just stop growing. But if we could get them closer to U.S. levels of payer penetration or even the U.K.'s levels of payer penetration, that would be a really big win. So that is one bucket of focus for international is Europe and countries like Europe in terms of their economic development, get them to have more payers. Number two is countries where we have very large sets of users and do okay on payers, but we believe that there is still opportunity for people to learn that we exist and to use us, have a ton of user growth opportunity. Places like that are Brazil, Philippines, rest of Latin America, Mexico, Colombia, Chile, et cetera. And Asian countries like Thailand, Vietnam, potentially Cambodia. In many of these places, we know from research that a very large number of people in our user cohort know that we exist and those that know about us, use us. But then there are a bunch of others that don't know about us and because our brand recognition is not as high in those countries as it is in the United States or the U.K. And so as they learn about us, we believe there will be opportunity for them to start using us, which we think will be very valuable. And then the third bucket is India, which should be called out separately because of its size. 10 years ago, it was illegal to be gay in India. So obviously, there's a ton of social stigma attached with being gay. It is changing for young users, as you can see from the data that we shared. But we want to be present there as the social transition changes, or happens and as more and more people become comfortable with who they are, and kind of continue to be the primary product for gay people in India like we already are as many more of them become comfortable using our product. And so that's the kind of opportunity. A lot of what we need to do internationally is around localization of the product. That might be simple things like how we show up in a specific language in a given country. We don't use a lot of slang in how we describe ourselves in a lot of these places in our translations, and we probably should and kind of what -- how people communicate in those languages to what kind of imagery we show you in each of these countries. And then on a more advanced level, what kind of products do we build? If you go to New Delhi, for example, and you open up Grindr, the grid will look very, very different from what the grid looks like in New York. Everywhere, there are a lot of people who are discrete and who might not show their face. or might not have a picture at all. But in India, vast majority of people don't show their face in a picture at all because it's still really hard to be gay. And so maybe in a place like India, the grid should actually look a little bit different. Maybe we should allow people to have AI-generated photos that they can post. I'm not saying that's what we would do, but like you can imagine through product solving the problem of discreetness in India differently than you deal with it in other places because they have unique needs in that country. And those are all things that we can do to help grow our presence. And obviously, through marketing, we can do a lot as well. We've spoken the shareholder about the fact that we have now launched our Spanish-speaking social media channels. We've also launched our first social show in Spanish. And those are the kinds of things we'll be doing in other languages as well, such as Portuguese and for specific countries like India as well. So that's on international. When it comes to gAI, we believe that AI, and I detailed this quite a bit in the document we shared last quarter about AI incumbent companies with a lot of data can benefit significantly if they start taking advantage of AI early before potential challenges are able to catch up with data because AI is better with data. And if you are kind of at the forefront, you can make your product be very, very different from a technology point of view with AI. And we do want our product to be turned into an AI-native product. And that's very much what we've been striving to do by retraining models to be able to speak gay, and I think we're doing a pretty good job at that. And then being able to use those models inside our product to do specific new experiences that previously did not exist. To start with, a lot of those experiences will go into the premium tier that I spoke about in the previous question in the shareholder letter. And there will be things like insights where we will actually provide users with detailed information about people that might be talking to that we can infer based on people's behaviors or conversations. Obviously, that will only be done with permission, meaning only people who agree to be part of our AI features will be able to see those features and we'll have those features or the information available about them in the app. Another kind of product that we've built through AI is called A-list, which goes through all your messages and creates a short list of people that we believe you should keep talking to and gives you summaries of conversations that you have with those people, brings together all the photos that you've exchanged with those people, all in a really nice summarized folder that makes it much easier for you to navigate the product. You can envision that as the next step of that, we will add a little button that will be the gAI button, and you can start asking gAI questions about that specific user that you were previously talking to. So it's something that you discussed previously does not appear in the chat summary, you can say, hey, I believe we talked about XYZ, can you get that information back to me to remind me what it is that we exactly talked about. So very similar to what Grok is doing inside X, where you can actually get information about a specific post with a lot more detail that would be quite kind of -- that's quite beneficial. So those are the kinds of features that we are working on. I don't know of a lot of consumer-facing products that are doing the kind of stuff that we're doing yet. But the same way that Grindr invented the use of mobile in the way it is used today, I think we'll be at the forefront of using AI in the consumer experiences in the future. And for advertising, I'll switch over to John to speak about that. John North: Yes. Thanks, George. We did have a good quarter in terms of our advertising growth. That's been an area of focus both through the TPA and then the direct piece. It's also a very nice contribution margin because it doesn't have the cost of sales associated with the subscriptions do come in through the app stores. So that tends to be more accretive to EBITDA, and we did see some benefit in that in the third quarter, you're right to call it out. But more importantly, I wanted to focus and just remember -- remind everyone that last year, we had a pretty significant direct advertising boost in the fourth quarter that we don't expect to continue this year. And so that's contemplated in the range of guidance that we gave. And certainly, we think this is an area that can continue to be a focus for us and that it should give us opportunity for potential additional growth in the future. There is much more we can do here, and we've had good success with Brian and the advertising team, but we're going to continue to look for ways to grow that in 2026 and beyond. Operator: [Operator Instructions] There are no further questions at this time. I will now turn the call -- we have a question, by the way, from John Blackledge from TD Cowen. Logan Whalley: It's Logan on for John again. Just -- maybe one follow-up on the user base breakdown. It's really interesting. Could you talk maybe about any trends you've seen over time or since you've come on board, George, in usage amongst different age groups? Like have you seen any trends among older age groups or younger age groups like more engagement or less engagement over time? And do you think there -- like you may have any initiatives in place in the future to kind of boost engagement amongst specific age demos like maybe older people, for example? George Arison: Yes. Great question. Thank you for that. We debated whether we should put in more, but we thought for competitive reasons, probably kind of what we shared made sense because we do have obviously data on the things you're asking. So I'll try to speak to it directionally without being too specific because I thought that for competitive reasons, releasing more of that would be potentially risky. What we know are the following things. One is our young adults, meaning people in the 18 to 35 age range, tend to do a lot of communication with each other, but they also get messaged a lot by older users, and they respond to older users as well, whereas the younger adult cohorts such as 18 to 30 don't actually initiate a lot of conversations with older users themselves. Since we know that they actually do respond to people who are older when they get messages, that is something that you could probably solve the product, right? Because I think what happens is a lot of younger adults, such as 18- to 30-year-olds, might feel uncomfortable messaging somebody who is older because they think, hey, this older person might want to talk to me. And that's why they're not messaging out to them, but they're getting messages from them and then they're willing to respond. And so that is something that we could solve through product by saying -- by having product features that kind of facilitate that a little better. We also do know from our older users kind of in that 50-plus age demo, and I'm approaching that cohort soon. So I'm kind of learning about that more, is that sometimes they don't always feel as welcome in the app as they did before, meaning they all have Grindr accounts. But as they age, their priorities tend to change. And as a result, sometimes they don't quite feel as at home. And we definitely can do things, I think, through a product to make that experience be better for them. That is part of the thinking behind the premium tier and the AI features with insights, right? Because part of what we can do with insights is tell a user, yes, this person is likely to engage really well with you based on what we know about you. And that I think would be very helpful for users who are older who might feel a little bit uncomfortable with the app because their priorities today might be different, right? If you are a 45-year-old or 50-year-old guy with kids living in the suburbs, your priorities are probably different than what they were when you were in your 20s and frequent circuit party. So I think those are the kinds of things that insights can really help solve, and that's something that we are envisioning. Obviously, older users do have more disposable income as well. And so I think the alignment there is quite interesting in terms of offering them better functionality that is unique through AI that is also creates a lot more value for them and so it is more expensive at the same time. Does that answer the question or any follow-ups on that? Before we close, unless there are more questions, I just do want to add one other thing. Grindr is an 18-plus product only. We do not allow people who are not 18 on the product. You cannot download the product if you are not 18 on either Android or iOS, and you cannot log into Grindr by creating an account on the web. We only allow you to create accounts through the app stores. And so whenever I refer to younger users, I'm referring to people 18 and older, nobody below 18. Operator: Thank you. This ends the conference call for today. You may now disconnect.
Operator: Good afternoon. My name is Julian, and I will be your conference call operator today. [Operator Instructions] as a reminder, this call is being recorded. I would now like to turn the conference call over to Mariann Ohanesian, Senior Director of IR for Puma Biotechnology. Thank you. You may begin. Mariann Ohanesian: Thank you, Julian. Good afternoon, and welcome to Puma's conference call to discuss our earnings results for the third quarter of 2025. Joining me on the call today are Alan Auerbach, Chief Executive Officer, President and Chairman of the Board of Puma Biotechnology; Maximo Nougues, Chief Financial Officer; Heather Blaber, Senior Vice President of Marketing; and Roger Storms, Senior Vice President of Sales. After the close today, Puma issued a news release detailing earnings results for third quarter 2025. That news release, the slides that Roger will refer to and a webcast of this call are accessible via the homepage and Investors section of our website at pumabiotechnology.com. The webcast and presentation slides will be archived on our website and available for replay for the next 90 days. Today's conference call will include statements about Puma's future expectations, plans and prospects that constitute forward-looking statements for purposes of federal securities laws. Such statements are subject to risks and uncertainties, and actual events and results may differ from those expressed in these forward-looking statements. For a full discussion of these risks and uncertainties, please review our periodic and current reports filed with the SEC from time to time, including our annual report on Form 10-K for the year ended December 31, 2024. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this live conference call, November 6, 2025. Puma undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call, except as required by law. During today's call, we may refer to certain non-GAAP financial measures that involve adjustments to our GAAP figures. We believe these non-GAAP metrics may be useful to investors as a supplement to, but not a substitute for, our GAAP financial measures. Please refer to our third quarter 2025 earnings release for a reconciliation of our GAAP to non-GAAP results. I will now turn the call over to Alan. Alan Auerbach: Thank you, Mariann , and thank you all for joining our call today. Today, Puma reported total revenue for the third quarter of 2025 of $54.5 million. Total revenue includes product revenue net, which consists entirely of NERLYNX sales as well as royalties from our sub-licensees. Product revenue net was $51.9 million in the third quarter of 2025, an increase from $49.2 million reported in Q2 2025 and a decrease from $56.1 million reported in Q3 2024. As a reminder to investors, Puma reported NERLYNX sales includes both U.S. net sales of NERLYNX and product supply revenues of NERLYNX to Puma's ex-U.S. partners. Please note that in Q3 2024, we reported product supply revenue to our international partners of about $7.4 million versus $0.1 million in Q3 2025. Therefore, U.S. net sales of NERLYNX in Q3 2025 were $51.8 million versus $48.8 million in Q3 2024. Product revenue for the third quarter of 2025 was impacted by approximately $3.1 million of inventory build in our specialty pharmacies and specialty distributors. Royalty revenue was $2.6 million in the third quarter of 2025 compared to $3.2 million in Q2 2025 and $24.4 million in Q3 2024. Q3 2024 royalty revenue included sales to China by our offshore partner, Pierre Fab. We reported 2,949 bottles of NERLYNX sold in the third quarter of 2025, an increase of 341 from the 2,608 bottles sold in Q2 2025. In Q3 2025, we estimate that inventory increased by 172 bottles. In Q3 2025, new prescriptions were down approximately 3% compared to Q2 2025 and total prescriptions were down approximately 1% compared to Q2 2025. Roger will provide further details in his comments and slides. I will now provide a clinical review of the quarter, then Heather Blaber and Roger Storms will add additional color on NERLYNX commercial activities. Maximo Nougues will follow with highlights of the key components of our financial statements for the third quarter of 2025. As investors are aware, Puma currently has 2 ongoing Phase II trials of our investigational drug, alisertib, ALISCA-Breast1, which is a Phase II trial of alisertib in combination with endocrine treatment in patients with HER2-negative hormone receptor-positive breast cancer; and ALISCA-Lung1, a Phase II trial looking at the efficacy of alisertib monotherapy in patients with small cell lung cancer. As a reminder, the ALISCA-Breast1 trial investigates alisertib in combination with endocrine treatment, which consists of either an anastrozole, exemestane, letrozole, fulvestrant or tamoxifen in patients with HER2-negative hormone receptor-positive metastatic breast cancer. Patients must be chemotherapy naive, have been previously treated with a CDK4/6 inhibitor and received at least 2 prior lines of endocrine therapy in the recurrent or metastatic setting to be eligible for the trial. Patients are being dosed with alisertib given at either 30 milligrams, 40 milligrams or 50 milligrams twice daily BID on days 1 to 3, 8 to 10 and 15 to 17 on a 28-day cycle in combination with the endocrine therapy and investigator choice. Patients must not have been previously treated with the endocrine treatment in the metastatic setting that will be given in combination with alisertib in the trial. The primary efficacy endpoints include objective response rate, duration of response, disease control rate and progression-free survival. As a secondary objective, the company will be evaluating each of these efficacy biomarkers within biomarker subgroups in order to determine whether any biomarker subgroup correlates with better efficacy and has been -- as has been seen in preclinical and clinical studies in other cancers, including breast cancer and small cell lung cancer. The company will then look to focus the future clinical development of alisertib in combination with endocrine therapy for patients with HER2-negative hormone receptor positive breast cancer with these biomarkers. The trial was initiated in late November 2024. There are currently 34 sites in the U.S. and 18 sites in Europe that have been activated for the trial, and the trial is enrolling ahead of expectations. There are currently 98 patients enrolled in the trial and 14 additional patients in screening. Due to the faster-than-expected enrollment in the trial, the former interim analysis was triggered sooner than expected. We anticipate that the formal interim analysis will be completed in the first half of 2026 and look forward to sharing this with investors at that time. With respect to the ALISCA-Lung study -- the ALISCA-Lung is a Phase II study of our investigational drug alisertib to investigate the efficacy of alisertib monotherapy in patients with small cell lung cancer and to specifically look at the efficacy of the drug in patients with biomarkers where the aurora kinase pathway plays the role. The goal is to correlate the efficacy in these biomarker subgroups in the ALISCA-Lung1 study to the efficacy that was previously seen in the biomarker subgroups from the randomized trial of paclitaxel plus alisertib versus paclitaxel plus placebo that was published in the Journal of Thoracic Oncology in 2020. In that randomized trial, a progression-free survival benefit and overall survival benefits were seen in patients with biomarkers, which correlate with the aurora kinase pathway. If the efficacy and biomarker data are comparable from the 2 studies, the company would look to engage the FDA to discuss the regulatory path further. As discussed on the recent earnings call, the company believes the data obtained to date from the ALISCA-Lung1 is providing a preliminary indication of potentially better activity in patients with biomarkers where the aurora kinase plays a role. The most recent analysis of the PK data from the ALISCA-Lung suggests that we are seeing lower PK of alisertib in the ALISCA-1 study compared to the previous Phase II of alisertib monotherapy in small cell lung cancer patients that was published in Lancet Oncology. The company has amended the protocol for the trial to increase the dose of alisertib from 50 milligrams BID to 60 milligrams BID, which the company believes will increase the PK of the drug to levels closer to what was seen in the prior Phase II. The company is currently enrolling patients at the 60-milligram dose -- 60-milligram BID dose. There are currently 61 patients in the trial with 9 of these patients enrolled at the 60-milligram BID dose and additional 2 patients in screening. Assuming the safety at the 60-milligram dose is acceptable, the company plans to meet with the FDA in order to amend the protocol to continue to dose escalate to 70 milligrams BID. The company looks to have additional interim data from this trial in the first half of 2026. As mentioned on prior earnings calls and in response to investor questions, Puma continues to evaluate several drugs to potentially in-licensed or acquire that would allow the company to diversify itself and leverage Puma's existing R&D, regulatory and commercial infrastructure. The company will keep investors updated on this as it progresses. I will now turn the call over to Heather Blaber for an update on our marketing initiatives. Roger Storms will follow with a review of our commercial performance during the quarter. Heather Blaber: Thank you, Alan. I appreciate the opportunity to share some additional insights into our marketing strategy. The marketing team is focused on creating awareness of both clinical messaging for NERLYNX as well as recently published data that demonstrate the continued need to reduce the risk of recurrence in HER2-positive early breast cancer after treatment with adjuvant therapy. We continue to invest in market research to help us better understand risk factors that put a patient at high risk of recurrence in HER2-positive early-stage breast cancer as well as Garner Insights on the NERLYNX clinical data in this patient population. Together with our marketing initiatives, our strategy is focused on increasing awareness of our broad indication of patients that are appropriate for treatment with NERLYNX. We have adjusted our strategy based on our learnings and revised both personal and nonpersonal messaging with the goal of engaging physicians on a broader set of patients where the risk of recurrence still remains high and where we believe NERLYNX can play an important role in helping to reduce the risk of recurrence in patients with early-stage HER2-positive breast cancer. In addition to revising our messaging, we have a new resource to support patients throughout their recommended course of NERLYNX therapy. This educational resource is provided to patients on a monthly basis with the goal of improving patient adherence as they receive their refills. Lastly, year-to-date, we have reached 99.7% of oncologists through nonpersonal promotion and continue to expand our share of voice, working closely with the sales team to increase engagement with health care providers. In summary, we are excited about our new marketing strategy and messaging, which we believe will continue to help educate and engage oncologists on the unmet need for those diagnosed with HER2-positive early breast cancer. I will now turn the call over to Roger Storms to provide an overview on the commercial performance for the third quarter. Roger Storms: Thank you, Heather, and thanks to everyone for joining our third quarter earnings call. Before I move into the commercial review, just a reminder that I'll be making forward-looking statements. The sales team remains focused on expanding overall HCP reach and frequency with a strong emphasis on driving engagement at key treatment decision points. In Q3 2025, call activity increased 22% year-over-year and increased 17% quarter-over-quarter. This is a direct result of continued emphasis put on executional excellence and increased accountability with the existing sales team. I expect call activity to continue to improve as we fill vacancies. The commercial team continues to prioritize increasing use of NERLYNX with the main focus on patients at higher risk of recurrence. They are also dedicated to enhancing clinical education and engagement through nonpersonal promotional efforts as well as utilizing patient resources to support persistence and compliance during NERLYNX therapy. Let me now transition to some of the commercial slides where I'll provide some additional specifics around performance. Slide 3 is an illustration of our distribution model, which is broken out into the specialty pharmacy channel and the specialty distributor or in-office dispensing channel. In regards to overall distribution of our business, in Q3 2025, about 65% of our business was purchased through the SP channel and the remaining 35% was purchased through the SD channel. We are seeing some stronger growth in the SD channel driven by 2 main factors: one, increased sales in the group purchasing organization segment; and two, increased 340B purchasing. Turning to Slide 4. NERLYNX net product revenue in Q3 2025 was $51.9 million, which represents an increase of $2.7 million from the $49.2 million we reported in Q2 2025 and a decrease of $4.2 million from the $56.1 million we reported in Q3 of 2024. As a reminder to investors, Puma's reported NERLYNX sales includes both U.S. sales of NERLYNX and product supply revenues of NERLYNX to Puma's ex-U.S. partners. Please note that in Q3 2024, we reported product supply revenue to our international partners of about $7.4 million versus the $0.1 million in Q3 of 2025. Therefore, U.S. net sales of NERLYNX in Q3 2025 were $51.8 million versus the $48.8 million in Q3 of 2024. I will provide some more details around inventory changes, and Maximo will provide some additional specifics around gross to net expenses during his update. In Q3 of 2025, we estimate that inventory increased by about $3.1 million. As a comparator, we estimate that inventory decreased by about $1.3 million in Q2 of 2025 and increased by about $0.7 million in Q3 of 2024. Slide 5 shows Q3 2025 ex-factory bottle sales and also provides both a year-over-year and a quarter-over-quarter comparison. In Q3 2025, NERLYNX ex-factory bottle sales were 2,949, which represents an approximate 13% increase quarter-over-quarter and an 8% increase year-over-year. Inventory declined for the first 2 quarters, but increased in Q3 of 2025. Similar to the prior slides, let me specifically call out the inventory changes from a bottle perspective. In Q3 2025, we estimate that inventory increased by 172 bottles. As a comparator, we estimate that inventory decreased by 85 bottles in Q2 of '25 and increased by 39 bottles in Q3 of 2024. Let me take a moment to provide some additional metrics regarding our second quarter performance. In Q3, we saw enrollments increase by about 6% quarter-over-quarter and decline about 6% year-over-year. New patient starts or NRx follow a similar pattern, increasing 3% quarter-over-quarter and declining about 1% year-over-year. Turning to total prescriptions or TRx, -- we saw TRx decline about 1% quarter-over-quarter and decline about 4% year-over-year. Finally, let me share some specifics around demand. In Q3 2025, we saw demand increased by about 3% quarter-over-quarter and about 3% year-over-year. As mentioned earlier, we have seen stronger demand growth in the SD channel where we saw SD demand grow by about 11% quarter-over-quarter and about 25% year-over-year. Slide 6 highlights the quarterly adoption of dose escalation since NERLYNX launch. In Q3 2025, approximately 77% of patients started NERLYNX at a reduced dose. This is higher compared to the 71% we reported in Q2 2025. Continued messaging and adoption of dose escalation remains an important commercial priority. Patients who are started on NERLYNX utilizing dose escalation have better persistence and compliance. We believe dose escalation, coupled with the new patient education resources will give patients better support throughout their NERLYNX therapy and ultimately help them reduce the risk of recurrence. Slide 7 highlights the strategic collaborations we formed across the globe. We really appreciate the excellent work being done by our partners around the world and look forward to supporting their continued success moving forward. Let me close by expressing my heartfelt gratitude to the entire Puma team for their unwavering passion and dedication to supporting patients and families affected by breast cancer. This disease can be devastating, and we recognize there is still more work to do and more that can be done. I will now turn the call over to Maximo for a review of our financial results. Maximo F. Nougues: Thanks, Roger. I will begin with a brief summary of our financial results for the third quarter of 2025. Please note that I will make comparisons to Q2 2025, which we believe is a better indication of our progress as a commercial company than year-over-year comparisons. For more information, I recommend that you refer to our third quarter 2025 10-Q, which will be filed today and includes our consolidated financial statements. For the third quarter of 2025, we reported net income based on GAAP of $8.8 million or $0.18 per basic share and $0.17 per diluted share. This compares to net income in Q2 2025 of $5.9 million or $0.12 per share. On a non-GAAP basis, which is adjusted to remove the impact of stock-based compensation expense, we reported net income of $10.5 million or $0.21 per basic and diluted share for the third quarter of 2025. Gross revenue from NERLYNX sales was $70 million in Q3 2025 and $62.1 million in Q2 2025. As Alan mentioned it, net product revenue from NERLYNX sales was $51.9 million, an increase from the $49.2 million reported in Q2 2025 and a decrease versus the $56.1 million reported in Q3 2024. As a reminder to investors, Puma reported NERLYNX sales include both U.S. net sales of NERLYNX and product supply revenue of NERLYNX to Puma's ex-U.S. partners. Please note that in Q3 2024, we reported product supply revenue to our international partners of about $7.4 million versus $0.1 million in Q3 2025. Therefore, U.S. net sales of NERLYNX in Q3 2025 were $51.8 million versus $48.8 million in Q3 2024. The increase in Q3 2025 net revenue versus Q2 2025 was driven primarily by an increase in NERLYNX bottles sold in the U.S., inventory build of $3.1 million, offset by a higher gross to net expense. Inventory build by our distributors was approximately $3.1 million in Q3 versus drawdown of approximately $1.3 million in Q2 2025. Royalty revenue totaled $2.6 million in the third quarter of 2025 compared to $3.2 million in Q2 2025. Our gross to net adjustment in Q3 2025 was about 25.9% and 20.8% in Q2 2025. The increase on gross to net was driven mostly by a higher-than-expected Medicare rebate driven by the Inflation Reduction Act implemented in Q4 of 2022 and higher Medicaid share. Cost of sales for Q3 2025 was $12.2 million and includes $2.4 million for the amortization of intangible assets related to our neratinib license. Cost of sales for Q2 2025 was $12.3 million. Going forward, we will continue to recognize amortization of the milestones to the licensor about $2.4 million per quarter as cost of sales. For fiscal year 2025, Puma anticipates that net NERLYNX product revenue will be in the range of $198 million to $200 million, higher than our prior guidance. We also anticipate that our gross to net adjustment for the full year 2025 will be between 23% and 23.5%. In addition, for fiscal year 2025, we anticipate receiving royalties from our partners around the world in the range of $22 million to $23 million, lower than 2024 due to the fewer shipments expected to China as our partner works through regulatory transitions during the first several quarters of 2025. We don't expect any license revenue in 2025. We also expect that net income for the full year will be in the range of $27 million to $29 million. The current guidance does not include any potential release of any additional tax asset valuation allowance in our net income estimate. The company is reviewing its deferred tax assets as part of its ongoing tax valuation analysis and has not yet determined whether any adjustment will be required or if so, the potential timing or size of such an adjustment. We will continue to keep investors updated on this as it progresses. At this time, we do not believe the tariffs imposed or proposed to be imposed by the United States, particularly with other countries, will have a material impact on our product cost or results of operations. However, shifts in trade policies in the United States and other countries have been rapidly evolving and are difficult to predict. As a point of reference, our manufacturing product cost accounts for a mid- to high single-digit percentage of our cost of goods sold. We anticipate that for Q4 2025, NERLYNX product revenue net will be in the range of $54 million to $56 million. Please note that Q4 net product revenue guidance includes almost $4.5 million of product sales to one of our global partners as well as U.S. net revenue, which we will -- we expect to be in the range of $50 million to $52 million. The sales to our global partners will also contribute to the large royalty revenue we expect in Q4. We expect Q4 royalty revenue will be in the range of $13 million to $14 million and no license revenue. We further estimate that the gross to net adjustment in Q4 2025 will be approximately 24% to 25%. Puma anticipates Q4 net income between $9 million and $11 million. SG&A expenses were $16.8 million in the third quarter of 2025 compared to $18 million in the second quarter. SG&A expenses included noncash charges for stock-based compensation of $1.1 million for Q3 and $1 million for Q2 2025. Research and development expenses were $15.9 million in the third quarter of 2025 and $15.5 million in the second quarter. R&D expenses included noncash charges for stock-based compensation of $0.6 million in the third quarter of 2025, unchanged from the second quarter. On the expense side, Puma anticipates flat to slightly higher total operating expenses in 2025 compared to 2024. More specifically, we anticipate SG&A expenses to decrease by 7% to 10% and R&D expenses to increase by 20% to 25% year-over-year. The higher increase in R&D is driven by faster enrollment in our clinical trials than previously expected. In the third quarter of 2025, Puma reported cash burn of approximately $1.6 million. This compares to cash burn of approximately $2.9 million in Q2. Please note that during Q3, we made our sixth quarterly principal loan payment of $11.1 million related to our obligation with Athyrium. As a result of this, our total outstanding principal debt balance decreased to approximately $33 million. At September 30, 2025, we had approximately $94 million in cash, cash equivalents and marketable securities versus about $101 million at year-end 2024. Our accounts receivables balance was $33.6 million. Our accounts receivable terms range between 10 and 68 days, while our days sales outstanding are about 50 days. We estimate that as of September 30, 2025, our distribution network maintained approximately 3.5 weeks of inventory. Overall, we continue to deploy our financial resources to focus on the commercialization of NERLYNX, the development of alisertib and controlling our expenses. Alan Auerbach: Thanks, Maximo. On past earnings calls, we have stressed that Puma's senior management in cooperation with the Board of Directors continues to remain focused on NERLYNX sales trends in 2025 and beyond and recognizes its fiscal responsibility to the shareholders to continue to maintain positive net income. We believe that this focus has contributed to our commercial execution in a positive way. And according to our current projections, 2025 will mark the first year-over-year demand increase for NERLYNX in the United States since 2018. We are pleased to report this demand-driven growth in NERLYNX sales for the first 9 months of 2025. In addition, we believe that the positive net income that the company achieved in Q3 '25 and that the company is guiding to for the full year 2025 has resulted from the continued financial discipline across the company over the last few years. The company remains committed to continuing to achieve this positive net income, and we'll continue to reduce expenses if needed to achieve this. We look forward to updating investors on this in the future. There continues to remain a significant unmet need for patients battling breast cancer, lung cancer and other solid tumors. We at Puma are committed and passionate about finding more effective ways of helping these patients during their journey, and we will continue to strive to achieve that goal. This concludes today's presentation. We will now turn the floor back to the operator for Q&A. Operator? Operator: [Operator Instructions] And our first question comes from the line of Mark Frahm with TD Cowen. Marc Frahm: Maybe just looking forward to the breast cancer interim. Just remind us what the kind of bar you're going to be kind of evaluating that with in terms of willingness to continue to spend on that indication, particularly in light to your comments in the prepared remarks of remaining committed to staying profitable. Alan Auerbach: Yes. Thanks, Marc. So there's been 2. This is going to be alisertib in combination with endocrine. You remember, there was a previous trial TBCRC41 of alisertib in combination with endocrine. And I think that's probably going to be the gauge we're looking for to see -- to compare it to those numbers. Right now, as you know, the standard of care for ER-positive HER2-negative breast cancer is first line, they get a CDK4/6 inhibitor. Second line, depending on which mutation they have, they may get a targeted therapy or may get a different type of a combination therapy. Third line is still kind of a white space, if you will. And that's where we're focusing is in that third-line white space. So all these patients are kind of third-line endocrine, if you will. So obviously, what we would look for in terms of continued spend would really be, number one, how the efficacy compares to what we would typically expect to be standard of care in third line. But then also assuming we're able to find a biomarker where it portends for or it predicts a better outcome to alisertib, that would obviously be quite compelling as well. So we've gotten asked that question in the past, which is, okay, you have both the breast and the lung. You want to remain profitable. As we've said in the past, and I will say again, we're happy to stagger the indications to control the burn so we can remain a profitable company. Marc Frahm: Okay. That's helpful. But I guess the next steps could ultimately involve a larger pivotal program. Would that -- which I think would strain -- for any one of the indications might strain the ability to stay profitable. Would you be willing to go negative the data and go back to a loss if the data supports -- or does that require a partner? Alan Auerbach: Yes. So a couple of things to remember from that perspective, Marc. If you look at our guidance for our full year in terms of net income, remember, that includes us paying down our debt. The debt goes away mid next year, and we become a debt-free company. So you start to see cash flow generation occurring because of that. Now in terms of the pivotal Phase III that you would need, based on the other Phase IIIs I've seen in this space, I'm not anticipating this to be like a 1,000-patient trial or something. So I think it would still be within a manageable number, especially given that you're not going to hit all those expenses at once, you're going to see it spaced out over time. I think it's still possible to be able to do a pivotal Phase III just based on the cash flow from NERLYNX and remaining committed to being net income positive. Operator: With that, this does conclude today's question-and-answer session. I'd like to turn the conference back to Mariann for closing remarks. Mariann Ohanesian: Thank you for joining us today. As a reminder, this call may be accessed via replay at pumabiotechnology.com beginning later today. Have a good evening. Operator: Thank you, ladies and gentlemen, thank you for participating in today's conference call. This concludes our program. Everyone, have a great day. You may now disconnect your lines.
Operator: Ladies and gentlemen, thank you for standing by. My name is Abby, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Essent Group Ltd. Third Quarter Earnings Call. [Operator Instructions] And I would now like to turn the conference over to Phil Stefano with Investor Relations. You may begin. Philip Stefano: Thank you, Abby. Good morning, everyone, and welcome to our call. Joining me today are Mark Casale, Chairman and CEO; and David Weinstock, Chief Financial Officer. Also on hand for the Q&A portion of the call is Chris Curran, President of Essent Guaranty. Our press release, which contains Essent's financial results for the third quarter of 2025 was issued earlier today and is available on our website at essentgroup.com. Prior to getting started, I would like to remind participants that today's discussions are being recorded and will include the use of forward-looking statements. These statements are based on current expectations, estimates, projections and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially. For a discussion of these risks and uncertainties, please review the cautionary language regarding forward-looking statements in today's press release. The risk factors included in our Form 10-K filed with the SEC on February 19, 2025, and any other reports and registration statements filed with the SEC, which are also available on our website. Now let me turn the call over to Mark. Mark Casale: Thanks, Phil, and good morning, everyone. Earlier today, we released our third quarter 2025 financial results. Our performance this quarter again underscores the resilience of our business as we continue to benefit from favorable credit trends and the interest rate environment, which remains a tailwind for both persistency and investment income. These results reflect the strength of our buy, manage and distribute operating model, which we believe is well suited to navigate a range of macroeconomic scenarios and generate high-quality earnings. For the third quarter of 2025, we reported net income of $164 million compared to $176 million a year ago. On a diluted per share basis, we earned $1.67 for the third quarter compared to $1.65 a year ago. On an annualized basis, our year-to-date return on equity was 13% through the third quarter. As of September 30, our U.S. Mortgage Insurance in force was $249 billion, a 2% increase versus a year ago. Our 12-month persistency on September 30 was 86% flat from last quarter, while nearly half of our in force portfolio has a note rate of 5% or lower. We continue to expect that the current level of mortgage rates will support elevated persistency in the near term. The credit quality of our insurance in force remains strong, with a weighted average FICO of 746 and a weighted average original LTV of 93%. Our portfolio default rate increased modestly from the second quarter of 2025, reflecting the normal seasonality of the Mortgage Insurance business. Meanwhile, we continue to believe that the substantial home equity embedded in our in-force book should mitigate ultimate claims. Our consolidated cash and investments as of September 30 totaled $6.6 billion with an annualized investment yield in the third quarter of 3.9%. Our new money yield in the third quarter was nearly 5%, holding largely stable over the past several quarters. We continue to operate from a position of strength with $5.7 billion in GAAP equity, access to $1.4 billion in excess of loss reinsurance and $1 billion in cash and investments at the holding companies. With a 12-month operating cash flow of $854 million through the third quarter, our franchise remains well positioned from an earnings, cash flow and balance sheet perspective. We remain committed to a prudent and conservative capital strategy that allows us to maintain a strong balance sheet to navigate market volatility while preserving the flexibility to invest in strategic growth. Thanks to our robust capital position and strength in earnings, we are well positioned to actively return capital to shareholders in a value-accretive fashion. With that in mind, year-to-date through October 31, we have repurchased nearly 9 million shares for over $500 million. At the same time, I am pleased to announce that our Board has approved a common dividend of $0.31 for the fourth quarter of 2025 and a new $500 million share repurchase authorization that runs through year-end 2027. Now let me turn the call over to Dave. David Weinstock: Thanks, Mark, and good morning, everyone. Let me review our results for the quarter in a little more detail. For the third quarter, we earned $1.67 per diluted share compared to $1.93 last quarter and $1.65 in the third quarter a year ago. My comments today are going to focus primarily on the results of our Mortgage Insurance segment, which aggregates our U.S. Mortgage Insurance business and the GSE and other Mortgage Reinsurance business at our subsidiary, Essent Re. There is additional information on corporate and other results in Exhibit O of the financial supplement. Our U.S. Mortgage Insurance portfolio ended the third quarter with insurance in force of $248.8 billion, an increase of $2 billion from June 30, and an increase of $5.8 billion or 2.4% compared to $243 billion at September 30, 2024. Persistency at September 30, 2025, was 86% compared to 85.8% at June 30, 2025. Mortgage Insurance net premium earned for the third quarter of 2025 was $232 million and included $15.9 million of premiums earned by Essent Re on our third-party business. The average base premium rate for the U.S. Mortgage Insurance portfolio for the third quarter was 41 basis points, consistent with last quarter, and the average net premium rate was 35 basis points, down 1 basis point from last quarter. Our U.S. Mortgage Insurance provision for losses and loss adjustment expenses was $44.2 million in the third quarter of 2025 compared to $15.4 million in the second quarter of 2025 and $29.8 million in the third quarter a year ago. At September 30, the default rate on the U.S. Mortgage Insurance portfolio was 2.29%, up 17 basis points from 2.12% at June 30, 2025. Mortgage Insurance operating expenses in the third quarter were $34.2 million, and the expense ratio was 14.8% compared to $36.3 million and 15.5% last quarter. At September 30, Essent Guaranty's PMIERs sufficiency ratio was strong at 177% with $1.6 billion in excess of apple assets. Consolidated net investment income and our average cash investment portfolio balance in the third quarter were largely unchanged from last quarter due to our share repurchase activity. In the third quarter of 2025, we increased our 2025 estimated annual effective tax rate, excluding the impact of discrete items from 15.4% to 16.2%. This change was primarily due to withholding taxes incurred on a third quarter dividend from Essent U.S. Holdings to its offshore parent company. As Mark noted, our holding company liquidity remains strong and includes $500 million of undrawn revolver capacity under our committed credit facility. At September 30, we had $500 million of senior notes -- senior unsecured notes outstanding, and our debt-to-capital ratio was 8%. During the third quarter, Essent Guaranty paid a dividend of $85 million to its U.S. holding company. As of October 1, Essent Guaranty can pay additional ordinary dividends of $281 million in 2025. At quarter end, Essent Guaranty's statutory capital was $3.7 billion with a risk-to-capital ratio of 8.9:1. Note that statutory capital includes $2.6 billion of contingency reserves at September 30. During the third quarter, Essent Re paid a dividend of $120 million to Essent Group. Also in the third quarter, Essent Group paid cash dividends totaling $30.1 million to shareholders, and we repurchased 2.1 million shares for $122 million. In October 2025, we repurchased 837,000 shares for $50 million. Now let me turn the call back over to Mark. Mark Casale: Thanks, Dave. In closing, we are pleased with our third quarter financial results as Essent continues to generate high-quality earnings, while our balance sheet and liquidity remains strong. Our performance this quarter reflects the strength and resilience of our franchise, while Essent remains well positioned to navigate a range of scenarios given the strength of our buy, manage and distribute operating model. Our strong earnings and cash flow continue to provide us with an opportunity to balance investing in our business and returning capital. We believe this approach is in the best long-term interest of our stakeholders and that Essent is well positioned to deliver attractive returns for our shareholders. Now let's get to your questions. Operator? Operator: [Operator Instructions] And our first question comes from the line of Terry Ma with Barclays. Terry Ma: Just wanted to start off with credit. New notices were a bit lower than what we had, but the provision on those notices were higher. So any color on kind of just the makeup from a vintage or even geography perspective this quarter? Mark Casale: Yes. Terry, it's Mark. I wouldn't say there's nothing really to read out in terms of geography or trends. The one thing for you guys as analysts, we pointed this out a few quarters ago is just our average loan size continues to increase. I mean ever since for years, it was like $230,000. And when the GSEs started raising their limits and it really kind of picked up post-COVID. So our average loan size, if you just look through the stat supplement for the insurance force is close to $300,000. So again, larger loans when they come through kind of into default, it's going to be a larger provision. So I wouldn't read any more into it than that. I think the -- again, the default rate is relatively flattish. And I think from a credit position, there's nothing we're really seeing that concerns us at the current time. Terry Ma: Got it. That's helpful. And then maybe just a follow-up on the claims amount. The number was higher and also the severity. So like anything to call out there, like anything idiosyncratic? Or is there more of a trend? David Weinstock: Terry, it's Dave Weinstock. Yes, there's really nothing to point out there. A lot of that is going to depend on when we get documents in and when the claims are fully adjudicated and ready for payment. And so you're going to see fluctuations based on what the underlying claims are. But at the end of the day, there are not a lot of claims there. And the biggest takeaway really is that the severity continues to be well below what we're reserving at. So we're getting favorable results there. Operator: And our next question comes from the line of Bose George with KBW. Bose George: First, just on the ceded premiums, it was kind of the high end of the range. Is that a good level going forward? Or does that just bounce around depending on the timing of when you're doing the reinsurance transactions? David Weinstock: Bose, it's Dave Weinstock. Yes, it's going to bounce around a little bit based on default and provision activity. So it's seasonal. I think you saw the ceded premium being a little bit lower in the first half of the year, similar to where you see our defaults being more favorable and lower. And this is the seasonal second half of the year, as we've talked about, we definitely -- you generally see an uptick. And so you're going to see a little bit of an uptick in the ceded premium. Mark Casale: Yes. And also keep in mind, Bose, we raised the quota share this year to 25%. So that is going to create a little bit more volatility. At the end of the day, it comes through the wash, right? So in terms of the mix between the provision and expenses and ceding commission, but yes, it will bounce around a little bit more. So I'd be conscious of that in your models. Bose George: Okay. Great. And then just in terms of the tax rate, what drove the higher tax rate? And then just can you remind us just based on how much you're ceding, et cetera, where you think the tax rate is going to be over the next, say, 12 months? Mark Casale: Yes. I mean I think Dave alluded to it in the script, a lot of it is just a little bit of the tax friction moving from kind of guarantee to U.S. up to Bermuda and out to shareholders. So I think 16 and maybe a touch higher going forward. I would think through that with your models, I'd be relatively conservative those. And it really gets back to the fact that we're just distributing a lot more capital back to shareholders. And that's kind of a little bit of a signal that we don't really see it changing much, given where sitting with still $1 billion of cash at the holdco and kind of where the stock is right around bookish value. And I think we pointed this out last time in our investor deck, which will come out kind of post earnings, like the embedded value of the business, we believe, is much higher than kind of where we are today, right? And just again, it's simple math, it's nothing revolutionary. We have $6 billion of cash, $6 billion of equity. We trade right around $6-ish billion. It doesn't really give credit for the $250 billion of insurance in force that we have. And there's a significant embedded value. I think we've proven that over the past 10 years in terms of the cash flow. And just look, again, just we generated $854 million of cash flow over the last 12 months. So based on that and where we're -- just given the capital position, and we're still generating unit economics kind of in that 12-ish to 14-ish range. We think it's the best value. So I think we'll continue to do that. But there, again, it just getting the cash out is -- creates a little friction. But I think from a shareholder perspective, we'll pay a couple of extra bucks on the tax rate. But I think from lowering the share count and kind of delivering value to shareholders, it's a little bit of a no-brainer. Operator: And our next question comes from the line of Rick Shane with JPMorgan. Richard Shane: I'm looking at Exhibit K and one trend that is pretty consistent is the increase in severity rates, and that makes sense given slowing home price appreciation and vintage mix. It was 78% this quarter. I'm curious, long-term where you think that could go? Are we sort of asymptotically approaching the limit there? Or are we -- should we expect that to continue to rise? Mark Casale: Yes. I mean I wouldn't -- I don't know if you would expect it to rise. Again, we -- the provision is at 100, Rick, just so you know. The embedded HPA in the book is still kind of 75-ish. So I mean, in terms of mark-to-market LTV. So some of it is just timing, right? If somebody from the later vintages kind of call it, '23 or '24 goes into default, there's going to be a higher provision or if they go into claim, we're going to pay a higher claim there because they have less embedded value. But taking a step back just at the portfolio level, we're not going to get too fussed about it, Rick. I mean, again, you're talking about a relatively low losses. And remember, just -- and we point this out every quarter or 2, just what the real risk is in our business, right? Take from my seat, Rick, we own that first loss position, right? So call it 2 to 3 claims out of 100. We hedge out from above that kind of into that 6, 7 range, and we reattach above that. That's the risk in the business, right? We are a specialty insurance type business, almost like a cat where our catastrophe is a severe macroeconomic recession. And that's when we hold capital when we think about PMIERs, we think about the different stress tests that we run, whether it's Moody's Constant severity S4, the GFC, that's when we come in and think about it week-to-week or month-to-month. That's -- we're focused really on making sure we're fine there, and we clearly are given the amount of capital that we're using to repurchase share. So getting back to this, again, we clearly look at it. I think we're conservative in how we provision just from a severity standpoint because I think that's -- the severity is an actuarial -- I mean, the provisions is an actuarial-based model. So we don't really mess with it quarter-to-quarter, even year-to-year that much. So again, I'm just trying to -- from a big picture standpoint, sure, you're going to try to point out trends. And Terry pointed out the trends around the new notices, those are all good. That's like you guys have to do that for your models. But I think taken like a step back, the biggest metric for the quarter, Rick, is we produced $854 million of cash over the last 12 months. So again, not trying to get too high level, but I mean, I think it's important to kind of put context around some of these numbers. Richard Shane: No. Look, it's a fair point, Mark. Given how low losses have been for so long, a modest dollar movement looks like a larger -- looks like a significant percentage movement. And I think we're all sensitive to that and trying to sort of, I think, understand what the normalized returns on the business are? And do you think we are approaching those levels? Or -- and look, you've enjoyed an extraordinary period for a long time, for a whole host of reasons that we've all talked about. But as the business normalizes and sort of reverts to the return levels that the two of us spoke about a decade ago? Or do you think we're getting there now? Mark Casale: No, it's a good question. And Rick, we've been studying this. So let's go back in time, right? Let's start with 1990, which is really the beginning of the modern day Fannie and Freddie. And let's just go with the last 35 years. If you take away the GFC, which it's hard to do, but just to stick with me here for a second, the average loss rate on Fannie and Freddie back loans is less than 1%. That, I believe, is actually -- so it's not this, "Oh my goodness, we have such a good run, when is it going to end?" This is it. This is the business. It's a great business. You're talking about, and again, and some of the things that caused the great financial crisis because you don't want to ignore that. And the reason we like the business, coming out of the crisis, you had the Dodd-Frank qualified mortgage rules. So 35% of the loans that were done during the crisis, they no longer qualify. They literally got the RIF-wrapped out of the industry. So that is now either going, it's going to either FHA or it's going to kind of non-QM or they're not being originated, which is the most case. A lot of those borrowers are ending up in single-family rental. It's a great outcome for them, right? So then all of a sudden then you add in the increased, I would say, sophistication of DU and LP at the GSEs, their quality control has gotten significantly better. I mean, over the last 15 years. So all of a sudden, the credit guardrails around our business are exceptional, and we don't see it changing. Unless there's something happens with GSE reform, and clearly, we look at that. But as long as the market is where it is today, this is a very narrow fairway. And so we don't see really credit changing that much. It's hard. I mean, actually, our credit for this -- the last 2 quarters, Rick, was the best FICO's we've had since we started the company. So -- and part of that's affordability, part of it is affordability, like just folks are having a harder time qualifying. But the credit quality in this business is exceptional. And just from a public policy standpoint, 65% of our borrowers are first-time homeowners. I mean, I was with a young guy last week who just got mortgage insurance through one of our clients. He's paying like $65 a month. You put 10% down. I mean you can't beat it. It's a great value to the customer, which you always want to have, right? The borrowers is our ultimate customer, and then I think the math for us. So I would say from -- and some of our longer-term investors kind of know this clearly, I would stop and one of our other analysts has always asked me, Mark, is this as good as it gets? Guys, It's been good for a long time. I mean -- and I don't really -- again, there's going to be some volatility Rick, quarter-to-quarter or year-to-year. Look, If unemployment goes up, we're probably going to pay some losses. But remember, we're kind of capped until we hit until we go through that mezz piece. So it's relatively well boxed. Hence, our confidence in paying the quarterly dividend and right now in terms of where we are returning capital to shareholders has been quite a shift the past 12 months, but part of it was we've just continued to accumulate cash and we've had this retain and invest mentality. We just haven't invested in anything. And so we look at it now and say the best investment we can make is in the company. And if we keep this pace up, Rick, every time you repurchase shares, our long-term owners, which include the senior management team, we own a little bit more of the company. And if I'm going to own a business, this is my favorite business. So we'll see. So sorry for the long-winded answer, but I want to again try to give some of the investors on the phone some context. Richard Shane: No. Mark, look, I appreciate it. And I suspect there are some folks who are listening to this call imagining the 2 of us on rocking chairs debating the stuff. And that's okay, too. I appreciate the answer. Operator: [Operator Instructions] And our next question comes from the line of Mihir Bhatia with Bank of America. Mihir Bhatia: I actually want to follow up on Rick's last question there about just about the guardrails, around underwriting currently. I think there was news yesterday about Fannie removing the minimum credit score requirements. There's been some noise out of Washington about trying to do -- play a more active role in housing or lower increased housing demand, if you will. And I was just wondering from your seat, are you seeing any signs of that? Are originators trying to get more stuff underneath, gets more stuff approved that maybe wouldn't have been -- they wouldn't have tried a couple of years ago. Just wondering what that looks like. Mark Casale: It's a good question. There is a lot of noise around kind of credit scores and Vantage and Fair Isaac and Vantage can qualify more borrowers, all those sort of things. The reality is, Mihir, the GSEs haven't changed their systems yet. So until that happens, there's really not going to be changed. So like a lender would be unable today to kind of "get something past the GSEs." It gets back to my point, the GSE's, their systems are fantastic. And in terms of DU and LP, very sophisticated. And if they do get through it, they're most likely their QC and repurchase program, they're going to put that back to lenders. So lenders have I think lenders have really understood that the game today, and you're seeing some of the bigger lenders do it, the game today is all about lowering and being efficient on origination cost. That hasn't always been the case. So if you go before the crisis, what would happened is if you get a small or midsized mortgage banker, and all a sudden production is down, they immediately go to credit expansion right? I wouldn't normally do that loan, but I have fixed costs, I'm going to try to get that loan in either through the GSEs or to whole loan buyers. You can't do that today. I mean, whether it's -- you're trying to get it through the GSEs, you're trying to go through some of the larger correspondent purchases like PennyMac, whose systems are also excellent. And it's not going to happen. So you're almost -- you have to either you have to manage costs. And again, from a credit provider, that's exactly where we want it. So we're not too worried about it. And if it were to go, we mentioned this last call, if it were to change, right, and I'm not saying it's going. If it were to change and you could have like kind of a wider fairway, so to speak, so more things qualify. The fact that our credit engine doesn't really rely on FICO, we're really -- we're almost credit score agnostic. We're looking at the 400 kind of variables underneath that along with things in the 1003, we're not too worried. We can see through that. In fact, our model works better when things are a little bit more disparate, so to speak. It doesn't work as well in a market like this. It kind of works more from a premium standpoint, picking and choosing, but credit, not -- you almost don't really need it from a FICO standpoint. So again, I think I would look at it that way. I think it's something that we're pleased with, but I don't see any kind of chink in the guardrails to date. Operator: [Operator Instructions] And our next question comes from the line of Doug Harter with UBS. Douglas Harter: Can you talk about your plans to upstream capital from the MI subsidiary? It sounds like you have a lot of capacity left for the year. Do you plan to kind of spill that over or do a large dividend in the fourth quarter? Mark Casale: I think it's pretty consistent with the dividends. It might be a little bit larger in the fourth quarter for sure. I think, again, as we look at kind of PMIERs, Doug and credit and where it's going, we feel comfortable continuing to upstream cash from Guaranty to U.S. Holdings. And as I said earlier, there's a little bit of friction getting it back to the group level, but that's -- and that's not the worst problem to have. And also, we have the quota share reinsurance, that's one of the reasons we took it up to 50% earlier this year. That's another kind of backdoor way to get cash up to the holdco. Douglas Harter: And then you -- obviously, you bought Title a little while ago. Can you just talk about how you're thinking about the benefit of the great business that is MI versus looking to further diversify and have other avenues of growth? Mark Casale: Yes. I mean I think right now, it's a good question. I think Title has performed pretty much in line with what we thought, if we would have thought rates would be this high, to try to be honest with you. I think if rates go lower, we're very levered to rates given the lender focus of the business. We have an underwriter. It's really kind of in it's still small stages growing primarily in Texas and Florida and a bit of the Southeast. That's kind of the purchase angle of the business, but it's small. So the real lever is lenders and refinance. And we've continued to add lenders, we're working on developing a new system. We're still building the business out per se, and we're fine with that. So it's kind of in corporate and other, Doug. And think of that almost as like an incubator. So again, if it gets big enough, it will pop up as its own segment. If it stays small, it stays small. And that could happen. And clearly, Essent Re has some opportunities outside of mortgage. We haven't really done anything yet, but there's things that we look at. So I would look at it as another "incubator". We kind of call them call options. But for the time being, clearly, the focus and where the cash flow is coming in from the MI business. And when we look at investment opportunities whether it's title, other acquisitions that come to us, we still feel at this time, our stock is the best value, and we're kind of voting with our feet there. And I don't really expect it to change absent like some large movement in the stock. And then if there's a large movement in the stock, which it's -- it would be nice per se, but not necessarily. If you're in the business of buying back shares and shrinking ownership, this isn't the worst place to be in. If the stock were to move outside of our range, we would probably do like a special dividend. We'll continue to look for ways to get capital back to shareholders. But given just how good the MI business is today we would need to -- again, there's going to have to be a good reason for us to do it. And I look at it, if you're looking at a way to kind of quantify it, our book value per share today is right around $60. It's a tad below 58-ish. It will finish -- my guess is it will finish the year around $60 Doug. So if we look and say, hey, we're going to grow it, 10%, 12% a year, which we've been doing, that book value per share over the next 4 or 5 years is going to be $85, $90, right? It's big picture, right? Just looking at the numbers. So as we look at an acquisition, it's going to have to either help us increase that book value per share target or achieve that book value per share target sooner, all else being equal or making us a stronger company and things like that. There's other factors in there. That's a pretty high bar. That's a pretty high bar. We kind of know this business well. And like what I've said, just in my response to Rick earlier, this is such a good business. We're a little bit spoiled and in terms of how good the business is, again, there's going to be some bumps along the road. There always are, but that's why you have capital, right? You have capital to withstand those bumps and reinsurance is another form of capital. We expect kind of those expected losses per se. And then you have capital on reinsurance for unexpected losses, they'll come, but that's what we're prepared for. We don't necessarily try to sit down and say, where is the market going? We try to prepare for every different avenue that the market potentially could go down. I mean, that just comes with experience. We've been doing this for quite a while. But that being said, so to sum it up, the investment right now continues to be an asset. I don't expect that to change absent something really special comes along. Operator: And there are no additional questions at this time. So I will now turn the conference back over to management for closing remarks. Mark Casale: Thanks, everyone, for their time and questions. And have a great weekend. Operator: And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Operator: Thank you all for joining us this morning. Before I turn the call over, I need to advise that certain statements made during this call today may contain forward-looking information, and actual results could differ from the conclusions or projections in that forward-looking information, which include, but not limited to, statements with respect to the estimation of mineral reserves and resources, the timing and amounts of estimated future production, cost of production, capital expenditures, future metal prices, and the cost and timing of the development of new projects. For a complete discussion of the risks, uncertainties, and factors, which may lead to the actual financial results and performance being different from the estimate contained in the forward-looking statements, please refer to Allied Gold's press release issued last night announcing quarter 3, 2025, operating and financial results. I would like to remind everyone that this conference call is being recorded and will be available for replay later on today. Replay information and the presentation slides accompanying this conference call and webcast are available on Allied Gold's website at alliedgold.com. I will now turn the call over to Peter Marrone, Chairman and CEO. Peter Marrone: Operator, thank you very much. And ladies and gentlemen, let me begin this conference call by pointing to the quote at the bottom of the first slide of our presentation, and I would like to repeat that quote. Let's not react to speculative headlines and geopolitical matters. We continue to operate normally. We refer to Mali in particular, and particularly in light of recent headlines. Let me begin by talking about the people of the country. They are industrious, entrepreneurial, and overwhelmingly in the country across the population, there is support for mining. Similar to many countries, the politics, geopolitical circumstances go on. Mostly, they are stable, sometimes changes occur. But business goes on, and this is especially true for mining. Recent disruptions in fuel supply into the capital of the country, affect only the capital, and there are signs of improvement. Regional governments and internationally support has been offered. And national efforts to counter the factors that have disrupted the fuel supply have received local, regional, and international endorsement. Prolonged fuel shortages do risk civil unrest and other challenges. But so far, this has not occurred and fuel supplies have begun to enter the capital. While there has been unexpected government change in the country before, and this is true for many countries, it has not been the result of external forces, and that seems to be true now as well. And in those times of government change, I remind everyone that mines have continued to operate normally, production and cash flows were generated. We have no reason to believe that this is not true now, and we attribute that to the industrious and entrepreneurial nature of the people, who support business as usual regardless of political affiliation or affinity and regardless of localized conflicts. So with that then, our Q3 was certainly ordinary and normal course. We had solid production of just over 87,000 ounces that sets us up for a strong Q4. We had strong cash generation, just under $110 million of adjusted EBITDA and our operating cash flow of just under $200 million. We made significant progress on the Sadiola Phase 1 expansion and the Kurmuk development. Our all-in sustaining costs of $2,092 per ounce were down 11% as compared to the second quarter. As we had indicated with our second quarter conference call, we would expect, and we expect further reductions in Q4 with higher grades at Sadiola, particularly with the Phase 1 expansion completed over the course of the next few weeks into December. Operations are performing well, we're operating normally at Sadiola, and that carries strong momentum into the fourth quarter. At Agbaou production quarter-over-quarter from Q2 to Q3 was up 43%. We expect that sustained production to continue into Q4 and into next year. And at Bonikro, we're on plan, grades are where we expect them to be, recoveries and throughput improved. And again, we expect that that will continue into this quarter and the quarters to follow. We had adjusted EBITDA to conclude of $110 million, cash flow of just under $200 million and cash balances at the end of the third quarter of just over $262 million. What to expect then in Q4 and beyond? Sadiola and Bonikro will be notably higher. We indicated up to 40% higher in Q4 over Q3. We are almost halfway through the quarter, and we can see that production ramp-up progressing very well. Our Q4 costs are expected to improve. Momentum from that is expected to continue into the first quarter of next year and throughout the year. And we stand by the guidance of a production level for 2025 that is greater than 375,000 ounces, that sets us up for a consistent 100,000 ounces per quarter at improved costs, leading to improved financial performance and then Kurmuk kicks into production by the middle of the year. With that, ladies and gentlemen, let me pass the call to Johan, our Chief Operations Officer to go through our production in more detail. Johannes Stoltz: Good morning, Peter, and good morning, everybody. Thank you very much, Peter, for the headlines. I would like to start off with the -- on Slide 3, the operations, and starting off with Sadiola. The operations were stable and on plan. I was at Sadiola last week and operations are running normally. We're not seeing any logistic disruption and consumable inventories, including fuel remains at normal levels. The operation is running normally with noticeable improvements. Production is on track to meet the full year guidance with Q4 expected to be 40% higher than previous quarters. Phase 1 expansion remains on schedule for completion in December, enabling us to treat up to 60% fresh ore in the mill feed. Bonikro was on plan with higher grades, better throughput and recoveries. The stripping and maturity of Pushback 5 and Pushback 3 will provide us access to higher grades at lower cost in Q4. Agbaou production increased 43% quarter-on-quarter, as Peter also alluded to, and driven by higher grades and throughput and operational improvements. Overall, operations were on plan, positioning us higher production and lower unit cost in Q4. If we go to the next slide regarding the Sadiola Phase 1 expansion progress. The Phase 1 expansion remains on schedule and continued to advance through Q3 and into Q4. Mechanical installation of the new mill and crushing circuit is complete. The mobile pebble crusher is on site and ready for the December commencement. Engineering and pre-leach thickener is on its way to support higher fresh ore processing with Phase 1 nearing completion. We expect new commission circuit to be ready to receive ore late in the fourth quarter. At that point, Sadiola will be able to process up to 60% fresh ore through the plant, which will materially lift throughput rates, improved recoveries, and lowering processing costs. This expansion will bring additional flexibility into the operation and pave the way for lower cost and improved predictability. So in short, Phase 1 is on plan, commissioning begins in December, and it will set up structural setup change for Sadiola production and cost base. Moving over then to the Kurmuk progress. Kurmuk continues to advance on schedule. Engineering and the substantial complete and the site extension is well underway. The plant construction, including the mechanical erection, concrete works, and the key infrastructure such as water, the water dam is advancing. Logistics are active. Long lead equipment is on site. Initial ore supply has been established from both Ashashire and Dish Mountain. The plant capacity has been approved to the 6.4 million tonnes per year, which enhances the long-term production profile. Looking ahead, priorities to complete the mechanical and electrical infrastructure works, build up to the 3-month high-grade stockpiles, connect the power line, and advance to the pre-commissioning. Upcoming priorities include the completion of the construction, build the high-grade stockpiles, as alluded earlier, provide the line connection and for -- and the pre-commissioning. We maintain on track for first gold by mid-2026. And with this, I'd like to pass over to our Chief Exploration Officer, Don Dudek. Thank you. Don Dudek: Thanks, Johan, and good morning. Hello, everybody. One thing I want to emphasize for Sadiola, and it's something we tend to forget because of time. But this deposit has produced over 8 million ounces of gold, and we have 10 million ounces of mineral resources on the books. Because of the robustness of the system, we see the potential or we have an exploration goal to add another 3.5 million ounces of resources within the next 5 years. Including within that is about 1 million ounces of oxide inventory and resources. Our exploration strategy underpins our long-term production profile for this project and supports mine life extension at attractive returns. The oxide zones are located near infrastructure, and oxide boosts flexibility and profitability within our operations. Our drilling is focused on near-mine targets. And really, we're targeting those zones, which have higher-than-average grades, which again supports the long-term plan. And they also provide an optionality for production that will again service us over the long term. We have 19 years of mineral reserves, and we see this increasing over time, just again based on the robustness of the system. When you look at these systems in West Africa, a lot of the large gold zones, they really don't -- we haven't found the limits of them, and the limits are more defined by operation cost profile versus running out of mineralization. So that's something very important to keep in mind. In this last year, we've seen significant success at 4 different zones. And again, that was touched upon in the exploration news release. And these discoveries, as noted before, validate the scale and the scope and the potential of this mineralized system. Going forward, drilling will remain active into year-end, and continue through 2026 and beyond. We are prioritizing the targets with the highest potential, and again, with a focus on oxides. We're initiating new geophysical surveys over a 2.5 kilometer stretch of productive stratigraphy, that already has produced a couple of recent near-term gold deposits. This area has never been systematically tested. And as we march ahead with the drill, we keep on finding more mineralization. Our results from this work will be summarized in an updated mineral resource estimate in Q1 2026. And this update will capture new discoveries, oxide additions, and extensions. Furthermore, we plan exploration updates for Kurmuk in Ethiopia late this month, and for our project group in Cote d'Ivoire in early '26. With that, I'll pass things off to Jason to discuss the Q3 financial performance. Jason LeBlanc: Great. Thanks, Don. Good morning, everyone. In Q3, the business delivered another solid quarter of financial results. Adjusted net earnings were $0.29 per share and adjusted EBITDA came in at almost $110 million, reflecting strong operating performance and improving costs across the portfolio. We generated $182 million in net operating cash flow during the quarter and ended with a cash balance of $262 million, giving us strong liquidity into Q4 and as we finish up the construction of Phase 1 at Sadiola and at Kurmuk in Q2 next year. All-in sustaining costs were $2,092 per ounce, an improvement of 11% quarter-over-quarter despite higher royalties from gold price. So overall, Q3 delivered strong cash flow generation, improving costs and higher margins. More importantly, we're positioned for a stronger Q4 with a combination of increased production, lower unit costs and higher gold prices that will result in a step change in cash flow generation to end the year. As just mentioned, most imminently in Q4, we have our best production quarter of the year, driven by production increases at Sadiola and Bonikro in the range of up to 40% over Q3. At Sadiola, we wrap up the Phase 1 expansion and have the benefit of new oxide zones to complement higher-grade fresh ore that can now be processed through the new mill at a higher throughput rate than before. At Bonikro, our intensive stripping campaign over the last year is finishing up and the mine starts a higher-grade mining sequence with modest waste removal in Q4. But our improving performance doesn't end there. As we look to 2026, the operating and financial performance will transition to a higher sustainable platform with the completion of our development projects. Importantly, the predictability and operational flexibility of Sadiola and our Cote d'Ivoire complex improved prospectively. In Cote d'Ivoire, we moved to more direct ore extraction at higher grades with less waste movement. At Sadiola, we're able to primarily rely on the abundant higher-grade fresh ore reserves as primary plant feed for up to 60% of throughput. Oxides fill the balance of the mill compared with being the primary feed source in this and recent years. Furthermore, new oxide discoveries represent optionality to potentially increase production levels at Sadiola up to 230 ounces per year in the medium term. And finally, at Kurmuk, first gold is fast approaching. This will be a step change for Allied, adding a new long-life, low-cost asset that significantly increases group production and cash flow. Kurmuk is expected to be transformational to our portfolio and financial profile. On the chart here, you can see the production growth we're expecting in coming years. This will correspond to impressive top line growth in today's gold environment, the more impressive will be the leverage effect we see in EBITDA and cash flow generation, because of our fixed overhead and decreasing unit operating costs or AISC. With that, I'll hand things back to Peter for his wrap-up. Peter Marrone: Thank you very much, Jason. So in terms of -- just to conclude the presentation, upcoming milestones with our Sadiola exploration update, as Don mentioned, we have demonstrated value creation short term and long term, finding more oxides and expanding the already robust inventory of fresh ore. We have updates coming for our other mines. That includes an exploration update for Kurmuk in November and for the Cote d'Ivoire complex in January. Expect that we will have completed the Sadiola Phase 1 expansion late this year, literally over the course of a few weeks now. That has a huge impact on operational flexibility because of that abundance of fresh ore. We have an analyst and investor site visit at Kurmuk, which is expected early in Q1. We have the Sadiola Phase 2 expansion update, how we intend to progress to get to that 350,000 ounces to 400,000 ounces per year, which we plan to deliver in January next year. We have had a team in Mali and in Cote d'Ivoire last week on our reserves and resources to complete their work, so that we can provide an end of year reserve and resource update, including the impact of Oume on the Cote d'Ivoire complex. And of course, including in that is Kurmuk, which we expect in February. Our Q4 results, of course, are expected soon after the completion of the quarter, in late January or early February. We will provide an update on Agbaou and its reserves and resources, which we expect in the second quarter. We start Kurmuk operations in the middle of the year. I should say with respect to Agbaou that of course, the objective there is an extension of mine-life. Ladies and gentlemen, we've committed to improving improvements in block models and mine plans, our mining efforts, our processing, creating organizational effectiveness that begins with hiring senior local persons to manage our operations. All of that is now in place. We do not identify here the results of that, but those results include improving production and costs this quarter, the quarter that we are now in and into next year. New equipment, better utilization, better mine plans, confident operators, access to higher grade ore, enhanced mining access, and flexibility. And that positions us for a strong fourth quarter and an even stronger 2026 across all measures, including production, costs, and cash flow. Operator, perhaps at this point, we can open the call to questions. Operator: [Operator Instructions] And your first question comes from Carey MacRury from Canaccord Genuity. Carey MacRury: Hello, good morning, Peter and team, and congrats on the good quarter. I guess my first question is just on Sadiola Phase 2 -- Phase 2 -- or sorry, Phase 1 is almost complete. It sounds like you're adding more oxide. When realistically -- like how should we think about the timing of when you'd actually commit to Phase 2 in terms of putting a shovel on the ground? Peter Marrone: Yes. So let's begin with first principles, Carey. As I said a few moments ago, in -- either with our year-end results or in advance of that, so that would mean in January, we will provide an update on what we intend to do with Phase 2. We have a feasibility study for a new plant up to 10 million tonnes per year, and that gets us that production platform of 350,000 ounces to 400,000 ounces. That would idle the existing plant. We would commit to expenditure by the end of 2026, and we would be in production by late '28, early 2029. As I mentioned, that would also mean that we will have decommissioned the existing plant. But over the course of the last 15 months to 18 months, we've been looking at an alternative. It's something that we were very familiar with as a management in Yamana. We're looking at how can we take the existing plant, further modify it to increase its throughput, not to 10 million tonnes per year, but something in between the current level to 10 million. How do we improve recoveries so that we get to a similar production level in the range of 350,000 ounces per year, but with 2 improvements. The first is potentially less capital. And the second is better capital efficiency. In other words, we're not committing to that capital completely upfront. We're just about complete on that technical work. And with the completion of that technical work, we have Board meetings in December, and we expect then that in January at the latest with our fourth quarter results, we will provide you with our take on what is the best course for us, taking all factors into account, what is the best capital efficiency, delivers the best results and the greatest certainty. Carey MacRury: And then maybe just reserves and resource price is pretty low compared to -- we were sitting at $4,000 an ounce. I guess within your portfolio, are there any specific assets that really have better optionality at maybe not $4,000, but higher prices than reserves and resources? Peter Marrone: Yes. Really good question. And that one really applies to Agbaou. So part of the effort on Agbaou is a 3-part program that we've undertaken to improve mine life. And one of -- the first part of that is can we look at the pit design at a higher gold price. And we're looking at a $2,000 pit design. What does that do in -- and of course, the infill that follows from that and what does that do in terms of extending mine life. The other 2 components, of course, is a possible underground and regional exploration opportunity. We'll have more to say on that into next year, as I mentioned, but you should expect that for that asset, we will be using a $2,000 gold price for reserve estimation. We're reviewing what our peers are doing more generally to see what they have already done or what they're planning to do. So we are evaluating at this point, where I'm personally leaning, but we have to have lots of discussions with management is a $2,000 gold price for reserves across the board to complement what we're already doing at Agbaou and $2,300 for resources. Operator: And your next question comes from Justin Chan from SCP Resource Finance. Justin Chan: Congrats on the quarter. I'll consolidate. I have 2 -- instead of one question, a follow-up, I'll just -- if you wouldn't mind, I'll ask 2 separate questions. Just one is on -- just on the accounting. Is the 2 prepays that were mentioned at the end of September in the documentation, were those included in cash flow from ops, just to make sure my model is accounting for everything correctly. That's my first one. Peter Marrone: Yes, that's right, Justin. There weren't much… Justin Chan: Okay. Appreciate the color. Peter Marrone: Hey, look at maybe the EBITDA, they're not… Justin Chan: And then the second one is, I mean, there's a lot of headlines over the weekend, especially just on supply chains and fuel availability in Mali. I was just curious if you guys could give some color on maybe what you're seeing on the ground. Sometimes there's obviously a difference between what media says and what the actual operators are seeing? So yes, could you give us your perspective on the current operating situation? Peter Marrone: Yes. I tried to address that at the beginning, Justin. I think it would be wrong for us to talk about what is the geopolitics of one thing or another other than to say that, look, it's business as usual. There is a fuel disruption. There are many reasons for that fuel disruption in -- that it has affected the capital. Interestingly, as that -- the first of these articles was published on Friday of last week, we understand that roughly 200, 250 trucks filled with fuel came into the capital. And that's about a week supply, and that's typically the way that the capital runs. So the best that we can say at this point is that there is no disruption to fuel supply lines or other supply lines relating to the mines. There has been some disruption as a result of some insurgency activity in and around the capital. It does appear to us as if there is some alleviation of that. And I repeat what I said before, this is a business-as-usual situation. We in the country, those who are familiar with the country, those who are familiar with countries such as this have seen this sort of thing before. But at the end of the day, the best way that I can describe it is regardless of disruptions, business must go on and does go on, and that's what we expect here. Operator: And your next question comes from Mohamed Sidibe from National Bank Capital Markets. Mohamed Sidibe: Just maybe to start with the Q4 guide that you gave with Sadiola and Bonikro being potentially up to 40% higher. What would it take to see, I guess, both operations be closer to that 40% mark? What are the key drivers that we should look for Sadiola and Bonikro? Peter Marrone: I'll turn it to Johan in a moment, but bear with us, Mohammed. We are ahead of our expectations for the quarter so far. In the case of the Cote d'Ivoire, we're more than 5% ahead. In the case of Sadiola, just a few percentages ahead. But again, on a production platform, we expect to be greater than Q3. So I think you should expect that we will be able to meet the expectations of getting close to or at that 40%. Johan, I will summarize by saying that in the case of Sadiola, it is these oxide discoveries that were made earlier this year that you're bringing into production, going through the development process and bringing into production. But of course, by the end of the year, it's the Phase 1 expansion that completes and being able to process some of a greater percentage of fresh ore. And in the case of Cote d'Ivoire, all that effort that's been undertaken to date, including, for example, at Agbaou, where we had waste removal that was very significant in the second quarter that increases production. We're going to higher grades at Bonikro as a result of that waste removal. And that's what accounts for that higher level of production. Johan, did you want to supplement that with anything more specific? Johannes Stoltz: Peter, you've summarized most of it. I want to say that the hard work from the team started in January up to now, created flexibility within Sadiola. You've alluded to the oxide deposits and also the mill start-up that will enhance the throughput in Sadiola with higher recoveries. So more predictable, more flexibility was given into the Sadiola as well as into the CDI complex that enable us to move ore to and from between the various plants that set ourselves up to where we are currently. We're ahead of the Q4 numbers. As you alluded, we're halfway through the quarter already and a positive trend. The teams are doing well. The plans are coming together nicely. Looking forward to the end result, definitely very close to the 40% mark, if not slightly higher, Peter. Mohamed Sidibe: And then just if I can move on, maybe on exploration. I think you provided a pretty good update at Sadiola with a lot of outside potential on your exploration target there. But I wanted to maybe shift to Cote d'Ivoire and the visibility at Agbaou and Bonikro. I know there's an update that is coming, but how do you currently look at those 2 assets in terms of mine life remaining? And what do you envision them to ultimately be as a potential source of production for you guys? Peter Marrone: Again, at this point, we have not completed the work, but Oume contributes comfortably to Bonikro's increase in mine life. We publicly have said we want to get to at least 180,000 ounces per year from the complex. So roughly 50% from Bonikro and 50% coming from Agbaou. Oume contributes very meaningfully to that mine life extension. It looks as if we'll be above the 10 years for Bonikro. Agbaou is a bit more complex, because it's further behind in terms of the exploration effort. But with what we're doing, looking at and doing drilling into reachable through added reachable underground, what we're doing with the pit shell with a $2,000 gold assumption and what we're doing with the broader outside of the compensated area exploration effort, we'll begin to demonstrate. We won't get with that update next year. I don't believe that we'll get to 10 years of mine life for Agbaou, but we'll begin to demonstrate that it's more than the roughly 2 years of mine life that we currently carry. And we think significantly in excess of that. I believe in our MD&A with our second quarter, we indicated that we were looking at 4 years to 5 years of extension. That was our objective. We expect that the exploration results and the other efforts that we're undertaking for with technical services will demonstrate at least that. Finally, then, what's our objective? Our objective is at least 10 years of mine life at 180,000 ounces per year. But we're refining that objective. We're trying to get to 200,000 ounces per year at least that 10 years of mine life. With that, this becomes a meaningful asset, a very meaningful asset. It will not have the prominence. It does not have the Tier 1 status of Kurmuk and Sadiola, but it does -- it is meaningful. It does contribute to the share price. By my estimation, taking the existing mine life as we show it based on reserves and resources and getting to 10 years of mine life at 200,000 ounces per year, by my estimation, it adds somewhere between $8 and $10 per share. I think that's pretty significant. Mohamed Sidibe: And then I guess, finally, with -- you've strengthened your balance sheet with the forward sales agreement, the rates post quarter as well as the good cash flow from operations there. As you're heading into the completion at Kurmuk, better 2026 on free cash flow, the sector is getting, I guess, a little bit harder in terms of M&A. Could you maybe share your thoughts on further consolidation down in West Africa or M&A opportunities that you may be looking at from the acquisition side? Or is that more of a 2027 event and Kurmuk remains a main priority alongside Sadiola? Peter Marrone: What a question. So if we gone back a year ago, Mohammed, I would have said, of course, we should be looking at acquisitions, what are the opportunities in Africa, in other developing parts of the world, that's where we still think there's the best juice, where that we think the best value. But frankly, over the course of the last several quarters, we've had a bit of an epiphany. When we look at Kurmuk, that's a real prize. It's a Tier 1 asset. I repeat what I said before, it's a Tier 1 asset. And we're now looking at how we expand its throughput to match the size that we already carry for the SAG mill to that 6.4 million tonnes per year from the 6 million tonnes per year. That gets the production platform to over 300,000 ounces per year. And with all-in sustaining costs, as we've described them, that means that we're generating some impressively robust cash flows. From a production point of view, mine life point of view and from a cash flow point of view, it is a Tier 1 asset. And the same would be true for Sadiola. I can't think of very many mid-tier companies that are underpinned by 2 Tier 1 assets. And so that epiphany to which I referred is that we're going to keep our eyes on the prize this year. Keep your eyes on the prize. We don't think that there is anything that is as compelling as engaging in the completion of these efforts that we have inside the company that get us to that roughly 800,000 ounces of production beginning next year to 600,000 ounces and then a few years after that to that 800,000 ounces. We think that that is what delivers the best value for shareholders. We've become a real catch at that point as well, and that has not escaped us. Operator: And your next question comes from Ingrid Rico from Stifel. Ingrid Rico: I have, I guess, 2 follow-ups on Sadiola. And I appreciate the comments, Peter, on the progressive expansion options and how you guys are evaluating that? But I noticed in the press release, I think it was that you will be proceeding with a pre-leach thickener and you're going to be adding that in 2026. So I guess my question would be, one, on what sort of cost budget do you have for that? And two, what would it do with the recoveries or the improvement on the circuit by adding that thickener? Gerardo Fernandez: Hello, Ingrid. Its Gerardo. Yes. It's a small CapEx ticket. It's about $7 million to $8 million. What it does is allow us to manage the density better, so we can increase the proportion of fresh rock up to 90%. And depending on the flexibility from oxides also can lead to increased throughput. So the beauty of it is it works -- it's necessary for both scenarios, the full expansion or the progressive expansion. So we decided to go ahead and start engineering and start the construction next year, so we can see the benefits as soon as possible. Ingrid Rico: And then just, I guess, more near term and sort of the grade expectation that we could start to see as the Phase 1 expansion is completed and you're able to put more of the fresh ore in. Should we think of grades picking up Q4 and into 2026? And what sort of grades should we be looking for with that Phase 1 completed? Peter Marrone: Yes, we should -- you should expect to see the grade improves. Gerardo or Johan, do you want to address where we expect the grade to be? Gerardo Fernandez: Maybe I can comment long term. Ingrid, if you look at the inventory of fresh rock in Sadiola, that is in the range of 1.8 grams per tonne. Some areas are higher than that, some areas are lower, but that's the bulk of the -- or that's the average of the -- bulk of the reserves, which is the fresh rock. So long term, that's what we should be tracking towards. And in terms of oxide, there is an upside to connect with what Don was describing with the new opportunities to add moderate grade or high-grade oxides, which allowed the plant to increase capacity and recoveries. Maybe Johan can comment on the short term. Johannes Stoltz: Great question, and Gerardo, I think your numbers are spot on around the 1.7 grams to 1.8 grams a tonne. We do find these honeypots around the Sadiola property with higher oxide grades. But if we look at the average over the life of mine, it sits around [indiscernible]. Peter Marrone: And Ingrid, we're not complete the quarter yet. But if we go over the course of the last couple of weeks, so it's a meaningful part of the short term of the quarter. We are experiencing, because of some of those honeypots, as Johan described it, we are experiencing grades that are better than what we had planned. Ingrid Rico: And if I can squeeze just one last question on Kurmuk. And I appreciate that we're going to get that update on the exploration very soon. But just how should we think -- and maybe just some comments, if you can, on the infill drilling and how that's shaping up for grade reconciliation and looking into the grades as you start sort of commissioning and ramping up next year? Peter Marrone: Don is on the line. Don, did you want -- Don is remote. So if you're available, Don, did you want -- can you answer that? Don Dudek: Yes. So we're not doing a lot of infill drilling. We're mostly focusing on extending the resources down dip, down plunge, along strike. And so really trying to bulk out the reserve pits as we see them today. We are seeing continuations of the mineralized zones, and yet have not found the limits of the system. And then we're also looking for other optionality things. We've talked about [ Sekenke ] before, which is a 7-kilometer long gold and soil trend. We've been drilling at the south end of that for a good part of the year. And we have a few other targets that we're moving up the list. We've talked about this for Sadiola in terms of optionality. And again, newer close to surface discoveries will provide more optionality for Kurmuk going forward. So the update near the end of this month should -- we'll present all of that. Peter Marrone: Maybe to complement Don's comments and addressing your question, Don was referring to what we're doing now looking into the future, but we -- what was done in the past in 2024 and into the beginning of 2025 was to do confirmation drilling, especially around Dish, not much in Ashashire, but heavily in Dish. And that information has been modeled. We have ore exposure now with the mining at both deposits, and we're confirming the interpretation of the geology and the drilling is also confirming the grades and the mineralization as we had it in the plan. So it's very positive from that perspective on risk management and setting us in a good position to the -- start our operations next year. Ingrid Rico: So looking forward to that Kurmuk update later this month. Operator: [Operator Instructions] And your next question comes from Luke Bertozzi from CIBC. Luke Bertozzi: Just to follow-up on Ingrid's question on the pre-leach thickener at Sadiola. Can you give us any indication of when that pre-leach thickener could come online? Should we be expecting that to impact 2026 production? Peter Marrone: Yes. Look, towards the end of 2026, we haven't issued our guidance, so we cannot quantify how much the impact will be or disclose it. We have an idea, but bear with us when we issue guidance, we'll reflect it there. Jason LeBlanc: Luke, we've indicated that we see Sadiola in its current form before the second Phase partial or whole expansion being in a range of 200,000 ounces to 230,000 ounces per year. This is part of the plan to get that higher level of production. We'll have more to say on it as we complete some of the work to the end of this year when we give our guidance for the next year. Luke Bertozzi: The rest of my questions have been answered. So, I'll leave it there. Peter Marrone: Operator, are there any other questions? Operator: No, there are no further questions at this time. So I would now like to turn the call back over to Peter Marrone for the closing remarks. Please go ahead. Peter Marrone: Ladies and gentlemen, thank you very much for your participation on this call. We look forward to several of the milestones that we mentioned being provided. Any questions or comments, please do reach out to any of us. And we look forward to seeing many of you on -- in-person at our site visit at Kurmuk in January. Thank you very much.
Jason Lettmann: Thanks, everyone, and welcome to our Q3 2025 results. I appreciate everybody spending some time with us this morning, and I'm looking forward to this update. On Slide 2 here before we start our presentation of housekeeping here are our forward-looking statements for your review. So on the next slide, Slide 3 here, here is the agenda and our plan for today. We're going to be providing an update on our key accomplishments in the third quarter of 2025. Most notably, we are very excited to share with you the data set that will be presented at SITC this weekend from a preplanned analysis of our ASPEN-06 trial that showed CD47 expression as a key predictive biomarker for increasing durable clinical response with evorpacept in HER2-positive gastric cancer patients. So our goals for today are most importantly to share these detailed results with you as we believe this data set now clearly validates the role of CD47 in HER2-positive cancers. We will then give you a sense of how this data now impacts our development strategy for evorpacept going forward. We will also be providing an update on our novel ALX2004 EGFR-targeted ADC, which is now in the clinic. Today, we are also excited to be joined by Dr. Peter Schmidt from Barts Cancer Institute in the U.K., who is a key opinion leader in breast cancer and investigator in our evorpacept Phase II breast cancer study. He will be presenting his views on evorpacept data and its potential within the current treatment paradigm for HER2-positive metastatic breast cancer. Then our CMO, Barb Klencke, will provide an update on our novel EGFR-targeted ADC, ALX-2004, which is currently dosing patients in our Phase I trial. Now on Slide 4. In the third quarter, we made significant advances in both evorpacept and ALX2004 clinical programs. We again are excited to present the full data at SITC that is demonstrating the potential of CD47 expression as a predictive biomarker and highlight a clear opportunity to now identify patients who are most likely to achieve the greatest benefit from evo. As Barb will present in detail in our clinical section in this analysis, we saw that patients with high CD47 expression derived the greatest benefit across all key efficacy markers, response rates, duration of response, median PFS and overall survival from evorpacept versus those with low expression. The data is very clear as the magnitude of benefit across many of these metrics was double or even triple those observed in the control arm and also clearly compare very favorably with the large benchmark studies in second-line gastric cancer. Most importantly, these results support the potential to pursue targeted oncology approach to additional tumor types with evo. And given the broad overexpression of CD47 in both solid tumors and heme malignancies, it gives us a real opportunity to really focus evo now as a targeted IL therapy. Our Phase II clinical trial in breast cancer, which is designed to pursue a CD47 and HER2 biomarker-driven strategy based on this strong data is on track to dose its first patient this quarter. And as we've discussed, evo has the potential to represent the first and only option for metastatic breast cancer patients who overexpress CD47, which we know can lead to worse outcomes and a poor prognosis for these patients. And with our second pipeline product, our novel EGFR-targeted antibody, ALX-2004, which is a highly differentiated ADC, we presented preclinical data and design of our Phase I trial at the Triple Conference a few weeks ago. So we're excited to announce today that we are currently enrolling patients in the second dose cohort. We're rapidly clearing the first dose cohort in this Phase I trial. Turning to our financials quickly. We reported a total cash balance of $67 million, and that cash is expected to provide us runway into the first quarter of 2027, which positions us to achieve the value-enhancing data milestones for both ALX2004 and evorpacept that we have coming next year. Now turning to Slide 5. It has been very well established that CD47 is widely overexpressed across almost every type of cancer. And it is also clear that CD47 overexpression matters as it is clearly a negative biomarker for patients. So when you look at research in CD47 over the last decade plus, it is a very strong foundation that CD47 is clearly a negative prognostic biomarker. And what you can see here is a meta-analysis of 38 cohorts across 17 publications, which includes over 7,000 patients. And there really is no question that CD47 is clearly associated with shorter survival and worse outcomes. And you can see on the right, the wide range of tumor types where this has been established. Now turning to Slide 6. And as a reminder that during our Q2 call just a few months ago in August, we presented the top line data, which support that CD47 overexpression is a clear predictive biomarker for response with evorpacept in HER2-positive gastric patients. In this analysis, patients with both confirmed HER2 positivity and CD47 high expression had a dramatic response to evorpacept as compared to those in the control group who did not have vivo. And as you can see here on the ITT population, we saw a strong response of a 41% ORR in the evo arm versus 27% ORR in the control arm. And if you look at the data now in patients that clearly have CD47 high expression, there is a magnitude of benefit for those patients where we had an ORR of 65% in the treatment arm versus 26% in control with a nominal p-value of less than 0.05. Now as you can see on Slide 7 and what we're very excited to share with you now and at SITC later today, this strong ORR benefit with evorpacept in combination with TRP and CD47 high patients was also reflected and translated well to DOR, PFS as well as survival as it's clear that patients who overexpress CD47 and retain HER2 expression is driving the effect here. This is very important as this clearly validates EVO's dual mechanism of action. And again, this is a second-line plus gastric population, which has historically been a very tough cancer to treat. So in addition to the ORR benefit, which had a delta of almost 40% versus control, the median duration of response here for those patients is over 2 years, which is more than triple the control. The median PFS was over 18 months in the evorpacept arm versus just 7 months in control with an impressive hazard ratio of 0.39. And then we were also pleased to see these gains further translate to a benefit to overall survival where we saw a median OS of 17 months with evo versus about 10 months in control and also a strong hazard ratio of 0.63. Barb will walk through this data in more detail and the full data set will be shared at SITC here soon. What is clear is that this data shows the potential for evorpacept to drive really substantial benefit for these patients with high CD47 expression. On the next slide, this just shows the focus set of milestones that we're driving to now. In summary, we're laser-focused on these 2 programs. First, driving evorpacept into ASPEN-Breast, which is our study investigating patients post in HER2 and again, focused on CD47 high and understanding the impact of that biomarker. We continue to execute well against the milestones that we've communicated in the past and are anticipating first patient in Q4 of 2025, with interim data expected Q3 2026. ALX2004 also remains on track and continues to proceed very well. We dosed our first patient in August of 2025, and we continue to expect initial safety data first half of 2026. Turning to the next slide, and in summary, before I hand the call over to Barb, we had a strong quarter, both in terms of execution, continued tight discipline around our capital and are excited about the key value catalysts for ALX in 2026. And as you can see here on Slide 9, this is a snapshot of our current clinical pipeline. As we have communicated previously, we are pursuing a focused development strategy for evo in combination with anticancer antibodies, given the consistent proof of concept that we have seen in various clinical studies with different monoclonal antibodies, and this data here today further builds on that. In addition to our HER2-positive breast cancer program with a CD47 biomarker-driven approach, ALX2004, again, our EGFR-targeted ADC continues to progress well, and we are also very excited about our partner program with Sanofi Sarclisa in multiple myeloma, which is now in dose optimization phase. So next, we'll turn this over to Barb, who will take over and provide more details on the evorpacept CD47 biomarker data presentation coming here at SITC. Barb? Barbara Klencke: Thank you, Jason. I will start by describing evorpacept's mechanism of action. CD47 has broadly overexpressed on cancer cells as a means of abating the immune detection. And it does so by sending a don't eat me signal. Evorpacept is a fusion protein, and it's designed to block that signal. Evorpacept's Fc region is engineered to be inactive and since it's particularly effective when given in combination with an anticancer antibody such as Herceptin. The active Fc domain on the anticancer antibody can then trigger very effective phagocytosis, which otherwise would have been suppressed by the CD47 signal. Slide 12 shows that the evorpacept's approach to blocking CD47 is different from the conventional approach pursued by other CD47 targeted agents. While CD47 is overexpressed in cancer cells, it is also expressed in healthy cells, such as red blood cells. The conventional approach to block CD47 with an antibody that then also binds to macrophages through an active Fc has caused significant toxicities in some patients, and thus, this approach has largely failed. In contrast, the evorpacept approach using an inactive Fc spares normal cells and our safety database in more than 750 evorpacept-treated patients confirms the safety of this approach. Slide 13 shows the design of the ASPEN-06 gastric study that Jason has introduced earlier. We enrolled 127 second-line or third-line HER2-positive gastric cancer patients, all of whom had received prior HER2-directed therapy. Patients were randomized to evorpacept, trastuzumab, ramucirumab and paclitaxel or the TRP alone. The primary endpoint was objective response. Importantly, because there can be loss of HER2 expression following prior HER2-directed therapy, we wanted to look beyond the HER2 status as diagnosed on archival tissue. Based on the known mechanism of action for evorpacept, our drug is not going to work as effectively if HER2 is not overexpressed on the cancer cell surface. To this end, ctDNA was obtained at baseline in all patients. And in addition, 48 patients underwent a biopsy, either at study entry or at some point following their prior HER2-directed therapy. In total, 95 patients or 75% of the enrolled population were confirmed as having retained HER2 positivity by either the ctDNA or on fresh biopsy. 90 of these 95 patients were evaluable for CD47 expression in tumor cells using either archival tissue or where available, a fresh biopsy sample. High CD47 expression based on a cut point of IHC3+ staining in at least 10% of the tumor cells was present in 48% of these 90 patients. The expanded results of this preplanned exploratory analysis of efficacy by CD47 expression level in patients who retained HER2 positivity is the focus of the data that I will review with you today. Slide 14 shows the objective response rate in key subsets. As we've previously reported, in the 95 patients who retained HER2 positivity, we see a robust response rate of 48.9% for the avorpacept CRP arm versus 25% in the control arm. And in the subgroup by CD47 expression level, evvorpacept produced a response rate of 65% compared to 26% in the control arm amongst patients with the high CD47 expression levels. The response rate in the control arm was consistent across CD47 expression levels and lower than that in the avorpacept arm in both the CD47 and CD47 -- in the CD47 high and CD47 low groups. Moving to Slide 15. I'm now displaying the duration of response in these same subgroups. Again, we see the potential of CD47 expression as a powerful predictive biomarker for evorpacept benefit. The duration of response in all HER2-positive patients, irrespective of CD47 expression was 15.7 months for evorpacept plus TRP compared to 9.1 months for responders in the control arm. In the CD47 high group, the duration of response was 3x longer for patients in the evorpacept trastuzumab RP arm compared to the control with a median duration of response of 25.5 months versus 8.4 months. In the CD47 low group, evorpacept TRP had a median duration of response of 11.2 months compared to 12 months for TRP. In Slide 16, we are now showing the progression-free survival in patients with confirmed HER2 positivity and high CD47 expression. The hazard ratio is 0.39 with a median PFS of 18.4 months for the evorpacept trastuzumab RP arm, which is more than double the 7 months seen in the TRP alone arm, again, suggesting the potential for CD47 expression as a powerful predictive biomarker for evorpacept benefit. Slide 17 shows a similar pattern of longer survival observed in the HER2-positive CD47 high evorpacept arm. Median overall survival was 17 months compared to 9.9 months for the control arm with a hazard ratio of 0.63. All of these data being presented at the SITC conference this week are based on mature follow-up. The median follow-up for survival, for example, was 25 months. Slide 18 shows some of the various cut points that we examined for CD47 expression based on the range and strength of IHC testing. As shown here, we look at the median -- we looked at medium or high intensity staining defined as IHC 2+ and 3+ in at least 10% and in at least 25% of tumor cells. And we also looked at high-intensity staining or IHC 3+ in tumor samples with 5% or more or 10% or more of cancer cells expressing that high-intensity staining. The prevalence of CD47 high across these ranges from 40% to nearly 60% of HER2-positive patients depending on the cut point. The key takeaway from this slide is that we see consistent improvements in response rates, PFS and OS in the evorpacept treatment arm, irrespective of the cut point for CD47 expression. On Slide 19, I'm showing a cross-trial comparison of our evorpacept efficacy data in patients with retained HER2 positivity and high CD47 expression relative to benchmark trial data in HER2-positive gastric cancer. With the usual cross-trial comparison caveats in mind, evorpacept data directionally compares very favorably to recent ENHERTU data from the DESTINY gastric04 study in the second-line setting. In that trial of nearly 500 patients published earlier this year in the New England Journal of Medicine, those patients required confirmation of HER2 status by fresh biopsy following a trastuzumab-containing regimen, and they randomized these patients to ENHERTU or to RP as a control arm. As effective as ENHERTU was in the second-line setting in that trial, our second and third line evorpacept data generated in patients with high CD47 expression, a known negative prognostic biomarker appear much better. Turning our attention now from gastric cancer to HER2-positive breast cancer. Slide 20 introduces a Phase Ib/II trial in HER2-positive breast cancer patients conducted by Jazz that evaluated the safety and efficacy of evorpacept plus zanidatamab in patients who progressed on prior HER2-directed therapy. These patients were heavily pretreated with a median of 6 prior lines of therapy. In 9 patients confirmed to retain HER2 status by central assessment, the response rate was 56%. The median duration of response for that group ranged from 5 months, 5.5 months to nearly 26 months with the median not reached and the median PFS being 7.4 months. These data compare favorably to benchmark data, including, for example, the SOPHIA trial, a predominantly second and third-line HER2-positive breast cancer trial, which produced a response rate of 22% for MARI2'etuximab. Moving to Slide 21. We've now demonstrated in these 2 studies, the potential of evorpacept to engage the innate immune response, validating the mechanism of action of evorpacept given in combination with anticancer directed antibodies in both HER2-positive breast cancer and in HER2-positive gastric cancer. This gives us strong conviction of evorpacept's potential and its path forward in the HER2-positive breast cancer setting, which we'll talk about next. Slide 22 describes briefly the opportunity that we see for evorpacept in breast cancer, which now has a high probability of success, having been derisked by the 2 positive data sets in 2 different HER2-positive settings. A CD47 HER2-positive biomarker-driven approach with evorpacept enables a highly targeted strategy, potentially addressing the high unmet medical need in the evolving breast cancer landscape, which includes patients who have now progressed on ENHERTU. It is now my distinct pleasure to introduce Dr. Peter Schmidt, a Professor of Cancer Medicine and Center lead at the Center of Experimental Cancer Medicine at Barts Cancer Institute. He's a well-known global lead investigator on multiple ongoing Phase III trials in metastatic and localized breast cancer. Just 2 examples of trials with immunotherapy agents he is a global lead investigator on the pembrolizumab KEYNOTE-522 study and the atezolizumab IMpassion130 study. With that, I turn this over to you, Peter. John Mills: Thank you, Bob. The treatment options for patients with metastatic HER2-positive breast cancer are currently undergoing. I would also say, a dramatic change. We obviously have seen a very active drug moving initially into second and third line treatment with trastuzumab deruxticam, but everyone is aware of the data that now placing T-DXd increasingly in the first-line setting. And I think that's where the drug will ultimately end up. That is fantastic from a patient perspective. We have a very powerful new first-line treatment option. But the challenge that comes out of this is there is no standard of care for patients who have been treated with trastuzumab, the sequence we had previously that patients would get a treatment called TPH, first line with trastuzumab, pertuzumab and second-line T-DXd and then third line other options has just been turned upside down. So at the moment, there's a number of options we can choose from, but none of those options have actually been specifically approved and tested in patients with prior T-DXd therapy. So the options we have to choose from is tucatinib trastuzumab in combination with capecitabine. PD-1 is still an option. Some investigators and clinicians may give chemotherapy and trastuzumab HER2 TKIs play a smaller role and increasingly are less and less being used. But of course, we're also hoping to have other HER2-targeted therapies. So there is a significant unmet need for patients with HER2-positive breast cancer who have progressed on or after T-DXd. And I can see that well percept has a possibly exciting role to play that has demonstrated activity in patients post trastuzumab deruxtecan in combination with other HER2-targeted agents. Now if you look at what we would hope to see in such a situation, our challenge is to bring in new agents that can overcome the resistance to T-DXd. The need for agents in the HER2-positive breast cancer space at this point is to find novel agents ideally bring a different mechanistic approach to target HER2. And we can see for evorpacept that it has a different mode of action by killing cells via enhanced ADCP versus the classic payload-based ADCs or other drugs we are currently using. The second thing we want to achieve is we want to have a drug that obviously has demonstrated activity post HER2-directed treatment after ADCs and after monoclonal antibodies. And at the out of the room here is always trastuzumab deruxtecan. Now we've seen from the data in the gastric study, but also in some of the HER2 pretreated breast cancer studies that evorpacept has shown activity post trastuzumab in gastric cancer and following up to 4 more lines of patients with HER2 breast cancer with prior HER2 treatment. We would like to have a treatment that can supplement and enhance the current standard of care rather than replace the backbone treatment. And again, if you look at the way how evorpacept works, it is really designed to work synergistically alongside the key therapies and the key backbone, obviously, for HER2-targeted therapy is trastuzumab or similar antibodies. We are keen to have a drug that's safe and safer than ADCs. We have to learn over the years ADCs have quite substantial possible toxicity, which is obviously driven by the payload as it is ultimately targeted chemotherapy. And the safety profile of evorpacept is very different to what we know and seems to be much more favorable compared to some of the ADCs. Finally, having immunotherapy agents that can really drive what we see sometimes in HER2-positive breast cancer, this long tail we as clinicians often go on about that is what ultimately patients need to have a long-term benefit in survival. And we feel that there's an immune component to that. We know already that there's a small percentage of patients who have very, very long survival on HER2 target therapy. But enhancing that immune effect by giving a CD47 targeted drug can possibly increase the tail for patients, that is at least my hope. If you look at CD47 as a selection strategy, and again, I think that is really important for this program is that we're not going into this blindfolded. We actually have a very powerful biomarker. And as you have seen from the gastric data, it's a very clearly better signal for this concept in patients with high CD47 expression. Now as you can see, there's a number of breast cancer studies that have looked into this, and I'm not going to go into each of those trials and the scoring methods in too much detail. The bottom line is about 1,000 patients, and they're relatively consistently showing a CD47 high expression rate of around 50%. So 54% is the average if you go through those trials. And that's a substantial proportion of patients and actually allows us to drive that program forward without having a target group that is ultimately too small to select for clinical trials. Now a couple of preclinical data, I think, are really interesting. Now preclinical data, you may say it's a little bit nerdy, but I think it's really helpful for us to understand the biology. So if you look at this slide on the left side, you see the CD47 expression in HER2-positive breast cancer cells compared to HER2-negative cells. Green means low expression, red means high expression, this black or blue color is moderate expression. And it's very obvious to see that we have a higher percentage of CD47 expression in HER2 high disease. If you move to the right side of the slide, again, probably even more important for what we're aiming for is this is -- this compares the CD47 expression in primary disease on the right side and in recurrent disease, of pretreated disease on the left side. And again, it's very obvious that we have more positivity, CD47 positivity in tumors and therefore, in patients who have prior HER2 treatment and have recurrent HER2-positive breast scans. And this is exactly the target population we are aiming for. If you then look at emerging data and again, cell line-based data for cell lines that were treated with trastuzumab deruxtecan. And as I said earlier, this is the new standard of care in the first-line setting. So our prediction for the future is all patients will have T-DXd pretreatment. And we have to focus on patients who have persistent to T-DXd. As you can see here, in orange, these are cells that have been T-DXd pretreated in purple DM1 and then in white is ultimately controlled. And it shows the percentage or the number of CD47 positive cells. And as you can see very, I think, impressively is that we have a markedly higher expression of CD47 in cell lines that were prior exposed to trastuzumab deruxtecan, and that is the target group we are aiming for. So the target population is very clearly a substantial population of patients with HER2-positive breast cancer. The population is probably even bigger in patients who have prior CD47 pretreatment. But it also may be one of the ways these tumor cells evade the ADC treatment effect and therefore, may be a really fantastic opportunity for us to target this clinically. Now the clinical trial that is ongoing, the ASPEN trial you're very much aware of is, in my opinion, serves one key focus. So as a clinician, I have asked that question before, I'm keen to see this move forward into a Phase III as quickly as possible because we know it works. We know what the target population is, and we know there's a huge need post T-DXd. But what we don't know exactly is how to do the statistics for a Phase III trial by having the exact response rate at PFS and other endpoints, which we obviously need to do to size up and design the Phase III trial properly. So this trial, therefore, is a nonrandomized Phase II trial in patients with HER2-positive metastatic breast cancer with measurable disease with prior treatment with trastuzumab deruxtecan and are then offered treatment with evorpacept in combination with trastuzumab and patients of physician's choice chemotherapy. Very pragmatic design. This is the real world out there. But what we want to learn from this trial is really how -- what the response rates are in patients who are ctDNA positive for IL-2, but also what the duration of PFS overall survival is and in patients with CD47 high, but also CD47 low tumors to get further confirmation from the biomarker data we have already obtained from gastric cancer, which ultimately allows us to fine-tune the Phase III design going forward. Thanks, everyone. I would like to pass back to Barb, please. Barbara Klencke: Thank you, Peter. Well, let me wrap up this section with a brief breakdown of the addressable patient numbers in the core markets. As you can see, there are roughly 48,000 breast cancer patients in the second plus line setting who are HER2-positive. Of that, we believe that at least 60% to 80% of these patients will retain HER2 positivity following prior therapy. Of that group, 50% to 70% will have high CD47 expression. As Peter highlighted, there are a number of publications to support that CD47 overexpression in HER2-positive breast cancer patients will be upregulated post ENHERTU treatment. We believe that this represents approximately 20,000 addressable patients who are both HER2-positive and CD47 high. If you boil this down and use conventional estimates on pricing, we get to roughly a $2 billion to $4 billion market opportunity, again, just in patients that are CD47 high and HER2-positive, representing a significant opportunity for evorpacept. On Slide 31, I now want to provide a quick update on ALX2004, our EGFR antibody drug conjugate program. As shown on Slide 32, our company's first ADC, the ALX2004 molecule was a result of rigorous internal drug design process. Our goal is to create a best and potentially first-in-class drug designed to maximize the therapeutic window and to overcome the historic toxicity challenges that others have encountered in targeting EGFR with an ADC. With ALX2004, we have optimized all 3 components to do this, including the payload, the linker antibody to create a truly novel molecule against a very well-validated target. ALX2004 uses matuzumab-derived EGFR antibody selected to minimize skin toxicity and to maximize the therapeutic window. Its binding epitope is distinct from the U.S. FDA-approved EGFR antibodies such as cetuximab and panitumumab. Additionally, ALX-2004 has a proprietary linker payload and TPO 1 inhibitor payload engineered to offer improved linker stability for on-target delivery of payload and enhanced bystander effect. At the recently concluded Triple Meeting in Boston in October, we presented preclinical data highlighting these elements in greater detail. Moving to Slide 33. Here are the preclinical data highlights. Both in vitro and in vivo animal models support impressive dose-dependent activity and a differentiated safety profile. Importantly, nonhuman primate toxicology studies did not demonstrate EGFR-related skin toxicities at clinically relevant doses, and there was no evidence of payload-related ILD in the animals. This overall profile supports our conviction that this molecule could potentially demonstrate efficacy with a manageable safety profile in patients. Slide 34 shows a snapshot of the efficacy data from our in vivo models. ALX2004 showed regression and tumor suppression across a panel of xenograft models, representing a broad spectrum of cancer types and EGFR expression levels. Notably, ALX2004 was effective in models harboring KRAS, BRAS and p53 mutations. ALX2004 shows excellent tumor suppression activity at doses as low as 1 milligram per kilogram given either once or once weekly times 3, leading to complete tumor eradication in several of the models. These results confirm the broad applicability of ALX2004 in targeting EGFR-positive cancers. Slide 35 shows the key findings from our 6-week repeat dose with 6-week recovery period in the GLP nonhuman primate tox study. All findings were minimal to moderate and fully recoverable. Thus, these data support the design of the ALX2004 study and the likely safety margin for clinical use. Slide 36 highlights our clinical development plan. We are targeting EGFR-expressing tumor types, namely lung, colon, head and neck and esophageal squamous cell carcinoma in this dose escalation and dose expansion trial. We dosed our first patient in August, and we have completed our first dose cohort at 1 milligram per kilogram without any DLT. We are currently dosing patients in our second dose cohort at 2 milligrams per kilogram. We are on track to provide initial safety data from the Phase Ia portion of the study in the first half of 2026. Our goal in this Phase Ia, Phase Ib trial is to identify the dose that optimizes safety and activity in tumor types, which we believe have the highest potential for success. These data will then set up the program well to advance into a future registration study. With that, I turn the call back over to Jason. Jason Lettmann: Thanks, Barb, and thanks again to Dr. Schmidt for sharing his perspectives on the program as a KOL in the field. Again, Q3 was a strong quarter, both in terms of execution and new data. What we're most excited about now is driving a targeted IL breakthrough in a first-in-class drug with evo as well as are very encouraged by AOX2004's fast start in the clinic and building momentum. In sum, our CD47 blocker has been successful where no other has, both in terms of its manageable toxicity profile as well as activity as we've now demonstrated efficacy in a randomized study, and we've identified an actionable and predictive biomarker for response to evo in our gastric cancer study. This further reinforces the benefit we have seen in terms of DOR, PFS and OS. And again, this biomarker is on mechanism. Going forward, we're developing a CD47 biomarker, and therefore, it is really of no surprise to see that CD47 overexpression shows such a strong impact on our data. So what this allows us to use is CD47 to select for patients in both current and future trials with the goal of replicating the results we have seen here with gastric cancer and demonstrating the same significant and transformational benefit for patients in our HER2-positive breast study. Again, there are no approved therapies for patients overexpressing CD47 and no options in late development to address this known path of evasion. So we remain focused on delivering for them. In 2004, there are also no approved EGFR-targeted ADCs. And although clearly a validated target, there remains a substantial unmet need for these patients as well. ALX2004 is off to a very strong start in the clinic, and we believe also has the potential to redefine standard of care across a range of EGFR-expressing cancers. So with that, I'll open up the floor to Q&A. Again, thank you for the time this morning.[ id="-1" name="Operator" /> [Operator Instructions] And our first question will come from Lee Watsek with Cantor Fitzgerald. Daniel Bronder: This is Daniel Bronder on for Lee. This is an exciting update, and we're curious to hear your thoughts on how to correlate the CD47 positivity that you showed on Slide 30 with the kind of CD47 expression cutoffs that you showed in the gastric data on Slide 18. What would you say is CD47 high in this context? And how should we think about the patient population that would be matching that in your trial? Jason Lettmann: Thanks, Daniel. Appreciate the question. So 30, just thinking about what we saw in breast or what we've observed in the literature versus gastric, is that the question? Daniel Bronder: Yes, basically, yes. Jason Lettmann: Okay. Yes. Well, yes, it's a great question. I think it's one we've looked into. I think what's really -- what we're really fortunate to have is a strong scientific basis behind CD47. And so what we see is really promising concordance across the 2 indications. So if you look at gastric, it was roughly 50-50 in terms of the CD47 high group. And I think then if you turn to the benchmarks, and again, this is where the strength of the science comes in, it's -- we see we have 5 different publications looking at the question of CD47 in specifically HER2-positive cancer. And again, what we see is strong concordance there, too. And if you add those numbers up, it's roughly half again. So 5 different studies supporting that around 50% of the patients will be CD47 high. And interestingly, those different publications use different clones, different methodologies, et cetera. And so yes, I think that's what gives us such conviction that this is translatable not only to breast, but frankly, a broad range of tumor types. Daniel Bronder: And if I may, can I ask a follow-up question? Jason Lettmann: Yes, sure. Daniel Bronder: How should we think about your companion diagnostic development? Are you doing that yourself in-house? Are you using the same kind of evorpacept construct? Or are you using an independent antibody? Can you shed any light on that? Jason Lettmann: Yes, sure. I mean I'll take it at a high level and then maybe ask Barb to weigh in on the path to a CDx. We've done the testing with a partner for the gastric study, plan to do the same in breast. And then, of course, as this data builds and I think as we continue to understand the right cutoff and how this translates, we'll pursue further work. But Barb, do you want to add to that? Barbara Klencke: I would just say that the assay is an IHC. It's a research use assay that was applied to the gastric data. our ongoing or our soon-to-be enrolling trial in breast cancer, the 80-patient single-arm trial will use the same research-based assay. And then we are working already with partners to think about the operationalization of the process prior to the initiation of a Phase III trial so that we will be ready for a companion diagnostic, but again, via a partner. [ id="-1" name="Operator" /> And our next question comes from Roger Song with Jefferies. Jiale Song: Very interesting data. Maybe related to the efficacy in the CD47 high population, do you have any data in your breast cancer trials with Jazz and any new data you can maybe give some comments on the CD47 high versus low? And then in terms of historical breast cancer, do we have any evidence for the CD47 high population, the traditional or the standard of care is performing less than the CD47 low population? Have you done any retrospective study as well? Because I know the benchmark is using the SOPHIA or any other HER2 chemo combo, but that's in the broad HER2 positive, not the CD47 cutoff. Jason Lettmann: Yes. No, that's -- those are both great questions, Roger. So number one, in terms of the high versus low comparisons in the zani study and frankly, broadly, I think those are great questions. So this data and the way in which it's rippling through our development plan is relatively new, as you know, Roger. So I think we're really excited about what we're seeing. It's incredibly strong in terms of CD47 high in gastric. There's no question it's driving the effect in that study. And so the natural question is where else is this working? And I think whether it's the study with Jazz or our work with Sanofi or the other studies we have going with anticancer antibodies, we're very keen to understand that. So I'd say what we know is we're seeing a 56% overall response rate in patients post ENHERTU that have seen a whole lot of HER2-directed therapy. And to your point around the margetuximab comparator, it's well north of what you'd expect. And actually, there was recent data at ESMO that supports, again, a relatively low response rate. There was a real-world study that was sub-20% in patients in terms of ORR post ENHERTU. So to see 56% is very strong. And I think your question on CD47 high versus low is one we're in the process of understanding. And then your second question on just benchmarking the data and what we see Barb had laid out the comparator with ENHERTU in the DESTINY-Gastric04 study. Certainly, if we were to line up the RAINBOW studies, to the best of our knowledge, the control arm is performing at par with benchmarks across a number of different studies. And to your question, which again is a good one, those benchmarks, we think are the best they're going to be, right? Because we know CD47 high is a negative prognostic and we know that those patients should do more poorly. And so to clear those benchmarks and compare well and then also be armed with the knowledge that those patients probably -- if we were to select from those studies, the CD47 high only patients, they would do even worse, certainly, I think, builds our conviction. [ id="-1" name="Operator" /> [Operator Instructions] And we'll go next to Sam Slutsky with LifeSci Capital. Samuel Slutsky: Just on the interims next year, both the EGFR ADC and the breast cancer program with evorpacept, curious on how many patients you're hoping to have in each of those data sets? And then just how you view a win as you think about safety on the EGFR side and then just delta efficacy on the evorpacept side? Jason Lettmann: Yes, both great questions. Thanks, Sam. I'll take 2004, and I'll ask Barb to weigh in on the breast front. I think 2004, as you know, targeting EGFR, one of the most well-validated Trode targets in oncology, there's just no question that EGFR is effective. So I think it's led to a natural question from investors and partners, and that's can you target this target with an ADC when you have a payload involved. And as a reminder, again, I think we're very encouraged by what we see in the primate work. That tends to translate very well. And so far, so good, right, to clear 1 mg per kg quickly, I think, is a strong start at already a relatively high dose and now on to the next cohort, which, again, I think is moving fast is what you want to see. So as we go into the next year, early next year in terms of what we'll share, I think it's it depends, right, which is the reality of a dose escalation study. I think our goal is to answer the safety question as best we can in a Phase I and then put up data that will answer that. And again, the study is marching very well here. And I think we feel real confident that if this continues, of course, we'll be able to share something going into early next year. And then on the breast front, in terms of benchmarks, Barb, do you want to weigh in on that one? Barbara Klencke: Yes. I think, Sam, thank you. I think you were asking what might our expectations be both for number of patients as well as the bar. The bar I'll start with. There's a lot of data with trastuzumab and chemotherapy, which really is the backbone upon which we add evorpacept in our trial. Chemotherapy, trastuzumab at best will have about a 20% response rate. Interestingly, there was new data coming out of ESMO looking at the post-ENHERTU setting and response rates continue to drop, not unexpectedly. And as we noted, our trial will enroll all patients post ENHERTU, where we do anticipate that CD47 overexpression becomes part of the mechanism of resistance, we attack that directly, and we anticipate having good outcome data in our evorpacept trial. So I think the benchmark is going to be in the range of 15% response rates. Again, 20% might be the upper bound, but with the combination of the 2 things, the poor prognostic effect of CD47 as well as the evolving standard of care and the fact that there really isn't anything that has shown up well post ENHERTU really bodes well for us. What do we expect in our bar? I think doubling that would be nice, 35% to 40%. We certainly in our gastric data that I showed you in the gastric setting did even better, and we anticipate that the opportunity is there to do quite well, but I think we would be very happy with a 35% to 40% response rate in our breast trial. [ id="-1" name="Operator" /> And this now concludes our question-and-answer session. I would like to turn the floor back over to Jason Lettmann for closing comments. Jason Lettmann: Great. Thanks, everybody. Really excited to share this data with you and continued good progress across both evo and 2004. So a real positive update today. And again, I appreciate the engagement and support and look forward to future updates. Thanks so much. [ id="-1" name="Operator" /> Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.
Operator: Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the LFL Group Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] I would now like to turn the call over to Jonathan Ross, Investor Relations for LFL Group. Please go ahead. Jonathan Ross: Thank you. Good day, everyone. And welcome to LFL Group's third quarter 2025 conference call and webcast. LFL's Q3 2025 financial results were released yesterday. The press release, financial statements and management's discussion and analysis are available on SEDAR+ and on our website at lflgroup.ca. Joining me on the call today are Mike Walsh, President and Chief Executive Officer; and Victor Diab, Chief Financial Officer. Today's discussion includes forward-looking statements. These statements are based on management's current assumptions and beliefs and are subject to risks, uncertainties and other factors that could cause actual results to differ materially. We encourage listeners to refer to the risk factors outlined in our management's discussion and analysis and annual information form, which provide additional detail on the risks and uncertainties that could affect future results. This call also includes non-IFRS financial measures. Definitions, reconciliations and related disclosures for these measures can be found in the management's discussion and analysis and press release issued yesterday. Forward-looking statements made during this call are current as of today and LFL Group disclaims any intention or obligation to update or revise them, except as required by applicable law. All financial figures discussed today are in Canadian dollars unless otherwise noted. With that, I'll now turn the call over to Mike Walsh to discuss our third quarter results. Michael Walsh: Good morning, everyone, and thank you for joining us. This is our first quarterly call, and we appreciate you being here. We're looking forward to using this format to provide more regular insight into our performance, our strategy and how we're thinking about the business going forward. So let's get right into the quarter. We delivered strong top line performance in the third quarter with system-wide and same-store sales up 3.7% and 3.9%, respectively. I am particularly pleased with our continued performance given the broader backdrop. Consumer discretionary spending remains pressured and the retail environment continues to be highly promotional. Canadians are looking for value from retailers they trust and our strategy is built to outperform when value matters most, and we're seeing that play out in the numbers. Even more importantly, we continue to translate our top line momentum into profitability growth. Adjusted diluted earnings per share grew 20.4% year-over-year, reflecting not just sales strength, but disciplined execution across sourcing, category management, promotional optimization and cost control. Underpinning our third quarter performance is the consistency of our execution and the strength of our platform. Our scale enables us to negotiate directly with suppliers and secure advantaged pricing. Our banners are trusted by Canadians coast-to-coast. And our integrated logistics network, including one of the largest final mile delivery systems in the country, gives us a level of service differentiation that's difficult for others to replicate. These are durable strengths that position us to win across cycles and help us continue to take share. Furniture was once again the standout category in Q3, supported by our focused assortment strategy. We've narrowed the range, gone deeper in our best sellers and leaned into categories where we can offer real value. This laser focus on solidifying our leadership in this most important category continues to deliver results. Furniture is our largest and highest margin category and in the current environment represented the most effective opportunity to gain share. Our performance in furniture is a result of the deliberate and disciplined execution of our strategy, prioritizing areas of our business with the greatest near-term opportunity, while continuing to advance our broader categories. While industry-wide traffic headwinds have continued, we maintained our focus on maximizing every customer interaction. Both average transaction value and conversion rate strengthened during the quarter. In our stores, we're seeing more purposeful visits translate directly into purchase activity. Our omnichannel infrastructure is instrumental here. We're strategically utilizing our digital ecosystem, not only as a revenue channel, but as a qualification funnel that delivers customers with clear purchase intent. Once in the stores, our highly trained sales associates and attractive financing offers work together to drive a stronger average transaction size and higher total ticket profitability. Our overall appliance business was also strong in the quarter led by the commercial channel, as has been the case for the past several quarters. We continue to deliver on projects booked over the past couple of years. And while we're mindful that builder pipelines are slowing across the board as we approach 2026, our team is laser-focused on continuing to gain traction in the replacement market, especially with property managers. That's a segment we believe can be a more meaningful contributor over time. And our warranty and insurance businesses remain a key part of our value proposition. These are profitable, capital-light businesses that support the core and extend our relationship with the customer. We also continue to see strong attachment rates and growth in these business lines and we believe there's more opportunity to grow these platforms, both inside and outside the LFL ecosystem. From a capital allocation standpoint, our priorities remain consistent. We're focused on maintaining a strong balance sheet and reinvesting in the business where we see attractive returns. We remain attuned to potential acquisition opportunities that could enhance the long-term value of the company and we continue to grow our regular dividend over time. Our retail store count remained consistent from last quarter at 300 stores, including 201 corporate stores and 99 franchise stores. As we continue to optimize our footprint, it's worth reiterating that our strategy is not about maximizing store count. Our stores are designed to be destinations with larger catchment areas and a focus on delivering a full-service experience that drives meaningful returns. We evaluate every investment through the lens of a 4-wall profitability and long-term value creation. That discipline is reflected in how we approach new locations, renovations and reopenings. It's also why we're comfortable growing selectively rather than chasing unit expansion for its own sake. Now looking ahead to the fourth quarter and into early 2026, we expect consumer confidence and discretionary spending to remain selective. Consumers are being careful with their dollars, but they are spending. The environment remains dynamic. Similar to last year, the Canada Post disruption is creating near-term headwinds during a very important promotional period. While this does affect all retailers that rely on flyer distribution, we remain competitively well positioned. We faced a similar situation late in the fourth quarter of 2024. And while the disruption began earlier this year, we're drawing on last year's experience to adjust quickly. That said, if the strike continues through year-end, we do expect some impact to key promotional events in the quarter. Before I hand it over to Victor, I truly want to thank our associates across banners and regions from our warehouses to our sales floors to our drivers on the road and the customer service folks manning the phone lines. Their execution in the quarter was outstanding. Victor will take you through the financial details and provide some additional context on the quarter. I'll come back with a few closing thoughts before we open it up for questions. Victor, over to you. Victor Diab: Thanks, Mike, and good morning, everyone. As Mike mentioned, we delivered strong top line growth in Q3 with system-wide sales up 3.7%, revenue up 4.1% and same-store sales up 3.9%. From a category standpoint, furniture was a key contributor. We also saw continued strength in appliances, led by our commercial channel, which added to growth this quarter. That strength was driven by the delivery of previously booked projects, particularly in multiunit residential as we continue to fulfill orders tied to developments moving through to completion, despite a softer new construction market. We expect revenue from developers, in particular, to begin moderating as we move into 2026 and we're certainly seeing that across the market. Our team is actively working to increase our share of the replacement business where we're seeing good traction with property managers. But it will take time for that portion of the business to catch up with the new build market, which is lumpier, but can be meaningful as we have seen this year as builders finish up projects. Gross profit margin expanded by 79 basis points year-over-year to 44.6%. This improvement reflects both the impact of higher-margin furniture sales and our continued focus on strengthening sourcing and vendor relationships. We've deepened relationships with our top vendors and increased purchasing penetration through our First Ocean subsidiary, driving improved cost efficiencies and supply consistency. At the same time, disciplined promotional activity and optimized pricing strategies have supported margin performance across categories. As we move into the end of the year and early 2026, gross margin will continue to be influenced by category mix, promotional intensity and our ongoing sourcing work. We're always looking for opportunities to drive improvement, but we also take a balanced and dynamic approach. We'll make the investments necessary to drive traffic and market share when it makes sense to do so. That's just part of how we manage the business. SG&A rate was 35.51% of revenue, an improvement of 14 basis points year-over-year. This improvement was driven by lower retail financing fees due to declining interest rates. This helped offset expected increases in advertising costs due to event timing shifts as well as higher occupancy expenses from the Edmonton D.C. lease commencement and other facility renewals. Adjusted diluted EPS came in at $0.65, up 20.4% compared to last year. We're also pleased with where inventory levels sit today. Freight disruptions that impacted the start of the year are now behind us and our written-to-delivered sales relationship has normalized with a focus on going deeper on certain SKUs, enabling us to improve written-to-delivered timelines. We're in a healthy in-stock position heading into the back half of the year with good availability across key categories, and no material constraints on flow. From a capital allocation standpoint, I'll build on Mike's comments. Our approach remains disciplined and consistent. We prioritize reinvestment in the business where we see attractive returns, maintain a strong balance sheet and return capital to shareholders over time, primarily through growth in our regular dividend. Annual maintenance CapEx is running in the range of approximately $35 million to $40 million annually, which supports our ability to continue generating strong free cash flow. On the balance sheet, we ended the quarter with $549.6 million in unrestricted liquidity, including cash, marketable securities and our undrawn revolver. That level of flexibility is a strategic asset in this environment. It enables us to stay agile, pursue opportunities as they arise and continue investing in the business without compromising our financial strength. Given our 100-plus year track record of navigating cycles and making the right long-term investments, we're comfortable maintaining the financial flexibility. We will continue to be opportunistic in our approach to buybacks, taking advantage of volatility where it aligns with our long-term strategy. We did not repurchase any shares under our existing NCIB during the quarter. Overall, we remain confident in our ability to deliver consistent financial performance in the context of the market and versus the industry. Our scale, disciplined sourcing and promotional strategies and solid balance sheet provide the foundation to continue driving profitable growth and shareholder value over the long-term. Before handing it back to Mike, I'd like to briefly address the previously announced initiatives to create a real estate investment trust. This remains an important strategic priority for us. The timing will be driven by market conditions and regulatory approvals, and we'll share additional updates when appropriate. That's the only update we can provide on today's call. With that, I'll turn it back to Mike for closing remarks before we open the line for questions. Michael Walsh: Thanks, Victor. To wrap up, we're really pleased with how the business performed for the first 9 months of the year. Over that period, we have delivered total system-wide sales growth of 3.5% and adjusted diluted EPS growth of 28.7% in a dynamic consumer and industry environment. What's just as important is how we're delivering that performance. We're seeing stronger conversion in our stores, more consistency in execution across banners and better alignment between what customers want and what we're delivering. That's the outcome of deliberate long-term choices, not quick wins, and it's showing in both our results and how resilient the business has become. We're not immune to the macro, but we are well positioned to navigate it and continue delivering value for our customers and our shareholders. Thanks again for joining us today. With that, I'll pass it back to the operator for questions. Operator: [Operator Instructions] Your first question comes from the line of Nevan Yochim with BMO Capital Markets. Nevan Yochim: Congratulations on a solid quarter and your first conference call. Hoping we could start on the top line here. Are you able to provide an update on quarter-to-date trends? Have you seen the Q3 momentum continue, as well as any detail on your positioning as we move into the important sales and holiday season? Michael Walsh: Thanks very much, Nevan. It's great to talk to you and you're the first person asking us a question on the live webcast. So congratulations. Just a little bit on the third quarter. So the consumer still remains very price conscious Value continues to be a key focus area for us and that's how we think we're winning. The Canadian consumer is still looking for a retailer that they know and trust and is going to be around for after sales service. The trend from the second and third quarter, we're seeing a lot of traffic going to our website and traffic being more like flattish going into the stores. So more qualified customers coming into our stores, allowing our sales associates to spend more time selling the value-added services. We're seeing the attach rates for warranty insurance products are also improving. And so we feel like we're well positioned going into the fourth quarter. There's still some macro headwinds. You've got the coastal strike affected last year starting around November 15th. This year started near the end of September. So we're feeling good about that. It kind of levels the playing field with all retailers but we learned a lot going through the fourth quarter of last year that we're applying this year. Nevan Yochim: And maybe just a little bit more on that Canada Post strike. Are you able to parse out what the impact was last year, maybe just a magnitude? And then, how does that flow through the P&L? Is that solely a revenue impact or are there margin pressures there as well? Michael Walsh: Great question. I don't think there's margin impact to it. But it's definitely very difficult to quantify what the impact is because last year we were having challenges with inventory position as well. So how much of it was a flyer impact, how much of it was the inventory impact. So really difficult to tell. And then as you pivot going to more ,of a digital way, how much of that did you get a pickup on. So really difficult to quantify the impact of the flyers. But for sure, there is an impact to all retailers, especially when you're a high-low retailer and the consumer is looking for the flyer. It definitely impacts the traffic that's coming to your stores. Nevan Yochim: Got it. Maybe just one more for me, maybe for Victor. It's nice to see the SG&A leverage again this quarter. You called out lower POS financing fees. As we've seen the Bank of Canada cut rates as recent as just 1 week ago, does that imply you expect this tailwind to continue into the second half of next year? Victor Diab: Great question. Yes, every time the Bank of Canada cuts rates, there's a bit of a delay in terms of when it translates to our numbers, but we'll get a bit more leverage off of that next year. Obviously, most of the cuts happened over the last year and we've benefited from that this year, and we'll see a little bit more of that next year if rates continue to be cut. Operator: Your next question comes from the line of Martin Landry with Stifel. Martin Landry: It's super helpful. I know it's a little bit more work on your end, but for us, it's very much appreciated. My first question, I'd like to understand a little bit how the quarter has evolved. There‘re some retailers that have talked about a strong July and August and a slower September. I was wondering if you've seen any of that dynamic? Michael Walsh: I would say we were very happy with the quarter as a whole. I think July and August were super strong. September was a little bit weaker, whether that's due to the postal strike, but definitely, we saw some weakness in September. Martin Landry: And that weakness, is it -- have you seen differences per regions? Has it been Canada-wide or more located in the Central Canada where the manufacturing base is? Michael Walsh: Yes. I'd say that the trend continues. Ontario has been softer. And again, the flyer distribution in Ontario is really soft and BC has been soft. Martin Landry: Okay. And then maybe lastly, my last question. I know you mentioned that -- in your opening remarks that the story is not about store openings. But I was just wondering, do you have any plans to increase your network across your banners in the next 12 months? Michael Walsh: I would say we don't have anything pending, Martin, but we do have a focus for Leon's in BC. The challenge has been inventory of retail sites. And to be honest with you, it's the leasing cost in BC. There's just no inventory. The Brick continues to focus on the East Coast, but we don't have anything pending. We've got the one store in Welland that we're building. We're probably going to open that in the spring of 2027. Victor Diab: And Martin, just to build on Mike's comments. We've seen a lot of good success with a couple of the new renovations with The Brick opening up in Richmond, we released the release in Kelowna, and we're seeing a lot of good success with some of those renovations. So we're keeping a close eye on that and it's something that we'll look to do more of. Michael Walsh: I think the last thing on that is we're really excited because we opened up a store within a store in Richmond, BC with Appliance Canada taking up about 10,000 to 12,000 square feet of Leon store, and we're seeing some good success there. And because Appliance Canada is generally in Ontario, they've got a lot of commercial customers in the East and West. And so we're going to do that as a bit of a test and it may be something that we can do on a broader scale. Martin Landry: Okay. That's helpful. And just to be clear, how many renovations have you done year-to-date? Victor Diab: I would say we've done about 3 major renos year-to-date. Operator: Your next question comes from the line of Jim Byrne with Acumen. Jim Byrne: Just maybe on gross margin side. I appreciate the color, Victor. Margins were up about [ 80 ] basis points this quarter and kind of averaged about [ 80 ] so far this year, up over last year. Is that a number that you would kind of expect to continue for the fourth quarter and kind of foreseeable future? Or are there moving parts there that might put some pressure on those margins in the coming quarters? Victor Diab: Jim, thanks for the question for sure. We're very happy with the margin performance year-to-date. A function of 2 things, really very strong furniture mix, that being our highest margin category. When you sell more furniture, you're also selling more furniture warranties, which tends to be accretive to margin as well. And the teams have done a really good job on the rate front from focusing assortment, getting us better leverage with our suppliers, flowing goods, slightly lower freight rates year-over-year. So there's a lot to that. We don't really comment on a quarter-to-quarter basis. We tend to be very disciplined historically around managing within a certain range. So that's a focus for us. We think we're going to end the year strong overall holistically. There may be puts and takes in terms of investing some margin back into certain categories. But over the full year, we expect to hold on to some of those gains for sure. And going into next year, again, it's about continuing to edge our margin rate forward. But there will be -- it's never going to be a linear -- just a straight line, there will be ebbs and flows in terms of when we choose to invest that back into the categories. Jim Byrne: Okay. That's great. Maybe if you could give any updates on kind of the warehouse initiatives and some of the optimization that you've been working on? Michael Walsh: We're still continuing to test and tune and learn. As we spoke about in the previous quarter, we migrated the Mississauga warehouse to surrounding stores and we're still measuring the KPIs on that from customer experience to the time between written-to-delivered. So still going down that path and analyzing that and we may end up doing another test in the first or second quarter of '26. So stay tuned. But definitely, it's not going to be a short-term project. It's going to be something that's more long-term figuring out how many warehouse stores do we still need to keep and what that looks like. So stay tuned on that. Jim Byrne: Okay. And then maybe just, Victor, you kind of mentioned the maintenance cap at $35 million. It looks like you're kind of tracking towards that for this year. It doesn't sound like next year will be much different given the lack of new stores, et cetera. Is that fair to say for 2026? Victor Diab: I think that's fair from like the core CapEx target in line around $35 million to $40 million. I think any strategic initiatives that we do end up moving forward with may be over and above, but we'll keep you posted on that. But I think that's a good target to have in mind for now. Operator: Your next question comes from the line of Ahmed Abdullha with National Bank Capital Markets. Ahmed Abdullah: Q4 seems like an easier comp given the inventory dynamic that took place last year. Are you better prepared from an inventory standpoint to drive sequentially improving growth in 4Q? Victor Diab: Ahmed, I appreciate the question. Thanks. A couple of things that we planned going into Q4, and we thought about, obviously. One , being in a much stronger inventory position, which we are and the teams have done a really good job there, and it's paying off for us. And two, we were hopeful that 1 year later, the Canada Post challenges would be behind us, right? So that unfortunately has kind of been a storyline early into the quarter. Now we will comp being -- having a Canada Post strike later in the quarter but that's certainly going to be an impact there as well. So I think there's different puts and takes. That being said, we feel really well positioned to continue competing for value in the space, but there's a couple of considerations there for you in Q4. Ahmed Abdullah: Okay. That's fair. And just -- I know you've mentioned the customer traffic and basket sizes and conversion rates have improved, but I would like just you to touch a bit more on that. Can you give us some sort of magnitude of how much of this quarter's results was driven by perhaps pricing versus volume or, any more specific color around these factors would be appreciated? Victor Diab: Yes. I think you would have seen sort of our furniture performance was really strong in the quarter. I think that's just really driven off of volume and just being really well positioned for value. I think we've got scale advantages there and we've done a really good job around focusing our assortment and being sharp on pricing and promo optimization. So I just think it's more around our go-to-market strategy. To Mike's point, in-store traffic is softer, but we're seeing really good traffic to and engagement on our websites that are ultimately leading more qualified shoppers into our stores and allowing our folks to drive higher closing ratios. And then, of course, the ancillary businesses along with that, like I mentioned, you're selling more furniture, you're selling more furniture warranty and our attachment rates are going up inside our stores. So it's a function of a bunch of different factors. It's not really on price. We're very focused on being sharp on price and being sharp on our promo strategy, Ahmed. But that's the extent of what I could provide there. Ahmed Abdullah: Okay. That's fair. And one last one for me. Your comments of growth rates like moderating in 2026. Are you still budgeting some revenue growth or more of a flat to down next year? Victor Diab: Yes. Like I think -- it's a interesting question, Ahmed. Like as you think about 2026, right, we never go into a year thinking we're not going to grow. Our mindset is always to grow. But we do think about it more along the lines of a 3 to 5-year horizon, have we sustainably grown the business from a top line and bottom line perspective over that period. And that's what we go -- that's our primary goal is to continue to win share. We still feel really well positioned to compete for value. That being said, a couple of considerations as you think about 2026. We mentioned our commercial business has been on a tremendous run. That's going to normalize a little bit just given the challenges with the development community. So that's something that we're being mindful of. And obviously, at this stage, we're probably going to comp some pretty strong furniture numbers as well. So it's another consideration. But do we believe going into the year we can drive growth? That's always our mindset. But of course, we have to be realistic around some of the considerations I just mentioned. Operator: Your next question comes from the line of Ty Collin with CIBC. Ty Collin: Great to hear from you guys in this format. So just for my first question, can you kind of speak to the different competitive dynamics within your key product categories? It seems like, obviously, mattress and electronics were more promotional, but maybe furniture a bit less so. Can you just help us understand what's going on there? And is the promotional activity being driven by any specific subset of competitors worth noting? Victor Diab: Yes. I mean it's a great question. Look, like we -- over the last couple of years, we've had a really strong focus on the furniture category and being able to position ourselves for value, right? And then -- and we've been seeing really good traction there. I think as it relates to the other categories, we have to be balanced in our approach. So in some cases, it is highly promotional, for example, in retail appliances across the board. More people are doing buy more, save more and things of that nature. That's always been done. It's just being done at a greater magnitude in terms of our observations. And then, as it relates to mattress, the mattress category, again, very promotional, more promotional than we've seen in the past, and you've got a lot more online players as well in that category. So we're being selective in terms of, in some cases, whether we want to participate in being more highly promotional. In some cases we're choosing not to, to protect margin. And just given how our overall business is performing, we're kind of -- we're satisfied not doing that. And in some other cases, we've identified opportunities where we can better position ourselves moving forward. So I think it's a combination of those things, Ty. Michael Walsh: Yes. And I think just to build on that, because there's no other comp we can really look at in Canada, we think we're winning share in the furniture space, although it's a very fragmented -- the competitors are very fragmented. But definitely, we feel like we're winning share there. Ty Collin: Okay. Got it. Yes. I appreciate that color. And then shifting to the commercial business. So yes, I appreciate that you're trying to diversify that business into the replacement channel. But as you alluded to, condo completions really are kind of expected to fall off a cliff after 2026, should probably be a headwind for you guys, which you mentioned. But I guess I'm just wondering, at what point do you think you might be able to sort of fully offset the lower new build business with replacement business? Or should we kind of expect the commercial business to ultimately take a step back after next year? Michael Walsh: Yes, there'll be softening, especially in the Toronto market as it relates to condo, but we still do a lot of housing. We do things other than just condo. And I think we started the thing about 12 months ago migrating to more of the property manager, and we're seeing success at both MidNorthern as well as Appliance Canada. And that's the other reason why we did the store within a store of Appliance Canada. They've got customers in Ontario that are also out West and in the East. And we're feeling pretty strong that they can build on the commercial business as well. So not sure if I can answer the question on timing, but definitely, we started this some time ago. And we think it will be soft in '26 and '27 and then building back up in '28. But definitely, we've been exploring options about how to compensate for any shortfall in the commercial business. Ty Collin: Okay. Got it. And maybe if I could just sneak in one more and kind of press you guys a little bit on capital allocation. So, I mean, the net cash balance does continue to climb up. I know you've talked about the need to hold on to some of that for maybe potential real estate-related investments and just to remain opportunistic. But given that the time line on some of those more opportunistic investments are ultimately unclear. I mean, at what point would you get more comfortable looking at stepping up, returning some of that capital to shareholders either through a special dividend or buyback activity? Victor Diab: No, I appreciate the question. And yes, you kind of hit it on the nail, right? So we really like our cash and liquidity position right now. It is, by design, building up this year to help us navigate any volatility in the market, but also to be opportunistic. And when we say opportunistic, like we're actively exploring what that could mean for us. So we typically go through our capital allocation funnel around, obviously, first and foremost, investing in our core business, evaluating strategic opportunities, whether that relates to the core of our business or potential M&A opportunities. And then we go down the funnel around returning capital to shareholders. In Q2, we increased our dividend by 20%. And we have these conversations with -- as a management team and with our Board all the time. And when we built that -- look, we're sitting on too much liquidity and there isn't something imminent. We're not afraid to return capital to shareholders. We've been very consistent with that strategy over many years. So it's just continuing to go through that decision process. At this stage, we feel good about where we are, but we'll keep you posted otherwise. Operator: Your next question comes from the line of Ryland Conrad with RBC. Ryland Conrad: Congrats on the first conference call. So maybe just continuing that conversation on M&A with the balance sheet in a really healthy spot. Can you maybe just provide an update on the criteria you're looking for and target? Michael Walsh: Yes. I would say that we've been reviewing any M&A opportunity for some time. I think our criteria that we look at is, we look at a company that has strong management team, runway for growth, and then lastly, being able to dovetail part of our ecosystem, meaning warranty and insurance into that business. So that's kind of the criteria we're running with. And again, we're very opportunistic. So we're not just going to do something for the sake of doing it. We're going to do it because it's in the best interest of growing our business. Ryland Conrad: Okay. Great. And then just on the Canada Post strikes, given they're on more of a rotating schedule this year, I believe, are the impacts that you're seeing on flyer distribution, I guess, less meaningful compared to last year? Victor Diab: I -- Yes -- Not -- I would say it's very tough to kind of say because it's just as impactful in terms of being able to get our flyers out. We have to -- when this strike hits, we have to think about alternative routes, right? So whether it's a full strike or a rotating strike, we have to think about, okay, what are different ways we can either get the flyer out or reallocate some of our marketing funds. So, it's a similar impact this year versus last year in terms of just our ability to get the flyer out. Last year, there was a lot of noise just given the core of the holiday season, our inventory position at that point in time. But like we commented last year, we definitely saw traffic to our stores moderate over that period of time and pockets within our network and regions be more impacted than others depending on our ability to get flyers out. Now we're obviously not just sitting on our hands and the teams are working really hard to try and reallocate those marketing funds. It's just -- it's not going to be as high of an ROI relative to the flyer channel, because each channel has its kind of own unique ROI. So if you put an extra dollar in TV, for example, it's not going to do as much for you as $1 in a flyer just given there's diminishing returns with each of the channels. So that's the dynamic that we're competing with. Ryland Conrad: Okay. Very helpful. And then I guess just last for me. Can you talk a bit to your insurance business and just how conversion rates have been trending following the expansion into new categories earlier this year? Victor Diab: Yes. I mean if you -- our insurance business has done really well this year. I think if you look at our year-to-date growth for the insurance business, it's up double-digits. We feel really good about our attachment rates in stores, and frankly, just the traction we've gained growing that business outside of our own ecosystem. The team continues to work really hard to increase penetration of products with some of our existing partners. For example, you'll start off on a typical -- putting insurance on a typical loan product, then you'll talk to some of our partners around putting an insurance product on a mortgage, et cetera, et cetera. So we're deepening some of those relationships with some of our partners and we continue to explore new partnerships. So we feel really good about the attachment in store and what we've seen this year and our ability to grow it outside our network. Operator: There are no further questions at this time. Ladies and gentlemen, this concludes today's call. Thank you all for joining, and you may now disconnect.
Operator: Good morning, and welcome to the Heritage Insurance Holdings Third Quarter 2025 Earnings Conference Call. Please note, today's event is being recorded. I would now like to turn the conference over to Kirk Lusk, Chief Financial Officer for the company. Please go ahead. Kirk Lusk: Good morning, and thank you for joining us today. We invite you to visit the Investors section of our website, investors.heritagepci.com, where the earnings release and our earnings call will be archived. These materials are available for replay or review at your convenience. Today's call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based upon management's current expectations and subject to uncertainty and changes in circumstances. In our earnings press release and our SEC filings, we detail material risks that may cause our future results to differ from our expectations. Our statements are as of today, and we have no obligation to update any forward-looking statements we may make. For a description of the forward-looking statements and the risks that could cause our results to differ materially from those described in the forward-looking statements, please refer to our annual report on Form 10-K, earnings release and other SEC filings. Our comments today will also include non-GAAP financial measures. The reconciliations of and other information regarding these measures can be found in our press release. With me on the call today is Ernie Garateix, our Chief Executive Officer. I will now turn the call over to Ernie. Ernesto Garateix: Thank you, Kirk. Good morning, everyone, and thank you for joining us today. We delivered strong third quarter results, having achieved net income of $50.4 million, up significantly from a year ago and maintaining the positive trajectory of our earnings. As Kirk and I have been discussing on our earnings calls over the last year, we continue to see tangible results from the successful implementation of our strategic initiatives, which were designed to generate positive and consistent shareholder returns by attaining and maintaining rate adequacy, managing exposure, enhancing our underwriting discipline and improving claims and customer service levels. This has created a significant amount of earnings power within Heritage, which continues to show through. As part of that strategy, we re-underwrote our personal lines book while taking needed rate increases to achieve adequate rates. This has led to a steady contraction in our policies in-force over the last 4 years, while our in-force premium increased from approximately $1.1 billion to an all-time record in the third quarter of $1.44 billion. At the same time, we improved both the quality and the diversification of our book of business. Looking out over the next 6 months, we expect our personal lines policy count to return to growth as we have now opened nearly all of our geographies to new business as compared to only 30% a year ago. We are already seeing our new business production ramp up with new business premium written for the third quarter of $36 million, representing an increase of 166% as compared to $13.7 million of new business written in the third quarter of last year. The decline in our policy count continues to moderate, having decreased by 6,800 policies in the third quarter as compared to a decrease of over 19,000 policies in the third quarter of 2024. In fact, our third quarter PIV count reduction was the smallest decrease that we have experienced since we deployed these strategic initiatives in June of 2021. While it takes time to open our territories, we are seeing good new business momentum continue across our regions. Based upon these factors, I believe that we are on a firm path to deliver full year policy growth in 2026. Importantly, we have long-standing relationships with agents and brokers across our geographies that we have maintained over the last 4 years despite slowing new business growth and re-underwriting our book of personal lines business. In the Northeast and portions of the Mid-Atlantic, we predominantly produce business through Narragansett Bay Insurance Company domiciled in and operated out of Rhode Island. Over the years, we have built a successful homeowners insurance business, which has expanded across the coastal regions of the Northeast and Mid-Atlantic. The company has strong relationships with independent agents based upon a trusted brand. Likewise, Zephyr Insurance operates in and serves the Hawaiian market. Although Zephyr initially focused on exclusively on Hawaiian hurricane wind risk, we subsequently expanded Zephyr's product offering to meet the needs of our customers in the overall Hawaiian market. Our organization benefits from the agility and the rapid market responsiveness typical of a regional enterprise, while also leveraging the economies of scale found in larger super regional companies. We have consolidated many functions to gain efficiency but retained the underwriting, marketing and customer service functions in each region to better address the unique needs of each market. Every region has its own unique dynamics and operating the business locally allows us to quickly adapt to changing conditions as well as provide outstanding customer service to our policyholders and agent partners. As we grow, our robust infrastructure allows us to write new personal lines business without adding significant administrative expense. We understand each of our markets and have built relationships with hundreds of master agencies, which represent thousands of agents throughout our geographic footprint. Our long-standing agency partners have expressed a willingness and desire to grow with us, which in turn provides confidence in our outlook for improved growth in the year ahead. We also remain focused on making decisions based on our data and analytics. This has been the cornerstone of our disciplined underwriting process across all of our geographies, which we will maintain as we grow and which contributed to the lower net loss ratio this quarter. As we grow, we will maintain our disciplined underwriting processes as well as rate adequacy and managing exposures. An example of our disciplined approach can be seen in the commercial residential business, which we reduced in the third quarter due to more competitive market conditions. I believe this further demonstrates the discipline of our management team. Fortunately, we have ample room to grow our personal lines business and can choose to be selective across the 16 states where we do business. We are also exploring expansion opportunities into new regions of the country as well as the delivery of new products to our existing markets. We have a long runway ahead of profitable growth of our business and deliver value to our shareholders. Reinsurance is a critical component of our business, and we have maintained a stable indemnity-based reinsurance program at manageable costs with an excellent panel of highly rated and collateralized reinsurers. Over the course of the third quarter, we continue to meet with our reinsurance partners who continue to support our growth and from whom we anticipate will offer incremental capacity as we look to our 6/1 renewal next year. Additionally, we are seeing the benefits of tort reform as industry loss expectations for Hurricane Milton have been steadily coming down, largely due to reduced litigation, which our reinsurers should begin seeing in the coming months. Given the improved litigation environment in Florida, the lack of reinsured losses and the capacity entering the reinsurance market, we are optimistic that reinsurance pricing will continue to improve looking ahead in 2026. We also believe that the impact of this necessary legislation will be favorable to the consumer in terms of the cost of insurance. To conclude, our business continues to gain momentum and the earnings power of the company is building. We are also growing capital, which will support our managed growth strategy as we expect to begin to deliver policy count growth in the quarters ahead. We are also now in a capital position to review our capital allocation strategy and believe our shares are trading below intrinsic value and do not reflect the many opportunities that we have to further grow the company. As a result, we restarted our share repurchase program in the third quarter, having repurchased 106,000 shares for a total cost of $2.3 million. I would also like to reiterate our dedication in navigating the complexities of our market with a strategic focus that prioritizes long-term profitability, shareholder value and customer service driven by our dedicated workforce. Kirk? Kirk Lusk: Thank you, Ernie, and good morning, everyone. Starting with our financial highlights. We reported net income of $50.4 million or $1.63 per diluted share in the third quarter, which compares very favorable to the $8.2 million of net income or $0.27 per diluted share that we reported in the third quarter last year. The increase was primarily driven by a significant reduction in losses and loss adjustment expenses, combined with a decrease in other operating expenses. For the 9 months ended September 30, we reported net income of $129 million or $4.17 per diluted share, which is a substantial increase from the $41 million of net income or $1.35 per diluted share that we reported for the first 9 months of 2024. Gross premiums earned rose to $362 million, up 2.2% from $354.2 million in the prior year quarter, reflecting the rate actions that we have taken, combined with organic growth in selected geographies as we open more regions for new business. This was partially offset by a decline in commercial residential business due to competitive market conditions. As Ernie touched on, we expect our growth to accelerate at a managed pace through 2026 as we ramp our new business efforts across our recently opened geographies. Net premiums earned were $195.1 million, down 1.9% from $198.8 million, resulting from increased ceded premiums. The increase in ceded premiums was driven primarily by a $4 million reinstatement premium for Hurricane Ian and an increase in the Northeast quota share program as written premiums from that program grew from the prior year quarter. The result was an increase in ceded premium ratio to 46.1%, up 2.2 points from 43.9% in the previous year third quarter. Our net investment income for the quarter was $9.7 million, relatively flat due to a higher portfolio value, offset by a lower interest rate environment. We continue to manage our investment portfolio while maintaining a conservative portfolio with high-quality investments that are durations liability matched. Our total revenues for the quarter were $212.5 million, relatively unchanged from our prior year quarter. As discussed, we expect our revenues to return to growth through 2026 as we ramp our new business efforts. Our net loss ratio for the quarter improved 27.1 points to 38.3% as compared to 65.4% in the same quarter last year, reflecting significantly lower net loss in LAE. Net weather losses for the current year quarter were $13.8 million, a decrease of $49.2 million from $63 million in the prior year quarter. There were no catastrophe losses in the current quarter as compared to $48.7 million in the prior year quarter. The reduction in weather losses was coupled with favorable reserve development as compared to the prior year. Our attritional losses continue to remain fairly stable as we believe is associated with the enhanced underwriting strategy over the last several years. Additionally, favorable net loss development was $5 million in the third quarter compared to adverse development of $6.3 million in the prior year quarter. Our net expense ratio for the quarter was 34.6%, a 60 basis point improvement from 35.2% in the prior year quarter, driven primarily by a decrease in policy acquisition costs. The reduction in policy acquisition costs was driven primarily by higher ceded commission income associated with both a larger amount of ceded premium under the net quota share program and a higher ceding commission rate due to favorable loss experience for that program. This resulted in a 1.2% reduction in policy acquisition costs, which was partially offset by a 60 basis point increase in the net general and administrative expense ratio. The net combined ratio for the quarter was 72.9%, an improvement of 19.6 points from 100.6% in the prior year quarter, driven primarily by the lower net loss ratio as well as the lower net expense ratio just highlighted. Turning to our balance sheet. We ended the quarter with total assets of $2.4 billion and shareholders' equity of $437.3 million. Our book value per share increased to $14.15 at September 30, 2025, up 49% from the fourth quarter of 2024 and up 56% from the third quarter of 2024. The increase from December 31, 2024, is primarily attributable to year-to-date net income as well as a $15.7 million net of tax benefit associated with the reduction in unrealized losses. The unrealized losses are related to a decline in interest rates that occurred through the third quarter. The average duration of our fixed income portfolio is 3.13 years as the company has extended duration from the prior year quarter to take advantage of higher yields further out on the yield curve while still maintaining a short duration, high credit quality portfolio. Nonregulated cash at quarter end was $50.1 million. In addition, combined statutory surplus at our insurance companies affiliates at quarter end was $352.2 million, which is up $93.4 million from the third quarter of 2024. The increase in statutory surplus provides for additional growth capacity as we open territories to get up to full capacity. Looking ahead, we remain focused on executing our strategic initiatives aimed at driving long-term shareholder value and providing our policyholders and agents with the service they deserve and expect. We believe that our diversified portfolio and distribution capabilities, along with our overall proactive management approach to exposures, rate adequacy and investing in technology will position us well for continued success. Thank you for your time today. Operator, we are now ready for questions. Operator: [Operator Instructions] The first question is from Mark Hughes with Truist. Mark Hughes: The growth prospects, you talked about the PIV growth in 2026. How do you evaluate the opportunity in Florida versus outside of Florida? Ernesto Garateix: Sure. So there's still plenty of opportunity for us in Florida. If you kind of go back to a couple of years, we derisked a bit in Florida, especially in some of the Tri-County areas. So there's plenty of runway for us in Florida. We understand there's more new markets in Florida, but our name has still been predominant with the agents, and that's why we talked quite a bit about our agency relationships, which remain strong. And the agents have been -- we've been working with the agents. They have reached out to us about continuing to write. So as we mentioned on the call there, $30-plus million of new business premium is something that is only gaining more momentum in Florida. Mark Hughes: Okay. Of that new business momentum, I think you talked about $36 million was -- how much of that was Florida? Ernesto Garateix: We have that number here. I'll get that for you. Mark Hughes: In the meantime, I'll ask, how do we think about the pricing or competitive environment in Florida? It looks like commercial property is really a tremendous amount of pressure. I know in homeowners, the pricing cycle is a whole lot slower. But what's your current anticipation in terms of pricing? I think you've talked about filing for maybe low mid-single-digit rate decreases in 2026. Is that still a fair assessment? And is that... Ernesto Garateix: That's still a fair assessment, right, we have a current filing with the -- pending with the OIR for a rate decrease. And the plan would be as well in '26, we've also planned for a single-digit rate decrease. Regarding commercial, you're right, there is more pressure, but I also remind people where the beginning point is when you're talking about CRs in the 70s, yes, they have pushed up slightly to 80%, but an 80% CR is still very profitable in the commercial lines arena. Kirk Lusk: About $17 million of that new business was Florida. Mark Hughes: Okay. So kind of consistent with your current mix. And then ceded premiums in absolute dollars, is this a good starting point when we think about the fourth quarter, the $166 million, $167 million? Kirk Lusk: Yes. It's probably going to be a little high. We had about a $4 million onetime adjustment in there due to reinstatement premium. So yes, I think if you look at backing off some of that, then you're going to be about where the number needs to be. Mark Hughes: So low $160s million. Is just reinstatement premium from Ian? Kirk Lusk: Yes, Ian and Milton -- sorry, it was Ian. Mark Hughes: Okay. So it shows up a couple of years later? Kirk Lusk: Yes. Mark Hughes: Okay. How much growth can you support with the surplus that you've got, the $352 million up pretty substantially? Will that be good enough for kind of what you're seeing in 2026? Kirk Lusk: Yes. Well, I think if you look at kind of where our change in statutory surplus is for the year, it's up about $66 million. And then if you assume that, that is 3:1 ratio, that type of stuff, that gives us over $180 million of net earned premium to write. And again, that's net written. So then you actually figure that, that number is going to be a little higher because of the ceded. And so therefore, I mean, you're looking at roughly well over $225 million, $250 million of premium that we can write based upon that increase in surplus. And then again, that doesn't include any improvements in that number in the fourth quarter. Mark Hughes: Yes. Yes, which I guess leads to the question, with your level of earnings and your strong capital position already, I think you talked about $2 million in buybacks in the quarter, but it seems like there's going to be a lot of excess capital floating around in pretty short order. What are the priorities there? Is that something you could act sooner rather than later on maybe further buybacks? Kirk Lusk: And again, one of the things we also mentioned is that the Board did authorize an additional $25 million worth of stock buybacks. And again, I think if you look at our capital priorities, again, it's one, it's using capital for growth because of the ROEs we're able to generate. Second of all is we do look at where our stock is trading. We still think it's undervalued. So therefore, stock buybacks is our second priority and then dividends after that with the ROEs, if we can't generate what we think are substantial ROEs. So that's kind of like the priority of our capital utilization. Mark Hughes: Yes. Yes, I hear you. Yes, your net income relative to your market cap relative to your capital requirements is pretty striking when you put all that together. Kirk Lusk: Yes. Yes, it is. Operator: The next question is from Karol Chmiel with Citizens. Karol Chmiel: I just have a follow-up question to Mark's question about the new business. So if $17 million of the $36 million was Florida, roughly $19 million was outside of Florida. Can you just maybe comment on where you're seeing the most momentum of those territories outside of Florida? Ernesto Garateix: Yes. So Virginia is a new growing state for us as well as growth in Hawaii. New York is also ramping up. And the one reminder there is that we did take additional 9%, which made us rate adequate in New York. So that started midyear. So that is only beginning and will kind of roll into '26. So additional states as California on an E&S basis also is another positive momentum growing for us. Karol Chmiel: Okay. Great. And just a quick question on this favorable development of $5 million. Is this still due to the reserve strengthening of last year? Kirk Lusk: Yes. It has partially to do with that, and it just also has to do with just kind of what we're seeing in the underlying portfolio. So again, we think that we're adequately reserved for sure. So yes, it does have to do a little bit with that where we did take a hard look at last year. Operator: At this time, there are no further questions. So this concludes our question-and-answer session. I would like to turn the conference back over to Ernie Garateix for any closing remarks. Ernesto Garateix: We'd like to thank everyone for joining the call and thank especially our workforce and our employees for all their hard work this year. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Karat Packaging Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Roger Pondel. Please go ahead, sir. Roger Pondel: Thank you, operator. Good afternoon, everyone, and welcome to Karat Packaging's 2025 Third Quarter Conference Call. I'm Roger Pondel with PondelWilkinson, Karat Packaging's Investor Relations firm. It will be my pleasure momentarily to introduce the company's Chief Executive Officer, Alan Yu, and its Chief Financial Officer, Jian Guo. Before I turn the call over to Alan, I want to remind our listeners that today's call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous conditions, many of which are beyond the company's control, including those set forth in the Risk Factors section of the company's most recent Form 10-K as filed with the Securities and Exchange Commission, copies of which are available on the SEC's website at www.sec.gov, along with other company filings made with the SEC from time to time. Actual results could differ materially from these forward-looking statements, and Karat Packaging undertakes no obligation to update any forward-looking statements, except as required by law. Please also note that during this call, we will be discussing adjusted EBITDA, adjusted EBITDA margin, adjusted diluted earnings per share and free cash flow, which are non-GAAP financial measures as defined by SEC Regulation G. A reconciliation of the most directly comparable GAAP measures to the non-GAAP financial measures is included in today's press release, which is now posted on the company's website. And with that, I will turn the call over to CEO, Alan Yu. Alan? Alan Yu: Thank you, Roger. Good afternoon, everyone. Despite ongoing trade volatility, Karat achieved another quarter of record net sales, up over 10% year-over-year, fueled by solid volume expansion, a favorable product mix and effective pricing initiatives. We've experienced double-digit growth across all major markets, especially in Texas and California. Even with significant higher import costs due to increased duties and tariffs, we successfully sustained a gross margin of 34.5% for the third quarter. We remain committed to our sourcing diversification strategy, and our nimble and flexible operating model continues to enable us to effectively manage ongoing supply chain challenges. During the third quarter, we increased domestic sourcing to approximately 20% from about 15% in the second quarter, and we reduced imports from Taiwan to approximately 42% from 58%. We continue to closely monitor tariff developments and are ready to quickly adjust our sourcing strategy accordingly as we have done in the past to maintain Karat's competitive advantage. Additionally, foreign currency exchange rate between the U.S. dollar and the new Taiwan dollar have shown increased stability since August, which is expected to help improve our operating performance for the current quarter. Earlier this year, we secured a major add-on of business to supply paper bag, a new product category for Karat to one of our largest national chain accounts. Initial shipments to select distribution centers started in the third quarter, and we expect the volume to accelerate in the fourth quarter. With fulfillment expected during Q1 of 2026, this new category of business with this chain account is for a 2-year term and expected to contribute approximately $20 million in additional annual revenue. Over the next 2 to 3 years, we aim to scale our paper bag business to more than $100 million in additional annual revenue. The anticipated growth from this new category is being driven by national and regional restaurant chains that are transitioning to paper bags from plastic bags. This shift is influenced by evolving state and municipal regulations as well as a growing emphasis on enhancing customer experience and brand images. We expect continued market share growth in this segment, further solidifying our position as a leader in providing sustainable, eco-friendly disposable food service products. In late May and June this year, we implemented broad pricing increases across most product lines to offset rising import costs. Heading into the fourth quarter and 2026, business trends remain strong. We continue to make disciplined pricing approach and partner with our customers while focusing on operating efficiencies. We are actively integrating several meaningful new customer accounts and focusing on increasing online marketing, which will strengthen our 2026 pipeline, building a strong foundation for what we expect to be another record-setting year in sales. Karat announced a first-ever stock repurchase program this week. In addition to the regular quarterly dividend, the announcement underscores our Board confidence in the company's future growth prospects and financial strength. And I will now turn the call over to Jian Guo, our Chief Financial Officer, to discuss the company's financial results in greater detail. Jian? Jian Guo: Thank you, Alan. I'll begin with a summary of our Q3 performance, followed by an update on our guidance. Net sales for the 2025 third quarter were $124.5 million, up 10.4% from $112.8 million in the prior year quarter. The increase was primarily driven by an increase of $9.4 million in volume and a $3.5 million favorable impact from product mix, partially offset by a $0.7 million unfavorable year-over-year pricing comparison. Sales to chain accounts and distributors were up by 13.7%. Online sales increased 3.1% over the prior year quarter and sales to the retail channel were down 12.5% over the prior year quarter, reflecting the softness of the overall retail sector. Cost of goods sold for the 2025 third quarter increased 17.8% to $81.6 million from $69.3 million in the prior year quarter. Product costs increased $5.0 million due to sales growth, partially offset by more favorable vendor pricing and product mix. Additionally, import costs increased $8.2 million due to higher import duty and tariffs, coupled with a 21.0% increase in import volume as we purchased more inventory ahead of expected business expansion, partially offset by a 13.4% decrease in average freight container rates. Gross profit for the 2025 third quarter was $42.9 million compared with $43.5 million in the prior year quarter. Gross margin for the 2025 third quarter was 34.5% compared with 38.6% in the prior year quarter. Gross margin was negatively impacted by higher import costs, which as a percentage of net sales increased to 14.4% compared with 8.6% in the prior year quarter. The decrease in margin was partially offset by a decrease in product costs as a percentage of net sales due to more favorable vendor pricing and product mix as well as a reduction in inventory write-offs and adjustments as a percentage of net sales. Operating expenses in the 2025 third quarter were $34.3 million compared with $32.2 million in the prior year quarter. The increase was mainly driven by $2.1 million of higher shipping costs due to higher sales volume, $0.7 million of higher rent expense due to a higher rate on our Chino, California facility lease extension plus the opening of a new Chino distribution center and $0.6 million of higher salaries and benefit expenses. These increases were partially offset by a $1.4 million reduction in online platform fees. Operating income in the 2025 third quarter was $8.6 million versus $11.3 million in the prior year quarter. Total other income net was $1.3 million for the 2025 third quarter compared with $0.6 million in the prior year quarter. The increase was primarily from foreign currency transaction gain of $0.7 million, driven by the strengthening of the United States dollar against the new Taiwan dollar during the 2025 third quarter compared with a loss of $0.3 million on foreign currency transactions during the 2024 third quarter. Net income for the 2025 third quarter was $7.6 million compared with $9.3 million for the prior year quarter. Net income margin was 6.1% in the 2025 third quarter compared with 8.2% in the prior year quarter. Net income attributable to Karat for the 2025 third quarter was $7.3 million, $0.36 per diluted share compared with $9.1 million or $0.45 per diluted share in the prior year quarter. Adjusted EBITDA for the 2025 third quarter was $13.1 million compared with $14.7 million for the prior year quarter. Adjusted EBITDA margin was 10.5% of net sales for the 2025 third quarter compared with 13.0% for the prior year quarter. Adjusted diluted earnings per common share was $0.37 for the 2025 third quarter compared with $0.47 for the prior year quarter. We generated operating cash flow of $1.0 million in the third quarter compared with $19.5 million in the prior year quarter. Duty and tariff payments as well as the inventory purchase payments increased. However, such increases were offset by strong collections and as you will see described in the Form 10-Q filed tomorrow. Despite the significant cash outlays for operations and a $3.5 million early loan repayment on one of our consolidated variable interest entities term loans, we ended the quarter with $91.1 million in working capital. As of September 30, 2025, we maintained financial liquidity of $34.7 million with another $19.9 million in short-term investments. As of September 30, 2025, we reclassified one of our consolidated variable interest entities term loans into current liabilities as the maturity is within 12 months, totaling $20.4 million. We intend to pay down the loan upon maturity with our cash on hand. On November 4, 2025, our Board of Directors approved the quarterly dividend of $0.45 per share payable November 28, 2025, to stockholders of record as of November 21, 2025. Additionally, our Board of Directors approved our first-ever share repurchase program of up to $15.0 million, under which Karat is authorized to repurchase shares of its outstanding common stock from time to time through open market purchases. Looking ahead to the 2025 fourth quarter, we expect net sales to increase by approximately 10% to 14% over the prior year quarter with gross margin projected to be within 33% to 35% and adjusted EBITDA margin to be within 8% to 10%. As Alan mentioned earlier, our new business pipeline for 2026 is robust, supported by the new paper bag category offering and the addition of several key customer accounts. We remain focused on accelerating top line growth with disciplined pricing while continuing to enhance operational efficiency and cost management. Alan and I will now be happy to answer your questions, and I'll turn the call back to the operator. Operator: [Operator Instructions] And the first question will come from Michael Francis with William Blair. Michael Francis: Alan and Jian, it's Mike on for Ryan. Nice quarter. I wanted to start on paper bags. Did I hear you right that you aim to scale that to $100 million over the next 2 years? Alan Yu: Yes, that is correct. Michael Francis: And what gives you confidence in that number? Alan Yu: It's because there's a lot of chains are moving away from plastic bag into paper bag. And this is a segment that we're seeing that it's -- as one of the large chains in the U.S. move towards this area, more and more similar chain will follow through that. And there -- basically, that -- we feel that there is an organic growth in that segment. And also at the same time, it is not just the paper bag was handled, there's different type of bag. There's SOS bag, which every fast food restaurant will need. And I mean with the growth of the fast food chain that is growing, the number of stores that is growing, we feel that we're competitive -- we can be competitive enough to gain market share in that segment as more and more people looking toward that area. And also, there's other bakery bag as well. There's just too many items in that segment, that make us feel that we can grow immediately. I mean, as we mentioned in our announcement that one chain, the annual sales of that number will be $20 million to $25 million per year just for one chain. And we do have 2 or 3 other chains already working in testing our paper bag and SOS bag. That's why it's -- we feel confident that this will grow quickly into an annual sales of additional $100 million a year. Michael Francis: That's all good to hear. And then I wanted to ask on gross margins, went lower, I think, as we were expecting and 4Q is a little lower than we were expecting. Would like to know longer term, do you think that there's an opportunity for you to get back into that high 30% range on the gross margin number? Or is that going to be difficult while tariffs are in the market? Alan Yu: Well, we're trying to be conservative right now at this point because there's still uncertainty. But the good thing is we feel there's a tailwind. One of the things that -- one of the issues that reduces our gross margin drastically in the second quarter was the sudden drop in the Taiwanese -- sudden increase in the Taiwanese dollar versus the U.S. dollar that it was a drop of 11% in just 3 days alone. And that 11% has come back to just about an increase of 4.5%, 5%. So basically, it's more of a stabilization in the U.S. dollars against Asian currencies. And this is actually enabling us to go back to our vendors to negotiate a better pricing this past 2 months basically. So we're seeing that there's more tailwind in terms of the gross margin. But we do want to be conservative in terms of how we look at in terms of the numbers in September and giving us the number that we see in October, we already see some improvement in October versus September. September was better than August. So we want to see more of the positive trend before we can issue a -- increase our gross margin numbers basically. Michael Francis: Okay. And lastly for me, it's good to see the share buybacks. Would love to get an update on your capital allocation priorities between debt paydown, buybacks and the dividend and any potential M&A. Alan Yu: Well, we -- our strategy is that if we have more than $20 million in short-term deposit that we can allocate it to the dividend, special dividend, regular dividend or use it for other investment. At this point, even with the increase in tariff, increase in -- inventory-wise in the second quarter, our deposit amount is still the same, remains the same. So we're still strong in cash. And lately, we're seeing that we're bringing -- we have been bringing down our inventory to reduce our cost in terms of the tariff as well as implication costs. So we're seeing cash flowing back into our accounts. And that's why we feel like it's good for us to do some type of a share repurchase. While our stock is kind of low right now, I think it's a value to repurchase share back. At the same time, we are still looking to merger and acquisition. We do have a few in the pipeline, investment, partnership, joint venture and also acquisition. We don't feel that this will deter us in terms of moving towards this direction. Operator: The next question will come from George Staphos with Bank of America. George Staphos: Can you hear me okay, Alan? Alan Yu: Yes, I can, George. George Staphos: So listen, maybe just piggybacking on the question on capital allocation. I want to take it from a different approach. I mean your dividend basically represents the majority of your earnings per share. Why would you consider or contemplate doing more buyback in light of that? Would you consider borrowing to buy back more stock? It would seem like deleveraging and taking care of your incoming debt paydown needs would be probably more prudent. But how do you think about that? Alan Yu: Well, here's the thing. The debt -- we don't have any debt on our book right now at this point. The debt that you're seeing VIE, that's on the real estate [ side -- part ] of the ventures. George Staphos: That $20 million, that current liability, you said you're going to pay that down in the upcoming year? Alan Yu: We can pay it down. We can pay either with our current CD that we have in our short-term deposit, to utilize some of the cash on that. And at the same time, we can have third party -- we can also continue to borrow with different banks. It depends on how -- what the cash flow situation is, if there's a need to do that because right now, like I said, we don't have any debt in our Lollicup or Karat Packaging book right now. So we're -- this is one of the things that we still have time to think what we want to do, allocate our capital. If there's other things that we can do better, then we will do that. But at this currently, the rate of CD income is dropping as the interest rate reduces. So we have to figure out which is better. If we were to pay down the debt, we actually will be making -- generating additional income. It will be an interdepartment -- intercompany loan to the VIE company in paying down that debt. So it won't be like really just paying, it will be paying down the debt for the VIE company, but at the same time, for Lollicup, it will be income -- additional income. Instead of [indiscernible] us for deposits from -- yes, deposits from the banks, there will be actually more income from the VIE company. Jian Guo: And George, this is Jian. I just wanted to add on to what Alan was talking about to answer your question. The main purpose really is to have one additional tool in our toolbox to further enhance our shareholder return while we continue to focus on growing the company either organically or inorganically. As we previously announced, as you probably saw yesterday in the announcement, the total amount of the Board approved of the share repurchase program is $15 million. So it is a fairly small program at management's total discretionary. So this will be something that management will continue to evaluate in terms of a lot of the different factors, right, the pricing, the performance, the liquidity, the strength of the balance sheet, quite a few factors, just another tool in our toolbox to further enhance our shareholder return. You're right. I mean, obviously, our dividend yield is already pretty rich. So that definitely is something that we consider as we move forward with the potential execution under this program as well. George Staphos: Okay. I appreciate the thoughts on that, and thanks for the reminder on the VIE. One question, back to the question, I think Mike teed up on the bag business. So let's assume you have perfect accuracy on the revenue side on bags, and that's $100 million in whatever time period you said. What kind of margin do you think you're going to get on that business? And you're already starting to see some of that show up in the fourth quarter, you said, correct? So 2 questions there. Alan Yu: It will be a mix -- more of a mix margin. The higher volume will be in the -- could be in the high teens on margin side, and the SOS bag could be in the high 30s. So it depends on the product line. There's also bakery bag that could be in the high 50s. So -- and also at the same time, we are selling online on these new bags that we're bringing in. The online will be even in a higher margin range. So it will be more of a balancing mixture of each, just like as we are doing right now. So -- and also, we are actually working heavily toward in terms of getting our bags to manufacture more efficiently to increase margin from there, better sourcing of raw material from our vendors and also moving -- shifting the manufacturing site locations, potentially moving some into domestic U.S. production, that might save some costs, even enhancing more margin. So this is -- these are the things that we can do once -- as the volume increase in the next 12 months. George Staphos: All right. So 2 quickies for me, and I'll turn it over to Alan. So with that being the case, and we're already in November, so almost halfway through the quarter, the range on revenue growth, the range on margin is fairly wide. And I realize you're trying to be prudent. I realize there are a lot of vagaries in the market, especially with tariffs and sourcing. But I find the range is maybe a little bit wider than I would expect at this juncture in the year. What's giving you pause in terms of maybe perhaps having a little bit narrower both growth rate range and margin range for the quarter? And then did I hear you say -- and my last question, I'll turn it over. Did you say there was an inventory write-off? I apologize, I'm on the road right now, so I don't have your materials in front of me. Alan Yu: I wasn't -- I'm not sure what the inventory write-off was, but I know that we're reducing inventory at this currently for the year-end. Actually, our sales have been very robust. As you said that we are in the middle of the fourth quarter already. So we're seeing our sales almost in the mid-teen range, but we just want to be conservative. And basically, at the mid-teen range, this is a sales increase organically that we haven't seen for actually for the past 3 years. That's where -- we're seeing that 12% to 14%, but we are seeing numbers very close to the mid-teens. But we just want to be prudent in terms of 12% to 14%, that's where we're trying to -- this is where we're being conservative, but we're seeing in the mid-teens right now in the growth of numbers -- actually, the sales numbers. And basically, in our industry, this is kind of very good numbers in terms of -- well above our industry right now. Operator: And this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Alan Yu, CEO, for any closing remarks. Please go ahead. Alan Yu: Thank you. Thank you, everyone, for joining our third quarter Karat Packaging earnings conference call. I'd like to say thank you again, and have a nice day. Goodbye. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon, and welcome to Diodes Incorporated Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Thursday, November 6, 2025. I'd now like to turn the call over to Leanne Sievers of the Shelton Group Investor Relations. Leanne, please go ahead. Leanne Sievers: Good afternoon, and welcome to Diodes Third Quarter 2025 Financial Results Conference Call. I'm Leanne Sievers, President of Shelton Group, Diodes Investor Relations firm. Joining us today are Diodes' President and CEO, Gary Yu; CFO, Brett Whitmire; Senior Vice President of Worldwide Sales and Marketing, Emily Yang; and Vice President of Marketing and Investor Relations, Gurmeet Dhaliwal. I'd like to remind our listeners that the results announced today are preliminary as they are subject to the company finalizing its closing procedures and customary quarterly review by the company's independent registered public accounting firm. As such, these results are unaudited and subject to revision until the company files its Form 10-Q for its quarter ended September 30, 2025. In addition, management's prepared remarks contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the safe harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today, and therefore, we refer you to a more detailed discussion of the risks and uncertainties in the company's filings with the Securities and Exchange Commission, including Forms 10-K and 10-Q. In addition, any projections as to the company's future performance represent management's estimates as of today, November 6, 2025. Diodes assumes no obligation to update these projections in the future as market conditions may or may not change, except to the extent required by applicable law. Additionally, the company's press release and management statements during this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms. Included in the company's press release are definitions and reconciliations of GAAP to non-GAAP items, which provide additional details. Also throughout the company's press release and management statements during this conference call, we refer to net income attributable to common stockholders as GAAP net income. For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 90 days in the Investor Relations section of Diodes' website at www.diodes.com. And now I'll turn the call over to Diodes' President and CEO, Gary Yu. Gary, please go ahead. Gary Yu: Welcome, everyone, and thank you for joining us on today's conference call. As announced in our press release earlier today, revenue in the quarter increased 7% sequentially and 12% year-over-year, driven by strong demand across the general computing market, including for AI-related server applications as well as data center and agent computing. Our global point of sales increased the strongest in Asia, followed by North America. Additionally, our channel inventory is at a healthy level, decreasing again this quarter in terms of dollars and weeks with overall inventory dollar decreasing over 25% from peak levels. Even though the rate of recovery in the automotive and industrial market continues to be slower than expected, revenue increased both sequentially and year-over-year in both of these end markets. When coupled with the computing market growing the strongest along with the consumer also increasing sequentially, product mix unfavorably weighted on the gross margin during the quarter. Future margin expansion will be driven by ongoing improvement in the product mix as the pace of recovery accelerate in our higher-margin automotive and industrial end markets, combined with increased new product introductions in our target markets as well as improved loading across our manufacturing facilities. At the midpoint of our fourth quarter guidance, we expect to achieve approximately 12% growth for the full year. Looking forward, we are gaining increasing confidence in broader demand improvement in the automotive and industrial market. Diodes is gaining increasing market share in the automotive market with new programs scheduled to launch early next year. Combined with increasing content in industrial applications like AI robotic, power management, medical and factory automation. With that, let me now turn the call over to Brett to discuss our third quarter 2025 financial results as well as our fourth quarter guidance in more detail. Brett Whitmire: Thanks, Gary, and good afternoon, everyone. Revenue for the third quarter 2025 was $392.2 million, an increase of 12% over $350.1 million in the third quarter 2024 and a 7.1% increase over $366.2 million in the second quarter 2025. Gross profit for the third quarter was $120.5 million or 30.7% of revenue compared to $118 million or 33.7% of revenue in the prior year quarter and $115.3 million or 31.5% of revenue in the prior quarter. GAAP operating expenses for the third quarter were $108.9 million or 27.8% of revenue and on a non-GAAP basis were $103.1 million or 26.3% of revenue, which excludes $5.9 million amortization of acquisition-related intangible asset costs. This compares to GAAP operating expenses in the third quarter 2024 of $96.1 million or 27.5% of revenue and $105.9 million or 28.9% of revenue in the prior quarter. Non-GAAP operating expenses in the prior quarter were $99.8 million or 27.3% of revenue. Total other income amounted to approximately $7.5 million for the quarter, consisting of $8.5 million of interest income, $2.4 million in unrealized gains from investments, $0.4 million in other income, $3.3 million in foreign currency losses and $0.5 million in interest expense. Income before taxes and noncontrolling interest in the third quarter 2025 was $19 million compared to income of $18.8 million in the prior year period and $53.2 million in the previous quarter. Turning to income taxes. Our effective income tax rate for the third quarter was approximately 18.7%. We continue to expect the tax rate for the full year to be approximately 18%, plus or minus 3%. GAAP net income for the third quarter was $14.3 million or $0.31 per diluted share compared to net income of $13.7 million or $0.30 per diluted share in the prior year quarter and net income of $46.1 million or $0.99 per diluted share last quarter. The share count used to compute GAAP income per share for the third quarter of 2025 was 46.4 million shares. Non-GAAP adjusted net income in the third quarter was $17.2 million or $0.37 per diluted share, which excluded net of tax $4.8 million of acquisition-related intangible asset costs and $1.9 million of unrealized gain on investments. This compares to non-GAAP adjusted net income of $20.1 million or $0.43 per diluted share in the third quarter of 2024 and $15 million or $0.32 per diluted share in the prior quarter. Excluding noncash share-based compensation expense of $5.4 million for the third quarter, net of tax, both GAAP net income and non-GAAP adjusted net income would have increased by $0.12 per share. EBITDA for the third quarter was $46.6 million or 11.9% of revenue compared to $46.9 million or 13.4% of revenue in the prior year period and $84.5 million or 23.1% of revenue in the prior quarter. We have included in our earnings release a reconciliation of GAAP net income to non-GAAP adjusted net income and GAAP net income to EBITDA, which provides additional details. Cash flow provided by operations was $79.1 million for the third quarter. Free cash flow was $62.8 million, which included $16.3 million of capital expenditures. Net cash flow was a positive $59.3 million. Free cash flow per share was $1.35 for the quarter and $4.02 per share for the trailing 12 months, approaching the historical high of $4.34 per share in 2021. Turning to the balance sheet. At the end of third quarter, cash, cash equivalents, restricted cash plus short-term investments totaled approximately $392 million. Working capital was approximately $890 million and total debt, including long term and short term, was approximately $58 million. In terms of inventory, at the end of the third quarter, total inventory days were approximately 162 as compared to 173 last quarter, down approximately 11 days sequentially. Finished goods inventory days were 62, a decrease of 9 days from the 71 days last quarter. Total inventory dollars decreased $11.8 million from the prior quarter to $470.9 million, consisting of a $17.3 million decrease in finished goods and a $1 million decrease in work in process and a $6.5 million increase in raw materials. Capital expenditures on a cash basis were $16.3 million for the third quarter or 4.2% of revenue, which was below our targeted annualized range of 5% to 9% of revenue. Now turning to our outlook. For the fourth quarter of 2025, we expect revenue to be approximately $380 million, plus or minus 3%. At the midpoint, this is better than typical seasonality from third quarter and represents a 12% increase over the prior year period and will be the fifth consecutive quarter of year-over-year growth. GAAP gross margin is expected to be 31%, plus or minus 1%. Non-GAAP operating expenses, which are GAAP operating expenses adjusted for amortization of acquisition-related intangible assets, are expected to be approximately 27% of revenue, plus or minus 1%. We expect net interest income to be approximately $1 million. Our income tax rate is expected to be 18.5%, plus or minus 3%, and shares used to calculate EPS for the fourth quarter are anticipated to be approximately 46.4 million shares. Not included in these non-GAAP estimates is amortization of $4.8 million after tax for previous acquisitions. With that said, I now turn the call over to Emily Yang. Emily Yang: Thank you, Brad, and good afternoon. Revenue in the third quarter was up 7.1% sequentially and at the midpoint of our guidance, mainly driven by strong demand in Asia, especially in Taiwan for the AI computing applications. Our global point of sales increased in Asia, followed by North America and our channel inventory decreased both in dollars and in weeks. During the quarter, we continued to drive our new product initiative with approximately 180 new part numbers, of which 60 were for automotive applications. Looking at the global sales in the third quarter, Asia represented 78% of the revenue; Europe, 12%; and North America, 10%. In terms of our end markets, industrial was 22% of Diodes product revenue; automotive, 19%; computing, 28%; consumer, 18%; and communications, 13% of the product revenue. Our automotive industrial revenue combined was 41%, which was 1 percentage point lower compared to the last quarter. Even though automotive industrial revenue increased quarter-over-quarter, the computing end market experienced stronger growth than the 7% of the company average for the quarter and the industrial market grew at a lower rate than the average. Now let me review the end markets in greater details. Starting with automotive. Revenue in the quarter grew 8.5% sequentially and 18.5% in the first 3 quarters over last year, even though as a percentage of the total product revenue was flat to the last quarter due to the growth in the other markets. The revenue increase during the quarter serves as a further evidence that the inventory situation continued to improve even though the overall demand remained dynamic and the pace of recovery is slower than expected. The other positive news is that we are starting to see more new programs scheduled to ramp early next year. Our controllers and MOSFET combination from the low-voltage MOSFET product line has established a strong presence in the automotive DC source applications. Our newly released 50A and 650-volt automotive-grade Silicon Carbide Schottky Barrier Diodes are specifically seeing traction in energy storage systems. And our small signal bipolar junction transistors devices packaged in DFM are proving to be valuable for general-purpose signal switching, offering flexibility and compactness for various electronic designs. Additionally, our latest NPN and PNP bipolar junction transistor products feature industrial-leading low saturated voltage, making them ideal for a range of automotive applications. These products are ideally suited for voltage regulation, DC-DC converters, motors as well as LED lighting, engine control units, power management and linear controllers. Diodes TVS products are being designed into battery management system applications, providing robust search and overvoltage protection for reliable automotive battery performance. In addition to our TVS products, our switching diodes, Zener diodes and SBR products have design wins in autonomous driving, telematics and infotainment applications. And our USB 2, signal booster devices are being adopted for in-car charging solutions and other cockpit electronics, enabling stable signal transmission in long cable environments. We have also seen strong demand for our low quiescent current LDO operating at 40 to 60 volt, driven by increased production of MCU power supply systems. Our automotive Hall effect sensors, including latch and Omnipolar switch variant have experienced double-digit growth, driven by new design wins in DC motors, window and tailgate lifters, cooling fans and glass ball sensors. This momentum is expected to continue as automotive design become increasingly more sophisticated. And lastly, our LED driver are seeing solid demand supporting a diverse range of applications such as gear shift control indicators, interior cabin lighting and mood lighting. Turning to industrial market. Similar to the automotive market, the inventory situation continues to improve gradually with revenue in this market grew almost 4% sequentially and 13% for the first 9 months. We continue to expect the overall inventory situation will begin to normalize next year. We are seeing applications such as AI robotics, medical and factory automation gaining strong demand momentum. With the increasing power consumption by new systems, the importance of power supply and backup power solutions for AI servers is becoming increasingly critical. Next-generation server power supply systems are transitioning from the current 48-volt system to 400-volt and 800-volt systems and adopting a stand-alone power rack design. Diodes SBR products, Silicon Carbide MOSFET, ideal diode controllers are gaining traction in this innovative applications are increasingly being adopted by a range of power supply customers. Additionally, our portfolio of 50M 1,200-volt Silicon Carbide Schottky Barrier Diodes products are achieving success in energy storage applications, delivering efficient and reliable performance. And our silicon carbide MOSFETs are also seeing increasing adoption, especially for applications such as EV chargers and power supply for AI surfers and data center applications. Also in the industrial, Diodes TVS products are being integrated into power adapters to provide robust ESD and search protection, enhancing device reliability and our high-voltage sensors, low dropout regulators and voltage reference solutions are demonstrating strong momentum in a variety of industrial applications, including fan motors, household appliances, power tools and e-meters. In the computing market, we saw the strongest growth this quarter, increasing almost 17% sequentially and 22% in the first 9 months compared to last year. The highlight continues to be the strong demand momentum for AI-related applications. With the chipset refresh cycle underway, we are gaining strong traction and market share across our connectivity and timing product line with particular strength in PCI Express 5.0 and 6.0 clock solutions. This growth is fueled by increasing demand within AI, data center and edge computing applications. Our level shifter products are also seeing notable expansion, especially in server applications with major customers. Additionally, our signal integrity and high-speed switch portfolio, including USB4 and PCIe 5 and 6 has gained significant traction. These products are being widely adopted in key applications such as AI cars for server and solid-state drivers. Our ESD protection devices are also increasingly being integrated into SSD applications, showing a positive ramp-up. We also continue to secure design wins for our PCI Express 4.0 and 5.0 redriver solutions and are now entering solid production phase in both notebook and SSD applications. And our power switches are in high demand for the data center SSDs, while USB-C source switch are being utilized in power ports for the desktop and docking stations. Our linear LED drivers are also seeing increased deployment in servers. In the consumer market, revenue also increased 8.5% sequentially and 7% for the first 9 months, even though flat as a percentage of the total product revenue. Diodes bridge rectifiers are being designed into multiple power adapters that are ramping up, fueled by increased demand in the gaming systems. The adoption of DP 2.0 redrivers is on the rise in high-resolution gaming monitors, supporting enhanced image quality and faster refresh rates. Additionally, adoption of our MIPI switches and redrivers is also ramping up as they are being incorporated into augmented reality glasses, signaling rapid growth opportunities in wearable display technologies. Lastly, in the communication market, overall growth was relatively flat sequentially and a slight decrease for the first 9 months. We are, however, seeing pockets of growth driven by the AI and high-speed interconnect applications. This demand is being driven diodes introduction of new crystal oscillators that offer significant lower jitter less than 60 femtoseconds and also support higher frequency, now reaching 312.5 megahertz in addition to the previous 156.25 megahertz. These advanced oscillators are gaining adoption in the optical transceiver modules, which are integral to the high-speed 800G and 1.6T optical communications within data center and the auto directional level shifter and the low dropout regulators experienced strong demand driven by the growth of AI-enabled smartphone applications. In summary, our continued year-over-year growth momentum is a result of our past design wins and content expansion initiatives across our target end markets. Additionally, our continuous investment in new product introduction in our high-margin end markets of automotive industrial position us well for a return to strong growth in those markets as the recovery accelerates. And with a return to more healthy inventory level and shipments more closely reflecting true end demand, we expect to see increased loading at our manufacturing facilities and improving margin over the coming quarters. With that, we now open the floor to questions. Operator? Operator: [Operator Instructions] We'll take our first question today from the line of David Williams at Benchmark. David Williams: Congrats on the solid results here. I guess maybe first question, Emily, you kind of touched on this at the end on the increased loadings. But as you kind of think about the gross margin for the year and what those loadings could look like, can you kind of give us a sense of what your expectations are for growth and maybe how those loadings should look as we move through next year? Emily Yang: Yes. So I think if you look at the gross margin, right, there's a couple of areas that we believe is going to improve over time, right? So number one, we do expect the product mix will continue to improve throughout the quarters, right? With a lot of pipeline, we have a lot of success in the automotive with the key focus introducing a lot of new products, we are actually confident that the combination of the product mix will continue, right? And then if we look at the Pericom product family, we continue to focus on the AI areas. We believe that will continue to help us from the product mix. On top of that, we have new product introduced throughout the quarters, especially focus in automotive area and some other areas. So again, right, that's part of the product mix. For the longer term, 2026, we do expect the revenue to be a growth year, right? So naturally, when we grow the revenue, that will increase the loading of our factories, right? -- we're also aggressively porting our product into our factories from outside to inside and balance overall the loading as well. So gradually, that will show some improvement, right? I think going down to manufacturing efficiency, I think overall, Gary and the company is driving very aggressively for cost down and continue improving on that area. So I would say if you add all these things together, that's actually the reason that we believe. And then on top of that, right, I also talked about it, if we look at the channel inventory, we believe the ship in, the ship out is going to be more balanced moving forward. We have been depleting quite a lot for the last few quarters, and that's actually going to get more stabilized. So I would say that's another angle to think about it. David Williams: Okay. Great. And then maybe on the tariff side, it seems like some of your peers have had a challenging time kind of sidestepping some of the earlier in the year pull-ins, but that doesn't seem to have impacted you, and we're not seeing it here in the fourth quarter. Maybe talk about that, how you're able to navigate that. But are you seeing that impact? Or could you potentially see that as we move into next year? Is there anything, I guess, from that perspective that we should be thinking about? Emily Yang: So David, I want to make sure you are talking about the tariff importing into U.S? David Williams: Yes. Just the general demand trends as we saw with the tariffs that were driving some earlier loadings for production to come to the U.S., just that -- just the demand dynamics around that and that channel inventory associated with it. Emily Yang: I would say, overall, we didn't really see the big spike or change overall for the demand point of view. I think tariff is not new just for last quarter. It has been in place for quite some time. I think we are working aggressively leverage our flexible manufacturing site and moving things around to minimize the tariff overall impact for U.S. revenue. I think on top of it, right, majority or there's quite a lot of revenue within North America is actually importing into Mexico or Canada. So that's actually also a different story. I would say, all in all, if you look at the overall percentage of the business for North America is still a very small percentage. So that's the reason that we are working different angles, but the overall impact is relatively small for Diodes. Gary Yu: But -- and I would like to add a comment on that. The market is very dynamic, especially like country to country, this kind of geopolitical issue. So at Diodesn we always want to keep our flexibility to support customer anywhere they want it. David Williams: Okay. All right. Very good. Certainly appreciate that. And maybe just lastly for me is on the automotive side. You've talked about things getting better there, inventory is better. How do you see maybe your position given your content growth and these programs that are ramping next year? How do you think we should look at the revenue growth trajectory for automotive specifically as we get into next year? Emily Yang: Yes. So current percentage for automotive for us based on the Q3 result is 19%, right? We definitely expect our automotive percentage will continue to improve in 2026, especially with the market share gain and the content expansion that you just mentioned. Operator: Next, we will hear from the line of Tristan Gerra at Baird. Tristan Gerra: You mentioned in-sourcing as a gross margin catalyst for '26. How should we look at the gross margin benefit for an analog product currently outsourced in Korea or in Japan versus once it moved internally? And is it fair to say that the qualification process for your South Portland, Maine fab is ongoing, and it sounds that perhaps it's more of a second half of next year dynamic given that industrial and automotive are still somewhat in recovery mode? Gary Yu: Okay. Tristan, this is Gary. Let me help to answer this question for you, right? And by moving external to external, definitely going to benefit Diodes a lot, right? For example, if I subcon to my wafer to our subcon partner, they're definitely going to earn some premium from Diodes and then we can save the premium and by loading internally with our like kind of very, very effective cost this kind of model on that. So definitely, we can enjoy the benefit of moving external to internal. As for the analog part, we continue loading or qualify the process new product into our SP fab. And we do see a very, very good progress so far, and we do have our new product or requalified product from this wafer fab being qualified in our key customer side. And we do see the PO coming in just recently from the previous couple of quarters. So to offset our OEM customer under load issue or continue to drive the demand, we do significantly improve our loading in those particular SP fab to offset this kind of under loading issue in the cost. So for year 2026, I do believe loading will be improved and the GP coming from this wafer fab will improve, too. Tristan Gerra: Great. That's very useful. And then you mentioned AI as a key driver of computing, but you also mentioned computing being a negative on mix. What percentage of your computing revenue right now is data center? And then any way to quantify how much of the growth is coming from AI-related products? Emily Yang: Yes, Tristan, this is Emily. We're sorry, right now, we actually don't have the breakdown information. But if you look at our Q3 result, right, computing is the strongest growth market segment for us -- we actually achieved 70% -- 17% sequentially and 22% just compare the first 3 quarters, right? A majority of this growth is driven by AI. So I think the other thing I want to point it out, right, AI is not just in the computer segments, right? We're also, for example, seeing AI related in the industrial power supply or some other edge AI applications that's driving some of the refresh cycle. That's actually the reason we haven't been able to break it out. I think on top of that, if you really think about our product, it's really fitted for a lot of applications, not just limited to AI, right? But I would say, all in all, it's really positive. We're actually excited to see the performance and the growth, especially in the computing market segment. Gary Yu: Yes. And just like Emily said, no matter AI in compute or industrial, we do see this kind of market segment will continue to grow next year and even the year after next year. And at the same time, we continue to introduce a new product into this segment. And this new product, usually, we can enjoy much better GP on that. So that's really we're going to put our R&D focus on that but continue to grow our GP percent in the future. Tristan Gerra: Okay. Great. And just one quick last one. Do you see yourself as a benefit from the disruptions around Nexperia? Because my understanding is that it's a lot of discrete product. And are you second sourcing some of that? Is that a tailwind for next year? Emily Yang: Yes. Tristan, we're definitely aware of the situation. Discrete, Diodes, rectifiers, MOSFETs, logic, definitely part of our broad portfolio, and it does cross over to some of our peers like Nexperia, right? Like I mentioned before, any time there's a change of supply situation, strategic decision, whether change price or supply or low-margin focus, it always creates opportunity for Diodes, and we always utilize this type of opportunities to really expand and build a stronger relationship with our strategic customers and also the focus in automotive market segment, right? We do review all this business very carefully and engage in the areas that fit into our overall long-term strategy and focus. So our goal at the end is really better serve the customers overall. Operator: [Operator Instructions] We'll hear next from William Stein at Truist. Paul Smith: This is Elliott on for Will. You mentioned 2026 being a growth year, and it looks like recent top line growth is holding in around plus 10% year-over-year. Is that a reasonable level for us to expect through 2026? And I'm wondering if you could give us some examples of end markets or products or applications that could maybe trigger a more robust recovery than, say, plus 10%? Gary Yu: All right. This is Gary. Let me try to help answer this question. Yes, the answer to you is yes, for sure. We do believe the year 2026 will be another good year for Diodes. Not only the revenue growth like a double digit, I want to drive on that way, but also I want to make sure our profitability also grows aligned with our revenue growth. That's our commitment to the shareholders. And as for which segment we are looking for the most aggressive growth, one is AI, as Emily mentioned that about in the previous answer. Another one will be automotive plus industrial because we do see the automotive and industrial in the near future, not only the segment increase, but also we do have a newer product and introduced into this segment and been designing since the past couple of quarters. So we do see the revenue is going to be significant growth in these two segments. Emily Yang: Yes. I think on top of that, right, we went through a period of inventory adjustment. We believe that by 2026, even with few customers' inventory situation will continue to improve, and that naturally is going to drive some of the demand as well. Gary Yu: Exactly. Paul Smith: Okay. And one more, if I can, on -- we've talked previously about a 20% operating margin target. I'm wondering if you could give us some color and maybe be a little more prescriptive in terms of the different variables you gave earlier about margins improving of how you can get to potentially that 20% range again from the -- call it, mid-single digits today. What's the lion's share? Anything like that you can provide? Gary Yu: Okay. Let me try to give you a very high-level direction I want to drive on that. The first, we want to drive top line means like revenue is going to be growth, right? And along with the GP and GP percent improvement on that direction on the growth mode. At the same time, and I really want to keep our SG&A flat or less percentage while the revenue growth, but I really want to put more focus on R&D expenditure along with the revenue growth. With that, I do believe we can improve more on our bottom line. So let me emphasize again, revenue growth and along with the GP percent GPM growth, we keep SG&A percentage flat or reduced. And at the same time, I want to focus on -- invest more on R&D. Brett Whitmire: Yes. A couple of things I would add to that. This is Brett. Is that when you think about that 20% margin, the building blocks to that are principally two things. Our gross margin continuing to improve and working its way back to 40-plus percent. And you basically got the OpEx that we have -- that we've shown that at the higher revenue levels will be around 20%. And as Gary mentioned, the goal is to -- and what you can see in our investment is leaning heavier into the R&D piece than we are on the SG&A. And so I think that's -- those are the two main components. And the big one we spend the time on is on the gross margin and the real drivers to that and building on the differentiated, more quality products across our portfolio while then in addition, not adding to our manufacturing footprint while we do that, but getting the entitlement of it as -- that's in place. So those things together, it will accelerate the margin improvement and will basically transition back to margin that we saw a few years ago. Operator: And now we'll take a follow-up from Mr. David Williams at Benchmark. David Williams: On the AI side, is there a way to kind of parse out the demand or new demand that you're seeing relative to maybe the content expansion? And the reason I'm just trying to understand, are you driving -- and I get that you're probably driving both, but what is the bigger one? Is it just increased demand all around? Or are you just able to sell more products into each one of these solutions? Emily Yang: I think it's really a combination of both, right? I think it's important that we continue to drive new product introductions. Like I mentioned, there's a lot of change even with the AI data center with some shifting of transitioning from 48-volt to 400-volt and 800-volt, which also means that there's a new set of requirements that need to be fitted into the application. So I think it's important for Diodes continue to focus on the technology, continue to focus on new product introduction that will be well fitted into the new application, right? At the same time, the volume will continue to grow. When you combine those two together, it's going to get the best result overall. Gary Yu: Yes. Another important information I'd like to share is like Diodes and Vantage has a very good relationship with those like Tier 1 customers, no matter any company or other company, right? And that's why we understand from their architecture, from our system point of view, we know what they want 3 years or 5 years from now. That's why we cooperate with them to develop the product they wanted. David Williams: Okay. Okay. That's great color there. And then maybe just on the inventory side, do you get a sense that some of your customers have started to replenish if you look across your inventory levels? And is that something that's helped here? Or do you think that is still in front of us, just kind of given where inventory levels are today? Emily Yang: I believe a lot of customers' inventory situation changed a lot. There are still some pockets of customers, especially, I would say, in the industrial market segment that's still going through some corrections, but we also expect situation should be improved or completed by the beginning of next year. Brett Whitmire: Yes. So David, one way to think about that, too, is that you've seen the last 2 quarters, the internal inventory as well as, as we've described, our channel inventory continue to come down. And as long as that is happening in that way, you're not getting the full entitlement of the market on our margins. And so I think going forward, we feel a more balanced basically ship in and ship out and then the ability to have the entitlement of the full demand coming through our margin. And as Emily said, we think we'll -- you'll start to see that as we transition into probably second quarter next year, especially as we start to see the strength. Operator: And we have no further questions from our audience today. I'm happy to turn the floor back to Mr. Gary Yu for any additional or closing remarks. Gary Yu: Thank you, everyone, for participating on today's call. We look forward to reporting our progress on next quarter's conference call. Operator, you may now disconnect. Operator: Ladies and gentlemen, thank you for joining today. You may now disconnect your lines.