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Operator: Good day, ladies and gentlemen, and welcome to Tutor Perini Corporation's Third Quarter 2025 Earnings Conference Call. My name is Julian, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference call is being recorded. [Operator Instructions] I will now turn the conference over to your host today, Mr. Jorge Casado, Senior Vice President of Investor Relations. Thank you. Please proceed. Jorge Casado: Hello, and thank you all for joining us. With us today are Gary Smalley, CEO and President; Ron Tutor, Executive Chairman; and Ryan Soroka, Executive Vice President and CFO. Gary and Ryan will review the details of the quarter and provide some commentary regarding our outlook and guidance. Ron is here to help answer any project-specific questions as he remains involved in the setup of our newer major projects. Before we discuss our results, I will remind everyone that during this call, we will be making forward-looking statements, which are based on management's current assessment of existing trends and information. There is an inherent risk that our actual results could differ materially. You can find our disclosures about risk factors that could contribute to such differences in our Form 10-K, which we filed on February 27, 2025, and in our Form 10-Q that we are filing today. The company assumes no obligation to update forward-looking statements, whether due to new information, future events or otherwise, other than as required by law. In addition, during today's call, management will be referring to certain non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures in the earnings release that we issued today and in the Form 10-Q that is being filed today, both of which can be found in the Investors section of our website. Thank you. And with that, I will turn the call over to Gary Smalley. Gary Smalley: Thanks, Jorge. Hello, everyone, and thank you for joining us. As I mentioned during our last 2 earnings calls, it certainly is a great time to be a Tutor Perini shareholder. Our business and correspondingly, our stock has performed extremely well this year, yet we are just at the start of what we expect will be a very strong period of double-digit revenue growth, increased profitability and solid cash generation over the next several years. With what we continue to see on the horizon, there remains tremendous opportunity ahead for further substantial shareholder value creation. Now let's talk about our third quarter performance. Tutor Perini delivered excellent results for the third quarter, once again setting new records across various key metrics. Our operating cash flow was extraordinarily strong for the quarter at $289 million and $574 million through the first 9 months of 2025, setting new records for both respective periods. The strong cash flow was almost entirely driven by collections from newer and ongoing projects. Our third quarter cash flow was the second best for any quarter ever, and our cash flow through the first 9 months of this year is already well in excess of last year's full year record operating cash flow. With what is now our fourth consecutive year of record operating cash generation, the cash on our balance sheet is quite healthy. We plan to continue building our cash position until our general corporate purpose cash reaches a level at which we can comfortably initiate one or more strategic capital allocation alternatives, most likely in the form of a recurring dividend and/or a share repurchase program. Tutor Perini has been benefiting from favorable macroeconomic tailwinds, which are driving strong sustained market demand for construction services across all segments. We believe that these tailwinds will persist due to the tremendous amount of federal, state and local level funding that are now in place and because our country has for decades and until recent years, neglected to adequately fund and prioritize the types of substantial infrastructure investments being made today. We have continued to be successful in capitalizing on major project opportunities, adding $2 billion of new awards and contract adjustments in the third quarter, which increased our backlog to a new record of $21.6 billion, up 54% year-over-year. Backlog for both the Building and Specialty Contractors segments also set new records. Our book-to-burn ratio for the third quarter was 1.4x. I'll provide further details on some of our new awards shortly. Our third quarter revenue was strong, up 31% year-over-year, and revenue for the first 9 months of 2025 was the highest since 2009, achieving record quarterly and first 9 months revenue performance for the Civil segment and the best performance since 2020 for the Building segment. Operating income was up significantly this quarter despite a further substantial increase in our share-based compensation expense that resulted from the dramatic growth in our stock price, which has nearly tripled since the end of last year, reflecting our continued strong operating performance driven by contributions from various newer, higher-margin projects in the Civil and Building segments. I will note that while we expect our share-based compensation expense to be higher than previously anticipated for the full year of 2025, it is still projected to decrease considerably in 2026 and further in 2027 once certain awards have vested. The Civil segment continues to perform at record levels, delivering its highest segment operating income ever for both the third quarter and first 9 months of the year with strong margins that are sustainably above the historical range for the segment. The Building segment's operating income for the first 9 months of 2025 was the highest since 2011. And importantly, the Specialty Contractors segment returned to profitability this quarter ahead of expectations. Adjusted earnings per share for the third quarter, which excludes the impact of share-based compensation expense, net of the associated tax benefit was $1.15, up significantly compared to the adjusted loss per share of $1.61 reported for the third quarter last year, again, demonstrating our strong core operating performance and contributions from various newer, larger and higher-margin projects, many of which are just ramping up. Our GAAP EPS was $0.07 for the third quarter, a substantial improvement compared to a loss of $1.92 per share for the same quarter last year. Overall, our business continues to perform extremely well this year, significantly better than we anticipated at the start of the year. The newer, larger projects I mentioned are expected to drive very substantial growth, strong profitability and solid cash flow over the next several years. Now taking a closer look at our new awards in the third quarter, the largest of these included the UCSF Benioff New Children's Hospital in California, valued at approximately $1 billion, a $182 million defense system project in Guam and $155 million education facility project in California. We also listed several other smaller new awards in our earnings release today. Looking ahead, we believe that our backlog will remain strong as we continue to see numerous major bidding opportunities for our Civil and Building segments, many of which should also include a significant role for our electrical and mechanical business units within the Specialty Contractors segment. Our most significant new project opportunities over the next several years are primarily located in California, New York, the Midwest and the Indo-Pacific region. Among these opportunities are several building segment projects currently in the preconstruction phase that are expected to advance to the construction phase, a few later this year and others over the next 2 years. We have well over $25 billion of upcoming bidding opportunities over the next 12 to 18 months, the largest of which include the $12 billion Sepulveda Transit Corridor, the $3.8 billion Southeast Gateway Line and a $2 billion replacement hospital, all of which are in California as well as the $5 billion Penn Station transformation project in New York, the $1.4 billion I-535 Blatnik Bridge project in Minnesota and the $1 billion I-69 ORX Section 2 project connecting Indiana and Kentucky. In addition to these billion-dollar plus projects, we have an even firmer opportunity that is on the near-term horizon. We expect to add approximately $1 billion to backlog by second quarter of next year for the finished trade scope of work for Phase 1 of the Midtown Bus Terminal in New York City. Recall that we were awarded the first part of Phase 1 of the bus terminal project last quarter for an announced value of $1.87 billion. We also continue to have significant Indo-Pacific opportunities, largely driven by the federal government-specific deterrence initiative Black Construction, our Guam-based subsidiary has had tremendous success in winning various new projects throughout the region and continues to be well positioned to capture additional major projects over the coming years. We remain highly selective as to what opportunities we will pursue with a continued focus on bidding projects with favorable contractual terms, limited competition and higher margins. We are pursuing projects that will highlight Tutor Perini's differentiated approach, depth of operational talent and history of outstanding project execution. Based on our outstanding performance to date and strong confidence in the results we expect to deliver for the fourth quarter, we are raising our guidance for the third consecutive quarter. Our adjusted EPS for 2025 is now expected to be in the range of $4 to $4.20, up from our previous guidance of $3.65 to $3.95. Importantly, the outlook for Tutor Perini remains very positive beyond 2025. We still anticipate that our adjusted EPS in '26 and '27 will be significantly higher than the upper end of our increased guidance for 2025, and we expect strong operating cash flow for the rest of this year and beyond. Finally, I will reiterate and expand a bit on what we have said earlier this year regarding the broader macro environment. We still do not anticipate that tariffs will have a significant impact on our business. We also do not currently foresee the risk of any of our major projects in backlog being canceled, delayed, defunded or otherwise materially impacted by the administration's targeted funding cuts or by the recent federal government shutdown, including our work on the first phase of the California high-speed rail project or any of our projects in New York. We have had discussions with our customers, and they have confirmed that our projects are funded and authorized and they are not expected to be adversely impacted. So for us, it continues to be business as usual at this time on all of our major projects. Thank you. And with that, I will turn the call over to Ryan to discuss the details of our third quarter results. Ryan Soroka: Thanks, Gary, and good afternoon, everyone. I will start with a discussion of our third quarter results, after which I'll provide some commentary on our balance sheet and our latest 2025 guidance assumptions. All comparative references will be against the same quarter of last year, unless otherwise stated. Revenue for the third quarter of 2025 was $1.42 billion, up 31% year-over-year. Civil segment revenue was $770 million, up 41%. Building segment revenue was $419 million, down slightly compared to last year, but expected to increase substantially over the coming quarters. Specialty Contractors segment revenue was $226 million, up a very strong 124%. Our revenue growth for this quarter continued to be driven by increased project execution activities on various newer, larger and higher-margin projects that all have substantial scope of work remaining. These included the Midtown Bus Terminal Phase 1 project in New York, a new hospital project in California, the Brooklyn and Manhattan jails, the Honolulu Rail project, the Manhattan Tunnel, the Newark AirTrain replacement and the Kensico-Eastview Connection Tunnel. All of these projects are in their early stages and are expected to ramp up substantially over the next several years. Civil segment income from construction operations was $99 million in the third quarter of 2025, up substantially compared to a loss of $13 million. Last year's third quarter loss was due to a significant charge that resulted from an adverse arbitration decision on a completed bridge project in California, which we are appealing. The improvement this quarter was otherwise driven by contributions related to the strong revenue growth from higher-margin projects that I mentioned for the segment. Civil segment operating margin was solid at 12.9% for the third quarter of 2025 and 15.1% through the first 9 months of 2025, both well ahead of the segment's historical 8% to 12% range and in line with our expectations for 13% to 15% for this year. Building segment income from construction operations was $14 million in the third quarter, also up considerably compared to a loss of $4 million last year, which was mostly due to a charge we took during last year's third quarter for the settlement of a legacy dispute on a completed government facility project in Florida. The profit increase in the current year quarter was primarily due to contributions related to the increased project execution activities I mentioned. Building segment operating margin was 3.4% for the third quarter of 2025, in line with expectations. We believe this margin will continue to increase over the next several quarters as volume from certain higher-margin projects growth. Specialty Contractors segment income from construction operations was $6 million for the third quarter, reflecting an earlier-than-anticipated return to profitability and compares to a loss of $57 million last year. The improvement was primarily due to the absence of certain prior year unfavorable adjustments as well as the current year contributions related to the segment's very strong revenue growth with increased project execution activities on various newer projects across diverse end markets. Specialty Contractors segment operating margin was 2.7% for the third quarter of 2025. Other income for the third quarter was $7 million compared to $4 million last year. Interest expense was $14 million, down 36%, compared to $21 million last year because of our significant debt reduction since last year. Income tax expense for the third quarter was $15 million with a corresponding effective tax rate of 44.6% compared to an income tax benefit of $34 million last year with a corresponding effective tax rate of 27.5%. We trued up our tax provision again this quarter, and our new projected effective tax rate for 2025 is now higher than previously anticipated, entirely due to the significant increase in share-based compensation expense that Gary mentioned and the fact that nearly all of that higher expense is nondeductible. On a GAAP basis, net income attributable to Tutor Perini for the third quarter of 2025 was $4 million or $0.07 of earnings per share, a result impacted by the further increase in our share-based compensation expense, but still a substantial improvement compared to the net loss attributable to Tutor Perini of $101 million or $1.92 loss per share in last year's third quarter. Adjusted net income attributable to Tutor Perini was $62 million or $1.15 of adjusted earnings per share for the third quarter, up very substantially compared to an adjusted net loss attributable to Tutor Perini of $85 million or an adjusted loss of $1.61 per share for last year's third quarter. For the first 9 months of 2025, adjusted net income attributable to Tutor Perini was $171 million or $3.22 of adjusted earnings per share, also up very meaningfully compared to an adjusted net loss attributable to Tutor Perini of $46 million or an adjusted loss of $0.88 per share for the same period last year. As you can tell, our business is performing well with core operations performance driving very solid earnings this year and reflecting a dramatic turnaround compared to last year. As Gary mentioned, our operating cash flows for the third quarter and first 9 months of 2025 were record-breaking at $289 million and $574 million, respectively. We expect that our operating cash for the full year of 2025 will shatter last year's record and will represent our fourth straight year of record cash generation. We also anticipate that our cash flows will continue to be strong well beyond 2025, driven by organic cash collections, that is from new and existing projects and occasionally enhanced by collections associated with dispute resolutions. Next, I'll address our balance sheet. Our total debt at September 30, 2025, was $413 million, down 23% compared to $534 million at the end of 2024. Our cash balance has grown substantially this quarter due to our record operating cash flow, and it continues to significantly exceed our total debt now by $283 million. Our cost and estimated earnings in excess of billings, or CIE, declined again this quarter and is at the lowest level it has been since the first quarter of 2017. CIE has declined by $95 million or 10% since the end of last year, mostly driven by the resolution, billing and collection of various disputed matters as opposed to project charges. Our CIE is expected to continue to decrease as we resolve the remaining legacy disputes. Finally, here are our latest updated assumptions regarding our increased earnings guidance. G&A expense for 2025 is now expected to be between $410 million and $420 million, with the increase from our previous assumption due entirely to increased share-based compensation expense as our share price has continued to climb. Depreciation and amortization expense is now anticipated to be approximately $50 million in 2025, with depreciation at $48 million and amortization at $2 million. Interest expense for 2025 is still expected to be approximately $55 million, of which about $5 million will be noncash. This $34 million or 38% lower than our interest expense of $89 million in 2024. Our effective income tax rate for 2025 is now expected to be approximately 30% to 32%, higher than previously anticipated due to the increase in share-based compensation expense, nearly all of which is nondeductible. We still anticipate noncontrolling interest to be between $75 million and $85 million, significantly higher than last year due to increased contributions from certain joint ventures. We still expect approximately 53 million weighted average diluted shares outstanding for 2025. And capital expenditures are now anticipated to be approximately $170 million to $180 million, with the vast majority of the CapEx in 2025 estimated at approximately $120 million to $130 million to be owner-funded for large equipment items on certain large new projects such as tunnel boring machines. Thank you. And with that, I will turn the call back over to Gary. Gary Smalley: Thank you, Ryan. In summary, we delivered extraordinary results for the third quarter that exceeded expectations with record operating cash flow, continued strong revenue growth, solid operating income and profitability across all segments and strong bottom line earnings as well as backlog that climbed to a new all-time record of $21.6 billion. This record backlog should enable us to produce strong double-digit revenue growth and significantly higher earnings in 2026 and 2027, while serving as a catalyst for continued strong annual cash flow as our newer projects progress through design and into construction. Our excellent performance to date, combined with our confidence in the results we expect to deliver for the fourth quarter, has enabled us to raise our 2025 EPS guidance for the third consecutive quarter. The outlook for Tutor Perini is very bright over the next several years as we continue to benefit from favorable macroeconomic tailwinds and strong public and private customer funding that are fueling sustained market demand for our services. Finally, and just to reiterate, despite the dramatic growth we have seen this year in our stock price, I still believe we have tremendous opportunity ahead for further substantial shareholder value creation. Thank you. And with that, I will turn the call over to the operator for questions. Operator: [Operator Instructions] And our first question comes from Adam Thalhimer with Thompson Davis & Company. Adam Thalhimer: Great quarter. Gary Smalley: Thanks Adam. Adam Thalhimer: Can you give a little more color on specialty turning positive? What drove that? And what's your expectation for the next few quarters? Gary Smalley: Yes, Adam, look, what's really driving specialty performance is the work that we have, the non-claim resolution or dispute resolution work is just going extremely well. We're making a heck of a lot of money, and that is the work that we're primarily doing is for Tutor Perini, but also the work that we're not doing for Tutor Perini is just doing extremely well. So we have a quarter that had very little noise from dispute resolutions, and that's what's really driving it. So whenever we have quarters like that throughout the business, but especially for specialty at this point, you're going to see much improved results. Adam Thalhimer: Does the specialty revenue trend up from the Q3 level? Gary Smalley: Yes. It will because keep in mind that most of the work that they're doing is for these larger projects that we've been announcing awards of over the last 1.5 years or so. And as those projects continue to ramp up, their participation will continue to ramp up. So their revenue is going to go up significantly, particularly New York-based revenue. Adam Thalhimer: And then can you just level set us lastly on how many of the legacy disputes are remaining? Gary Smalley: Yes. The -- we're looking at about a dozen, let's say, of any significance. There's some cats and dogs, odds and ends out there, too, but 10, 12 of any significance. Operator: And our next question comes from the line of Liam Burke with B. Riley Securities. Liam Burke: As you move on with better terms and better margins on these contracts rolling over as we can see in your operating margins, is your bidding activity staying robust? Or have you been seeing less interest in certain areas? Gary Smalley: No, it's still very robust. We've got a load of work that's coming up in different geographies, really led by New York still and a lot of things happening in California. We still have Indo-Pacific that's looking very strong as well as the Midwest. So we're -- in all of our major geographies, there's still a really strong pipeline of work yet to be bid. Liam Burke: Great. And I don't want to keep harping on specialty contractors, but you had a pretty nice quarter in awards and the announcements, which we really don't hear a lot about. Is there something changing in terms of the amount of awards that specialty contractors are getting? Gary Smalley: No, not really. Just keep in mind, though, for these larger projects, particularly in New York that we've been announcing, their participation is very strong in each one of those projects. So that means that as the backlog was building for the whole company, the specialty backlog, particularly in New York, has also been building. And this is higher-margin work for them than what they've seen in the past. So expect higher margins to be reported as we move forward. Operator: And our next question comes from the line of Min Cho with Texas Capital Securities. Min Cho: Congratulations on another strong quarter and guidance raise. So you went through your $12 billion kind of near-term bid pipeline pretty quickly. I know the awards and backlog can be kind of lumpy from time to time. But based on that pipeline and just the timing of the pipeline, do you -- could you exit the fourth quarter at another record? Or are we expecting something a little bit more flattish? Gary Smalley: Yes, it's probably a little bit more flattish in the fourth quarter. It's going to be lumpier. Lately, it's been every quarter, it seems increased new record, new record, new record. And we're not going to see that going forward in the short term. We may have new records, but it won't be consistently quarter after quarter. So a little bit lumpy, but flattish over the short term -- short to medium term anyway. Min Cho: Right. It's still just at very high levels. That's great. Also kind of going back and maybe, Ryan, on the specialty contracting business, nice to see it back in the black. By 2026, could you kind of be at your target of 5% to 8%? Or given what's in the pipeline, do you expect that could take a little bit longer? Ryan Soroka: Yes. I think there's certainly potential to get up to that 5% to 8%, in particular, looking forward as these newer projects ramp up and that are obviously coming along with the significant civil work and building work. So I think as those revenues and margins come through, I think you're going to see those margins continue to elevate. Min Cho: Excellent. And then just finally, Gary, so obviously, the directional outlook for 2026 is still to be up substantially from the high end of '25. But from even the last quarter, are you feeling better or the same about 2026? And if you can just talk about what's maybe changed? Gary Smalley: Yes, I would say at least as good, if not better. What's happening is we continue to have exceptional results in resolving the things of the past. And so that certainly is helpful. But also as we go forward, we're seeing more clarity on the work that we were booking. We've been able to do a better job in negotiating what we call buyouts. So in other words, we offload risk to vendors and subcontractors. And for these lump sum projects, we've done a better job than what we thought. So everything is -- and then the early performance is also really better than what we thought. So I would say that we expect -- we just are more bullish now over '26 and even '27 than we were before. But it's always been very high expectations. And so we still have those, but with a little bit more. Operator: The next question comes from the line of Michael Dudas with Vertical Research Partners. Michael Dudas: Not sure who's had a better year due to Tutor Perini or Dodgers. Gary Smalley: That's a good question. Michael Dudas: You could ponder that offline. Gary, you've talked a couple of the response to the questions about the bookings that you're looking at and the bidding activity. There's several and they're large. How do you look at that relative to like where your business is today, what regions, your capacity, the ability to kind of continue to execute at this high level? And is this -- is the market set up for maybe not in the next few quarters, but maybe in the next 12 to 30 months to have another uptick in what the backlog can be and what the visibility can be out, say, to the end of the decade? Gary Smalley: Yes. It certainly can have an uptick as we progress through these bids. It really depends on the timing of when the bids come to fruition and then, of course, our success rate. But there are some large projects that you've heard. We like our chances. As far as capacity, we're not going to overextend ourselves. We're very disciplined in the approach. We still have capacity for more, but we also are working off projects, too. So as projects get worked off, we have staff that become available, and we insert those individuals, those key leaders where we need them most. So we feel really good about where we're staffed and we feel good about what the long-term prospects of this backlog can look like. Michael Dudas: I appreciate that. And then my follow-up is, Gary, I mean, the cash performance has been outstanding. It goes without saying. Maybe as we think about it, you're going to need some cash to grow the business, I'm assuming, as these projects ramp up and on the cash cycle. And you did mention about what to do once you get to this certain level on cash. And maybe you could share a little bit about what you're thinking, maybe the Board might be thinking internally on this concept and over how much more, what kind of level is required to maybe start thinking about that in a more tangible thought process? Gary Smalley: I won't give you an exact time line, but I will say that it is a topic of conversation every time we get together with the Board and the next time is next week. And I think that we're unanimous in believing up until the latest conversations is that it would be prudent to continue to accumulate more cash because of exactly what you said. There's -- we still have to look at future needs for the cash. So we'll be conservative. We'll be intelligent with what we do. And as far as the timing, I won't -- we won't have a spoiler alert at this point because we got to get through the meeting next week. And then we'll -- if there's any news, then we'll roll it out as soon as possible. But look for continued conservatism and just caution to make sure that we have excess cash rather than needing to draw down on some revolver or anything. Michael Dudas: That makes perfect sense. And just a quick follow-up on the bidding opportunities. Are you bidding on those by yourself? Or are there any joint venture partners in many of these projects? I'm assuming most of them are going to be on your own? Or is there some that you might join with some partners? Gary Smalley: Yes, it's a mix. When the projects get as large as the ones that we are talking about, it's likely that there's a JV partner. But look, we do very well with respect to surety support, being able to deliver projects ourselves without the need for others to participate. We also have capabilities internally that we don't always need help. But these are huge programs. So look for, we'll say, a good -- many of those to have a JV partner. And then we'll rely on our experience with our JV partners in the past. We've always had very successful JVs and would look to go back to our established partners. Operator: And our final question comes from the line of Steven Fisher with UBS. Steven Fisher: Congratulations also on the cash generation there. Just curious on that point, what's the outlook for sort of the mobilization payments or upfront payments that you're getting? Is that now mostly kind of happened as your sort of backlog is flattening before this next wave? And is cash going forward for the next handful of quarters going to be more related. It's just sort of ongoing project burn? Gary Smalley: Yes, there's -- most of the mobilization payments have happened. There's still a couple of fragments to go. I would look at cash continue to be strong, not as strong as what we had in the third quarter, that's just really phenomenal, the $289 million. So it will still be very strong compared to where we've been historically. And we look for continued strong cash going into '26 and '27 and beyond that, too. Steven Fisher: That's helpful. And just in terms of impactful margin momentum, I mean, clearly, going in specialty from negative to positive is important. But on the scale of dollars, it's maybe not as big as what could happen with the Building segment. So just trying to get a sense of the -- both the timing and the magnitude of that momentum in the building side. And so maybe you can help me with this in terms of as we think about the revenue mix of the Building segment over the next couple of years, what percent of that do you think is going to be sort of the typical lower-margin GC work with a lot of the subcontractor pass-throughs versus the larger prison type projects where you've got more -- a higher margin profile. Is this going to be like you think 50-50 within that segment or more weighted towards those kind of fixed price projects like the prison type thing? Gary Smalley: Yes. Yes. Look, as always, our margin profile is dependent on a large mix of work. A good bit of the work that we're doing now is the -- you mentioned the prisons, but it's work like that, that is higher margin. Even the traditionally lower margin work that we're doing now, some of those projects are showing increased margins, too. So without giving you an exact percent, the mix is better than it's ever been. Certainly, the fixed price work impacts that, but also the complexity of some of the work that we're doing and the absence of bidders, not even talking about the fixed price work, that's helping us to demand higher margins there, too. So that's why we're so bullish on building margins being improving because the content of this newer work that's higher margin is just going to feed the margin growth in the Building segment. Steven Fisher: Makes sense. And then just a quick follow-up there is when do you think you'll hit the point where the Building segment margins are really reflecting the solid burn on all the work that's gone in there? Is that sort of a 2027 time frame? Or could it be sometime before then? Gary Smalley: No, I think you're going to see by mid-2026, you're going to see a significant impact and it's going to be improved by the time you get to 2027. But '26, I think the latter part of '26 is going to look much better than where we are even now with the elevated margins in '25. Steven Fisher: And then I guess the last question here, I suppose I have to ask on the government funding side. You mentioned, Gary, that the government shutdown and the budget cuts aren't going to have an impact. I guess I'm curious to hear what you think about the dynamics with the mayor elect in New York City here versus the Trump administration and what that could mean for ongoing projects and perhaps importantly, something like Port Authority, which you have, it sounds like another slug coming. So what do you think about those dynamics and how they could play out? Gary Smalley: Yes. Look, it's hard to predict what the future might hold, but we're not expecting any significant impacts. And you mentioned the Port Authority. Look, the Port Authority is not a city agency. It's a state agency between 2 states, New Jersey and New York. And we don't -- we just don't anticipate any impacts and nor do our owners, our customers. We're having active dialogue with them as developments occur. And so far, we don't see any impact at all. Operator: And with that, that does conclude the question-and-answer session. I would now like to turn the floor back over to Gary Smalley for closing remarks. Gary Smalley: Well, thank you, everyone, again, for your interest and participation today. We look forward to continuing to deliver strong results going forward as we have for the first 3 quarters of this year. Look, we appreciate your support and confidence in the improvements that we are making and your patience for those of you who have been with us for a long time. For those of you who have been in wait-and-see mode, that's okay, I get it. But we believe that there's still a lot more good to come. So get on board, there's still time. And look, we look forward to talking to you again next quarter. Thank you very much. Operator: Thank you. With that, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, and thank you for standing by. Welcome to the Q3 2025 DENTSPLY SIRONA Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Wade Moody, Investor Relations. Please go ahead. Wade Moody: Thank you, operator, and good morning, everyone. Welcome to the DENTSPLY SIRONA Third Quarter 2025 Earnings Call. Joining me for today's call is Dan Scavilla, President and Chief Executive Officer. I'd like to remind you that an earnings press release and slide presentation related to the call are available in the Investors section of our website at www.dentsplysirona.com. Before we begin, please take a moment to read the forward-looking statements in our earnings press release. During today's call, we may make certain forward-looking statements that reflect our current views about future performance and financial results. We base these statements and certain assumptions and expectations on future events that are subject to risks and uncertainties. Our most recently filed Form 10-K and any updated information in subsequent Form 10-Q or other SEC filings list some of the most important risk factors that could cause actual results to differ from our predictions. On today's call, our remarks will be based on non-GAAP financial results. We believe that non-GAAP financial measures offer investors valuable additional insights into our business' financial performance, enable the comparison of financial results between periods where certain items may vary independently of business performance and enhance transparency regarding key metrics utilized by management in operating our business. Please refer to our press release for the reconciliation between GAAP and non-GAAP results. Comparisons provided are to the prior year quarter unless otherwise noted. A webcast replay of today's call will be available on the Investors section of the company's website following the call. And with that, I will now turn the call over to Dan. Daniel Scavilla: Thanks, Wade, and good morning, everyone. Let's start with Slide 3. I recently completed my first 90 days as CEO of DENTSPLY SIRONA. During my first week at the company, we held the Q2 '25 earnings call, where I shared my listen, learn, lead approach, along with my initial thoughts on the organization's focus areas. Since then, I've continued to assess DS through meetings with customers, partners and employees, where I've been learning our strengths and areas of improvement. These discussions have helped validate initial observations, gain alignment with my leadership team and shape our Return-to-Growth action plans to improve performance and deliver sustained profitable growth over the next 24 months. This plan requires us to go deeper, move faster and be bolder to reshape and improve the customer experience. I believe the potential for DENTSPLY SIRONA has never been greater, and we have at our fingertips what we need to achieve this. First, I'll discuss our Q3 '25 results and full year outlook. Then I'll share a deeper view of our Return-to-Growth action plan and its 4 key pillars. Before I begin, I want to note that as announced in this morning's press release, Matt Garth, our Chief Financial Officer, has departed the company. This action is not the result of any dispute, disagreement or financial reporting matter. Matt was not the right fit for me and where I plan to take the enterprise in the finance organization. He is a talented [ finance ] leader, and we wish him the very best. A transition plan is in place to ensure continuity and that we maintain financial discipline as we select the right leader to join us driving DENTSPLY SIRONA forward. Moving to Slide 4. Let's discuss our quarterly financial results. For Q3 '25, global sales were $904 million, decreasing 5% as reported or negative 8% on a constant currency basis. Excluding the Byte impact, sales declined 5%. And as disclosed in last year's Q3 earnings call, Q3 '24 included a $24 million onetime dealer prebuy in advance of the U.S. ERP implementation. Adjusting for this onetime headwind, Q3 '25 sales on a constant currency basis were down 2.5%. Adjusted EBITDA was 18.4%, up 50 basis points versus prior year, driven by lower sales on favorable product and geography mix and tariff impacts that negatively impacted gross profit. This was offset by reduced spending in OpEx. Non-GAAP earnings per share was $0.37, down $0.13 versus prior year. Approximately half the EPS decline reflects the impacts of sales mix and tariffs on gross profit with the remaining half driven by higher non-GAAP tax rates in the quarter of 32% versus 16% last year. This is due to shifts in profit between the U.S. and international markets. Q3 cash from operations was $79 million and ending cash balance was $363 million. We recorded a $263 million noncash after-tax charge related to the impairment of goodwill and intangible assets. These impairments were driven by the impacts of tariffs and lower projected volumes of equipment, implants and prosthetic products, particularly in the U.S. In the third quarter, DENTSPLY SIRONA returned $32 million to shareholders through dividends with $96 million returned to shareholders through dividends year-to-date. Now moving to Slide 5. For Q3 results from a regional perspective, U.S. sales were $291 million, down 22.2% versus prior year, driven by lower sales throughout Essential Dental Solutions, CAD/CAM, Imaging and Implants, partially offset by strong performance in treatment centers and in health care, our Wellspect business, which delivered 22.3% growth. Adjusting for the Byte impact and the onetime $24 million prior year, U.S. sales were down 9.7%. European sales were $382 million, increasing 9.9% as reported or 2.6% on a constant currency basis, driven by growth in Connected Technology Solutions and Labs, partially offset by softness in restorative. The U.K., France, Italy and Spain had strong constant currency growth, partially offset by lower sales in Switzerland. Germany sales were flat in Q3 versus prior year. Wellspect sales grew 5.3% in Europe on a constant currency basis. Rest of World sales were $231 million, down slightly versus prior year, with strength in Essential Dental Solutions offset by declines in Connected Technology Solutions and Implants. Strength in Australia and India were offset by softness in Japan. Wellspect grew 87.3% off a small base in Q3. Now turning to Slide 6 for our business segment results. CTS sales on a constant currency basis decreased 7% versus prior year. Equipment & Instruments increased by low single digits, reflecting growth of Imaging in Europe and Rest of World and growth of treatment centers across all 3 regions, partially offset by a decline in Imaging in the U.S. E&I growth was offset by double-digit decline from CAD/CAM in the U.S. and Rest of World. Distributor inventory levels for both CAD/CAM and imaging products remain below our historical averages. Moving to EDS, which includes Endo, Resto and preventative products. Sales on a constant currency basis decreased 6.2%, with the decline entirely attributed to the previously described dealer prebuy. Shifting to OIS. Sales in constant currency declined 17.1%. Excluding the Byte impact, OIS sales were down 5.8%. In Ortho, SureSmile declined low single digits in the quarter as we saw softness in the U.S. market, partially offset by growth in Europe and Rest of World. IPS declined mid-single digits in the quarter, driven by lower implant volumes in the U.S. and China. We saw a slowdown in the activity in the Chinese market in anticipation of the implementation of the second phase of the VBP program. In Europe, IPS increased slightly. Wrapping up our segment results. Sales in constant currency for Wellspect Healthcare increased 9.3% as we saw growth across all 3 regions. Now I'd like to discuss the outlook for the remainder of 2025 on Slide 7. The company is revising its 2025 outlook based on the results of the third quarter, tariff impacts and targeted investments we've already begun making in key areas to accelerate growth momentum in 2026. The revised outlook includes net sales in the range of $3.6 billion to $3.7 billion, and constant currency sales are expected to be in the range of negative 5% to negative 4% year-over-year. Adjusted EPS is expected to be approximately $1.60. Now on Slide 8, I'd like to look forward and discuss our detailed Return-to-Growth action plans designed to improve performance and deliver sustained profitable growth over the next 24 months. This will be achieved by going deeper, moving faster and being bolder, and based on 4 pillars: putting customers at our center, reigniting the U.S. business to win, empowering people to power performance, and evolving operations to fuel innovation. I will now discuss the actions we will take in each pillar. Putting customers at the center. What I've learned in my first 90 days is in our businesses where the customer is the center of everything we do, we win. I know that may seem obvious, but one of the reasons we're not growing as an enterprise is that we have some parts of the company where we can serve the customer far more effectively. By putting the customer at the center of everything we do, every employee and every team at DENTSPLY SIRONA, now starts with the mindset of delivering a better, more positive, easy to do business with customer experience to earn their share and loyalty. The customers defined as any practitioner who uses our products regardless if they purchase directly through a DSO or a dealer. They're our customers, and we will partner with DSOs and dealers to deliver the timely, consistent support they need. We will achieve this by creating a global customer service and technical service organization that delivers high-quality support worldwide, while maintaining the agility needed to meet local market needs. We will also enhance our support for customers and our field-based employees through simplifying interactions, speed of response and increased strategic investments. The field is and will become even more so a strength of our company, the tip of our spear. Reigniting the U.S. business to win. Second, we're making the return to health of our U.S. business a top priority with a comprehensive plan to reignite growth and strengthen our commercial foundation. Under the leadership of Aldo Denti, our new Chief Commercial Officer, we're aligning our teams, accelerating decision-making and positioning DENTSPLY SIRONA to compete and win with greater speed and focus. Here are specific actions we're taking to drive this plan forward, many of which are already underway, including organizing our commercial teams to better reflect the requirements of the market with the aim of enabling improved coordination, clear strategic focus and stronger competitiveness supported by defined decision-making processes, performance indicators and accountability frameworks. As mentioned before, combining customer service and technical service into a single globally led team under experienced leadership to improve the customer experience and strengthen coordination with our dealer partners. Pursuing a multichannel approach to retain direct sales in specialty areas while reengaging and expanding our network of U.S. dealer partners in CTS to accelerate market penetration. We're also aligning with DSOs by offering simpler and more comprehensive support such as all-in-one de novo offerings, which leverages the breadth of our portfolio. Investing in our sales team to fill open rep positions, expand coverage and deploy growth-based compensation and retention tools to better serve existing customers and acquire new ones. Increasing our investment in clinical education for dental professionals, focusing on advanced training areas like connected dentistry and single-visit care. At the same time, we're strengthening our sales training to better reflect the needs of dental offices, giving our teams a deeper understanding of practice workflows and the tools to deliver tailored solutions that improve both clinical and operational outcomes. The initiatives outlined are focused on North America, but have clear applicability across the EMEA and Asia Pac. We plan to increase regional investments in 2026 to accelerate growth. At the same time, we're exploring new go-to-market models in Asia Pac to strengthen CTS market penetration in Japan and refining our strategy in China. As the U.S. business gains momentum, we will strategically shift additional investments towards EMEA and Asia Pac. Empowering people to power performance. To lead DENTSPLY SIRONA through this turnaround, we're strengthening our organizational foundation to empower our people to power performance. Our teams need the right tools, systems and information to operate effectively, supported by greater automation and clearer priorities with aligned leadership and bringing new expertise where needed to accelerate our progress. This balanced approach leverages the strength of our existing organization and complements them with leaders who have deep experience in global transformations, sustained growth and consistent financial performance. With our finance organization, we're taking steps to elevate capabilities while ensuring continuity as we identify the right long-term financial leader for DENTSPLY SIRONA. As I shared at the top of the call, Matt Garth has departed the organization and a transition plan is in place to ensure continuity and maintain financial discipline. A search for his successor led by Heidrick & Struggles is underway. During this interim period, Board member, Leslie Varon, former Chief Financial Officer of Xerox Corporation, will provide governance and oversight of the finance organization in her capacity as Audit and Finance Committee Chair. In our commercial organization, we're sharpening our focus on the customer experience and market competitiveness. Under the leadership of Chief Commercial Officer, Aldo Denti, we're strengthening execution in North America and rebuilding the U.S. commercial leadership structure. This includes a search for a new U.S. VP of Sales and broader efforts to deepen partnerships, improve service delivery, drive customer loyalty. Coming from a distinguished career at Johnson & Johnson and given Aldo's experience in the orthopedic industry, he knows how to fix customer experience and to enhance our approach in competitive and evolving markets. We've also established a transformation office responsible for oversight of our Return-to-Growth plan. This office will advance our enterprise AI and automation strategy, fundamentally improving how we work. To lead this critical effort, Dustin Shields has been appointed Chief Transformation Officer, joining DENTSPLY SIRONA in December. Dustin brings extensive global experience in commercial and operational functions, integrations and business optimization, most recently at Globus Medical. Under his leadership, the transformation office will focus on delivering cross-functional improvements that enhance efficiency, agility and long-term value creation. We've also appointed a leader of digital transformation who will lead the integration of AI across our operations to increase speed, strengthen data-driven decision-making and improve the effectiveness of our support functions. Evolving operations to fuel innovation. With a commercial organization more closely aligned to customer needs and improved product development processes, we'll focus our investments on innovation that help clinicians enhance care, streamline workflows and grow their practices. In parallel, we'll continue to increase and accelerate R&D investments to improve the health of our commercial engine. We're also taking steps to enable our supply chain to move faster and go deeper than before to create stronger, more profitable and scalable manufacturing and distribution network, building on the ongoing work of the supply chain transformation team. This includes a plan to enhance operational efficiencies through: resource consolidation, standardized packaging, and establish more advanced planning and forecasting to favorably impact working capital and product costs. We need to further streamline our support department cost structures to optimize resources, processes and systems to reach benchmark efficiency levels, reduce complexity and release capital to be redeployed into our commercial and innovation priorities. This will be accomplished by implementing common processes, common systems and establishing regional support centers. This will include a significant reduction in legal entities and the continued implementation of SAP as our global ERP system. We plan on deleveraging the business through profitable growth and disciplined execution to drive improved EBITDA, working capital and cash flow to support future capital needs, debt reduction and shareholder returns. The Wellspect business will be a key role in achieving our financial goals. As previously announced, following an evaluation of strategic alternatives for Wellspect, we determined that retaining the business will deliver greater financial and strategic benefit to shareholders than the other options available. Specifically, keeping the business as part of our portfolio allows us to realize previous investments not yet monetized while benefiting from the strong cash flow generation and preserving optionality for future growth beyond dental. As evidenced by our recent results, we know how to penetrate this market and grow this business. Moving to Slide 9. In summary, we made progress over the past 2 years in footprint consolidation, SKU rationalization and resource streamlining. We need to move faster and act bolder to reshape the customer experience and strengthen our competitiveness in the dental market. I'm continuing to work through my onboarding to better understand the complete enterprise and market to set the appropriate financial targets, but we expect to be able to free up additional capital in our operational structure and products while reaching benchmark levels in our support functions and improve rep effectiveness. Accomplishing this will free up capital to invest in additional field-based resources, increased rep and clinical education, and higher levels of investment and innovation to drive growth and shareholder returns. I'll end my formal remarks with a statement I opened with. I believe the potential for DENTSPLY SIRONA has never been greater. I recognize that the company has undergone change over the last few years. The change has not been fast enough for you or the DENTSPLY Board. That is why I stepped into the seat at their request. It's time for bold change, and we're entering a new era for DENTSPLY SIRONA. One that's rooted in discipline, ownership, acting with urgency and a mandate to deliver results. Our Board of Directors and my leadership team believe deeply in our ability to reposition DENTSPLY SIRONA as the market leader it once was and will be again. We're committed to doing the work necessary to get there, even if it means making tough decisions. I couldn't be up for this more than anything in my life. I'm excited to do this and drive forward with this making changes. I look forward to keeping you up to date on our progress, and I'm committed to communicating with you in a direct and transparent manner every step of the way. Thank you. We will now open the call for questions. Operator: [Operator Instructions] Our first question is from Elizabeth Anderson with Evercore ISI. Elizabeth Anderson: I was wondering if you could maybe talk a little bit more about the U.S. market. I think based on what you put in the slides, ex the onetime items, it looks like it's still down about 10% year-over-year. So could you just sort of talk about where that is? Is that a result of the sales situation? Is it a lingering impact of the sort of prior Patterson situation? Just a little bit more color on what you see driving those shorter-term results would be very helpful. Daniel Scavilla: Thanks, Elizabeth. I think it's really a list of many things. What I'm going to say is our focus in the U.S. from our structure and how we go at that competitively is one thing throughout the products. I think it's the relationships with the dealers that we need to make a move on. Honestly, getting deeper with the DSOs and more meaningful strategies. Many of these things all come together. It's not just one area. I really think it's more about our structural approach and our execution in the U.S. market and how we, as an organization, can give our team the better tools to do that throughout the portfolio in a better way. That's really what the return to health plan is about is addressing what I see as shortcomings that we can allow to continue and drive improvement in each one of these segments with a deeper focus through structure and funding. Operator: Our next question is from David Saxon with Needham & Company. David Saxon: So I just wanted to ask on this returning to profitable growth kind of framework over the next 24 months. I guess how should we think about the cadence of getting to growth over that 2-year period? Is that kind of -- should we think about flat next year? Or any guardrails around 2026 growth? And then just in terms of that target of growth, like is that absolute growth? Or is that market growth? Would love just some more color there. Daniel Scavilla: David, I appreciate the question. Listen, my desire is to Return-to-Growth tomorrow. I would say don't model that just yet. What I do need is a little more time. We're going through the 2026 plan now, and I'm really working with every department in every country to do this with the team. So give me a little bit of time to come back at this. I will tell you, it's not a January 1, everything is rosy, but it sure can't be that you're exiting the year the same way. And so how we lay out those sequential improvements, I need a little more time to refine, but I require that we have sequential improvements as we get through the year. I just need more time to figure out when I can tell you with confidence when they begin at what section of next year. David Saxon: Okay. And then just in terms of capital allocation. I believe you talked about deleveraging in the script. So can you just remind us your philosophy around capital allocation, and specifically on the dividend, like how important is that? Are there areas in other parts of the business or mechanics that you could direct that cash? Daniel Scavilla: Yes, you got it, David. And listen, I think that is a legitimate question. I think discussing dividend and its value is something we need to explore further with the Board and with the shareholders to understand how important is that in adding shareholder value and where could that be used differently. The main tool of deleveraging isn't buying down the shares. We're actually retiring debt. To me, it's about growing the business first through the U.S. and then consistently through the rest of the world, to raise EBITDA so that your ratio changes. I really think it's more about growing that piece of it, the denominator, if you will, that is the health of this. And yes, with that, comes better profit, better cash flow, which we then can and will, at some point, redeploy into debt retirement and when needed, share repurchase. Operator: Our next question is from Jon Block with Stifel. Jordan Bernstein: It's Jordan Bernstein on for Jon. Just on the R&D aspect of the Return-to-Growth action plan. You heard some recent comments from you about trying to take that number up and accelerating investments in R&D. Just if you could talk through that dynamic? And is that a multiyear type of acceleration and where your heads are at for the R&D organization? Daniel Scavilla: Yes. Great question, Jordan. So a couple of thoughts here. One of the reasons I'm adjusting down EBITDA now for this year is we are pulling forward millions of dollars of R&D investment into the fourth quarter that will help us position better strength in '26 and beyond. And so we are beginning that. I would like to get up to the right benchmark. I know we've always talked around 6% to 7%. We'll evaluate that. It's probably a likely thing. I'm not sure we can get there in one fell swoop. I am looking at that now. And while I have the desire and we will increase the investment in R&D, I'm also going to look deeper with the R&D leadership to make sure we're spending it efficiently, and that we are spreading it out to make sure that we mitigate risk. So there's a couple of steps there as well of are we really spending the dollars we have today in the best way. And then once we have that in a good spot, how do we increase it in a way that maximizes the output for the market and for the shareholders. Operator: Our next question is from Jeff Johnson with Baird. Jeffrey Johnson: Dan, maybe I could just follow up and stay on the track you were just on, on the R&D side and really the OpEx side. If I look at the guidance takedown for this year, I mean, no real surprise to see a new CEO come in and kind of flush the current year out, and I think all that makes sense. But it looks like maybe your OpEx spending, R&D included going up maybe $50 million in the back half of this year to kind of get to that new guidance range. Is that something we should think about as $50 million in the second half of this year up, and so we carry that over to another $100 million next year, just to annualize that. Is that kind of the new run rate spend? And if it is, I know you're nowhere close to talking about 2026 at this point, but the Street is hanging out at like 16% EBIT margin. It feels like to me, if you have to take OpEx spend up 2 to 3 points, maybe we should sharpen our pencils on that 16% op margin. Daniel Scavilla: Yes, Jeff, again, I appreciate that, too. And like I said, let me wrestle through 2026 with the team and see. The real thing I'm doing right now is taking a loan to increase investments so that as we go forward and we find efficiencies, we can actually make it self-funding. So I don't think it's a new add-on top thing. It's -- say, I'm going to pull some money up now, get this engine running. And as we find efficiencies and redeploy it, I'm going to expect to see decreases over time in those OpEx numbers with an increase in EBITDA. But again, to jump start it, I'm going to pull down, as you just said, some EPS, investing in the right areas so that we can start delivering these efficiencies I've talked about as we get through 2026 and into 2027. Jeffrey Johnson: All right. Fair enough. And I've been jumping between calls, so if you asked us to hold the one call or question, I apologize. But I'd like to hear on the European market. I don't know if you're still doing some of the surveys that your predecessor was doing. But some of our checks, and I think even if we look at 2Q results from some of the manufacturers and the dealers out there, it seems like the European dental market has maybe gotten back on a little bit better footing and really even the international market ex-Canada. So I would love to just kind of hear your overall overarching view of the international markets at this point, market more so even than your performance in the quarter. Daniel Scavilla: Yes, you got it. So a couple of things. We do our surveys every 6 months. We didn't do it for the third quarter with that. But nonetheless, we didn't see any drastic shifts from where we had done before. And anecdotally, as I was out in the field and talking with people. A few people said it would slow down, a few people said it's speed up. So I'm going to kind of call it as kind of normal and nothing changed. The European side is interesting because while I do think it may be improving, I think the credit of the growth in Europe really goes to our leadership team. I think the person leading it is a fantastic leader, who has done a great job organizing the resources cross-functionally and driving growth. I think the cadence is improving. And I really think it's more about the approach that team has taken, which, to be honest with, I'm looking at as applicable to the U.S. and it's pretty much included in these points I laid out. Therese, we can move to the next one, if we're not hearing the question right now. Operator: Our next question is from Erin Wright with Morgan Stanley. Erin Wilson Wright: How are you thinking about your relationship with distributors? I think you talked a little bit about kind of supply chain in your prepared remarks, but how does this intertwine with some of your strategies around return to growth and profitable growth? And are you entertaining more of a hybrid approach or not? What makes sense over the longer term? And I'm sure there's still stuff that's up in the air, but I'm curious your view right now as it stands. Daniel Scavilla: Yes. Thanks, Erin. Listen, I think like many people in the market, we need to look at this with open eyes, and I think there's several ways to get there. In my prepared remarks, I called out a multichannel approach. And so what I am signaling is, we have direct businesses, and we intend to keep those and go more direct in those areas and support them holistically. Anything with our disposables that we use, I'm saying, I think that's fine. I'm not looking to make any meaningful shifts there and keep those alone. But reengaging with dealers, Schein and Patterson, when I say that, and new dealers, which I won't call out at this point, so that we have a broader reach and more presence, I see that as the model that we need to use to go forward. I have personally spoken with all of the CEOs. We have these in play. I'm not going to comment further on that because they're all at several different stages of maturity with where we can line in or not. But I would envision us next year having that locked in, in a way that is beneficial for everybody. Operator: Our next question is from Vik Chopra with WF. Vikramjeet Chopra: A couple of questions for me. So on this Return-to-Growth action plan, Dan, I appreciate it's early, but can you just talk about some of the key milestones that you will use to measure success for each of the pillars? And then I have a follow-up, please. Daniel Scavilla: Yes. Vik, you got it. So let's start with the -- obviously, a focus on the U.S. market there. I'm really setting out metrics, which are obviously going to be stabilizing sales and then returning into growth over some period of time. It's going to be one of the key metrics. Doing that by actually hiring out and retaining reps is going to be a key one. The rate of training we do for not only the rest but our clinical partners as well will be another key metric through these investments. So as we start training more and seeing more of both the field and the dentist that's going to be key. Holding on to them is going to be key. Seeing the sales turnover as a result of that is going to be one of the major moves that I see. And I didn't mention this in my prepared remarks, but having a stronger presence in universities and teaching institutions is a focal point as well to create those long-term seeds. And now while we're there currently again, we need to go deeper there and be more present to create that longer-term health. That's really one of the things. I've already called out what's almost finished when it comes to the organizational build to supplement a great team with even stronger talent that's out there that way. I think with the supply chain and operations, there's really a couple of measures there. We're going to see a lift in gross profit naturally as we get through these things. And certainly moving facilities or people and all that take a longer term, that doesn't pop within a quarter. With the R&D, we'll see it as a percent of sale and product launches. So I think they're really the main ones, right? If we know how to free up cash and we see changes where we can redeploy this. We watch the sales stabilize and grow. And as a result of that, we see the profit lift through our customer experience. I think they are the ones that I'm trying to wrap around now, make sure the team is aligned with that in a simplified way, so we know how to react faster and move and address these as needed. Vikramjeet Chopra: Great. I appreciate the color. And a quick follow-up question. You recently appointed Aldo Denti as your Chief Commercial Officer. Just curious to get your early thoughts and what impact do you expect him to make over the coming months? Daniel Scavilla: Yes. Thanks, Vik. So Aldo is honestly a great one. I had the opportunity to work with him side by side when we were in Johnson & Johnson Vision Care. And that company needed a turnaround. And we had come in with several people, and we're all part of bringing that back to the strength that it had. And he was driving force of that in the commercial side of that coming in. Again, his role in Orthopedics in J&J, which is no small task running that really had a lot of activity. So bringing that strength and that experience with a known person to come side-by-side with me is really important to me. I think that his drive to actually create a focused, trained and well-resourced commercial team is going to be one of the keys here. I think that his professional approach out with dealers and DSOs will be a lift for us. I think, again, he's a main ingredient. Operator: Our next question is from Michael Cherny of Leerink Partners. Ahmed Muhammad Rahat: This is Ahmed Muhammad on for Michael Cherny. I appreciate color on the Return-to-Growth action plan and fully understand that FY '26 planning is still underway. But if you think about things bigger picture, which areas of your business do you think are best positioned to start stabilizing growth both from a competitive and innovative standpoint? Daniel Scavilla: Yes, it's a good question, and my easy answer is all of them. But at the end of the day, each one of these requires a different approach. So the CTS move is more about getting the dealers lined up, trained and out with us. I think the biggest part of changing both customer service and technical service under one team and one focus be a major lift and not only the ongoing customer experience, but new customers through the implementation of capital and training. And so those things are going to be one of the big return to health type of items. I think setting up implant strategies and how we can get the right training and the right holistic approach and using DS Core as one of the drivers of that will be a major thing to go through. And while strong in EDS, making sure that we continue to have the right investments in Endo. The right training with those type of things throughout EDS are all going to be key to actually lifting them up. So really, if you ask me, is 1 more important than the other, the answer is no. That's the benefit of having a diverse portfolio, and it's well balanced, but they all require different approaches, and they're all addressed in this plan. Operator: Our next question is from Michael Sarcone with Jefferies. Michael Sarcone: I'll ask my two upfront. Just first, can you talk about the characteristics you're looking for in a new CFO? And then just related to that, Dan, I guess, how do you think about your guidance philosophy right now? And do you expect that may change as you bring on a new CFO? Daniel Scavilla: Michael, good question. Looking for main attributes of CFO, and I'm not saying that the person before didn't have these, but what I really need right now is a person who can dig down into the data and get the meaningful metrics that we need. And then in a consistent fashion, communicate those and educate the team to follow those to go. Right now, we have plenty of data, but how we use it isn't the best way. And so I really need someone to harness all of that power to create the focus we need, to show the metrics and driving this return to health thing. That's first and foremost. An enterprise leader right now, who has deep experience throughout so that they can look at this and work with all of us to guide us through and help us do it, it's going to be one of the key factors that are out there. So it's kind of both, a broad person with a lot of strategy who can dig very deep and use numbers and make sure that everyone understands and follow us along, communication is going to be key. Guidance strategy, I would say, look, where I came from, I'm going to follow that when we get this back to health, right? It's one of those ones where we put out conservative estimates with the goal to beat and raise as we go forward, demonstrating a cadence of sustained profitable growth. That's ultimately where I want to get to. I don't think that would change with a CFO coming in. I think that's got to be the mantra of this company going forward. We need the right person to fit that approach. Operator: The next question is from Allen Lutz with Bank of America. Allen Lutz: Dan, you mentioned a lot of different investment areas in your prepared remarks: global customer service and technical service organizations, clinical education, shifts in regional spending. I would think that not all of that spending is going to take place in the fourth quarter. Can you talk about what you are spending money on in the fourth quarter? And maybe what we should expect to start in 2026? Daniel Scavilla: Yes, it's a great question, and thanks for it. So listen, there's a couple of things, and I won't lay out every single put and take here for you, but there are big moves that we need to make contractually to free up some of the things that we have done historically that don't make sense these days. Some of those will involve some penalties that we're going to pay in the fourth quarter to create freedom to free up cash as early as the first quarter. So I'm taking a few hits to free up some strategic moves that allow us to go into that right away into next year. In the fourth quarter, there is an acceleration of R&D that I have set up to go. And while we don't have the execution of clinical education, establishing those programs and putting in place anything that we can do for that is there. So what I would tell you is some acceleration in R&D, a little bit of prep work in the clinical side. You mentioned customer service, tech service, that probably won't have an impact in the fourth quarter because they are existing people we are reorganizing. And we're beginning to recruit, but most likely will be negligible in the fourth quarter, more prominent by the first half of the year is really where I'm going with that. Operator: Our next question is from Brandon Vazquez with William Baird. Brandon Vazquez: I just want to ask kind of a high-level question on kind of the initiatives you laid out here. Obviously, encouraging to see kind of an action plan here. But the story has been a bit of a -- it will be -- this is my phrase, maybe not yours, but the story under the prior management team has been a turnaround story. And then a little bit now, it looks like, once again, again my phrase, a bit of a turnaround story again. Many of the initiatives here feel like ones that we've been focused on for years, frankly, like getting closer to the customers and supporting them, improving efficiencies. So I guess what would be helpful is can you just talk a little bit at a high level about what of these initiatives do you think are incremental to what has been attempted to turn things around at DENTSPLY SIRONA in the past couple of years that you think will start to eventually lead to some more durable improvements? Daniel Scavilla: Yes. I think that is a great question. And so I'll give you a couple of thoughts, right? There is no doubt that the customers, the employees and the Board are tired, right? There's fatigue coming through with these words and not quite getting where we need to go. My assessment would be, while there are many right things that were done in the past, I feel like we were trimming branches when we should be cutting down trees. So when I talk about going faster, bolder, deeper, I think that's really what I mean with that. And a lot of these things were in the right move, but not deep enough to go. And I think Aldo and Dustin and I have experience in these that we can bring in. But I don't know, was there as strongly as before. Now there's great folks on the team who are already in place. But I think the real thing is to drive deeper and push there. And it is a turnaround story. And the goal for me isn't to convince you why we know how to do this or that I'm the guy, I'm going to prove it to you through results. We just got to get past the talk and into the action. And I think there's enough talk that's been done. It's time to start getting this done through execution and pointing to the numbers as opposed to saying where we'll be. Operator: Our next question is from Kevin Caliendo with UBS. Dylan Finley: This is Dylan Finley on for Kevin. Wondering if you could talk a little bit about Implants. You go direct there, so not necessarily impacted by your relationships with dealers in that area of the market. What are the specific pain points that you're facing there today? And why do you think your predecessors have not been able to close the gap within the market? Daniel Scavilla: Yes. Again, good question. I can't answer why people before me did or didn't do things because I wasn't here. So I'll focus really on where we're going to go from here. I don't think we have the right amount of reps present throughout the world. I'm not convinced they have the right training. I don't believe the branding and coordination is laid out in the way that can add strength. I don't think we're leveraging some of the other infrastructure like a DS Core type program that we have to benefit these. I think all of those have to occur with a significant increase in training not only of the reps, but of the dentists, of our products, and quite frankly, in that area, we need to be present. It's honestly not that different than orthopedics, where you need someone there in the room, someone well trained, who can offer a lot of optionality out for the dentist. And I think we've got to take that type of model and apply it more effectively here than it has been done in the past. Operator: Thank you for your question.This concludes the question-and-answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good afternoon, everyone, and welcome to the eHealth Inc. conference call to discuss the company's Third Quarter 2025 Financial Results. [Operator Instructions] I will now turn the floor over to Mr. Eli Newbrun-Mintz, Senior Investor Relations Manager. Eli Newbrun-Mintz: Good afternoon and thank you all for joining us. On the call today, Derrick Duke, eHealth's Chief Executive Officer; and John Dolan, Chief Financial Officer, will discuss our third quarter 2025 financial results. Following these prepared remarks, we will open the line for a Q&A session with industry analysts. As a reminder, this call is being recorded and webcast from the Investor Relations section of our website. A replay of the call will be available on our website later today. Today's press release, our historical financial news releases and our filings with the SEC are also available on our Investor Relations site. We will be making forward-looking statements on this call about certain matters that are based upon management's current beliefs and expectations relating to future events impacting the company and our future financial or operating performance. Forward-looking statements on this call represent eHealth's views as of today, and actual results could differ materially. We undertake no obligation to publicly address or update any forward-looking statements, except as required by law. The forward-looking statements we will be making during this call are subject to a number of uncertainties and risks, including, but not limited to, those described in today's press release and in our most recent annual report on Form 10-K and our subsequent filings with the SEC. We will also be discussing certain non-GAAP financial measures on this call. Management's definitions of these non-GAAP measures and reconciliations to the most directly comparable GAAP financial measures are included in today's press release. With that, I'll turn the call over to Derrick Duke. Derrick Duke: Thank you, Eli, and welcome, everyone. It's been 6 weeks since I stepped into the CEO role, and I couldn't be more excited to be part of this organization. With years of experience in health insurance distribution, I've long admired eHealth, especially the technological innovation it has brought and continues to bring to the industry. I joined because I see a massive opportunity in our core Medicare Advantage and adjacent markets. eHealth is uniquely positioned to capture this opportunity through our strong carrier relationships, trusted brand, high-performing sales organization and differentiated omnichannel enrollment platform. Before diving into our performance, I want to take a moment to thank Fran Soistman for his leadership through eHealth's business transformation and for assembling a strong mission-driven team. Over the past 6 weeks, I've spent time meeting employees across all levels and functions. What I found is a deeply customer-centric culture and a team that's passionate about helping beneficiaries navigate their healthcare choices. Right now, my top priority is executing on AEP. This is a critical period for our business, and I believe we've entered well prepared and better positioned than other distribution organizations to succeed in this dynamic environment. After AEP, I'll turn my attention to reviewing our longer-term strategy and refreshing our 3-year financial targets. I also remain committed to enhancing our capital structure. Last month, we extended the maturity of our term loan with Blue Torch to January of 2027 with other key items of the agreement remaining unchanged. This provides us with additional financial flexibility as we continue to work towards achieving greater liquidity by leveraging our receivable asset and addressing the convertible preferred instrument. Let me now pivot to where my focus is today, AEP execution. This year's AEP is once again marked by disruption. Carriers have made broad plan changes, focusing growth on their best-performing products and geographies while pulling back elsewhere. Healthcare is local and the impact of these changes vary significantly by region, carrier and plan type. In this environment, eHealth is playing a critical role. Our Medicare matchmaker brand and carrier-agnostic model continue to resonate strongly with consumers. As we enter the second year of plan disruption, seniors note that they can come to eHealth for unbiased advice and continuity. Carriers continue to view eHealth as a valuable partner in executing their targeted growth strategies. We maintain broad inventory across large national carriers, blue plans and regional insurers, allowing us to offer consumers an attractive variety of coverage options. Just as carriers have taken varied approaches to plan design this year, we've seen similar diversity in how they've adjusted compensation structures across distribution channels. Overall, we're seeing a solid year-over-year increase in our commission rates, underscoring the strength of our relationships and the confidence carriers place in our model. Through the first 3 weeks of AEP, our Medicare performance is tracking in line with internal expectations, supported by strong consumer demand on our platform. We are seeing early signs of a more favorable competitive environment as well as increased efficiency within our branded marketing channels. The most critical weeks of the enrollment period are still ahead of us. As we progress through AEP, we're prepared to be opportunistic, leaning in where we see the potential to drive incremental growth at attractive LTV to CAC ratios with flexibility afforded to us by online and hybrid fulfillment that can be more easily flexed compared to traditional call centers and feet on the street models. Now let's take a step back and look at our performance in Q3. In the third quarter, total revenue was roughly in line with internal expectations. Medicare Advantage volume came in below our expectations due to a more pronounced impact from new dual-eligible enrollment rules compared to what we saw in Q2. We responded by pulling back marketing spend, preserving budget for AEP where it can be deployed at significantly higher ROI. At the same time, we continue to recognize positive net adjustment or tail revenue from our existing book, driven primarily by our Medicare Advantage cohorts. Third quarter GAAP net loss and adjusted EBITDA exceeded internal expectations, driven by tail revenue, which has a positive impact on profitability. Disciplined cost management was also a key contributor to our Q3 profitability performance. During the quarter, we finalized our preparations for AEP, and I'm encouraged by the momentum we've built heading into this critical period. We entered the season with a more tenured and experienced adviser force than last year, a direct result of our continued investment in long-term career paths for top performers. Our consumer brand continues to gain strength. Direct branded channels are expected to drive the majority of application volume this AEP with a higher contribution than last year. These channels are not only generating better lead quality, but also driving stronger retention, evidence that our message is resonating. Technology remains a cornerstone of our strategy. Our digital team is focused on delivering a seamless omnichannel journey, whether a consumer starts online or with a licensed adviser. New features like click-to-call from adviser chat are helping bridge these environments, allowing for fluid transitions and more personalized support. Our AI screener, originally piloted in Q2, is now deployed at scale. We expect this powerful tool to enable us to unlock meaningful operational efficiencies and improve consumer experience. And while acquisition is essential, retention is equally critical, especially in a disruptive AEP. Our goal is to preserve the continuity of the member relationship, whether that means advising someone to stay on their current plan or guiding them to new coverage within our ecosystem. We've proactively reached out to members most impacted by plan changes, initiating adviser conversations early in the season. We are also equipping members with a robust suite of self-service tools to help them evaluate their options and make informed decisions with confidence. Our tool, MatchMonitor, delivers a personalized automated shopping experience for our members at the start of the AEP with a side-by-side comparison of their current plan to the top plan recommended for them by our proprietary multifactor algorithm. While AEP is our primary focus, I want to briefly touch on our diversification efforts. We continue to see solid performance in products that can be sold year-round and have favorable cash flow profile, including hospital indemnity plans or HIP, and MedSupp. Third quarter HIP enrollments more than doubled and MedSupp agency enrollments grew 10% year-over-year. Six weeks into my tenure, I've gained a deep appreciation for the strength of this organization, its people, its platform and its purpose. We are executing in a highly dynamic environment, and I believe eHealth is uniquely positioned to lead through this disruption. Our value proposition remains clear and differentiated. We offer among the broadest selection of plans in the private sector, enabling consumers to find the right coverage even as the market shifts. Our growing brand identity is driving higher engagement, more efficient member acquisition and better retention. Our online and AI capabilities allow us to flex capacity and scale intelligently, supporting both consumer experience and enrollment margins. And finally, our carrier value proposition is differentiated through our ability to tailor distribution strategies in support of carrier geographic and product focus. We are raising our 2025 GAAP net income and adjusted EBITDA guidance ranges, reflecting our performance through the end of Q3. John will provide updated guidance in his prepared remarks. I look forward to engaging with many of you after the call. Thank you for your continued support. And now I will turn the call over to our CFO, John Dolan. John Dolan: Thank you, Derrick, and good afternoon, everyone. Third quarter results reflect a typical seasonal dip in Medicare enrollment volume, further intensified by this year's dual-eligible regulatory changes accompanied by a corresponding reduction in our Q3 marketing spend. At the same time, we made a deliberate investment in scaling and training our licensed adviser force, an annual initiative that prepares our organization to meet consumer demand during AEP. Through the early weeks of the annual enrollment period, consumer demand on the eHealth platform has been strong and the effectiveness of our marketing spend is up not only sequentially, but also year-over-year. These early indicators reinforce our confidence in the strategic decisions we made this year to prepare us for the elevated consumer activity. As I review our results, please note that all comparisons are year-over-year unless otherwise specified. Total revenue for the third quarter was $53.9 million, down 8%. GAAP net loss improved to $31.7 million from $42.5 million and adjusted EBITDA was a loss of $34 million, also an improvement from a loss of $34.8 million last year. Third quarter Medicare segment revenue was $49.9 million compared to $53.2 million, reflecting lower enrollment volume, which was partially offset by $12.1 million in positive net adjustment revenue or tail revenue. This compares to $1.1 million in Medicare segment tail revenue last year. Q3 segment loss narrowed significantly to $1.2 million compared to segment loss of $5.6 million. Total Medicare applications across our fulfillment models declined 26%. As Derrick mentioned earlier, enrollment volume was below expectations with the removal of the quarterly dual-eligible enrollment period having a larger impact on our results in Q3 versus Q2. We believe that many dual-eligible consumers who could transact outside of the main enrollment periods likely did so earlier in the year. MA-related marketing spend declined 25%, roughly in line with volume. Customer care and enrollment expense was down 6%. While we use flexible staffing arrangements like voluntary time off to accommodate lower inbound call volume, we also ramped new adviser cohorts. This process includes onboarding, licensing and training in preparation for AEP. These dynamics are reflected in our Q3 Medicare unit economics. Member retention remains a cornerstone of our strategy. Last year, we introduced initiatives aimed at further strengthening member engagement and protecting our book of business impacted by Medicare plan changes. These initiatives delivered strong results as evidenced by the improved retention data we are seeing from the MA cohort we enrolled last AEP compared to the same cohort from 2023. This year, we're building on that success. During the third quarter, we expanded our dedicated customer service and retention team. We're applying key learnings from last year to optimize our retention initiatives, focusing on what delivered the highest ROI and resonated most with our members. We recognized another quarter of positive tail revenue, bringing our year-to-date cumulative positive tail revenue across all segments to $40.5 million. Medicare Advantage LTV declined slightly by 1.5%. Third quarter Employer and Individual segment revenue was $3.9 million, with segment gross profit of $1 million. This compares to $5.2 million in revenue and $1.8 million in gross profit last year. The year-over-year decline was due to shifts in market dynamics and our marketing budget allocations. We limited marketing and sales spend in the Individual ACA market amid declining eligibility and rising premiums that were impacted by the one big beautiful bill. In this segment, we are focused on building ICRA capabilities that advance eHealth's market-leading technology platform to support diversification. Combined, technology and content and general and administrative costs grew 3.6%. Beneath that, technology and content expense decreased 4%, while general and administrative expenses increased 8%, primarily due to compensation and benefits tied to leadership transitions. Total operating expenses declined 6%, driven by reductions in variable marketing spend. Cost management remains a key focus. We're proactively adjusting variable spend to drive growth at attractive unit acquisition costs while pulling back from areas with lower return on investment. We'll continue evaluating fixed costs as a source of leverage. Operating cash flow was negative $25.3 million, an improvement from negative $29.3 million last year. We ended the quarter with $75.3 million in cash, cash equivalents and short-term marketable securities compared to $105.2 million last year. Our commission receivable balance as of September 30 was $907.7 million. We continue to work towards leveraging our sizable receivable asset to increase access to capital in support of our strategic initiatives, including developing and integrating AI through our distribution platform, business diversification and other high ROI opportunities. The final tenet of our capital structure enhancement is addressing the convertible preferred instrument. As we stand today, we believe we have sufficient liquidity to execute on our operational plan and continue to enhance and scale our Medicare business and in-flight diversification areas. We are raising our net income and adjusted EBITDA guidance ranges to reflect execution through the end of Q3. AEP has started strongly, but it's important to remember that the final weeks have a significant impact on our fourth quarter performance. Our new guidance ranges are as follows: We continue to expect total revenue for 2025 to be in the range of $525 million to $565 million. GAAP net income for 2025 is now expected to be in the range of $9 million to $30 million compared to our prior guidance range of $5 million to $26 million. Adjusted EBITDA for 2025 is now expected to be in the range of $60 million to $80 million compared to our prior guidance range of $55 million to $75 million. And we continue to expect operating cash flow to be in the range of negative $25 million to positive $10 million. These ranges include estimated positive net adjustment revenue in the range of $40 million to $43 million compared to the prior range of $29 million to $32 million. Operationally and strategically, we believe we are well positioned to take share and continue building lasting brand and consumer relationships this AEP and beyond. With that, I'll turn the call over for questions. Eli Newbrun-Mintz: Operator, you can open the line for Q&A now, please. Operator: [Operator Instructions] And your first question comes from George Sutton from Craig-Hallum. George Sutton: I wondered if you could talk about the disruption that you speak of relative to AEP. What that means to us is more shoppers. You've got more folks turning 65 than ever and you've got all the plan changes and terminations that are creating the need for movement or shopping. Are we reading that disruption as being favorable for you correctly? Derrick Duke: Yes. George, it's great to hear from you and speak to you again. I think I would start by just saying that from a disruption perspective, we're seeing similar levels of demand year-over-year that's tied to that carrier disruption. And the way I would encourage you to think about that is that similar levels, different reasons and different carriers from the prior year. So sometimes we talk about that internally that it's sort of one event that is occurring over a multiyear period as carriers address their own issues related to margin and portfolio productivity. Early stage, again, in AEP. So we want to make sure we emphasize that the last few weeks are the important time period of the AEP enrollment period. But so far, our results are in line with our expectations and we're happy with the results that we're seeing. So again, similar levels of demand that we saw year-over-year and a high number of shoppers on our platform. George Sutton: You mentioned a plan to prepare to be opportunistic as you see the evolution of the AEP period. Can you talk about what that might look like? Derrick Duke: Yes. I'll start and maybe I'll ask Michelle to add. George, we're trying to be really thoughtful about which marketing channels that we invest into based on the economics of those channels. As you recall, I think we mentioned in our last quarterly call that we're investing more in our branded channels that have better economics, higher LTV to CAC ratios for us. In the prepared remarks, we talked about the fact that we reduced spend in Q3 in order to be ready to increase spend in Q4 when and where we saw those opportunities. Michelle, what would you add? Michelle Barbeau: Sure. Thank you. I think you captured it really well. But it is exactly that it is regularly looking at performance across all channels and how to continuously optimize to improve. As you well know, our North Star, right, is always LTV to CAC. And we look at that continuously across our mix, what is performing best? What do you need to dial back? What do you need to lean into? As we've talked about, we are continuing to grow branded channels as part of our mix and are really pleased with how they are continuing to perform. And as part of that, we actually look at the branded channels across several channels because they work cohesively together. For example, when TV is on, we also see a great lift in search and our search traffic is up substantially year-over-year as a result. So there's also sort of that holistic view that we give in addition. George Sutton: Got you. Lastly, you have really focused the discussion around stronger retention. That was not necessarily historically an eHealth strength. Can you talk about sort of what you're seeing there? Is this really driven by more of the brand message, meaning someone leaves or has a plan change and comes back to you to solve their needs? Derrick Duke: It's a great question, George. Let me start maybe with a bit of a philosophical statement on my part as I've started reacquainting myself and reestablishing long relationships I've had in this industry with carriers as well as building new ones. Part of the conversation I'm having with our carrier partners is around my expectation of what type of distribution company eHealth is going to be going forward. Sometimes I hear from carriers that we are best-in-class for telebrokers, whether it's retention, quality, which I appreciate the compliment. But my response to them so far has been, I don't want to just be the best telebroker, I want to be the best broker. And I believe that eHealth has all of the capabilities and competencies to allow us to do that regardless of who we compete with on the other side, whether that's another telebroker or whether that's a feet on the street brokerage or an FMO. And so often, we hear in this industry that FMOs have better retention because of relationships. And again, my perspective is we have the ability, especially because of the decision the company made a few years ago to begin investing in our brand to replicate those types of relationships. And so it's on the strength of the brand investment that the company has made that we believe we're seeing incremental growth in retention. Again, in John's prepared remarks, he talked about the improved retention on our most recent cohort during AEP last year and our continued investment in our retention and loyalty team. One metric to give you related to that is that we increased our outbound calls this year by approximately 20% into our membership base to ensure that they were prepared for the disruption that we believe they were going to experience during this open enrollment period. So based on all of those things, we believe we've yet to see the full benefit of increased retention because of the investments that we've made. And personally, I'm excited to see what we can do around not having a transactional relationship with our membership, but having a relationship that leads to transactions, if that makes sense. Michelle or John, would you guys add anything? John Dolan: I think you covered it. Operator: And your next question comes from Jonathan Yong from UBS. Jonathan Yong: I guess you mentioned that you're seeing similar levels of demand. I assume that's similar to last year. But the carriers in CMS have pointed to a flat to down type of growth expectations for next year and some carriers have removed some brokers from their network. So I guess within the context of that similar levels of demand, would you characterize this as share gains from competitors or underlying enrollment growth, if you could provide additional color there, understanding it's early in AEP? Kate Sidorovich: Yes. Jonathan, this is Kate. So if you look at how we performed in last AEP when we exceeded our expectations, we actually took market share, both as a percentage of new enrollment and the ending member base. Now as you progress through this year, it's a highly disruptive period. It remains to be seen where we end up as a percentage of total membership for the industry. But to your point, CMS does expect that the overall membership in Medicare Advantage will decline a little bit by about 3%. It is a temporary bump because by 2030, we still expect for Medicare Advantage to represent a much larger percentage of total Medicare enrollees, around 60%. Jonathan Yong: Okay. And then the enrollment, I think you said is tracking to internal expectations so far. And it sounds like you're seeing an increase in commission rate. I just want to make sure, is it those enrolled lives of the higher commission rates or just generally speaking, because of the commission increase you're seeing that? And then of those lots you are enrolling, are they actually commissionable or are they 0 commission lives and you just happen to be getting them? Derrick Duke: Yes. Jonathan, great question. I'll start, and then maybe I'll ask John to add on. So around the rate portion of your question, as you know, CMS rate decision led to carriers having the opportunity for a rate increase of a little north of 10%. What we've seen as we prepared for this AEP is that carriers took sort of a different strategy, if you will, on how they would deploy that increased rate. Some carriers gave us that increased rate across all products that we're selling. Others distinguished it between their product portfolio where they wanted to see growth. I would say, in general, what we're seeing and now expecting is that we'll sort of be in the mid-single-digit percentage rate increase year-over-year in -- during the AEP period. So that's number one. The second thing is the demand that we're seeing and the enrollments that we're seeing are in plans that are commissionable, and we fully expect to receive commissions on the production that we're producing. John? John Dolan: Yes. The one thing I'd just make sure you understand is when we think about our LTV, it's comprised of both the commission rates, which Derrick focused on in those increases. It also includes a component of administrative fees. So the -- some of the increase may not flow all the way through to the LTV. So I just want to make sure people hear that. Operator: [Operator Instructions] And your next question comes from Ben Hendrix from RBC Capital Markets. Michael Murray: This is Michael Murray on for Ben. Just a quick follow-up on the commission rates. So how should we think about LTV growth for 2026 given the higher commissions? Should we think about it in the low-single-digit range? Derrick Duke: John? John Dolan: Yes. I think as Derrick pointed out, we're expecting to see the commission in our forecast to be in the mid-single digits. A little bit of that will be muted by the administrative fees. So it's probably expected to be low-to-middle single-digits increase. Michael Murray: Okay. And then I just had a question on your tail revenue expectations for the year. So you increased your tail revenue guidance by $11 million at the midpoint while you raised adjusted EBITDA guidance by $5 million. Is there anything to call out in the delta between the 2? John Dolan: No, I think the -- if you're looking at the Q3 results, our revenue was kind of in line with expectations. We had -- as Derrick explained in his prepared remarks, I think our volume was lower, so our commissions were lower, but we had net adjustment revenue that offset it. So as we flow through that into our guidance for the full year, you got to take that into consideration. So the tail guidance, we think there's between the $40 million that is the low end of our range on a full year basis, which is what we booked year-to-date, we think there might may be potentially some upside in Q4. Operator: And there are no further questions at this time. Mr. Derrick Duke, you can proceed. Derrick Duke: Thank you. Thank you all for joining us today and for your continued interest in eHealth. We look forward to updating you on our AEP results in our next quarterly call. Have a great evening. Operator: Ladies and gentlemen, this does conclude your conference call for today. We thank you very much for your participation. You may now disconnect. Have a great day. Good bye.
Operator: Good morning, ladies and gentlemen, and welcome to the Westwing Group SE Q3 2025 Earnings Call. [Operator Instructions] Now dear ladies and gentlemen, let me turn the floor over to your host, Andreas Hoerning. Andreas Hoerning: Good morning, everyone, and thank you for joining us for our earnings call on the third quarter of 2025. My name is Andreas Hoerning. I'm the CEO of Westwing. I'm hosting the call together with Sebastian Westrich, our CFO. Looking at today's agenda, I will begin by providing key updates on our business for the third quarter of 2025, after which Sebastian will share the details of Westwing's financial performance. After our investment highlight summary, we will be happy to take your questions. Let's take a look at the current state of Westwing. In Q3, we delivered growth and continued to improve profitability significantly. Our GMV increased by 5.4% year-over-year despite changes in product assortment. We improved our adjusted EBITDA by 73%, reaching EUR 6 million at an adjusted EBITDA margin of 6.1%. This marks an increase of 2.5 percentage points year-over-year. Free cash flow was positive at EUR 10 million in Q3, and we ended the third quarter with a net cash position of EUR 58 million. For the full year 2025, we expect free cash flow to be double-digit positive. Strategically, we are well on track with the implementation of our 3-step value creation plan. Our own product brand, the Westwing Collection grew 19% year-over-year, which resulted in an all-time high group GMV share of 66%. As part of our geographic expansion, we achieved our full year objective of launch in 10 new countries, and we continued our store expansion with the opening of 7 new stores this year. The operational progress is fully in line with our targets. We confirm our financial guidance for 2025 and are currently expecting the adjusted EBITDA at the upper end of this guidance. We also confirm our ambition for 2026, which is the return to a high-single to double-digit growth and further improved profitability. As always, let's have a look at our 3-step value creation plan, which we started executing in 2022. In terms of levers, we successfully completed the first 2 phases, the turnaround and strategy update phase, and the building of a scalable platform phase. 2025 marks a transition year for us, where we are focusing on the key growth levers of the third phase to be able to scale with operating leverage from 2026 onwards. As in the last earnings call, let me now briefly guide you through our progress across the key levers of the third phase of our plan, beginning with the latest developments of the Westwing Collection, then moving on to how we strengthen our market share in existing geographies, pushing the premium positioning of our brand and finally, the progress we've made in terms of international expansion. So starting with the Westwing Collection. The Westwing Collection is our gorgeous sustainable private label product brand, and we continue to be very pleased with its performance. It again delivered strong growth of 19% year-over-year, resulting in an all-time high group GMV share of 66%. This represented a total GMV of EUR 75 million in Q3. The strong development supports our top line as well as profitability since the products are very desirable and they allow us to achieve a higher contribution margin compared to third-party products. As we build Europe's premium one-stop destination for Home & Living, we're creating a unique product assortment for design lovers, consisting of our own brand, Westwing Collection and the best third-party design brands. We still have significant room for improvement on both sides. As outlined in our last earnings call, besides improvements in product assortment, we see offline store expansion as a lever for share gains in existing markets. In 2025, we opened a total of 7 offline stores. In Q3 alone, we successfully opened 3 stand-alone stores located in Munich, Berlin and Cologne as well as 2 store-in-stores, one in Dusseldorf and one in Copenhagen. Before I share an update on our geographic expansion, let me show you some impressions of our newly opened stores. In Munich, we opened a so-called warmup store. It is more than just a pop-up. It's a preview of our first permanent Munich store coming next year in the heart of the city. Munich is especially meaningful to us as it's where our journey began and where many of our central teams are based, enabling us to learn and refine the customer experience even faster. Next to Munich, we are also very proud to now have a permanent stand-alone store in Berlin. This is located on the iconic Kurfurstendamm, bringing Westwing to life in the heart of Berlin's western city center. On top, we opened our stand-alone store in Cologne, one of Germany's busiest shopping cities. Next to our stand-alone stores, we also opened 2 store-in-stores. One is located at Breuninger Dusseldorf on the prestigious Konigsallee. Following the successful pilot of our store-in-store concept in Stuttgart in 2024, we are proud to continue our partnership with Breuninger, arguably Germany's leading fashion and lifestyle department store chain. The other one is our very first store-in-store in Scandinavia at the iconic Illums Bolighus flagship store in Copenhagen. This opening marks a new milestone in our Nordics expansion following the successful launch of Westwing in Denmark, Sweden, Norway and Finland earlier this year. By partnering with Illums Bolighus, a destination known for timeless elegance and Danish design culture, we are strengthening our presence in the Nordics and connecting with a design-savvy audience in a uniquely meaningful way. Overall, offline stores help us to further strengthen brand presence, positioning and top line, providing a holistic shopping experience across the multi-touch customer journey supports Westwing's market share gains. In Home & Living, many customers combine online and offline experiences in their journey, especially for large furniture purchases. The latter mostly for the touch and feel and simply because basket sizes in furniture are often very large and require many touchpoints for conversion. On the next slide, you can see impressions of the official opening of our Berlin store, where we welcomed over 250 friends of the brand, key opinion leaders, press and content creators from the world of fashion, art, design and lifestyle. The event generated strong positive press coverage and a high volume of social content, amplifying our brand visibility. Let's move on from gaining market share in existing geographies and increasing our premium brand positioning to entering new markets. At the beginning of the year, we announced our plan to open 5 to 10 new countries in 2025. We are happy to announce that we successfully opened 10 new countries this year, reaching our full year objectives. As outlined in our last earnings call, geographic expansion allows us to offer our existing global product assortment to customers in the corresponding market segment for design lovers in other countries. This means selling more of the same products. All Continental European countries follow the same logic with low marginal costs of serving them, translation supported by AI, onboarding of last-mile delivery providers, local influencer marketing and performance marketing with attractive returns within a few months. Therefore, in the midterm, we aim to be present in approximately all European countries. We do not plan to open any additional countries until year-end as our focus is now fully on the most important season of the year in Home & Living. To provide for a glimpse into our 2025 country expansion, let me share some impressions of our Nordics launch event. At the end of August, we celebrated our Nordics launch with 200 guests, including brand partners and leading voices across fashion, design, art and lifestyle. From our styled steamboat experience to sculptural installations at the Westwing Villa, the event showcased our passion for timeless design and cultural connection. It generated extensive positive media coverage and inspired highly shareable social content across the region, achieving exceptional reach, both online and offline. This milestone marks the start of our journey in Scandinavia, bringing beautiful living to even more homes. Back to results. I now hand over to Sebastian for details on our financial performance. Sebastian Westrich: Thank you, Andreas, and good morning, everyone. I'm Sebastian Westrich, the CFO of Westwing. Let me start with details on our top line. Our GMV increased by 5.4% year-over-year, while revenue was at plus 3.4% year-over-year despite the negative impact of the changes to our product assortment. I want to highlight here again what Andreas mentioned earlier in this call. Our Westwing Collection business continued to grow by 19% year-over-year. Now let me also briefly comment on Q3 top line development on segment level. The DACH segment saw a revenue decline of 2.1%, (sic) [ 2.4% ], while the international segment's revenue increased by 10.8%. There are 2 major reasons for this difference in top line development. Firstly, we began introducing a largely global and more premium product assortment and related restructuring of our local business functions in the international segment as early as Q2 2024. The assortment offered in the DACH segment remained unchanged until late 2024. And as a result, last year's baseline for DACH is stronger than that of the international segment. Secondly, the international segment benefited from additional revenue generated by our geographic expansion with 10 new countries launched in the first 9 months of 2025. Regarding top line outlook for Q4, we remain cautious as the performance depends largely on the month of November, including the upcoming Black Friday sales events. Now let me continue with an overview of our profitability development. In Q3, we improved our adjusted EBITDA by EUR 3 million to EUR 6 million, which represents an increase of 73% year-over-year. In order to show profitability development before D&A, we have also included the EBIT development on an adjusted basis on the right side of the slide. It is also clearly positive at EUR 3 million and showed an even greater increase of EUR 4 million year-over-year. Excluding adjustments, Q3 showed a negative EBIT of minus EUR 4 million. The adjustment mainly includes the negative impact of a higher fair value of employee stock option programs due to the significant share price increase in Q3. The impact amounted to minus EUR 6 million, which was non-cash effective. It is important to highlight that we are actively reducing the number of outstanding stock options to reduce both dilution risk for our shareholders as well as negative P&L impact from potential further share price increases. Let us now take a look at our P&L margins. In the first 9 months of 2025, we realized an adjusted EBITDA margin of 7%. This is a significant improvement of 2.6 percentage points compared to the previous year's period in the absence of any scale effects. Let us now focus on the P&L development in the third quarter of 2025, which you can see here on the right-hand side. I am pleased to report that we improved our P&L structure in Q3 in almost all areas, leading to a strong improvement in adjusted EBITDA margin by 2.5 percentage points year-over-year to 6.1%. Our gross margin improved by 2.2 percentage points year-over-year, mainly due to strong Westwing Collection share gains. The fulfillment ratio improved slightly by 0.1 percentage points year-over-year. The fulfillment ratio includes negative effects from expansion as we accept lower logistics linehaul utilization from our central warehouse to the new countries in the beginning. This ensures short delivery times also for our customers in the new markets but comes at higher cost per order. With increasing scale, this negative effect will decrease. Overall, this led to an increase in contribution margin of 2.3 percentage points to 33.9%, a really strong result for our third quarter. Our marketing ratio increased slightly by 0.3 percentage points year-over-year to minus 13.4%. The main reason for the increase is our investment into expansion. Our G&A ratio, which includes other result, improved by 2.3 percentage points to minus 17.9%, reflecting the positive effects from our 2024 complexity reduction measures. This led to an adjusted EBIT margin of 2.6% in Q3, up 4.3 percentage points year-over-year. D&A decreased by 1.8 percentage points year-over-year, primarily driven by the full depreciation of legacy technology assets. Overall, as mentioned before, our Q3 adjusted EBITDA margin improved by 2.5 percentage points year-over-year to 6.1%. The adjustments made in Q3 were minor, except for the higher fair value of our stock option programs following the significant share price increase, which I mentioned before. An overview of these adjustments as well as the unadjusted consolidated income statements can be found in the appendix to this presentation and in our Q3 financial report. Let's move on to profitability on segment level. In Q3, which is displayed on the right-hand side of this slide, we saw a strong improvement in adjusted EBITDA margin in both segments. In the DACH segment, adjusted EBITDA margin improved by 3.6 percentage points year-over-year to 6%. In the International segment, we were able to improve our adjusted EBITDA margin by 1.2 percentage points year-over-year to 6.4%. The improvement in profitability reflects the successful implementation of our 3-step value creation plan across both segments. Let's also briefly look at our earnings per share development. What you can see on this slide is the last 12 months data since Q1 2024. The dark green bars showing unadjusted earnings per share, the light green bars showing earnings per share on an adjusted basis. Adjustment includes changes in fair value of the aforementioned employee stock option programs as well as restructuring expenses. We are happy to be able to show that the very positive development continued also in Q3 2025. The dent in the unadjusted earnings per share in Q3 stems again from the steep increase in Westwing share price in Q3. Let us now move from profitability to our balance sheet and take a look at our net working capital. By the end of Q3, net working capital stood at minus EUR 1 million, which is EUR 4 million higher compared to Q3 2024, but EUR 7 million lower versus the previous quarter. Compared to the previous year, we still had higher inventory, mostly driven by the newly introduced Westwing Collection items that we already mentioned in previous calls. Compared to the previous quarter, we managed to reduce inventory levels slightly despite the typical seasonal inventory buildup towards the high season, and we improved trade payables as well as contract liabilities. We expect net working capital to improve further in Q4 due to typical seasonal effects and the respective positive impact on cash flow. On the next slide, you can see CapEx and CapEx ratio for the first 9 months as well as for the third quarter of 2025 compared to the same period in 2024. CapEx remained broadly stable year-over-year in 2025, both for the first 9 months and in Q3 specifically. However, when comparing 2025 to 2024, we see a shift between investments into property, plant and equipment and intangible assets. While in 2025, we invested more into store openings, we were able to reduce CapEx for internally developed tech assets as we move to a SaaS-based tech platform. Let us now take a look at our net cash position. We are pleased to report a strong net cash position of EUR 58 million at the end of September, which is EUR 8 million more compared to the end of June. Overall, free cash flow was at EUR 10 million in Q3. Taking lease payments of EUR 3 million into account, we had a positive free cash flow after lease payments of EUR 8 million in Q3. Our balance sheet remains strong with no debt other than the IFRS 16 lease obligations and IFRS 2 liabilities from cash settled stock option programs. We remain confident to enable double-digit free cash flow for the full year 2025, driven by both profitability and net working capital. Given our seasonality, Q4 is expected to be the strongest quarter. On the next slide, I'll comment on the financial guidance for 2025, which we published at the end of March. Our performance in the third quarter and the first 9 months of 2025 in terms of both revenue and profitability is fully in line with our guidance. In terms of top line, we had, as expected, headwinds from our changes in the product assortment. These negative effects are expected to ease further towards the end of 2025. But as mentioned earlier, top line in Q4 depends largely on a successful November and the Black Friday sales event. In terms of profitability, we expect a typical seasonal peak in the upcoming fourth quarter. To summarize, we are well on track to deliver on our 2025 guidance in terms of revenue and profitability and also in terms of a clearly positive double-digit free cash flow. Given the strong performance in the first 9 months with an adjusted EBITDA margin of 7% so far, we currently expect to end the year at the upper end of the adjusted EBITDA guidance. This brings me to our midterm outlook, which was shared for the first time in our full year 2024 earnings call. I want to highlight again that our ambition is to return to significant growth in 2026 while continuously improving profitability. Significant growth means a high-single to double-digit growth rate driven by our expansion initiatives and the anticipated easing of negative impacts from the product assortment changes. In terms of profitability, we expect scale effects as we grow, as well as positive effects from our improved product assortment. We remain focused on executing our 3-step value creation plan with a clear goal of driving sustained improvements in profitability and cash flow. Combined with our return to meaningful growth, this will enable us to unlock the full value potential of Westwing. I'm handing over to Andreas now to conclude our presentation with our investment highlights. Andreas Hoerning: Thank you, Sebastian. Let me briefly recap the investment highlights. First, we have a unique relevant customer value proposition through the specific assortment and the way we serve our customers. Second, the market potential is huge, especially in our existing geographies, but also beyond. Third, we are developing the superbrand in design with high loyalty and true potential to grow further. Fourth, we have high and increasing margins as well as operating leverage while we scale. Fifth, we have a great balance sheet with a strong cash position and no debt, strong net working capital and low CapEx. All of this will lead us in the midterm to 10% plus adjusted EBITDA with a continued strong cash conversion. Sebastian and I are now happy to take your questions. Operator: [Operator Instructions] And we already have one person who wants to ask a question, this would be Volker Bosse from Baader Bank. Volker Bosse: Volker Bosse from Baader Bank speaking. So first of all, of course, great results and congratulations, especially that you are able to specify your guidance to the upper end in this challenging times, very an outstanding achievement. Perfect. I would have 3 questions, if I may, starting with your still decline in orders and number of active customers year-over-year. So how do you see the momentum evolving? Do you see an improving momentum, means is the worst triggered by the transformation process is behind you, so to say? I mean, your outlook on the forward-looking on these 2 KPIs, please, would be the first question. Second question is on your country expansion. Yes, great to hear that you achieved also here the upper end of your given guidance range, so to say, 5 to 10, so 10 new countries. Can you already share initial developments in the new countries? I think Portugal is most advanced as it was the first country which you opened. How do you see the acquisition of new customers and incremental sales is progressing here or in other countries? Perhaps you have first thoughts already for us on that. And the third question would be on the new physical stores, which you opened. Do you see here an increased online activity be it in click rates or be it in sales in the catchment areas of the stores. So do you have this granularity of data on hand to share basically the stores do what they are supposed to do, meaning drive sales and brand attention? Andreas Hoerning: Thank you, Volker, for your questions. And also, thank you for the congrats. We're also pleased about the development of the EBITDA. So the first question was related to decline in orders and number of customers, and your question was how this will be evolving, whether the worst is already over? So generally spoken, the decline in order and number of customers is expected to ease in the same way as the negative GMV effect from the change in product assortment is also expected to ease. And we did this in a phased approach. So first, we changed the product assortments quite heavily in -- especially in Italy and Spain, where we also closed offices and warehouses and went from a local -- very local assortment to a global assortment. And there, we saw a pretty steep decline in number of customers simply because the offering that we had there beforehand to customers was different to the one that we have today, and the churn in customers was quite significant. This has already eased in those countries quite significantly. We're actually happy with the development now. And then the subsequent development was that we also changed the product assortment in our larger markets, Germany and also CEE. By the way, so DACH and CEE a bit later. And this effect we are seeing this year this is also why we were so cautious with our guidance on top line this year. And at the moment, we are fully in line with that. And it stems from exactly your point, the number of orders and number of customers, it is the same reason. You can also see that in the increase in average order value that we are reporting because there you can see that with the shift from a more impulse buying and smaller products to more Westwing Collection and more furniture, we see a strong growth in average order value and the decline of the number of orders and number of customers as it eased in Italy and Spain, it is also easing in Germany or in DACH and in CEE. So we can expect that the worst is over, as you say. And into next year, we actually expect a much, much lower effect of that, if even any. I hope that answers your question number one. Number two was on country expansion. You were asking about the development here. So as you rightly said, Portugal was the first one. And when we look now at the countries that we opened this year, so the 10 new countries, we, of course, compare the development of those to the one that we saw in Portugal in the first months and quarters. And we're actually very pleased with the development. It's in line with what we saw in Portugal. We see new customer growth there. Everything that we report from there is obviously incremental. That's the beauty of opening new countries. And our kind of the first results in terms of absolute numbers that we won't share now. Next year, I think we will give a bit more indication because it's very early still. But when you look at the absolute numbers, we're actually really happy with what we see in Sweden, in Denmark, in Norway and in Croatia also. Despite Norway and Croatia actually being relatively small markets, but we see really nice developments there. We'll give more updates throughout next year when the numbers become more meaningful, because at the moment, though we are happy, the relation to our overall GMV is, of course, still very small. So that was the second question on country expansion. And the third one was on the physical locations on our stores. And here, you asked whether we see besides the top line that we make in the stores, whether we also see an increased online activity in the catchment areas, and that's exactly the case. We don't share any numbers on the online catchment area uplift also for the reason that we don't have an A/B test in place. What we do is we compare catchment areas with stores against the catchment areas without stores. And there, we can see a significant effect of the stores. But of course, it's not 100% proof of this effect. But for instance, when we had Hamburg and Stuttgart as the only stores in Germany, those 2 catchment areas were the best performing in the whole of Germany. The reason behind this is, obviously, what you also pointed towards is that we have sales in the stores themselves. And then we also have the effect that is what we call also a marketing effect. So when people walk past our stores, it's like a billboard that's out there or even when they walk into the store and they have a look at products, they don't necessarily decide straightaway to convert to a buyer. That often happens only after their visit to the store. We have found that, for instance, when customers decide to buy a sofa, there are roughly 30 touchpoints involved between the first -- very first one and the purchase in the end. So these are many, many online touch points and increasingly so also our offline touchpoints. But this explains why we see this catchment area uplift in the cities where we have the stores. So it's absolutely positive. I can confirm what you said, Volker. Does that answer your 3 questions? Volker Bosse: Yes. And I would have a follow-up, more general remark on your Page 23, you give an indication on '26 already, very much appreciated. On market, you have a stable or a flat arrow, so to say, or how to say. I mean the question is for -- do you see any -- do you see no market tailwind, but also no market headwinds for next year? So what is your general assumption behind your '26 guidance in regards to what is the market providing? Andreas Hoerning: Thanks Volker. Your question on market development, how we see that in 2026, I'm handing over to Sebastian. Sebastian Westrich: Volker, thanks for your question on our view on the overall market development. So we expect overall no tailwind from overall consumer sentiment and market growth. But of course, there will be regional differences. So there are some areas within Europe, CEE, for example, where I think the overall conditions are more promising compared to what we see, for example, in the DACH segment where when you look at consumer sentiment indicators, there is no real improvement. And that is why we remain cautious. And our outlook or ambition for 2026, as we already mentioned in earlier calls, is based on our strength and executing our 3-step value creation plan with the share gains in existing markets and the expansion to new countries. And so far, we feel very confident to achieve those targets based on the financial and operational progress that we achieved so far in 2025. Operator: Next question comes from Jose Antonio Perez Parada from NuWays AG. Jose Antonio Perez Parada: Congratulations again on the strong quarter. I would like to ask for -- I have a couple of questions, if that's okay, I will just land them. The first of them is if has anything changed regarding the capital allocation over the quarter or if there's anything it's important to know for the near future? The second question will be that we already understand or we see that there will be no further geographic expansions in the rest of 2025. But could you give us any notion on the direction of the geographic expansion in 2026, maybe towards any region? That's another one. And the third one is that, you told us earlier that fulfillment ratio included some negative effects from expansion. So I would like to ask you again, if you could please guide me through the underlying dynamic again. Sebastien clearly mentioned something about the centralized distribution center in Poland, but I would like to grab the logic again. That would be it. Andreas Hoerning: Thank you, Antonio, for your questions. I'm going to hand over to Sebastian for the questions on the change to -- on the capital allocation and on the fulfillment ratio. And before I do that, I'll just briefly comment on your question on expansion. So you were wondering what the expansion in 2026 might look like. We're not going to share any specifics, but our general ambition is to be present in nearly all countries in Europe. And this also includes Great Britain, but of course, Great Britain is a bit more complex because it's not in the EU, and it also requires a bit more complex logistics setup. So we will likely expand also geographically in 2026, and we'll share more details on that when the time is right to do it. Jose Antonio Perez Parada: That clearly answers my question. Andreas Hoerning: And I hand over to Sebastian for capital allocation and fulfillment. Sebastian Westrich: Okay. Yes. Thanks a lot for your question. Let me start with the fulfillment question related to our expansion countries. So linehaul means the trucks that we send from our central logistics center in Poland, for example, to Portugal, and for new markets, we decided to already send those trucks even though they might not be fully utilized. So that means, of course, that the cost per item that we ship is higher, but this allows us to ensure better shipping times for our customers. So we accept the higher costs for a better customer experience. As we scale those new countries, Portugal, Nordics, et cetera, of course, also then the utilization of those trucks improves. So the cost should go down. And this is the effect that we briefly mentioned earlier. Andreas Hoerning: And it's also the effect that we are seeing in Portugal because there we already have significant volumes. We also combine this with Spain. So in Portugal, we actually see a very low logistics costs. And the same will happen to, for instance, the Nordics region, because there we are also able to combine certain shipments. Sebastian Westrich: Then on your question on the capital allocation strategy, and if anything changed over the quarter. So no, our capital allocation priorities remain disciplined and focused on long-term value creation, of course. So in line with this approach, we have demonstrated our commitment to shareholder value already in the past when we performed some share buybacks. And we may consider further measures going forward, but this, of course, is subject to market conditions and also regulatory requirements. So overall, no change to our capital allocation strategy. Jose Antonio Perez Parada: Again congratulations on the strong quarter and lots of success for the closing of the year and the upcoming holiday season. Andreas Hoerning: Thank you so much, Jose. Operator: At the moment, there seem to be no further questions. [Operator Instructions] Once again, Jose Antonio, please state your question. Jose Antonio Perez Parada: Thank you very much. Just taking advantage of the final question. You already answered some of the question to Volker. But we understand the underlying dynamic of the customer and orders. However, if I could have a little bit more color on the underlying dynamics of customer number and number of orders, given that they decreased, for example, our expectation of number of customers was lower and the expectation of orders was a little bit lower as well. So how does it look like going forward? Or what can we expect? Sebastian Westrich: Jose, thank you for your question. Let me better understand. So the -- you want to have -- you would like to have an outlook on the development of this in the future in more specifics. Is this what you would like to have? Jose Antonio Perez Parada: Yes, that would be perfect. I fully understand the dynamic behind it that we are expecting less customers, less orders due to the less impulse buy from smaller ticket items. But how does it in general look like going forward? Or what can we expect in -- Sebastian Westrich: Yes. So what we absolutely see for the future is that we will return to active customer growth and also to the growth of the number of orders. So this is absolutely the plan, not just from the expansion countries where we, obviously, see every customer that we gain there is a new customer, right, but also for the existing markets. So we have a clear commitment also to share gains in existing markets. And this, in the end, we cannot do without also active customer growth. We believe that a better assortment, better marketing and last but not least, also our physical presence, for instance, in Germany, will drive this. And actually, we see the beginning of this. So the stores enable us also to convince our customers that we previously weren't able to convince maybe because they required an offline step in their journey to actually then purchase with us. And as we came from 9 off-line stores, for instance -- from -- sorry, 2 offline stores at the beginning of this year and are now at 9, you can imagine that the full year effect can only be seen next year and actually in the years to come because the store has a certain trajectory of the first 3, 4 years of its existence. It needs to establish itself, if you like, in a city. So this is actually one important reason why we believe that also in the existing geographies, we will be increasing the number of active customers. It's a matter of time. We believe that next year, so we're not going to give a guidance on this, but we believe that next year we'll look a lot more positive than this year due to the easing of the effect that you also mentioned beforehand and the growing effects from our expansion measures plus stores. So no specific -- we don't have a specific forecast here, but you can expect that this significantly improves. And absolutely, our commitment is to going back to increasing number of active customers and orders. Operator: [Operator Instructions] And for some final words, I would like to hand over back to the management. Andreas Hoerning: Thank you. As we haven't received any additional questions, we're ending today's earnings call. Thank you for joining, and goodbye.
Operator: Thank you for standing by. My name is Gail, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lightspeed Second Quarter 2026 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Gus Papageorgiou, Head of Investor Relations. You may begin. Gus Papageorgiou: Thank you, operator, and good morning, everyone. Welcome to Lightspeed's Fiscal Q2 2026 Conference Call. Joining me today are Dax Dasilva, Lightspeed's Founder and CEO; Asha Bakshani, our CFO; and J.D. Saint-Martin, our President. After prepared remarks from Dax and Asha, we will open it up for your questions. We will make forward-looking statements on our call today that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Certain material factors and assumptions were applied in respect to conclusions, forecasts and projections contained in these statements. We undertake no obligation to update these statements, except as required by law. You should carefully review these factors, assumptions, risks and uncertainties in our earnings press release issued earlier today, our second quarter fiscal 2026 results presentation available on our website as well as in our filings with U.S. and Canadian securities regulators. Also, our commentary today will include adjusted financial measures, which are non-IFRS measures and ratios. These should be considered as a supplement to and not a substitute for IFRS financial measures. Reconciliations between the 2 can be found in our earnings press release, which is available on our website, on SEDAR+ and on the SEC's EDGAR system. Note that because we report in U.S. dollars, all amounts discussed today are in U.S. dollars unless otherwise indicated. And with that, I will now turn the call over to Dax. Dax Dasilva: Thank you, Gus, and good morning, everyone. I'm thrilled to announce that Lightspeed had another very strong quarter. Revenues, gross profit and adjusted EBITDA came in above our previously established outlook. This marks the second consecutive quarter where we have exceeded revenue and gross profit outlook metrics. In addition, we delivered positive free cash flow and saw our GTV and location growth accelerate as we continued solid execution of our strategy. Our decision to focus on our 2 core growth engines, retail in North America and hospitality in Europe is clearly working, and we are seeing fantastic momentum. From product development to landing new business, our teams are delivering at a record pace. To deliver on our strategy, we are harnessing the latest advances in AI. As an example, this quarter, we released a host of new AI-driven products and features to enhance our customers' omnichannel capabilities. We are already seeing strong adoption across thousands of use cases. Additionally, by increasingly integrating AI tools in our go-to-market efforts, we are seeing sales productivity improvements such as doubling the number of connected calls from our outbound sales reps. We continue to leverage AI thoughtfully to drive revenue, improve products and reduce costs. I want to begin today by comparing this quarter against the 3 strategic priorities we laid out at our Capital Markets Day. As a reminder, those priorities are: growing customer locations in our growth engines, expanding subscription ARPU and improving adjusted EBITDA and free cash flow. On growing customer locations. In Q2, customer locations in our core growth engines, North American retail and European hospitality were up 7% year-over-year, an acceleration from 5% last quarter with approximately 2,000 net new customer locations added in the quarter. This acceleration clearly demonstrates that Lightspeed is growing in markets where we have a proven right to win. As a reminder, our goal is a targeted 3-year customer location CAGR of 10% to 15%, and we are on pace to meet that goal. Total customer location count, which includes all of our markets, was net positive again this quarter. Expanded outbound sales efforts, increased investment in vertical brand marketing and more effective inbound spending have helped drive location growth, particularly in our growth engines. Outbound bookings in our growth engines nearly tripled year-over-year. Since the start of the fiscal year, we've grown our outbound team to approximately 130 fully ramped reps within our growth engines, each now carrying a full quota. This investment is paying off. Our outbound motion continues to drive highly targeted acquisition of our ideal customers with strong unit economics. We will keep allocating resources toward outbound to capitalize on this proven engine of growth. During the quarter, we continued to expand our presence at trade shows, a great source of lead generation for ICP customers. Our NuORDER offering gives us a unique position within the retail environment and participating in these events gives us an opportunity to both demonstrate our strong product offerings and communicate our vision for NuORDER and our wholesale network. We're also continuing to host our own signature product innovation events, where we gather customers to showcase recent product launches and industry insights. Coming up, we'll be hosting Lightspeed Edge in Paris on November 24 for hospitality customers and New York City on January 12 for our retail customers. All these efforts continue to have a halo effect on our inbound funnel as we increase our visibility with our ideal customers through trade shows, outbound targeting and Lightspeed branding on our terminals at local restaurants in Europe and retailers in North America. We had many notable customer wins this quarter. In retail, we added 40-location Crock A Doodle, which operates pottery painting franchises across Canada, Benson's Pet Center with 9 locations in New York and Massachusetts. Within NuORDER by Lightspeed, we extended our partnership with Nordstrom and added marquee brands such as Carhartt and Steve Madden. And in golf, we signed on Top of the World Communities with 3 restaurants and 2 golf courses in Candler Hills, Florida. In hospitality, we added the 2 Michelin Star restaurants Hirschen in Salzburg, Germany. The Beckford Group focuses on unique premium hospitality experiences across their 6 locations in the Southwest of England. And with 2 locations in Antwerp, Belgium, we welcomed Da Giovanni, one of the area's well-known Italian restaurants. On driving software revenue and ARPU. Q2 software revenue grew 9% year-over-year and software ARPU increased 10%. Growth in our key markets is fueling software revenue as expanding location counts and targeted outbound efforts attract larger, more sophisticated customers who tend to adopt higher-end plans. This momentum is further supported by our steady release of new innovative features on our flagship offerings. In the quarter, we released several new features. In retail, we launched multiple AI-powered tools designed to dramatically improve our merchants' online presence with minimal cost or effort on their part. We launched the Lightspeed AI showroom designed for physical retailers who want a compelling online presence without the added time commitment of running an e-commerce store. Lightspeed's AI agent takes product data hosted within the Lightspeed platform and delivers a custom-branded website and catalog to help drive store traffic. Originally released back in March in beta, Lightspeed's cutting-edge AI-driven website building tool is now available to all customers who are looking to offer a full e-commerce experience. Merchants simply describe or show Lightspeed's website builder the kind of site they want using real-world examples, and the tool builds a fully integrated professional looking online store with speed and ease. And we launched AI product descriptions. This powerful new tool significantly streamlines the manual workflow, adding new products to e-commerce sites. Retailers can customize subscriptions by adding specific instructions for tone, style and length to ensure brand consistency. Since August, this description and formatting tool has been used to create approximately 57,000 unique product descriptions. In addition to these AI-powered tools, we were very excited to launch NuORDER Marketplace. Currently, our retailers use NuORDER to connect directly to each of their brands individually, allowing them to search within that brand's product catalog. However, our retailers have to conduct searches brand by brand. With marketplace, retailers can search for specific products, colors, styles or sizes across multiple brand catalogs simultaneously to help them discover new products and better curate their offerings. Currently in beta, Marketplace will be launched soon to all eligible NuORDER customers. In hospitality, we launched Integration Hub. The hub enables our customers to easily discover, connect to and start using over 200 third-party applications within the Lightspeed ecosystem. We've seen strong initial reception with almost 1/3 of our flagship hospitality customers interacting with the hub since its launch. Adding on to the already robust capabilities available to restaurant tours through Lightspeed's AI-powered benchmarks and trends, our latest update adds new visual layers to the sales performance chart, highlighting best and worst days relative to the market and providing drill-down views for each sales metric, helping merchants to make data-driven pricing and operational decisions. Benchmarks and trends remains the anchor feature for our top-tier plan within hospitality. In August, we launched Lightspeed Capital in Switzerland, where we saw strong and immediate demand from our Swiss customers. Finally, we launched time menus to bring automation to multi-menu setups, eliminating the need for manual workarounds. We also enabled Lightspeed Order Anywhere to sync with the restaurant's Google business profile, ensuring a consistent online presence and improving discoverability. By narrowing our focus to our growth engines, we've enabled our development teams to become far more productive, and I'm thrilled with the pace of innovation we are seeing on our 2 flagship offerings. I want to take a moment to share a glimpse of what's next for Lightspeed. As you have seen with several of our recent product launches, we've been deeply investing in AI as a meaningful way to empower our customers and redefine how they run their businesses. I'm thrilled to preview our upcoming innovation, Lightspeed AI, a new way for merchants to access insights and make decisions directly within their POS. Think of this as your AI assistant with agentic capabilities. Our AI acts as a trusted partner to help our customers find answers, uncover trends and act faster than ever before, custom-built to serve our retailers and restaurateurs' needs. This is the next evolution of Lightspeed's AI journey, building on the success of products like AI showroom and benchmarks and trends and is already being tested by a select group of customers. We can't wait to share more in the coming months as AI becomes a foundational part of how we help businesses thrive. On expanding profitability. Finally, our third strategic priority was to expand profitability. And in this quarter, we did exactly that through expanded margins and improved cash flow. Lightspeed further strengthened its software gross margins to 82% and transaction-based gross margins reached 30%, with both improving year-over-year and from the previous quarter. Adjusted EBITDA of $21 million increased 53% year-over-year. Importantly, we also saw improved cash flow, delivering adjusted free cash flow of $18 million, up significantly from $1.6 million in the same quarter last year. Back in March, at our Capital Markets Day, we laid out a bold strategy with 3-year financial goals. We are now over 2 quarters into that period, and I believe our strong results are evidence that we are well on our way. Within retail, our large customers are complex retailers that need sophisticated solutions to help them order, manage and turn over their inventory. These customers need more than basic software to run their businesses. They need a light ERP solution, which is exactly what we offer. We believe no other cloud POS vendor can match the feature set within Lightspeed Retail. In addition, we stand apart with the NuORDER Lightspeed integration because with NuORDER, Lightspeed's retail POS has wholesale built right in. The end result is an unmatched ordering workflow and a flywheel effect where more brands bring in more retailers and more retailers bring in more brands. Within European hospitality, I am confident that we have the superior product offering. We are now complementing that strong offering with the go-to-market motion that is becoming best-in-class. In addition, regulatory requirements involving fiscalization are a barrier to new entrants into that lucrative market. We have a formula that is working, and we believe we will continue to excel in this region. I will let Asha take you through our financials before making closing comments. Asha Bakshani: Thanks, Dax, and welcome, everyone. Lightspeed had an exceptional second quarter with our key financial metrics and KPIs surpassing expectations. Our results are evidence that our product innovation, our aggressive outbound strategy and our strategic focus we embarked on are working. We are delivering in the areas that matter most, which sets us up well for the long term. Before I take you through the financials, I would like to highlight some key trends in the quarter that I found very encouraging. First, and perhaps most importantly, we're seeing a tremendous impact from our strategy to focus on our growth markets of North America retail and European hospitality, as you heard from Dax. Software revenue in these markets increased 20% year-over-year. GTV was up 15% year-over-year. Payments penetration was 46%, up from 41% last year, and customer locations were up 7% year-over-year versus 5% in the previous quarter. These markets make up over 65% of our total consolidated revenue. When we isolate the metrics in these markets, they reveal the true competitiveness of our offering and the strength of our platform. We are really excited about the accelerated growth we're seeing in these markets, especially since we are still early in our transformation. Second, even with aggressive investments in product and go-to-market, the company's total profitability and cash flow metrics continue to improve. Gross margins and adjusted EBITDA showed great progress, and our relentless focus on driving profitable growth helped us deliver positive free cash flow of $18 million in the quarter, up from $1.6 million a year ago, and we expect to generate breakeven or better free cash flow for the full fiscal year, a significant milestone for Lightspeed. As usual, I will walk you through a detailed look at our financials and then provide our Q3 and fiscal 2026 outlook. Total revenue grew 15%, ahead of our outlook, driven by a growing location count, software ARPU expansion and increasing payments penetration. Revenue growth was primarily generated by our growth markets of North America retail and European hospitality as more and more customers move on to our platforms and attach new modules. In addition, we benefited from improving same-store sales, thanks to a more stable macro environment. Software revenue was $93.5 million, up 9% year-over-year, with software ARPU up 10% year-over-year. Software ARPU increased due to our outbound teams attracting larger customers, new software releases and the benefit of price increases we implemented last year. Transaction-based revenue was $215.8 million, up 17% year-over-year. Gross payments volume grew 22% year-over-year and capital revenue grew 32% year-over-year. GPV as a percentage of GTV came in at 43%, up from 37% in the same quarter last year. Overall GTV grew by 7% to $25.3 billion and total average GTV per location continued to climb as we continue to sign more high-value customers. GTV in Europe benefited from favorable FX rates as the U.S. dollar weakened against local currencies. Total monthly ARPU reached a record $685, up 15% year-over-year, driven by both higher software and payments monetization. ARPU grew across both our growth and efficiency markets with growth markets outpacing the overall average. And as those locations grow, we expect a continued positive impact on overall ARPU. With respect to our efficiency markets, our goal is to maintain the revenue base through additional module attachments and expansion of financial services. As an example, this quarter in Australia, we launched Instant Payout on Lightspeed Payments for hospitality merchants. This high-margin offering allows merchants to receive their daily sales the very same day, including weekends and holidays. There also continues to be meaningful opportunities to grow payments revenue in these markets as payments penetration is at 36%, well below the 46% penetration in our growth markets. In the quarter, we were able to keep total revenue close to flat year-over-year. With respect to profitability and operating leverage, total gross profit was strong, growing 18% year-over-year, exceeding both 15% revenue growth and our prior 14% outlook, driven by strong top-line performance and expanding gross margins in both subscription and transaction-based revenue. Total gross margin was 42%, up from 41% last year, despite transaction-based revenue increasing to 68% of total revenue from 66% last year. Hardware gross margins declined this quarter due to strategic discounts and incentives to drive new business as well as free hardware provided to support customer transitions to our Unified Payments and POS offering. We delivered strong software gross margins of 82%, up from 81% last quarter and 79% a year ago. This is largely driven by increased cost efficiency. We are increasingly using AI to reduce the cost of support and service delivery. As an example, AI now resolves over 80% of inbound chat interactions on our flagships. This has allowed us to significantly reduce headcount in support, which is showing up in our expanded gross margins in software. Gross margins for transaction-based revenue were 30%, up from 27% last year. This improvement reflects growth in our capital business and in payments penetration in our international markets, where margins exceed those in North America. As we convert customers to Lightspeed Payments, we increased our overall net gross profit dollars. And in the quarter, we saw transaction-based gross profit grow 28% year-over-year. Total adjusted R&D, sales and marketing and G&A expenses grew 13% year-over-year. This includes meaningful investments we are making in field and outbound sales as well as product innovation in our growth engine. Adjusted EBITDA in the quarter came in at $21.3 million, increasing 53% from $14 million in Q2 last year, driven by continued successes from our strategic shift and our focus on AI and automation to accelerate operating efficiency. As a percent of gross profit, adjusted EBITDA was 16%, approaching the longer-term 20% target we outlined at our Capital Markets Day. I'm very happy to report adjusted free cash flow of $18 million in the quarter. Thanks to our improving profitability and disciplined working capital management, we were able to deliver positive free cash flow despite our accelerated outbound strategy and increased investment in R&D. Although free cash flow will vary quarter-by-quarter, we expect to deliver breakeven or better adjusted free cash flow for the full fiscal year. We continue to actively manage our share-based compensation and related payroll taxes, which were $17.4 million or 5% of revenue for the quarter versus $19.5 million or 7% of revenue in the same quarter last year. With respect to capital allocation and our balance sheet, we ended Q2 with approximately $463 million in cash, an increase of approximately $15 million from last quarter. Approximately $200 million remains under our broader Board authorization to repurchase up to $400 million in Lightspeed shares, and we continue to be opportunistic in evaluating further share repurchases. Total shares outstanding in the quarter were down by 10% versus the same quarter last year due primarily to the $179 million in shares repurchased and canceled over the last 12-month period. Aside from potential buybacks, our largest use of cash will be growing our merchant cash advance business. There are currently $107 million in MCAs outstanding, and we believe we can continue to grow this balance over time. With that said, we're also running the MCA business more efficiently, using less capital this quarter versus the same quarter last year despite growing revenue by 32%. This is due to our successful effort to reduce payback periods to 7 months. With respect to M&A, we remain opportunistic in the evaluation of small tuck-in acquisitions to help accelerate product development, but large-scale acquisitions are not a strategic priority for us. Our balance sheet remains healthy and positions us well as we continue our strategic focus. Now turning to our outlook. For modeling purposes, I would like to highlight a couple of factors. First, Q3 GTV is generally flat to slightly down from Q2 due to seasonality, and we expect similar performance this year. Although Q3 benefits from the retail holiday season, in Q2, we have strong performance in European hospitality as well as golf. In terms of software growth, in Q3, we will lap the price increases implemented last year. As a result, we expect software growth to slightly moderate for the second half of the year. Looking ahead, we remain confident in our ability to execute against our go-forward financial outlook shared at our Capital Markets Day in March. As a recap, we targeted a 3-year gross profit CAGR of approximately 15% to 18% and a 3-year adjusted EBITDA CAGR of approximately 35%. Given our strong performance to date, we are raising our outlook for the full fiscal year. For the third quarter, we expect revenue of approximately $309 million to $312 million, gross profit growth of at least 15% year-over-year and adjusted EBITDA of approximately $18 million to $20. For fiscal 2026, based on a strong first half of the year, we are increasing our outlook for the year. We expect revenue growth of at least 12% year-over-year, gross profit growth of at least 15% year-over-year and adjusted EBITDA of at least $70 million. With that, I'll turn the call back to Dax. Dax Dasilva: Thanks, Asha. Before we take your questions, I would like to take this time to welcome our new Board members. In July, we welcomed Glen LeBlanc, the former EVP and CFO of BCE Inc., who brings with him over 30 years of tech and telecom experience. Last month, we also welcomed Sameer Samat and Odilon Almeida to our Board of Directors. Sameer is currently President of the Android ecosystem at Google, and Odilon served as the CEO of ACI Worldwide, a global payment software and solutions provider. I look forward to working with all of them as we continue to advance our strategy and support our customers. I would also like to thank our departing Board members, Rob Williams, Paul McFeeters and Patrick Pichette for their contributions and support over the past several years. In closing, I think Q2 is clear evidence that our strategy is working. I want to thank all of the employees at Lightspeed for making this strategy a success. Without your dedication and commitment, none of this would be possible. With that, I will turn the call back to the operator to take your questions. Operator: [Operator Instructions] Your first question comes from the line of Thanos Moschopoulos of BMO Capital Markets. Thanos Moschopoulos: It seems like you're seeing a good return on your investment in outbound sales. And so in light of that, how should we think about the sales ramp? Might you look to accelerate your hiring plans for this year? And maybe too early to talk about next year, but safe to assume that you'll continue to ramp those investments heading into next year? Dax Dasilva: Thanks, Thanos. Yes. So outbound sales, overall, it's going really, really well. Our Q2 outbound bookings tripled year-over-year. So really, really pleased about that. As you know, this is the go-to-market motion that's going to allow us to really target our ICPs with precision and really have the best sales metrics. We've grown our outbound team to approximately 130 fully ramped reps right now in our growth engines, North American retail and EMEA Hospital (sic) [ European hospitality ]. And those are all carrying a full quota. We are expecting to get to 150 by the end of the fiscal year. And yes, and we are planning -- we're in the planning stage for how many reps we'll deploy in subsequent years. Thanos Moschopoulos: Okay. Great. And then maybe just a question on capital. As we think about the growth going forward? I mean, is much of that going to be driven by the launch in new geographies? And how should we think about the rollout? You mentioned Switzerland. What will be the strategy there for further expansion? Asha Bakshani: Yes. I'll take that one. Thanks, Thanos. Capital is going really, really well. You saw that come through in the prepared remarks and in the PR. We are using capital to upsell and cross-sell across the base. And in the Rest of the World portfolio, capital is one of the products that's super popular in the upsell to the merchant base. As we continue to ramp outbound and bring more ICPs into the funnel, we should continue to see capital growing quite nicely. You saw over 30% growth this year, and we should expect to see pretty solid growth into future years because the ICP customers that we're getting through in the outbound funnel are real prime customers for the capital business. They're very creditworthy, high GTV customers. And so that's -- we should expect that to help capital grow even stronger. Operator: Your next question comes from the line of Trevor Williams of Jefferies. Trevor Williams: I wanted to start with a bigger picture question on pricing. Just how you guys would frame the current backdrop at the industry level. Asha, I heard the call out on hardware discounting as more of a customer acquisition tool. I'm just curious if that's more of a proactive or reactive move to anything you're seeing competitively. Asha Bakshani: Trevor, thanks for the question. The hardware discounting is totally proactive. The hardware discounting is quite typical and common. You saw a slight uptick this quarter from what you've seen historically, and that just comes with more new locations. As we attract more and more locations in our growth portfolios, in particular, we are giving discounts to get those customers through the door. Pricing and packaging overall has been going very well for Lightspeed. We had some pretty significant price increases about a year ago, and that's what you're seeing come through partly in the growth this year. As we look forward, Dax talked a bit about all the product velocity and how strong that has been at Lightspeed. And so we keep including these new modules in different pricing and packaging. And so that evolution is going to continue, and that continues to drive quite a nice ARPU uplift for Lightspeed. Trevor Williams: Okay. No, I appreciate that. And then on the GTV growth acceleration we saw this quarter, I think you called out higher GTV location from the success with the growth engines. Anything else you can dimensionalize around same-store sales, location growth? And I know you don't guide to GTV growth, but with the momentum that we're seeing on the growth engines side, is it fair for us to assume that the trajectory that we've seen over the last couple of quarters that, that should persist going forward? Dax Dasilva: Yes. I'm going to say that same-store sales in both retail and hospitality, both in NAM and Europe were really positive this quarter. It's the best quarter for same-store sales in quite some time. And total GTV was up about 15% year-over-year in the growth engines and about 7% overall. So that's a good acceleration. It's also driven by all of the new locations. As you saw, we closed 2,000 new locations in the growth engines, which is an acceleration from last quarter. Operator: Your next question comes from the line of Josh Baer of Morgan Stanley. Josh Baer: Congrats on a really strong quarter. I wanted to dig in a little bit on investments in EBITDA and just really understand the takeaway from the change in the EBITDA guidance sort of reframe from $68 million to $72 million to greater than $70 million. So you've been -- you outperformed EBITDA again, the guide for Q3 was good. Like is there a reason to think that investments are ramping in the back half of the year and into Q4? Or yes, like how should we think about greater than $70 million? And then I just have a follow-up on OpEx. Dax Dasilva: As you can see, we're seeing a lot of traction in our growth engines. We want to continue to accelerate location counts. We want to continue to invest in our go-to-market. And so some of that -- some of our -- some of the funds are being reinvested in continuing that trajectory. I think that's important for the company. I think everybody wants to see us be able to capture share in our biggest opportunities for growth. Asha? Asha Bakshani: Yes. Thanks, Josh. I think Dax really drove that point home. We're just -- the EBITDA raise is smaller than the beats that you've seen to date only because we really want to give ourselves the flexibility to double down on investments where we're seeing that the investments pay off even more quickly than expected. And we are seeing that in several areas in our growth engines. And so the smaller EBITDA raise is really to give ourselves that flexibility to continue to invest in growth. There's a large TAM out there, and we're excited about that. Josh Baer: Okay. That makes a lot of sense. I guess a follow-up would be on just the software piece here. Software ARPU growth is higher than the total software revenue growth, but you're still adding customers on a net basis year-over-year, quarter-over-quarter. How do we put those 2 different growth rates? Asha Bakshani: Yes. Great question, Josh. The software ARPU growth is growing faster than total software growth really just results from the mix shift. As we're bringing larger and larger customers onto the platform and churning the smaller customers, you're seeing that show up in the average revenue per user per month more quickly than in the software revenue. And that's really all that's about -- and that's a good news story for Lightspeed. We're bringing more of the larger customers, higher ARPU customers onto our platform, and we're seeing the vast majority of the churn in the smaller merchants. Operator: Your next question comes from the line of Tien-Tsin Huang of JPMorgan. Tien-Tsin Huang: Just curious, any good quarter here. Any interesting observations out of the growth markets from a monthly perspective, month-to-month, that is, that informs your confidence to raise your outlook? And I'm curious, same question here for quota-carrying sales, any seasoning effects here? I'm assuming you'll see more productivity. I just don't know how that's balanced across the 130 that you have. Dax Dasilva: I think Q2 is a really good quarter for European hospitality. It's their go-to season as well as for golf. Obviously, we'll see a little bit less of those 2 elements of the growth engines in Q3. We'll see more of NoAm retail. So that's sort of how our seasonality looks in the next little while. But yes, I think we are we are seeing a real payoff of those go-to-market efforts and those growth engines. We're seeing acceleration. And I think with outbound, we're really able to target those customers that are natural fits for where our product plays, which is those higher GTV merchants in retail and hospitality. Tien-Tsin Huang: Got it. And then Dax, I'm curious I have to ask on the efficiency markets. Any change there in your thinking on strategy? Because it seems like there's some surgical things you're doing there to enhance growth or productivity there. Any change in thoughts? Dax Dasilva: I think we consider this a really big success, right? It's really helping us fuel growth in the growth engines. We see 20% software growth in our growth engines. We're happy. But as you can see, the efficiency markets are really holding. We're -- we have really positive trends on efficiency, and we're -- yes, it's maintaining what it needs to. Operator: [Operator Instructions] Your next question comes from the line of Matthew English of RBC Capital Markets. Unknown Analyst: This is Matthew on for Dan Perlin, RBC. So I have a question on NuORDER. It's great to hear the rollout of Marketplace. I was wondering if you could frame the monetization strategy of that asset and maybe the outlook for attaching payments to that B2B volume. Dax Dasilva: Yes. This is such an exciting part of the strategy, and you're seeing quarter after quarter become a bigger and bigger part of all parts of the retail story, and it's a massive part of our sales pitch now. So we are the only retail POS with wholesale built right in. You're going to see a massive rollout of our vision of this at NRF. But day-to-day in our sales calls, this is -- it is a massive benefit for the retailers in our target verticals to be able to buy from wholesale right inside our platform because we can offer a workflow that literally nobody else can offer in our space. Now that is even made more powerful by the fact that we can leverage all of our insights, our AI-driven insights and our capital products to make turns of inventory even more efficient. And now with Marketplace, it's not just the brands that you're currently working with that are available to you NuORDER, you can now discover new brands, search across brands that you haven't interacted with. And so it really opens up the world of NuORDER for our retail customers and allows them to diversify and add to their curation. So it's very, very exciting, multifaceted advances on NuORDER. We have amazing brands coming on to the platform as well, like this quarter, Carhartt is a major new addition. And I think what's exciting about that is that Carhartt also has a lot of retailers that they work with that should be on Lightspeed. And so brands are recommending retailers join the platform and retailers are recommending that their key brands are also on the platform. And as you mentioned, there's a big payments opportunity here as well. So we've got now the infrastructure in place to take advantage of that, and that's a part of our acceleration strategy with NuORDER. Operator: Your next question comes from the line of Matt Coad of Truist Securities. Matthew Coad: Really good set of results here. I wanted to touch on the locations growth. I thought really encouraging set of results, both on total locations and growth engines. I was hoping you could unpack it a little bit for us, both on gross adds in the growth engines, kind of like what subverticals maybe you're seeing outsized success in or what kind of geographies within Europe you're seeing success in? And then also curious if you could touch on churn rates. It seems like churn rates have gotten a little bit better for you guys based on our math. So any tidbits or pieces of information there would be helpful. Dax Dasilva: Yes. I think this is a major win for the company to have 2,000 new locations, an acceleration from 5% to 7% location growth in 1 quarter. As you know, our 3-year CAGR that we shared at Capital Markets Day is 10% to 15% location growth. So in 2 quarters of the transformation, we're already making major progress. And this just feeds all of our metrics, right? It just helps everything grow to have more high-quality merchants joining the platform. And so this is the #1 thing that I talk about every single day at the company as we have to bring more customers on to Lightspeed's platform. And this has become a rallying cry because we know that we can add value for these customers by having them join the platform, by having them leverage NuORDER, by having them leverage all our new AI tools and all of the deep inventory tools and restaurant management tools that we have for European restaurants as well. So in our growth engines, I would say location growth, if you look quarter-by-quarter. It's pretty evenly split across the 2 growth engines. We've got areas of seasonality, of course. When it's go time for European hospitality and golf in the summer months, there's less likely to be onboard onto a new system. They're often interested in learning about it, but to close them, it's more likely to close them in Q3. And then conversely, for retail, they're not going to want to switch systems in the middle of the buying holiday season, which is their opportunity to make the most money. So yes, we do see different opportunities, but I think we are able to -- we're still able to grow in our key verticals. So the key verticals as well for retail where we see some of the biggest opportunity is multi-brand apparel that are using NuORDER to buy from a lot of different brands. We, of course, are very, very strong in sport and outdoor, which includes some of our strongest verticals like bike and golf, but there's a lot of other different verticals that we're doing really well in like running and swimwear, et cetera. In European hospitality, we're in a number of different European countries. We've been historically strong in the Benelux and the U.K., but France and Germany are real exciting stars for us right now as well. So this is -- there's lots of areas of strength that we're going to continue to build on. Operator: With no further questions, that concludes our Q&A session. I'd now like to turn the conference back over to Papageorgiou for closing remarks. Gus Papageorgiou: Thank you, operator. Thanks, everyone, for joining us today. We will be around all day if anyone has any further questions, and we look forward to speaking to you at our next conference call in early of next year. Thanks, everyone, and have a great day. Operator: This concludes today's conference call. You may now disconnect.
Operator: Good day, everyone, and thank you for participating in today's conference call. I would like to turn the call over to Mr. John Ciroli as he provides some important cautions regarding forward-looking statements and non-GAAP financial measures contained in the earnings materials were made on this call. John, please go ahead. John Ciroli: Thank you, and good day, everyone. Welcome to Montauk Renewables earnings conference call to review the third quarter 2025 financial and operating results and development. I'm John Ciroli, Chief Legal Officer and Secretary at Montauk. Joining me today are Sean McClain, Montauk's President and Chief Executive Officer, to discuss business development and Kevin Van Asdalan, Chief Financial Officer, to discuss our third quarter 2025 financial and operating results. At this time, I would like to direct your attention to our forward-looking disclosure statement. During this call, certain comments we may constitute forward-looking statements, and as such, involve a number of assumptions, risks and uncertainties that could cause the company's actual results or performance to differ materially from those expressed or implied by such forward-looking statements. These risk factors and uncertainties are detailed in Montauk Renewables' SEC filings. Our remarks today may also include non-GAAP financial measures. We present EBITDA and adjusted EBITDA metrics because we believe the measures assist investors in analyzing our performances across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles. Additional details regarding these non-GAAP financial measures, including reconciliations to the most directly comparable GAAP financial measures, can be found in our slide presentation and in our third quarter 2025 earnings press release and Form 10-Q issued and filed on November 5, 2025. These are available also on our website at ir.montaukrenewables.com. After our remarks, we will open the call to questions from our analysts. [Operator Instructions] And with that, I'll turn the call over to Sean. Sean McClain: Thank you, John. Good day, everyone, and thank you for joining our call. On August 22, 2025, the EPA issued decisions on 175 million small refinery exemption or SRE petitions. The SRE decisions exempted corresponding volumes of gasoline and diesel for the 2023 and 2024 compliance years and increased the number of RINs available for obligated parties to use for compliance with the renewable fuel standard or RFS obligations. On September 16, 2025, the EPA proposed supplemental rule options that seek to offset these recent SRE decisions for increases in future renewable volume obligations by either a complete 100% reallocation or partial 50% reallocation of the SREs granted. The EPA had indicated the intention to finalize both the supplemental rule and the RVOs for 2025, 2026 and 2027 by the end of this year. However, the duration of the most recent U.S. federal government shutdown and any residual impacts on EPA staffing after the shutdown concludes, may extend finalization of these items into 2026. Growth of any future decision to reallocate obligated volumes associated with the recent SRE grants, the proposed cellulosic biofuel volume requirements for 2026 and 2027 are $1.300 billion and $1.360 billion D3 RINs, respectively. We note purchasing activity of 2025 D3 RINs by obligated parties has continued during the current U.S. federal government shutdown. In our August 2025 earnings call, we announced our agreement with Pioneer Renewables Energy Marketing to form a joint venture, GreenWave Energy Partners, LLC. The primary goal of the joint venture is to help address the limited capacity of RNG utilization for transportation by offering third-party RNG volumes access to exclusive, unique and proprietary transportation pathways. We have begun to match available RNG capacity to dispensing opportunities through GreenWave's transportation pathways and have separated RINs for a limited amount of volumes. We expect the benefits from this partnership to increase in the fourth quarter of 2025 and have made additional cash contributions to GreenWave during the third quarter of 2025 and have not directly recognized any significant share of profits from GreenWave. We continue our development efforts in North Carolina and continue to expect our production and revenue generation activities to commence in the first quarter of 2026. Alongside our construction efforts for this first phase, for which total investment continues to be projected between $180 million and $220 million, we continue to progress our negotiations with obligated utilities to monetize all remaining uncontracted renewable energy credits RECs from our projected first phase production volumes. Given the historically limited swine REC market in North Carolina, we've been negotiating our REC agreements with individually based on a variety of factors. While many of these agreements contain competitive details and there remains a limited active swine REC market in North Carolina, we believe the prices we are negotiating will be market-based. While we do not believe our negotiated rent prices will be based on solar REC prices seen in other U.S. markets, we do believe those indices are more illustrative of our expectations of North Carolina swine REC prices, versus the pricing for wind RECs across the United States market. Depending on a variety of factors, including but not limited to geographic region, we believe our negotiated swine REC prices could fall in the ranges experienced by solar REC indices at $200 to $450 per REC. In September 2025, a joint motion was filed with the North Carolina Utility Commission, the NCUC, by various entities seeking to modify and delay the 2025 requirements of certain aspects of North Carolina clean energy and portfolio, specifically the portfolio standards related to swine RECs. We note this filing is not dissimilar to historical annual filings in response to the historically limited swine REC market in North Carolina. In October 2025, we filed our response comments to this joint motion with the NCUC, requesting that they grant modifications or delays only to individual power suppliers that have demonstrated need and compliance best efforts, that they require power suppliers that have not achieved 100% compliance in 2025 to apply cumulatively acquired swine RECs to the suppliers unsatisfied 2025 pro rata obligation and modify swine REC set aside for 2026 and beyond to match the requirement as set by North Carolina in 2018. We are awaiting the response from the NCUC in regards to these filings. Our other announced development initiatives for new RNG facilities, CO2 development and biomethanol development remain active, and we expect to provide progress disclosures in our upcoming releases. And with that, I will turn the call over to Kevin. Kevin Van Asdalan: Thank you, Sean. I will be discussing our third quarter 2025 financial and operating results. Please refer to our earnings press release, Form 10-Q and the supplemental slides that have been posted to our website for additional information. Our profitability is highly dependent on the market price of environmental attributes, including the market price for RINs. As we self-market a significant portion of our RINs, a decision not to commit to transfer available RINs during a period will impact our revenue and operating profit. The impact of EPA rulemaking associated with the implementation of what we refer to as BRRR K2 separation has impacted our commitment timing in the 2025 year of adoption. We expect this timing between RINs generated but unseparated and RINs available for sale to only impact [ 2025 ], which is the year BRRR became effective. Also, the EPA indicated their intention to analyze the supplemental rule and the RVOs for 2025, '26 and '27 by the end of 2025. However, the duration of the U.S. federal government shutdown and any impact on EPA staffing after the U.S. federal government shutdown may extend this intended deadline into 2026, as Sean referenced. The average D3 index price for the third quarter of 2025 was approximately $2.19, a decrease of approximately 34.8% compared to $3.36 in the third quarter of 2024. At September 30, 2025, we had approximately 0.7 million RINs generated and unseparated. We had approximately 10,000 RINs in inventory from 2025 RNG production as of September 30, 2025. Total revenues in the third quarter of 2025 were $45.3 million, a decrease of $20.6 million or 31.3% compared to $65.9 million in the third quarter of 2024. The decrease is related to a decrease in the number of RINs we self marketed from 2025 RNG production in the third quarter of 2025. Our decision to sell an increased amount of our production under fixed or floor price arrangements contributed to our having less RINs in the third quarter of 2025 compared to the third quarter of 2024. Notably, we did not experience an appreciable increase in environmental attributes shared with our pathway providers during the third quarter of 2025. More information on these metrics are included in our 2025 third quarter Form 10-Q. Our average realized RIN price in the third quarter of 2025 was $2.29, which though approximately $0.10 higher than the average D3 index price, decreased approximately 31.4% compared to $3.34 in the third quarter of 2024. Total general and administrative expenses were $6.5 million in the third quarter of 2025, a decrease of $3.5 million or 35.1% compared to $10 million in the third quarter of 2024. The decrease was driven by accelerated vesting of certain restricted share awards as a result of the termination of an employee in the third quarter of 2024. Turning to our segment operating metrics. I'll begin by reviewing our Renewable Natural Gas segment. We produced 1.4 million MMBtu during the third quarter of 2025 and increased 53,000 MMBtu or 3.8% compared to $1.4 million MMBtu during the third quarter of 2024. Our Rumpke facility produced 50,000 MMBtu more in the third quarter of 2025 compared to the third quarter of 2024 as a result of higher inlet feedstock supply. Our Apex facility produced 25,000 MMBtu more in the third quarter of 2025 as a result of the June 2025 commissioning of the second Apex RNG facility. Offsetting this increase was the fourth quarter of 2024 sale of our Southern facility, which produced 69,000 MMBtu during the first 9 months of 2024. Revenues from the Renewable Natural Gas segment during the third quarter of 2025 were $39.9 million, a decrease of $21.9 million or 5.1% compared to $61.8 million during the third quarter of 2024. Average commodity pricing for natural gas for the third quarter of 2025 was 42.1% higher than the third quarter of 2024. Offsetting this impact during the third quarter of 2025, we self marketed 12.4 million RINs, representing a $3.4 million decrease or 21.2% compared to 15.8 million RINs self marketed during the third quarter of 2024. Average pricing realized on RIN sales during the third quarter of 2025 was $2.29 as compared to $3.34 during the third quarter of 2024, a decrease of 31.4%. This compares to the average D3 RIN index price for the third quarter of 2025, up $2.19 being approximately 34.8% lower than the average D3 RIN index price for the third quarter of 2024 of $3.36. At September 30, 2025, we had approximately 0.3 million MMBtu available for RIN generation, 0.7 million RINs generated but unseparated and 10,000 RINs separated and unsold. At September 30, 2024, we had approximately 0.3 million MMBtu available for RIN generation and 0.1 million RINs generated and unsold. At September 30, 2024, there were no RINs generated but unseparated. Our operating and maintenance expenses for our RNG facilities during the third quarter of 2025 were $13.9 million, an increase of $1.3 million or 10.6% compared to $12.6 million during the third quarter of 2024. The primary drivers of the third quarter of 2025 increase were timing of preventive maintenance, media change-out maintenance, well-filled operational enhancement programs and utility expenses at our Rumpke, Atascocita and Apex facilities, respectively. Excluding utilities, many of these expenses can be nonlinear in nature and timing can fluctuate by period. We produced approximately 44,000 megawatt hours in renewable electricity during the third quarter of 2025, an increase of approximately 3,000 megawatt hours or 7.3% compared to 41,000 megawatt hours during the third quarter of 2024. Our Bowerman facility produced approximately 2,000 megawatt hours more in the third quarter of 2025 compared to the third quarter of 2024. The increase is primarily related to the timing of processing equipment maintenance in the third quarter of 2024. Revenues from renewable electricity facilities during the third quarter of 2025 were $4.2 million, an increase of $0.1 million or 1.9% compared to the third quarter of 2024. The increase was primarily driven by the aforementioned increase in our Bowerman facility production volumes. Our renewable electricity generation operating and maintenance expenses during the third quarter of 2025 were $2.6 million, a decrease of $0.1 million or 4.3% compared to $2.7 million during the third quarter of 2024. Our Tulsa facility operating and maintenance expenses decreased approximately $0.1 million, primarily related to timing of annual engine maintenance. During the third quarter of 2025, we recorded impairments of $48,000, a decrease of $485,000 compared to $533,000 in the third quarter of 2024. The decrease primarily relates to specified -- specifically identified assets deemed obsolete or nonoperable in the third quarter of 2024 compared to the third quarter of 2025. We did not report any impairments related to our assessment of future cash flows. Operating income for the third quarter of 2025 was $4.4 million, a decrease of $18.3 million or 80.4% compared to $22.7 million for the third quarter of 2024. RNG operating income for the third quarter of 2025 was $11 million, a decrease of $22.6 million or 67.2% compared to $33.6 million for the third quarter of 2024. Renewable electricity generation operating loss for the third quarter of 2025 was $0.2 million, a decrease of $0.4 million or 73.1% compared to the $0.6 million operating loss for the third quarter of 2024. Turning to the balance sheet. At September 30, 2025, $47 million was outstanding under our term loan, and we had $20 million outstanding borrowings under our revolving credit facility. As of September 30, 2025, we had capacity available for borrowing under our revolving credit facility of approximately $96.7 million. For the first 9 months of 2025, we generated $30 million of cash from operating activities, a decrease of 30.4% compared to $43.1 million for the first 9 months of 2024. Based on our estimate of the present value of our Pico earn-out obligation, we recorded an expense of $0.3 million at September 30, 2025. This was recorded through our RNG segment royalty expense. During the third quarter of 2025, we made our first payment under the earn-out agreement to the former owners of the Pico site totaling approximately $0.2 million. For the first 9 months of 2025, our capital expenditures were $75.1 million, of which $51.9 million, $8.5 million and $7.5 million were related to the ongoing development of Montauk Ag Renewables, our Turkey project in North Carolina, our contractually obligated Rumpke RNG relocation project in Cincinnati, Ohio and our second Apex facility in Ohio as well. As of September 30, 2025, we had cash and cash equivalents net of restricted cash of approximately $6.8 million. We had accounts and other receivables of approximately $6 million. We do not believe we have any collectability issues within our receivables balance. Adjusted EBITDA for the third quarter of 2025 was $12.8 million, a decrease of $16.6 million or 56.5% compared to adjusted EBITDA of $29.4 million for the third quarter of 2024. EBITDA for the third quarter of 2025 was $12.8 million, a decrease of $16.1 million or 55.7% compared to EBITDA of $28.9 million for the third quarter of 2024. Net income for the third quarter of 2025 was $5.2 million, a decrease of $11.8 million as compared to $17 million for the third quarter of 2024. Our income tax expense decreased approximately $5.8 million for the third quarter of 2025 as compared to the third quarter of 2024. The difference in effective tax rates between the 2025 third quarter and the 2024 third quarter primarily relates to the change from pretax income to pretax loss for the third quarter of 2025. With that, I'll now turn the call back over to Sean. Sean McClain: Thank you, Kevin. In closing, and although we don't provide guidance on our internal expectations on the market price of environmental attributes, including the market price of D3 RINs, we would like to provide our full year 2025 outlook. We expect our RNG production volumes to remain unchanged and range between 5.8 million and 6 million MMBTus with corresponding RNG revenues also unchanged to range between $150 million and $170 million. We expect our 2025 renewable electricity production volumes to range between 175,000 and 180,000 megawatt hours with unchanged corresponding renewable electricity revenues ranging between $17 million and $18 million. And with that, we will pause for any questions. Operator: [Operator Instructions] Our first question comes from the line of Matthew Blair of TPH. Matthew Blair: You maintained your 2025 RNG production guide, which would imply a step-up quarter-over-quarter in the fourth quarter even at the low end of the guide. Could you talk about the drivers of the step up? Is this just better operations? Or is there any sort being that would push things up. And then thinking about your RNG production for 2026, I think most of your new projects are really more for 2027. So at this stage, would it be appropriate to think of 2026 RNG production is probably pretty similar to 2025? Kevin Van Asdalan: Thanks, Matthew. Thanks for joining our call. Yes, we continue to maintain our production ranges for RNG for the full 2025 year, which implies an expected step-up to hit the low end in the fourth quarter. It's a combination of a variety of factors, improvement in feedstock supply, which is also being beneficial at our Apex facility that we mentioned associated with some improvements in a newer plan. We continue to work with our rum landfill site to work through those wealth field challenges that we've been experiencing. So yes, we do believe we expect a continued uplift in our quarter-over-quarter production as we've been experiencing in 2025. Notably, in 2026, we have a policy not to provide other than current operating year guidance expectations. We'll look to release those expectations at our full year results release that next year in 2026 in March but we expect to continue to expect our normal growth rate in going into 2026 as well. Operator: Our next question comes from the line of Tim Moore of Clear Street. Tim Moore: I know the RIN pricing is out here control EPA and such. I just want to switch gears to something that improved in the quarter that was nice to see it seems like the maintenance CapEx wave might be hopefully done, there was some catch up there in the last 12 months for overhauled engines and things like that. Can you just kind of speak to that a bit? The OpEx looked good, do you expect any more kind of catch-up maintenance spending in the next couple of quarters? Or are you past it? Sean McClain: Thanks, Tim. I appreciate the question. I would view the shift in the operating expenses as less of a catch-up and more of some nonlinear expense items that correspond to the life cycle of the equipment. There is a component of it that although it's bundled in your operating expenses, it is directed towards noncapitalizable investment into some of the debottlenecking of feedstock volumes for well field production. And so you're seeing that corresponding lift in your production volumes as you're moving quarter-to-quarter. Kevin's explanation of your expected growth rate. We do not see any meaningful increase as we go into the outlook of operating expenses other than onboarding, obviously, our new Turkey Creek facility in 2026. And so you have to compare that to the revenue and the EBITDA lift that we get from commissioning that project in the first quarter. Operator: Our next question comes from Betty Zhang of Scotiabank. Y. Zhang: My question, I wanted to ask about G&A. I understand you talked about the variance versus a year ago. but curious what the drivers were for the difference versus last quarter? It seems like this quarter was quite a bit lower versus your run rate. So curious if you could just give a bit of color there. Kevin Van Asdalan: Yes. The vast majority with that Betty is associated with timing of various professional fees, items like that. We are noticing a nominal increase in audit fees and auditor fees. As a reminder, this is our final year of EGC status. So there's some additional work as we're prepping for our first year in 2026 of a fully integrated audit. Last year, as we noted, there was the uplift in stock-based compensation associated with an employee termination. And then if you remember, there was another employee termination in the second quarter of 2024. That also was a onetime increase to G&A. So there are some blips in the third quarter of last year, second quarter of this year that we're getting through as we get back into a more normalized G&A run rate. Operator: This concludes the question-and-answer session. I would now like to turn it back to Sean McClain for closing remarks. Sean McClain: Thank you for taking the time to join us on the conference call today. We look forward to speaking with you in 2026. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good morning, and welcome to the Celsius Holdings Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I will now hand the call over to Paul Wiseman, Investor Relations. Please go ahead. Paul Wiseman: Good morning, and thank you for joining Celsius Holdings Third Quarter 2025 Earnings Webcast. With me today are John Fieldly, Chairman and CEO; Jarrod Langhans, Chief Financial Officer; and Toby David, Chief of Staff. We'll take questions following the prepared remarks. Our third quarter earnings press release was issued this morning with all materials available on our website, ir.celsiusholdingsinc.com and on the SEC's website, sec.gov. An audio replay of this webcast will also be accessible later today. Today's discussion includes forward-looking statements based on our current expectations and information. These statements involve risks and uncertainties many beyond the company's control. Celsius Holdings disclaims any duty to update forward-looking statements, except as required by law. Please review our safe harbor statements and risk factors in today's press release and in our most recent filings with the SEC, which contain additional information and a description of risks that may result in actual results differing materially from those contemplated by our forward-looking statements. We will present results on both a GAAP and non-GAAP basis. Non-GAAP measures like adjusted EBITDA, adjusted EBITDA margin, adjusted diluted earnings per share, adjusted SG&A and adjusted SG&A as a percentage of revenue and their GAAP reconciliations are detailed in our Q3 earnings release, and non-GAAP financial measures should not be used as a substitute for our results reported in accordance with GAAP. With that, I'll turn it over to John. John Fieldly: Thank you, Paul. Good morning, everyone, and thank you for joining us today. The third quarter of 2025 was another pivotal period in what continues to be a transformational year for Celsius Holdings, setting the stage for our next phase of growth. Building on the Alani Nu acquisition in April and our ongoing international expansion, we've deepened our partnership with PepsiCo, added Rockstar Energy to create a total energy portfolio and strengthened our leadership team to lead the next era of modern energy. Before getting into the highlights of our business, I want to thank our employees, our retail and distribution partners and our loyal consumers for their commitment and belief in what we're building. Their energy continues to drive ours. In August, we announced an important expansion of our long-term partnership with PepsiCo, a milestone that deepens our collaboration and establishes Celsius Holdings as PepsiCo's U.S. Strategic Energy Drink Captain. This new role gives Celsius a leadership position within PepsiCo's energy portfolio and greater control over the distribution of our leading portfolio of brands, including Celsius, Alani Nu and now Rockstar Energy. With the expanded partnership, we're further increasing our ability to shape planograms, prioritize SKUs, align promotional periods and bring a unified commercial strategy to life across channels. In short, we're helping lead how energy shows up in retail for the consumer from the aisle to the checkout cooler and everywhere in between. As part of the same transaction, a large portion of the U.S. Alani Nu-based DSD network is joining the PepsiCo distribution network starting December 1, 2025, a move that over time is expected to expand Alani Nu's reach and accelerate its growth trajectory. For Celsius Holdings, this is a meaningful near-term catalyst, and we intend to execute the transition with the same efficiency that made our original Celsius integration into PepsiCo's leading distribution system a success. We also acquired the Rockstar Energy brand in the U.S. and Canada at the end of August, adding one of the most recognizable brands in energy to our total energy portfolio. Rockstar extends our reach into new consumer segments and strengthens our ability to serve a broader spectrum of energy consumers from fitness to lifestyle to culture and music. Together, we believe that these steps, category accountancy, Alani Nu's expanded distribution and the Rockstar acquisition represent a meaningful advancement for our company. It gives us greater scale, control and the platform to compete from a position of strength. Importantly, this also comes with an endorsement of PepsiCo's increased ownership stake in Celsius Holdings and an additional Board representation, a vote of confidence in our shared long-term trajectory. In the third quarter of 2025, our combined portfolio represented more than 20% share of the U.S. energy drink market in tracked channels and grew 31% year-over-year according to Circana, nearly twice as fast as the overall energy drink category. Only 2 years ago, Celsius Holdings was celebrating after surpassing a 10% share with the Celsius brand alone. Now through both organic growth and strategic expansion, we've doubled the share position with our total energy portfolio. It's a remarkable achievement that validates the power of our brands and our disciplined execution. Over the last 52 weeks, our portfolio generated more than $5 billion in retail sales in U.S. tracked channels according to Circana. That success is supported by strong retailer partnerships and consistent consumer demand for functional, great tasting modern energy innovation. Across major retail and convenience partners, we continue to expand our space and distribution. Winning new displays at Target, end caps at Walgreens and CVS and achieving double-digit growth in unit sales across Walmart, Circle K and Dollar General, just to name a few. In Walmart alone, Celsius Holdings portfolio gained more than 2 share points year-over-year, and Alani recorded its best ever sales week in August, led by Witches Brew. The Celsius brand achieved double-digit retail sales growth in the third quarter of 2025 at a 13% year-over-year. Alani Nu grew triple digits at 115% year-over-year, and Rockstar began selling under our ownership. Together, these brands are defining what a modern energy company looks like, inclusive, functional, culturally relevant and growing. Marketing and culture continue to drive how we win. Seasonal flavor offerings once again delivered strong results with Alani Nu, Witches Brew notching record sales, reinforcing the power of flavor, innovation to excite consumers and drive velocity. In October, we launched our first Celsius limited time offering, Spritz Vibe, and we are seeing strong consumer response from U.S. and Canada retailers. Our Celsius Live Fit Go campaign continues to strengthen awareness, trial and repeat purchase for our core brand, connecting performance energy through an inspirational lifestyle. And we're extending the same storytelling across the entire portfolio, ensuring each brand stands for something clear and inspirational. Celsius, fitness and lifestyle performance. Celsius Essentials, high performance energy; Alani Nu, female-focused lifestyle energy; and Rockstar Energy, culture, music, next-generation energy. Last week, I and along with several of our leaders had the opportunity to speak directly to 30,000 PepsiCo employees at one of their national town halls. We showcased our total portfolio approach and shared how Celsius Holdings has become the energy partner capable of powering every consumer occasion. Our goal in the conversation was simple, to inspire 30,000 teammates across PepsiCo to rally behind our portfolio and help us win in the category together. At the National Association of Convenience Stores Trade Show in mid-October, we spent time on the floor meeting with retailers. The excitement around our new portfolio was incredible. You could feel the confidence building for our growth in 2026. We believe that the message from consumers was clear. Celsius Holdings continues to be the growth engine of the energy category and retailers want to partner with us to share in the opportunities that lie ahead. We're also proud of how we continue to invest in our people and culture. Our annual Celsius University Summit brought together more than 200 of our student marketing ambassadors from across the U.S. and Canada, the next generation of marketers who are helping us stay culturally connected to our consumers. It's one of the many ways we build brand advocacy from the inside out. As our business grows, so does the depth of our leadership team. We've recently welcomed Rishi Daing as Chief Marketing Officer, who brings more than 2 decades of global marketing and commercial leadership experience, including senior roles at PepsiCo and Mark Anthony brands. We also had 2 other important leadership appointments, including Garrett Quigley as President, Celsius International; and Ghire Shivprasad, as Chief Human Resource Officer. Each brings valuable experience that complements the strong bench already leading the company. Our approach remains team first, execution-driven, focused on empowering our people and integrating new expertise, while at the same time, maintaining the entrepreneurial energy that defines Celsius. Across the organization, we're executing with focus, advancing Alani Nu's integration, capturing early synergies, onboarding Rockstar and preparing for what we believe will be an even stronger 2026. The third quarter was another step in a series of transformational moves for our global functional beverage portfolio future. We're now operating at true scale in the U.S., and we're currently beginning to build that same foundation internationally. In markets like Australia, performance has continued to exceed our expectations. In the U.K., we've learned valuable lessons that will make us even stronger as we enter 2026. We're refreshing the Celsius Fizz Free line and incorporating new limited time offers into Celsius brand portfolio, starting with Spritz Vibe, which has now launched in the U.S., Canada and the Nordics. Alani's highly successful Witches Brew proved again in the third quarter that limited time offers that create consumer excitement also can lift the whole trademark around them. This week, another Alani fan favorite, Winter Wonderland, returns for the holidays, and we have more great innovation in store for 2026 that I'm excited to share with you soon. We're optimizing our Rockstar Energy portfolio with a medium-term goal of stabilizing the brand and recapturing the magic that makes Rockstar an iconic and powerful force to grow the next generation of energy drink consumers. We've entered a new era for Celsius Holdings in 2025, one defined by scale, partnership and purposeful growth. We're building a portfolio that reaches more consumers during more occasions, and we're doing it with discipline, collaboration and a commitment to organizational excellence. I look forward to what's ahead in 2026 and beyond. I'll now turn the call over to Jarrod to discuss third quarter financial results. Jarrod? Jarrod Langhans: Thank you, John, and good morning, everyone. Turning to the financials. For the quarter ended September 30, 2025, consolidated revenue was approximately $725 million, up 173% from a year ago. The Celsius brand's third quarter 2025 U.S. scanner growth rate was 13%, driven by favorable product mix and increases in total distribution points. A number of factors can cause the scanner data to vary from reported results such as promotions and incentives and the success of such programs, timing of acquisitions and timing of customer orders, which can vary from time to time based on various inventory builds for promotions, cash management programs, limited time offering programs as well as a number of other factors. The difference between the 44% revenue growth rate at the Celsius brand versus the U.S. scanner growth rate of 13% was primarily driven by year-over-year inventory movements across the company's customer base, including a net benefit relative to the inventory optimization program with our largest distributor in the prior year quarter as well as increased promotional activity and our international expansion. Alani Nu revenue nearly doubled, up 99%, driven by strong limited time offerings, particularly Witches Brew, which delivered record sell-through as well as organic core SKU growth. Rockstar Energy contributed roughly $11 million in revenue in its first month under Celsius ownership. An additional portion of Rockstar sales, roughly $7 million was recorded in other income due to GAAP accounting. Combined, the total impact from Rockstar Energy was about $18 million in Q3. We expect this accounting treatment to continue through Q4 before normalizing in 2026. Year-to-date, consolidated sales are up roughly 75% or $770 million with Alani Nu accounting for the majority of that growth and Celsius up 12% through the first 9 months of the year. Gross margin for the quarter was 51.3% compared with 46% a year ago. Year-to-date gross margin was 51.6%, up from 50.2% last year. The improvement reflects the lapping benefits of the prior year inventory optimization, lower net portfolio promotional spend, pack mix, favorable channel mix and scale benefits on raw materials from higher volume, partially offset by tariffs and the impact of Alani Nu and Rockstar Energy's lower margin profiles. We expect to improve Rockstar Energy margins over time, starting in the first half of 2026 as we integrate sourcing and production, much like the progress we've seen with Alani Nu since its acquisition. Sales and marketing expenses were elevated, reflecting continued investment behind brand building, including the Celsius Live Fit Go campaign. Sales and marketing represented about 20% of sales, consistent with our reinvestment strategy. In connection with Alani Nu transition into Pepsi's DSD network, we recorded approximately $247 million in distributor termination expenses during the quarter. These costs are fully funded by PepsiCo under our long-term agreement. And while they are recognized in our P&L under GAAP, the reimbursements are deferred on the balance sheet and amortized into gross sales over the life of the distribution agreement, making the transactions cash neutral to Celsius Holdings. General and administrative expenses remained well controlled at approximately 6% of sales, excluding acquisition costs, down from 9% last year, reflecting efficiency initiatives and cost discipline. Operating income benefited from higher margins and overhead efficiency, partially offset by marketing and integration investments. We ended the quarter with a strong balance sheet and cash position, giving us flexibility to fund future growth and integration initiatives. Shortly after quarter end, we reduced debt by $200 million and reduced our term note by 75 basis points, bringing total debt to roughly $700 million and reducing our annual interest rate expense by approximately $20 million beginning in 2026. Our near-term priorities remain unchanged: continue investing in brand growth, capture synergies from our acquisitions and further strengthen the balance sheet through debt reduction and disciplined capital allocation. As Alani begins distribution in the U.S. Pepsi system in December, most of the financial benefit is expected to be realized in Q1 2026 due to a phased load-in approach ramping from Q4 into Q1 as retailers reset and inventory builds across the Pepsi network. Looking ahead, we expect continued growth in both Celsius and Alani Nu with a focus on stabilizing Rockstar Energy as we optimize the product assortment and reestablish the identity that makes that brand so relatable to consumers. We anticipate Q4 will be a noisy quarter, reflecting year-end timing effects from promotions, integration activities and cash management from our larger customers, along with some incremental freight and tariff pressure. We are looking at the potential for more pressure on our gross margins in Q4 2025 relative to the prior 3 quarters due to promotions, higher scrap and freight from the integration of Alani into the Pepsi system and tariff pressure before re-expanding in Q1 2026. We also expect sales and marketing to represent 23% to 25% of sales in Q4 as we continue investing in our Celsius Live Fit Go campaign and complete the Alani Nu transition. In summary, we delivered strong top line growth, maintained margins above 50% and continued investing for the future. Celsius is once again growing ahead of the category. Alani Nu continues to outperform expectations, and Rockstar Energy strengthens our total energy portfolio by expanding our reach to new energy consumers. We remain focused on balancing investment with profitability, maintaining a strong balance sheet and creating sustainable long-term value for shareholders. With that, I'll turn the call back to the operator for Q&A. Operator: [Operator Instructions] Our first question comes from the line of Gerald Pascarelli with Needham. Gerald Pascarelli: I just wanted to go back to core Celsius here. The 44% growth in core Celsius off of that depressed year ago base period implies a meaningful negative delta between the 13% growth that we saw in measured channels when you add back the $110 million to $120 million to the base. So I'm just curious on some of the mechanics on what's driving that negative delta. It would seem that the add-back to the base period should have been maybe much lower than the $110 million to $120 million. So I'm just curious if that's part of what happened in the quarter? And then if that's not the case, how do you explain just the wide variance between what you reported versus what we saw in the measured channels? John Fieldly: Yes, Gerald, thank you for the question. In our prepared remarks, Jarrod touched on that and some of the deltas that we're seeing in regards to the variety of numerous factors that are really impacting that difference from the 44% to the 13%. But I'll turn it over to Jarrod just to further reiterate some of his remarks he had. Jarrod Langhans: Gerald, the short answer is yes, but there were a bunch of puts and takes. It's not a perfect apples-to-apples comparison. Over the 52 weeks, mix can change, promos can change, timing can change. For instance, Q2, we had some benefit from the Prime Day buildup, which happened in early Q3. So there's a number of factors built into that, but it was a lower number. It wasn't a perfect one-to-one comparison year-over-year when you're talking about the inventory optimization. With that said... Gerald Pascarelli: Understood. So sorry, go ahead Jarrod. Jarrod Langhans: Yes. With that said, we're at 13% on the scanner growth. We believe the scanner is a good barometer of the health of the business. If you look at October, we're up ahead of the category growth from an energy perspective. So yes, definitely a lot of noise in the quarter with timing and sequencing of various things and Q4 will be a bit noisy as well. Gerald Pascarelli: Understood. So lower base and then maybe just a little bit more of a variance than we saw over the past couple of quarters, given multiple factors. Jarrod Langhans: Yes. John Fieldly: Yes, that's correct. And I think when you look at the 13% growth rate at the register, as Jarrod mentioned and reiterated, it was great to see really the rally come behind the brand. We started off slow in the first quarter and second quarter, not keeping up with the category growth rates. And heading into the back half, especially the end of the quarter, our Live Fit Go campaign that we kicked off really is adding more excitement around the brand, gaining more trial, more repeat purchase, which sets us up really nicely heading into resets in 2026 for the Celsius portfolio. Operator: Your next question comes from the line of Kaumil Gajrawala with Jefferies. Kaumil Gajrawala: A lot of conversations these days about pricing. Monster has announced some pricing. It sounds like it might be even higher than the 5% they have announced despite some promotions back. Curious how you're thinking about the price point, not just of Celsius, but also Alani and Rockstar. John Fieldly: Yes. Kaumil, it's something that is an extremely hot topic with a lot of the headwinds, even on the last earnings call that we had, we talked about some of the headwinds we're seeing, especially with tariff impacts, higher cost of commodities and then the investments behind these brands. So it's something we are contemplating and looking at. There's a variety of ways in addition to taking frontline price, promotional strategies we're evaluating. We're really also building out a revenue management team as well to further enhance our capabilities around that. So we can be more precise, building out further our key accounts team. But there is -- we think there's opportunities there. We're tracking it very closely, but we're not going to make any formal announcements today. Kaumil Gajrawala: Okay. Got it. And then on some of this timing and integration stuff for Q4, if you could just go over it maybe in a little bit more detail. It sounds like there's some additional integration stuff and timing that moves into 1Q or Q4? Or is Q4 messy and then it's back to sort of ordinary course of business by the time we get to 1Q? John Fieldly: Yes, I'll turn it over to Jarrod to further enhance some of his prepared remarks. Jarrod Langhans: Yes. So it's -- I mean, it's Q4 and it's December when the activity is happening. If you go back to when Celsius went into the Pepsi system, it was October 1. We're going in on December 1. So obviously, a lot of CPG companies, there's not a lot of activity at the very end of December. Also, if you recall, when we went in, we were replacing Bang. So it was a one-for-one swap out. So there was a ton of space that needed to be filled immediately. So it was a bit quicker of a push. So it's going to be more of a phased approach. And because we're so close to kind of the timing of resets and when the OTS, the kind of up and down the street programs are reloaded, we're going to kind of phase it in as opposed to have all this open space that will get shoved into. So I think -- it won't be quite as quick as you saw back in '22. But across kind of December and Q1, you'll see us really ramp up from Alani perspective. But there will be some crossover in the quarter as we build that inventory and as we roll it out across really Q1. John Fieldly: And I'll just add additional color around the strategic energy drink case within the Pepsi partnership further enhances those capabilities. So it's not a one-for-one replacement. But as Alani rolls through the network, we're able to really have control over the planograms. And we have over 30,000 PepsiCo team members and our dedicated team really working to further penetrate, gain ACV, distribution and really maximize the sets for the highest quality offerings for the specific channels and regions that we'll see the expansion. Operator: Your next question comes from the line of Michael Lavery with Piper Sandler. Michael Lavery: You cited that this transition could lead to optimized warehouse and distribution that may affect inventory levels. Can you be more specific, what exactly are you expecting? And how much does the intra-quarter transition mitigate disruptions that might be puts and takes within 4Q? Any just more detail on 4Q and into next year, what your comments there are pointing to would be great. Jarrod Langhans: Yes. I think we're just trying to be transparent and lay out what some of the puts and takes you could see in the quarter are. So typically, if you look at most large CPG companies, they do have some cash management activity in Q4. You'll also -- if we're going into a system in a warehouse and we're starting to build some inventory, last time, we didn't have any inventory in that system. So when we went in, it was just us going in as opposed to us being a part of that process. So I think there's just going to be some movement as we build the line and as we roll it out across really kind of December and Q1. And so we just wanted to list out some things that could cause some noise and really just let everybody know that there's going to be a lot of puts and takes in the quarter. It's going to be a really noisy quarter. So expect it to be noisy and not to be perfect. Michael Lavery: Can you just maybe unpack noise a little more? I mean you cited puts and takes. Where does it net out? Jarrod Langhans: Well, again, it's going to depend on how quickly we roll things out. So there's a lot that could happen over the course of the next 6 weeks. So instead of kind of put my foot in my mouth and throw a bunch of numbers out at you, I'm going to say it's going to be really noisy. I'd look at the scanner data that's going to tell you about the health of the business, and that's what all we're going to give you right now. John Fieldly: Yes. I'll just -- Michael, I'll jump in, in regards to some of the additional variances. As an example, we'll be picking up inventory on returns from the prior distribution network. So you've got increased costs there on logistical movements, also secondary warehousing, right, that you wouldn't have under a normal course of business. Also, as our really supply chain is not optimized and fully integrated as now we are strategically tied in with the routes servicing the warehouse through the PepsiCo network, and we're going to need to optimize that. We need to optimize the co-packing facilities, procurement, logistics. We want to make sure we're running 1-day hauls to optimize the freight lanes and making sure we have the right inventory in the right locations around the U.S. So there will be some pressure on margins as well and then also the puts and takes on inventory levels and returns. Michael Lavery: And just a quick clarification. So I appreciate some of the cost headwinds or the margin drags. As you get these returns, that's a reduction of sales, correct? And if so, would we hear you correctly that directionally you think that coming in could come more quickly than you refill pipeline going out that maybe directionally net that you at least are trying to make us aware of the possibility of a net drag as opposed to kind of all else equal? John Fieldly: Yes. I think we're not -- I mean, we need to be conservative on that, and that could be a scenario that plays out. We're just -- it's too early for us. We're not -- we don't have year-end orders in yet. So we got several weeks of orders in initially, but we got to see how the rest of the quarter plays out in Q4. And really, the return pickup is unknown right now. So we're evaluating that, but we'll have to see as we get closer. So making any firm predictions at this point is not really plausible. Jarrod Langhans: I would say if you go back to '22, we did -- the team did a great job managing that process so that there wasn't a significant impact. But with that said, it is a different time of year. There is different timing and sequencing that's going on. So we will manage that to the best we can, and we'll look to manage it as efficiently as we did before. And that's the plan. But we'll see what -- where things kind of pan out when you're talking about 250-plus distributors that you're working to drive down their inventory, build up another set of inventory and take returns at the same time. Operator: Your next question comes from the line of Eric Serotta with Morgan Stanley. Eric Serotta: Great. Just a housekeeping item to not try not to beat a dead horse on the inventory and situation with respect to the third quarter. But did your inventories with Pepsi decline sequentially? I know you referred to the year-on-year variances, Jarrod, but was there any change sequentially? And then bigger picture, in terms of Alani growth, we have seen it flow in scanner over -- really since the second quarter. You obviously had 2 totally incremental LTOs in the second quarter, one large but not fully incremental LTO in the third quarter. So how are you thinking about the Alani growth rate on a going-forward basis for sort of the core brand and then whatever sort of incremental contribution from LTOs that you expect over time, realizing the LTO timing is going to always vary a bit. John Fieldly: Yes. Thank you, Eric. I'll take the second part of that question in regards to Alani. We're really excited about the portfolio. And we've talked about in prior, there will be some lumpiness in regards to the timing of these LTOs and then the phase out. And we're seeing that right now with Celsius, with Spritz Vibe that's now rolling out. But in the quarter, you had Witches Brew, which was phenomenal, great success, amazing flavor. It was its fifth year, more than doubled prior year sales results and got everyone really excited. It was the talk of NACS with a lot of retailers as well. When you're looking at the growth rates and you look at the ACV where Alani is to where Celsius is in the PepsiCo system, I think there's a lot of underlying distribution and TDP gains that we're going to be able to capture as we move through 2026 and really leverage the benefit of the PepsiCo distribution network as well as the excitement behind the brand and all the work our key accounts team has been working on. When you look at large format, especially within food and mass and you look at Celsius and Alani, it is a large percentage of the overall energy drink category sales. So that really gives us a great leverage and to really further optimize and really create some unique programs for that channel. And as I mentioned in the prepared remarks, coming out of NACS, retailers are really excited about what Alani is doing to the category. It's incremental, really driving increased female consumption rates. And they really like the uniqueness of what Alani brings to the table within the category, some of its flavor profiles, Sherbet Swirl and so on. And right now, we have Winter Wonderland launching, which is rolling out in retailers. So we do anticipate that will not be as large as Witch's Brew. Witch's Brew historically has been one of the larger LTOs. And also Winter Wonderland, amazing flavor profile, check out the social media activations and in-store execution. It's been phenomenal. But it is crossing over through a transitional period with Alani moving from the prior distribution network into Pepsi December 1 in North America or in the U.S. So that likely will not be to its full potential as we're hoping to see next year there. So those are some of the puts and takes. The good news is and which we're really excited about is these LTOs bring up -- are growing the core SKU offering, which is great to see as well. So adding excitement, bringing incrementality and growing the base within Velocity. Jarrod Langhans: Yes. On the first part of the question, back on to the LTOs, John was talking about it, the Spritz Vibe was great for brand Celsius. I think we've got a great lineup for next year as well across the entire portfolio, in particular, Alani and Celsius. So I think that we were setting ourselves up well for 2026 from. In terms of the inventory rollover, it's not perfect. It's always a point in time. There was some noise in there. Pack size will change, mix will change over the last 52 weeks, the promos have changed. So there's a lot of puts and takes that went into it as well as timing of the inventory movements. And so that's where you got a little bit of a lower number that came through than maybe you had expected if it was a perfect one-to-one rollover. Eric Serotta: Okay. And any comments sequentially? I know the year-on-year is tougher, but given all those noise factors you mentioned, but any change in the inventory sequentially. I realize there's probably some seasonality to it. But going back 1.5 years or so, you would talk inventory impact sequentially. Jarrod Langhans: Yes. I think what we've said thus far, that's really all we're going to go with. Operator: Your next question comes from the line of Bonnie Herzog with Goldman Sachs. Bonnie Herzog: I had a question on gross margins in the quarter. I guess I'm hoping for some more color on the puts and takes and how we should think about gross margins moving forward. Maybe remind us of the impact, if any, from tariffs and then how big of an impact was the inflation we're seeing on the Midwest premium and then your hedging strategy on that? John Fieldly: Thank you for the question. And that's an area of opportunity for us within the gross profit line, especially as we further integrate Alani and Rockstar into the network we've built. And there's a lot of efficiencies in the areas we're focusing on. Midwest premium is impacted. We don't do hedging, but that is -- we do some forward buys that -- but long-term hedging is something we haven't implemented, and it's an opportunity and something we continue to evaluate. And as we have a larger purchasing power and a greater number of capacity, that's something that's on our radar. So more to come on that. In regards to tariff, we're seeing greater tariff impacts. We started to see it slightly in Q2, a little bit more in Q3. We anticipate even larger in Q4. Now we're trying to offset some of that with the scale and the synergies we're seeing as we're bringing and starting to really kick off the production of Alani. So also leveraging the vertical integration of our co-packer we acquired back in November. There's opportunities there as we look to '26, we'll be adding a second line to further enhance the capabilities of that and drive more efficiencies. But I'll turn it over to Jarrod, do you have any additional color in regards to addition to your prepared remarks. Jarrod Langhans: Yes. So I mean, John kind of covered the tariffs. We talked about last quarter that we'd see a little bit in Q3. It would increase a bit in Q4. At the same time, as we're integrating Alani, we were driving improved margin as an offset. Also with our scale, we're seeing the opportunity, and you've seen that across the last year from a raw material perspective. Even with the tariffs, there's still opportunity to take some of that pricing down. We've seen some movement internationally with the U.S. and other countries where we may actually see some benefit from tariffs. And then there's a variety of other tactics and other programs that we're putting in to further drive raw material savings across the board as we scale up. Like John said, we've got a new line coming in our plant next year that will help drive some savings as well. We're looking to continue to save freight as we bring all 3 brands together. If you look at brand Celsius, it's roughly kind of 3% of sales. Alani is a bit ahead of that as is Rockstar. So we'll be able to bring that down as an offset. But that will take some time. We talked about Rockstar, really, you'll start to see the margin from that business improve in the really first half of '26. Alani, we're on track to capture most of that by, I believe, in the modeling call we did in May, we'd look to capture it by the end of Q1. So there's a number of good guys coming through. They're just not coming through necessarily as quickly as some of the pressures. So that's why we called out there's probably going to be a little bit of pressure in Q4. We'll have some scrap and some returns and things like that, that will drive some pressure on the margin like you saw back in '22 when we transitioned Celsius into the Pepsi system, and you saw kind of some of those onetime impacts that came through and then we were able to then leverage the business from there on. So you'll see a similar thing happen in Q4 before we start to see a lot of those benefits come through in the first half of '26. Operator: Your next question comes from the line of Sean McGowan with ROTH Capital Partners. Sean McGowan: Questions about international. Now that we're deeper into the ownership of Alani and you've had some time to think about what to do with Rockstar. What are the plans there internationally? And then more broadly, how do you feel about how the performance has gone internationally? John Fieldly: Yes. No, great question. Thank you, Sean. Lots of opportunity in international. We just hired our first President of our international expansion. We've been really building a foundation over the last several years. As you know, we've started off in Sweden and Finland, been great markets for us for a long time and really just expanded into Australia, the U.K., Ireland, New Zealand, France and Benelux markets. And just getting started there. We started -- we built out small but yet impactful sales organizations and marketing organizations and really building that first foundation. And I think as you look for '26, we're going to lean in further. Those same opportunities we see in the health and wellness trends in the U.S., they're global trends. We're getting a lot of excitement from retailers and consumers as the world is just one click away. So as we look for '26, we are making further strategic investments in given markets. We've had a lot of key learnings as well, taking those key learnings and going to continue to build upon them. Our biggest successful market in the last -- from last year and into this year and an early expansion market has been Australia, really 7-Eleven leaned in, and we're seeing some great expansion opportunities which will position us really well as we're entering '26. And then when you look at the other markets in Europe, they're really foundational and working really closely with retailers and some of our key partners we kicked off our university ambassador programs and leaning into fitness, health and wellness. We're really well positioned. Celsius is our first push leading in, and then we see opportunities with Alani as well. So more to come on that, but definitely a growth driver for years to come. Operator: The next question comes from the line of Jon Andersen with William Blair. Jon Andersen: Quick question on Alani Nu, kind of a 2-parter. Currently well below the Celsius on ACV and TDPs in particular. How do you see the distribution kind of ramp for Alani Nu kind of playing out? And do you think it has the -- ultimately has the potential -- the appeal to kind of reach the kind of level that Celsius is in the market today? And then the second part is, I know there '24 or '23 was a really strong distribution build with Pepsi for Celsius. It did seem to result in quite a bit of inventory optimization in 2024. How do you kind of work with PepsiCo? Are you collaborating with them this time to avoid that kind of experience as you look to take aligning to new levels? Jarrod Langhans: Let me take the second one, and then John can jump on the first one. So from an inventory perspective, I think together, we've learned a lot. We've already gone through the process of putting a fast triple-digit growing business into their system. So we've got a lot of learnings. I think our teams are much more tightly connected today than they were in the past. We also have the captaincy, which gives us more control and more say in terms of what products we're putting in the coolers and how we're going to set that up within the Pepsi system, but also within our key accounts across the board. So I think overall, there's a lot more communication, and we also have brought Eric on, who was a long-time Pepsi person who is coordinating pretty tightly with them. So we're very confident that when it comes to kind of inventory movements, we've got a lot of learnings that we'll be utilizing so that we can make sure it flows efficiently and smoothly on a go-forward basis with the Alani business. And then I'll throw the other one over to John. John Fieldly: Yes. In regards to ACV and TDP and the opportunity and the appeal, I think specifically looking at Alani, and we're really attracted to it. And what we hear is there's a lot of appeal for it. It's done extremely well in convenience. If you look at the latest convenience numbers, it's performing well. Huge opportunity there, especially, as I mentioned before, coming out of NACS. I think the one-for-one swap out with Celsius moving into the bang really planograms and a lot of the AOM accounts and broader distribution within Pepsi. I think that happened very rapidly versus Alani with the captaincy, we're able to control those planograms. So the opportunity still lies there, but it could be more of a quarterly transition over the next 3 to 6 months as we continue to really reset those and work our way through 2026 and the resets. Eventually, -- but the same opportunity on ACV and TDPs lies within Alani. And it's -- we have a bigger key accounts team. We have a bigger distributor management team and the excitement just last week when we were up at the Pepsi Town Hall meeting, really excited about that. And then in food service is a big opportunity. Now as the -- really the category energy captain, we're able to get further enhancements and placements within the food service opportunities throughout PepsiCo. So I think the same opportunity within ACV and TDPs lies with all of our portfolio. Operator: And that is it for our question-and-answer session. I will now turn the call over to John Fieldly for closing remarks. John Fieldly: Thanks again for joining us today. Q3 was another strong quarter and a transformational year, marked by strength, partnerships, portfolio expansion and our commitment to organizational excellence. The energy drink category is a standout growth area in staples, supported by consumers' growing preferences for functional better-for-you modern energy offerings. We believe that we're very well positioned to continue to benefit from and lead the execution of this revolution that's taking place in the energy category. Thank you to all of our employees and partners for all their hard work, dedication that enables our success. Until next time, grab a Celsius and live fit. Operator: This concludes today's conference call. We thank you for your participation. You may now disconnect your lines. Have a pleasant day.
Mizuho Shen: This call is a simultaneous translation of the original call held in Japanese, provided solely for the convenience of investors. Thank you for joining the Recruit Holdings FY 2025 Q2 Earnings Call. I'm Mizuho Shen, Manager of Investor Relations and Public Relations. Today, I will give a brief talk about our business, then Junichi Arai, Executive Vice President and Chief Financial Officer, will give a presentation on results and guidance, followed by a Q&A session. Please note that today's session, including the Q&A, will be posted on our IR website after the event. Starting this fiscal year, we have integrated HR Solutions from Matching & Solutions into HR Technology. Accordingly, the year-on-year comparison of segment results in this fiscal year's financial presentation is based on FY 2024 pro forma figures, which assume that this integration had been effective as of April 1, 2024. Unless otherwise stated, comparisons will be made year-over-year. Lastly, please note that all references to dollars in this presentation refer to U.S. dollars. We have 3 business segments. HR Technology features Indeed and Glassdoor, which together create a global 2-sided talent marketplace across more than 60 countries with a focus on the U.S. As the core of our simplifying strategy, Indeed uses its broad reach, AI-powered matching and tools for faster connections to make the hiring process more efficient for employers and help job seekers find jobs faster and more easily. This strategy is enhanced in Japan through the Indeed Plus job distribution platform and the integration of placement services, including recruit agent. Staffing consists of 2 major operations: Japan and Europe, U.S. and Australia. Between 2010 and 2016, we expanded to our current scale and structure through multiple global acquisitions of staffing companies. Marketing Matching Technologies, or MMT, consists of marketing solutions of the former Matching & Solutions. In Japan, MMT provides vertical matching platforms that connect individual users and business clients in areas like the lifestyle subsegment, which includes beauty, travel, dining and SaaS solutions as well as the housing and real estate subsegment and others. These platforms offer services, including information and online reserving and booking services. Now over to Arai-san. Junichi Arai: Thank you very much. We have a slightly longer presentation than usual, so I hope you could bear with me. I will discuss the following 4 highlights of the FY 2025 Q2 earnings presentation. One, in HR Technology, revenue in the U.S. for Q2 increased by 5.8% year-over-year to $1.33 billion. Two, we have upwardly revised the full year U.S. revenue outlook in HR Technology from 0.3% year-over-year increase, basically flat announced in May to a 5.6% increase. Three, the full year consolidated financial guidance has been revised upward. Consolidated EBITDA+S for this fiscal year has been revised upward from JPY 697 billion to JPY 733.5 billion. Four, net cash at the end of September 2025 was JPY 590.5 billion. We commenced a new share repurchase program of JPY 250 billion on October 17 (sic) October 16. This is in line with the policy we announced in May 2024 to reduce net cash to around JPY 600 billion by the end of FY 2025. After reviewing our consolidated results for Q2 and the first half, I will discuss the performance and outlook by segment, followed by our full year consolidated guidance and finally, our capital allocation policy. Regarding FY 2025 Q2 consolidated results. In HR Technology, our focused monetization efforts were the primary driver of revenue growth, successfully counteracting the impact of a softer job market in the U.S. Revenue in Marketing Matching Technologies or MMT increased and revenue in staffing remained flat. As a result, total consolidated revenue increased by 2% to JPY 914.7 billion. As a result of continued efforts across all segments to further enhance productivity, EBITDA+S margin was 22.7%, exceeding Q1 of this fiscal year, driven by margin expansion in HR Technology and MMT. EBITDA+S margin over gross profit was 38.2%, reflecting our underlying cash flow generating capability. Before adding back stock-based compensation expenses, EBITDA margin improved compared to the same period last year, reaching 21.3%. For the first half of FY 2025, revenue decreased 0.3% to JPY 1,793.5 billion. EBITDA+S margin continued to expand, reaching 22%. Now I will move on to the results and outlook by segment. I will start by the results for HR Technology. For Q2, segment revenue on a U.S. dollar basis increased by 4.5% year-on-year and the 2.1% quarter-over-quarter to $2.41 billion. On a Japanese yen basis, segment revenue increased by 2.9% year-over-year to JPY 355.7 billion. As for revenue by region, turning to our U.S. performance, despite an approximately 8% decline in job postings, U.S. revenue increased by 5.8% year-over-year and by 5.6% quarter-over-quarter to $1.33 billion, exceeding our initial expectations. This was driven by successful monetization development of paid job ads with a notable contribution from premium sponsored jobs. This solution enhances our paid job ads by incorporating key features and leverages Indeed advanced matching and targeting technology. Revenue in Europe and others increased by 14.7% year-over-year to $509 million. The U.K., Canada and Germany together accounted for about 2/3 of Indeed revenue for Europe and others on a U.S. dollar basis. The revenue growth was primarily driven by the U.K. and Canada, where monetization development led to revenue growth of approximately 8% year-over-year, respectively, on a local currency basis as well as by foreign exchange impacts. Starting this fiscal year, HR Technology Japan consists of job advertising services, placement services and other hiring-related services after integrating HR solutions of the former Matching & Solutions. Revenue in Japan decreased by 7.2% year-over-year to JPY 84 billion or declined by 5.7% year-over-year on a U.S. dollar basis. Our job advertising service, Indeed Plus, which launched in January 2024, is performing above initial expectations. However, our placement services fell short of the initial assumption. This shortfall occurred because we underestimated the business impact of the system migration processes that followed our recent organizational integration. Even excluding the impact of the difference between gross to net revenue recognition related to the transition to Indeed Plus, overall, Japanese revenue came in below our initial expectations. Segment EBITDA+S margin expanded to 37.9%, driven by improved productivity and enhanced operational efficiency in the U.S. and in Europe and others. Even in a business environment where the total number of U.S. job postings continued to decline, the successful combination of a monetization development and improvements in operational efficiency and productivity was clearly reflected in segment EBITDA margin, which increased by 6.6 percentage points from the same quarter last year to 34.7%. As a result, for the first half, on a U.S. dollar basis, segment revenue increased by 4.1% year-over-year to $4.77 billion and on a Japanese yen basis, decreased by 0.5% year-over-year to JPY 697.5 billion. As for revenue by region, in the U.S., revenue increased by 3.4% year-over-year to $2.59 billion. In Europe and others, revenue increased by 13.7% year-over-year to $985 million. In Japan, revenue decreased by 5.8% year-over-year to JPY 174.3 billion or decreased by 1.3% year-over-year to USD 1.19 billion. Although placement services revenue fell slightly short of our initial expectations, job advertising services revenue performed above expectations, resulting in total revenue in Japan coming in slightly above our initial projections. Segment EBITDA+S margin was 36.5%. For the first half, sales commission, promotion expenses and advertising expenses in total amounted to approximately 13% of segment revenue, while employee benefit expenses and service outsourcing expenses totaled approximately 46% of revenue, reflecting the impact of the workforce reduction announced in early July, which began to take effect in the latter half of the first half. Now I will look -- discuss the second half outlook. But before diving into the outlook, today, I am introducing a new key performance indicator to track our monetization progress and serve as an important indicator of the future evolution of HR technology in the U.S. The U.S. average revenue per job posting on Indeed or U.S. ARPJ growth rate. Hereafter, we refer to the U.S. average revenue per job posting as U.S. ARPJ. For clarity, the U.S. ARPJ is calculated by dividing HR Technology U.S. revenue by the total number of free and paid jobs in the U.S., including those posted directly to Indeed and those aggregated from the Internet. It represents the average revenue generated per job posting on Indeed in the U.S. The U.S. ARPJ is based not only on paid job ads, but the denominator includes all jobs listed on Indeed, regardless of whether they are paid or free. Its year-over-year growth rate is the U.S. ARPJ growth rate. The revenue increase of 5.8% in the U.S. during this Q2 was driven by the U.S. ARPJ growth rate coming in at approximately 15% increase year-over-year despite an approximately 8% decline in the total number of job postings. For the first half, the U.S. ARPJ growth rate was around 13% increase year-over-year, clearly demonstrating the progress and success of our monetization strategy. This chart shows the index trend in total number of U.S. job postings on Indeed from February 2020 to the present, represented here by the Indeed Hiring Lab U.S. job posting Index. This index is based on the total number of U.S. job postings used in calculating the U.S. APJ growth rate. It is important to understand that this index is based on both free and paid job postings on Indeed, which are sourced in 2 ways. Hosted jobs are posted directly on Indeed by business clients. Indexed jobs are aggregated by Indeed from employer websites and other sources across the Internet. Our CEO, Deko stated in May 2024 that we assume that hiring demand in the U.S. will hit the bottom after decreasing for another 18 or 24 months, i.e., this second half. and we will run our business based on that. Given the current U.S. business environment, we still expect hiring demand in the U.S. to be broadly in line with our assumption at the beginning of this fiscal year, which is to continue a modest year-over-year decline throughout the second half with the trend bottoming out in Q4. Based on our assumption, we have revised our U.S. revenue outlook for Q3 and Q4. This chart shows the quarterly trend of U.S. revenue in HR Technology since Q4 FY 2019, together with the index chart that I mentioned earlier. On the far right, we have added the HR Technologies assumed trend for the IHL Index in the second half and the revenue outlook for Q3 and Q4. Looking at these results through Q2, as you can see, through FY 2023, HR Technology U.S. quarterly revenue moved largely in line with this index. However, from the beginning of FY 2024 through the first half of the current fiscal year, meaning 6 quarters, HR Technology U.S. revenue has decoupled from the declining trend in job postings. This divergence is the direct result of ongoing developments in monetization, which we have been successfully executing since our CEO, Deko, announced the beginning of year 0 in May 2024, a period of strengthening our foundation and preparing for a recovery in the business environment following the downturn. To provide clear insight into this divergence, we will report the U.S. ARPJ” growth rate as a new KPI. This metric represents our continued progress in evolving our business, capturing the success of our entire product and monetization strategy built on Indeed's foundation as a 2-sided talent marketplace that connects job seekers and employers. Currently, paid job ads remain just under 1/4 of the total number of U.S. job postings on Indeed. As we increase this penetration and as more business clients adopt our other value-added subscription services, including sourcing, branding and new AI products, the U.S. ARPJ will rise and its growth rate will accelerate, further widening the divergence from the IHL Index growth rate. Now turning to our U.S. revenue outlook for Q3 and Q4 in U.S. dollars. Despite an anticipated year-over-year decline of around 7% in the total number of U.S. job postings in the second half, we expect the U.S. ARPJ” to continue growing year-over-year at around 16% for the second half. We expect revenue for Q3 to increase by 7.2% year-over-year and decrease by 4.8% quarter-over-quarter, reflecting the seasonality of the holiday period when both job seeking and hiring activities tend to slow down. For Q4, we expect revenue to increase by 8.6% year-over-year and by 1.6% Q-on-Q. Our second half outlook is based on exchange rate assumptions of JPY 145 to the U.S. dollar and JPY 172 to the euro. We expect segment revenue to increase by 7.8% year-over-year to $4.74 billion and to increase by 2.5% year-over-year to JPY 687.9 billion. By region, in the U.S., based on the quarterly revenue assumptions I discussed earlier, we expect revenue to increase by 7.9% year-over-year to $2.56 billion and to decrease by 1.4% compared to the first half, reflecting normal seasonality. In Europe and others, we expect revenue to increase by 21.5% year-over-year to $1.03 billion, reflecting ongoing developments and monetization. In Japan, revenue in placement services, as explained earlier, will continue to decline in the second half, and we expect revenue to decrease by 7.2% year-over-year to JPY 167 billion or by 2.4% year-over-year to $1.15 billion. As I stated in the earnings presentation in May, in Japan, we are prioritizing the stable operation of our newly reorganized structure following personnel reassignments to facilitate future growth in the coming years. Since April, we have focused on maintaining stable operations for the integrated organization while launching a range of initiatives to drive business evolution and enhance efficiency, including actively leveraging AI to support future growth. Some of these initiatives are already yielding results, while others have required us to make adjustments. For those that did not meet our initial expectations, we have identified the underlying causes and are working to rectify and improve them. We remain committed to pursuing innovation boldly without fear of failure. Although corrective measures have already been underway, placement services generally take more than 6 months from the time a job seeker is introduced to a position until a successful match is finalized and revenue is recognized. Therefore, we expect the impact of these corrective actions to begin contributing from the first half of next fiscal year. Segment EBITDA+S margin is expected to reach 35.1%, up 3.4 percentage points from 31.7% in the second half of last fiscal year as we aim to balance monetization developments with further improvements in operational efficiency and productivity even in a business environment where U.S. hiring demand continues to decline modestly year-over-year. Margin expansion in the U.S. and in Europe and others is expected to continue, driven by upward revisions of revenue and progress in efficiency improvements, including the workforce reduction implemented in July. In Japan, we expect lower revenue due to the performance of placement services to contribute to a lower EBITDA+S margin. However, we also plan to control advertising and other promotional expenses carefully, which will partially offset the negative impact on margins. Based on the results for the first half and the outlook for the second half, the full year outlook has been revised upward. We now expect segment revenue to increase by 5.9% year-over-year to $9.52 billion, up from the initial outlook of a 2.4% increase to $9.2 billion. On a Japanese yen basis, we have revised our outlook upward to JPY 1,385.5 billion, representing a 1.0% increase year-on-year from the initial outlook of a 2.8% decreased to JPY 1,334.4 billion. By region, in the U.S., we have revised our outlook upward from the initial assumption of a 0.3% year-on-year increase to an increase of 5.6%, reaching $5.15 billion. In Europe and others, we have revised our outlook upward from the initial expectation of an 8.1% year-on-year increase to a 17.6% increase, reaching $2.01 billion. In Japan, we have revised our outlook downward from the initial expectation of a 2.7% year-on-year decrease to a 6.5% decrease to JPY 341.3 billion and on a U.S. dollar basis to $2.34 billion, representing a 1.9% decrease year-on-year. Segment EBITDA process margin has been revised upward from the initial outlook of 34.5% to 35.8%, representing an increase of 2.8 percentage points from 33% in the last fiscal year. Segment EBITDA margin is expected to be 31.1%, representing an increase of 3.7 percentage points from 27.4% in the last fiscal year. As for Staffing, segment revenue in Q2 increased by 0.8% to JPY 421.3 billion. In Japan, revenue increased by 6.1% to JPY 209.4 billion, driven by stable demand for Staffing. In Europe, U.S. and Australia, revenue declined by 3.9% to JPY 211.8 billion. This represents an improvement from the first quarter, driven by increased orders from large business clients as well as the impact of the Japanese yen depreciation. Segment EBITDA+S margin was 6.6%. For the first half of the fiscal year, segment revenue decreased 1.3% to JPY 829.4 billion. Segment EBITDA+S margin was 6.6%. For the second half outlook, segment revenue is expected to increase 2.3% to JPY 846 billion. Segment EBITDA margin is expected to be 4.8%. For the full year outlook, we have revised segment revenue to JPY 1,675.4 billion and segment EBITDA+S margin to 5.7% with only minor changes from the figures disclosed on May 9th. Next, I will discuss Marketing Matching Technologies or MMT. Regarding Q2 results, segment revenue increased by 6.3% year-over-year to JPY 144.3 billion with revenue growth across all subsegments. Revenue in Lifestyle, which consists of beauty, travel, dining and SaaS solutions increased by 8.5% to JPY 76.9 billion, driven by the continued growth in new business clients in Beauty. Revenue in Housing and Real Estate increased by 4.3% to JPY 38.5 billion, driven by the growth in the number of contracts closed for custom homes through Sumo Counter, our face-to-face housing consultation service. Revenue in others, which includes car and bridal, increased by 3.5% to JPY 28.8 billion. Segment EBITDA+S margin expanded to 32.3%, driven by appropriate cost control, principally related to service outsourcing expenses. For the first half, segment revenue increased by 6.7% year-on-year to JPY 281.2 billion, and segment EBITDA+S margin was 31.9%. For the second half outlook, segment revenue is expected to increase by 3.7% to JPY 286 billion, driven by continued strong performance in Lifestyle, including growth in new business clients in beauty and dining and continued increases in the number of room nights and unit price in travel. Segment EBITDA+S margin is expected to be 22.2%. I will now explain the background behind the significant difference in EBITDA+S margins between the first half and the second half of MMT. The primary factor is the seasonality of advertising and sales promotion expenses in the Japanese market. When planning for the next fiscal year, MMT carefully prioritizes these expenses across its subsegments, consolidating proposals submitted by the respective business units. Based on the latest performance outlook during the fiscal year, MMT allocates funds intensively and effectively in line with these priorities when the number of actions by individual users on our matching platform increases. Our Q4 coincides with the timing when the number of actions taken by individual users increases the most within the fiscal year due to the start of the new fiscal year in Japan in April, particularly in housing and real estate. By concentrating our spending on these expenses during this period every fiscal year, MMT aims to maintain and increase the revenue recognized in Q4 and in Q1 of the following fiscal year. In the previous fiscal year, approximately 36% of total annual sales commission, promotion expenses and advertising expenses broadly defined as marketing-related expenses were recorded in Q4. And approximately 58% were recorded in the second half with an EBITDA+S plus margin of 28.6% for the first half and 22.4% for the second half. In this fiscal year, in addition to the concentration of usual seasonal expenses in the second half, we will increase sales promotion expenses exceeding initial projections to support new growth initiatives across multiple areas aimed at realizing increased revenue in fiscal year 2026 and beyond. As a result, we expect approximately 60% of the annual marketing-related expenses to be recognized in the second half of this fiscal year. Moreover, we have a onetime impact from a planned update to MMT's accounting system at the end of the fiscal year. This upgrade will refine our revenue recognition policy, moving from a previous pro rata monthly allocation method to a daily basis recognition. This onetime transition means approximately JPY 5 billion in revenue and associated profit, which we had expected to book in March will not be recognized within the current fiscal year. Taking this into account, we expect EBITDA+S margin for the second half to be 22.2% compared with 31.9% in the first half. The full year segment revenue outlook is largely unchanged with an expected increase of 5.1% year-over-year to JPY 567.2 billion compared to the initial outlook of plus 5.1% year-over-year to JPY 567 billion, even after reflecting the one-off impact from the revenue recognition refinement that I mentioned earlier. Due to the one-off profit impact, segment EBITDA+S margin has been revised downward from the initial outlook of 27.5% to 27.0%. Regarding our segment EBITDA+S margin, our future targets remain unchanged. MMT aims to reach segment EBITDA+S margin of 30% in fiscal year 2026 and approximately 35% by FY 2028. We plan to share specific details about initiatives to drive revenue growth in the next fiscal year soon. Now based on the segment outlook, let me turn to our consolidated outlook for the second half. For the second half, we assume exchange rates of JPY 145 per U.S. dollar and JPY 172 per euro. As for the consolidated outlook for the second half of the fiscal year, revenue is expected to be JPY 1,805 billion. EBITDA+S is expected to be JPY 339 billion with the EBITDA+S margin to be 18.8%. We have revised the full year consolidated guidance, reflecting the first half results and the second half outlook of -- for each segment. Revenue guidance has been revised from JPY 3,520 billion, minus 1.1% year-over-year to JPY 3,598.5 billion, plus 1.2% year-over-year. EBITDA+S has been revised from JPY 697 billion, plus 2.7% year-over-year to JPY 733.5 billion, plus 8.1% year-over-year. EBITDA+S margin is expected to be 20.4% with EBITDA+S margin over gross profit assumed to be 34.5%. Profit attributable to owners of the parent has been revised to JPY 448.3 billion, representing an increase of 9.8% from the last fiscal year, and basic EPS is revised to JPY 313, up 15.3% year-over-year, reflecting the impact of share repurchases. Consolidated full year results will be expected to reach new record highs. Our capital allocation measures, I would like to cover this topic last. During the first half, we repurchased approximately 53 million shares for JPY 423.7 billion. Consolidated net cash and cash equivalents as of the end of September was JPY 590.5 billion. A new share repurchase program with an upper limit of JPY 250 billion started on October 17, and the market repurchase is currently being conducted through an appointed securities dealer with transaction discretion. The repurchase period is scheduled to continue until April 30, 2026, at the latest. We note that following the commencement of the share repurchase program, we may consider and execute strategic M&A transactions. The Board of Directors resolved today to pay an interim dividend of JPY 12.5 per share. The total per share dividend amount is expected to be JPY 25.0. We retired treasury stock in March of both fiscal year 2023 and fiscal year 2024 using shares acquired during the respective fiscal years. We will also consider retiring the treasury stock to be acquired through our share repurchase programs in fiscal year 2025 at the end of the fiscal year, taking into account market and business conditions. Finally, regarding the total payout ratio for the fiscal year, if we assume the currently ongoing JPY 250 billion share repurchase program is completed within the current fiscal year, in addition to the share repurchase results up to September 30 of this year, the total amount of shares repurchased this fiscal year will be JPY 677.9 billion. Additionally, taking into account the expected dividend for this fiscal year, the total payout ratio is expected to be approximately 159% based on our full year consolidated earnings forecast announced today. This concludes my presentation. Now we'd like to proceed to the Q&A session. Mizuho Shen: [Operator Instructions] So first, Nomura Securities, Oum,san please. Jiyong Oum: This is Oum from Nomura Securities. So my first question. U.S. ARPJ” second half plan, 16% increase, you said. Majority of that is premium sponsored ad contribution. Is that correct? Are there non-premium factors? Junichi Arai: Of course, premium contribution is expected. But it's not only that. There are various factors that will contribute to this number. We have incorporated other factors. As I mentioned earlier, subscription sales have partially started. And according to what we experienced now, it seems like we -- this is gaining traction. It is received positively. And as I mentioned earlier, market will continue mildly expanding. So we want to harvest and exert this monetization impact. So whether you think this is questionable or aggressive or we can do more, I hope you could take a good guess. So there are existing ones and the newly developed ones, newly launched ones. So when we announced our Q3 results, we will share with you what contributed to the results. Jiyong Oum: And my follow-up question is the current status of premium, if you could elaborate on that. I know it is difficult to disclose, but the breakdown between standard and premium, for example, what is the percentage of premium? And the number of countries or regions that you have deployed this, where you stand. So if you could give us a hint on penetration, it would be helpful. So today, we focused on the U.S. So how impactful premium is in the U.S. market and how things look like in Europe. Junichi Arai: I hope we can use different parameters to explain going forward. But today, we are focusing on the U.S. And when we disclose these numbers, then what is the revenue breakdown or hosted or indexed. All these breakdown will continue. So for today, we'd like to refrain from giving you the breakdown. But the number of users using this is increasing as we speak. Jiyong Oum: Thank you. Understood. I already use my right for one follow-up question. But in the premium, there are many functions. What is received well particularly? Junichi Arai: So the biggest reason from migration from standard to premium merchant hiring or Deko says, what we newly add on premium is what we often discuss. And any new things we can launch in the nonpremium. So what we include in the package, what we exclude from the package and the combination thereof and how we deliver this, offer this to our users. And have received the payment. There are so many things, factors that we consider. So of course, we may add new functions to raise the price of premium package in some case or do something else. So I think that the combination is diverse. So we may add some new functions to increase the unit price or take another option, and that all determines the final result. So we may share with you Q3, Q4 results on that. I hope you could look forward to it. So the candidate and the targeting function. There are industries that like that and not so well in other industries. So for the industries where this is popular, the numbers are showing. So I cannot say this across the board. It's difficult to make a general comment, market is large and the needs differ from client to client. Mizuho Shen: Next, Munakata-san from Goldman Sachs Securities. Minami Munakata: Hello. I'm Munakata from Goldman Sachs. Regarding the second quarter, U.S. Indeed growth is quite strong, which is reassuring listening to your presentation. And in addition, the -- you've also disclosed the average revenue per job posting a growth rate, which is very helpful. And here's my question. Comparing -- you have the bar graph showing the index and the revenue overlapping. The divergence between the index and the revenue with more monetization developments, you mentioned that this would increase. But currently, the assumption for the growth rate is 16% for the second half, which is at a high level. So from next fiscal year onwards, should we expect that this growth rate, the U.S. ARPJ growth rate will be maintained or even be higher -- is that realistic? And also more recently, Indeed, Talent Scout and other services have been announced and monetization of these new services, I don't think will come in, in this fiscal year, but more so for the next fiscal year, is that something we should expect? Junichi Arai: For the second quarter, the results -- perhaps this is not something I should mention much to external parties, but I think the results have some of the Deko effects. Currently, Deko is on the ground leading various efforts, monetization developments and perhaps there will be questions about this later from someone else, but we are also working on increasing efficiency of the business at such high speed, we are working on both of these efforts in parallel. Today, in my presentation, I talked about revenue outlook for the third and fourth quarters and also our interpretation of the index, our expectation of the index. This is the latest information, latest data that we are sharing at least for the third and the fourth quarters, we believe this is the level of impact of the monetization developments that we should expect. That is the pace that we are observing. For the next fiscal year, we've said that there will be many different things that will be introduced on a subscription basis, there will be an AI tool to be offered, things that are new that we have not done before will be introduced in the next fiscal year. So for these new services to be translated into value and how we should monetize in tandem, these are some of the things that we are currently considering. As for the market condition for fiscal year or calendar year 2026, we are making assumptions. And based on those assumptions, we are considering what should be the U.S. results that we can achieve for the next fiscal year. So it's not simply based on what we currently have. There will be new things that we will be stopping and by combination of these various different pieces, we are thinking about how we can increase our KPI and to reach the numbers that we've disclosed. I consider these KPIs to be quite challenging, tough KPIs with the market recovery with an increase in the number of jobs, even if we achieve the same level of growth, the growth rate itself does not increase. Therefore, we have to always overachieve in order for the growth rate to increase. So irrespective of the market recovery, we have to consider, what are some of the pieces we need to introduce in order to increase and increase revenues that we receive from our clients. So for next year, what will happen of course, will be something we will be talking about in February and May, but the fact that we've disclosed this time shows our unwavering resolve and determination for this. Minami Munakata: Thank you. I think I personally felt that determination through your presentation. As a follow-up, in my recent conversation with investors on our side, generative AI services have become more common. And some investors have said that things like ChatGPT, these are generative AI services provided by others, perhaps Indeed services may be replaced by the services offered by other companies. So that's a concern voiced by some investors. Could you elaborate once again on the strength of Indeed? Junichi Arai: For the past several months, when I met with investors, I myself have received the same questions from them. And what I said, how I responded to those questions at the time was that when a job seeker uses things like ChatGPT asking whether there is any good job out there. The ChatGPT says, what about this? And it also offers to write nice resume, I think that's a very plausible scenario. But then what would happen? So those are some of the questions that I actually received from the investors. And at the time, what I said was that job seekers, if that were to happen, they would be able to apply to more jobs since it's now easier. I think that's something that we can expect to happen. And if that is the case, how can we provide high-quality matching service and to address both job seekers and business clients to help them reach high-quality jobs for high-reach candidates. So I think that's one direction that will certainly be important. Job seekers may be sending in hundreds of applications, but they are not getting any reply because this puts a lot of burden on the business client side, the employer side. So Deko has said this from before, when matching becomes more difficult, how can we support the process is important. It's not simply placing advertisement or rather, how can we help business clients discover high-quality candidates? How can we help them select a better competitive candidates? I think these are the kind of services that will be in demand. So in that sense, as I said, we have a 2-sided marketplace. The fact that we have such a talent marketplace helps us increase the efficiency of matching. So that's how I responded to the questions from investors whether it's Yahoo!, Google or Facebook, there are already excellent platforms for jobs and technologies available for jobs. Other services have been in place and maybe if it was 10 years ago, people thought that they already had these platforms, and we would be no match. But if we look at the reality, the story is different. Maybe some companies started and they were not successful. For e-commerce, rather than booking or e-commerce, there are things out there that are mass produced as long as you pay for them, you can acquire. But jobs are different. There is only one job and selecting the right candidates, this is determined solely by the employers who are looking to hire people. So this is where we are different from EC and booking. In other words, it's always 2-way, two-sided. And I believe the fact that we have the 2-sided talent marketplace, this will continue to be appreciated by the 2 parties and to continue to be used by both sides. I think that's the nature of our business. My answer might not have been concise, but I often talk about things like this whenever I receive those questions. Minami Munakata: I understand the concept well now. Thank you. So how should I say what can we offer to business clients, simplifying hiring or helping clients determine whether a candidate is qualified or not, whether this candidate is these are real human person or not? Junichi Arai: I think in the future, there will need to be various aspects that need to be addressed. So by strengthening these pieces, I believe we will be able to differentiate ourselves. That's what Deko said. Mizuho Shen: Next, SMBC Nikko Securities, Maeda-san, please. Eiji Maeda: SMBC Nikko Securities, Maeda is my name. Thank you. So you have this proprietary original investment improvement and generating results, it's great. So the market model does not need to be worried, but every time we see the statistics, like you said, the job, we think will hit the bottom in Q4, as the stock market is having a more difficult view. And maybe that is reflected in your share price. But once again, you think that the job trend will bottom out, will show signs of bottoming out in Q4. Any changes in your forecast? And are there any risks? Junichi Arai: So when we say bottom, it is an image of ticking and turning upward. We tend to think of bottoming out that way. But even when there is a bottom, it does not necessarily mean a rapid recovery. And at the same time, it may not be overall trend. Industries may show different trends. We are starting to see many industries stopping their decline. So the U.S. labor market is impacted positively. So the decline in the labor supply in the U.S. is already impacting the market. So we do not think it will continue declining sharply going forward. That said, it may not show a V-shaped recovery right away. So to repeat my message, how we show our KPI U.S. ARPJ, how we raise our U.S. ARPJ, our important KPI, this is our focus. Eiji Maeda: Thank you. My follow-up question. So if things go as expected. Top line is growing as expected. But at one point in the future, you may shift gears to M&A. You are reducing cost through efficiencies. So once the projection changes, your cost will start rising again from Q4 to next fiscal year, what is your basic thinking of investment in this business? Junichi Arai: As we've been mentioning from the past, we do not think of doing M&A to increase our revenue. Even if we do that, it is for the future. As we received questions earlier, how we improve our U.S. ARPJ. In the future, will be the end goal. So for that purpose, we may do M&A. We will not do M&A for a short-term increase in the revenue or improve the margin by reducing the headcount. We are not thinking of that at all. So M&A will not have an impact in the short term, but will be impactful in the long run. So it will not impact in the performance in the short term. We will continue thinking on how we improve U.S. ARPJ growth rate. The same thing in the U.S. and further improvement in Japan. Once we see that, revenue will rise and costs can go down. So I think that combination is to steadily pursue this organically. Mizuho Shen: Yamamura-san from JPMorgan Securities. Junko Yamamura: This is Yamamura from JPMorgan. Can you hear me? Junichi Arai: Yes. Junko Yamamura: I just have 1 question. For me, regarding the outlook for the job postings, there may be 2 questions actually. I have a question around that. In the second half, you're expecting moderate recovery. There may not be a V-shaped recovery, but there should be a bottoming out in the Q4, which is, I think, a good thing. As Maeda-san pointed out, it is true the common debate, common discussion, there are 2 aspects. One is in the North America there has been restrictions on immigration. And if there is continued shortage of labor, it would put a lot of stress on recruit. And with the introduction of AI, of course, this would also impact the recruits business. So these are the 2 points often raised whenever we discuss this. So I would like to hear your views on these with even more shortage of labor, perhaps business clients are more motivated to hire. With the introduction of AI, maybe some companies or some jobs will no longer require human labor, but for higher quality talent that companies are willing to pay for, I think there is a huge or even a bigger demand for such talent. So with the efforts that you are currently implementing the monetization developments, perhaps will positively mesh with these developments in the market. So what is your view on the future state of your business? Junichi Arai: Well, this is what Deko says. The U.S. market is becoming closer and more similar to the Japanese market. So that's one thing. That's what he is saying over the past decades. Japan -- the Japanese market has experienced tightness, labor population declining, the population aging and others. So we are seeing similar things in the U.S. market, and he's saying the market in the U.S. is becoming more similar to the Japanese market. So as Yamamura-san said, things are happening in the market. What is happening today, what has happened? Perhaps if you trace them back to what has already happened in the Japanese market, you can certainly see a similar trend in the -- the number of job postings is actually increasing. And Deko today said this in one meeting. He, of course, looks at various stats and he tries to explain them to us. He looked at past examples of the U.S. market and from the latter half of the 1990s to 2010s over a 15-year period, the number of workers in factories in the U.S. decreased from 17 million to 11 million. However, the production output actually increased over the same period. So the white collar in the U.S. is said to be 30 million. So with AI introduction, I think this is a segment of labor that would be most impacted by AI. So we may see some decrease, but as I said, things that happened in the factory workers could happen. The unemployment rate as a result of these things did not actually increase rather workers were redistributed to other jobs -- other types of jobs. I say, oh, that's -- is that right? So the job market is huge. It's not specific to certain industries. It covers all industries. Therefore, the job market itself is enormous. I don't know what will be the analogies we would use as Japanese, maybe we would compare it to Lake Biwa, but if you consider a huge lake and a small pond, so just because AI is being introduced, it doesn't mean everyone will lose their job. I don't think that would happen. I don't think that's realistic. Maybe it will be the reality in certain areas. But if you look at the entire pool, there may be more people working in other industries, people earning more in other industries. Perhaps those are the results that we can expect. So if you consider all these things, in the U.S., the labor industry or where we operate, are becoming more similar to Japan. If you look at what is in high demand in Japan, where business clients are paying to higher talent. If you look at the Japanese market, I think we should reference that and consider them for what we are trying to do in the U.S. markets going forward. So with AI, I don't think there should be any immediate impact, but rather gradually, things will start to change with AI. So let's say, unemployment rate becoming 10%. If that were to happen, that's an extraordinary thing to happen, that's totally an extraordinary thing. And I don't think that will happen, at least that's what we are saying internally. We are not trying to make any excuses here, but let's say, the unemployment rate becomes 10%. And that is something beyond our control. That's not something we can address. It's for the government for the State to address. Of course, having said that, we want to help with no inflow of immigrants with the AI and so on. Of course, there are various factors, but they are localized and you ask us questions about recruits business being affected by these different pieces. I fully understand what you're saying, but we need to look at the entire pie, the number of jobs, the number of industries that exist, then I become skeptical with just these factors, would they bring a super huge impact on our business. It's like reducing the water in Lake Biwa by 10% or changing the color of the lake, what would it take? I think that's the kind of discussion that you are raising here. So there may be people who say that the business is quite challenging. It may be difficult. I fully respect their opinions. But I don't fully agree. I don't think that's the extent of the impact that we should expect. Going back to the question from earlier, should we expect a V-shaped recovery? No. And even without such a v-shaped recovery through efforts, I think we can go on. We want to go on. That's what I feel. Perhaps mobility will increase the type of talent. Business clients want to hire may change. They need to change. People want to work where they are needed. And I think that's the happiest situation for any worker. And of course, this is clients who are looking to hire such people. I'm sure there are clients out there who are willing to hire people who want to work with them. And we want to help support these job seekers and business clients and what are the services that we need to offer to reach and realize those goals. You go to a restaurant in the U.S., you go some places, and they are experiencing shortage of worker -- labor shortage is a serious issue. Junko Yamamura: I see. Junichi Arai: Whenever I have this -- I talk with you, Yamamura-san, we end up having conversations like this, very casual chat. Mizuho, are we already over the time? Mizuho Shen: It's already been 1 hour, but I see more hands up. So maybe we can stay on until quarter 2. So we'll go on to the next question. Morgan Stanley Securities, Tsusakan-san please. Tetsuro Tsusaka: Tsusaka speaking. Can you hear me? Junichi Arai: Yes. Tetsuro Tsusaka: So I have a simple or maybe a complex question. So Arai-san, you talked about Deko impact in one word. So for Indeed, as an organization, Deko's leadership is now incorporated and that resulted in a better growth than expected, better pricing increase than expected. So what is happening? So did the organization change or product change? I think all these factors are intertwined, but what -- in what way did things happen, if you could elaborate, please? Junichi Arai: Well, I don't want to praise him so much so that he blushes, but -- and I did not hear directly from him, but when I talk with Indeed headquarter people or the key office people I understand that he is quick. When we work with Deko, it's quick. He knows what we want and when things need to be decided, he decides right away. So what we want to do is clearly communicated. So it's easy to work with him, people say. So from the perspective of people working with him, I don't know, for a lack of a better word, it is rewarding. It motivates you, gives you a sense of fulfillment. That's what I hear from people, especially the people in products and sales. They do very detailed meetings with Deko. So if we make this kind of product, this is not good. This is what we want. Sales, please do this, very detailed requests come and concrete answers come for questions and consultations. So for sales increase and cost reduction, we can work on both sides in a very concrete terms. So the non-value-added products will not be focused. Focus is on where they are good results. Understand. So this is the recruit way. Tetsuro Tsusaka: I understand. Thank you very much. Junichi Arai: Of course, job seekers are very important. So how we offer value to job seekers comes first and foremost. That is the priority. But at the same time, how we can be appreciated by our clients so that they use more money. Deko is the businessman. So how we can bring smile on client's faces. That is all he thinks about every day, day in and day out. Please ask him directly too. Tetsuro Tsusaka: If there's an opportunity, I will. Mizuho Shen: Next will be the last question. Nagao-san from BofA. Yoshitaka Nagao: Nagao-san. I don't know if it's a question or comment. The ARPJ that you've disclosed, I have a question around that towards the second half. The ARPJ is going to increase, but looking at the formula, this is price-driven. If it is a price-driven increase, then that's good. Algorithm has been improved. Product unit prices increased and the profitability is enhanced. But if a number of job postings is decreasing or free advertising, free jobs are increasing. And still, we should see that this would contribute to the increase in the ARPJ as a residual effect. So how should we interpret this for the second half? Arai-san, are you intending for this to be price-driven increase? Junichi Arai: So far, we've had the Indeed model and if you continue to have a very strong impression of the past Indeed model, then if you look at the results 6 months from now or 1 year from now, you may think that the things are quite different from the expectations. I talked about subscription audio. For Indeed, this is a fairly new thing. So we need to consider everything, including all these new things divided by the number of jobs. We should increase, we should see an increase in the ARPJ. So as I said before, jobs that were not monetized in the past will bring in revenue and the paid jobs in the past should enjoy higher efficiency if clients are looking to reach better, more efficiently, then the clients can pay more. So the changes of how the jobs change irrespective of that, if we have more clients who value and are willing to pay for these things, then the ARPJ should increase. Just because the number of jobs decreased, it doesn't mean the growth rate increase is guaranteed. That is not the case. So as I said before, this KPI is a quite challenging, tough KPI for us. The reason I say this is because we look at the revenue for all jobs. So it includes jobs that we are not currently involved in at all. It is included in the denominator. So it requires us to consider how we can start to monetize these jobs. So that KPI includes all these things. So that's why I say this is a very tough KPI. AI tools like screening clients that are quite famous, they don't need to advertise. They already get enough applications. They have too many candidates applying. So those are clients that did not pay for our services. But going forward, this is something we can offer and sell to these clients. These are clients that we were not able to do business with in the past. But if we start to acquire these clients then, going back to Nagao-san's rather doubtful question, by doing things like this, we can increase -- we can see an increase in the ARPJ. Perhaps I did not answer that question. Yoshitaka Nagao: No, I get it. With the economic downturn, the number of job postings decrease, but there are still clients who are struggling to hire clients, who are determined to hire people, they will use the company's services and the paid advertisements or ARPJ, I don't know if it's going to be through subscription. In any case, the ARPJ will increase. Even in the economic downturn, the more clients paying for your products and services, you can see a higher ARPJ. That's certainly a realistic scenario. So as a KPI, I understand that this is a very difficult, challenging KPI that you've increased the hurdle rate yourselves, you're trying to take on this challenge yourself. I certainly see your determination, your resolve. So it's not that I've been doubtful. Junichi Arai: Sorry, because it's you Nagao-san, I was half joking when I said your question, I was doubting our intentions. Going after new clients as part of our recent initiatives. So we are starting to see positive results. That's what we are discussing with the business side. Deko also wants to maintain this momentum and do even more. Well, since Deko is saying that we can do this, I think we can. At least that's what I choose to believe. Mizuho Shen: Thank you very much for staying for a long time. So with that, we will close the Recruit Holdings FY 2025 Q2 Earnings Call. Thank you very much for late in the evening. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Welcome to the Eurazeo 9 Months 2025 Trading Update Presentation. Today's conference will be hosted by William Kadouch-Chassaing, Co-CEO. [Operator Instructions] Now I will hand the conference over to the speaker. Please go ahead. William Kadouch-Chassaing: Thank you very much. Good morning. Thank you all for joining this call. I'm pleased to welcome you to our trading update for the first 9 months of 2025. To remind everyone, for the trading update, we don't update the NAV that will be done at the end of the year, but I'm, of course, ready for questions you may have on the topic. In a nutshell, Eurazeo continues to gain market share in asset management. We had another quarter of dynamic fundraising and AUM growth outperforming the market. Second, we continue to outperform the market in realizations and distributions, which is, as you know, a key differentiating factor in the current market environment. And third, the quality of our balance sheet portfolio remains strong with healthy operational metrics across the board and realizations confirming our ability to monetize our balance sheet above its carrying value. Let me start with fundraising. We raised EUR 3.2 billion from our clients in the first 9 months of 2025, which is 4% above last year and well above market as global fundraising is estimated to be down this year at about 10% according to PitchBook, you may find as well other sources that will go in the same direction. This confirms our ability to gain market share in a more and more competitive and polarized market. This also highlights the quality of our investment franchises, the relevance of Eurazeo positioning as a focused European mid-market investment platform as well as the strength of our distribution capacities. Indeed, we make progress both with institutional and with individual clients. In terms of asset classes, whilst private debt continues to perform strongly, our private equity franchises have connected well. Private equity fundraising in Q3 was fueled by our secondaries and mandates franchise on top of our earlier successes in H1 in buyout, growth and impact. Our PE fundraising is up 38% year-to-date. Private debt, as I said, had a very good quarter with EUR 800 million raised in Q3 alone, mainly in direct funding. Our flagship EPD VII has already raised around EUR 3 billion in total. On wealth solutions, we raised close to EUR 700 million in the first 9 months, which is 7% more than last year. We just announced that we have received the regulatory approval from the launch of our new evergreen funds in the prime line, EPIC in private debt and EPSO in secondaries. They will support our growth ambitions in Europe. Given our current momentum and pipeline for the rest of the year, we are confident, I should say, very confident that fundraising in 2025 will exceed EUR 4 billion. We continue to expand and internationalize our client franchise, which is a key strategic objective that we had articulated in our Capital Market Day back in November 2023. We added 29 new institutional clients since the beginning of the year on a base of 440. This is a significant number. 74% of inflows came from international LPs in the first 9 months of the year, a share that continues to grow year after year, as you can see on the chart, with notable successes in Asia, Middle East and the rest of Europe. Our wealth solutions franchise also continues to grow at a steady pace with new distribution partners onboarded and already close to 10% of flows outside of our home market for the first 9 months of 2025. Overall, AUM growth and particularly fee-paying AUM growth illustrate the dynamism of our asset management business. Total assets under management were up 5% in the first 9 months, reaching EUR 37.4 billion. Third-party AUM only, which is a key focus of our strategic plan are up 11%. Fee-paying AUM were up 7% at nearly EUR 28 billion with third-party fee-paying AUM growing at also 11%. Let me stress that we believe this is above market growth. The decrease in balance sheet-related AUM reflects the successful implementation of our capital allocation strategy. Management fees stood at EUR 316 million for the first 9 months. Fees from third parties are up 5% overall, excluding catch-up fees and ForEx impact and fees from the balance sheet are down 3% year-to-date due to recent exits and reduced commitments in the funds as per the plan. On private market, we experienced strong inflows, which I just referred to, as shown by the rise in fee-paying AUM. It was partly offset by planned rate step-downs in older vintages that have been venture growth and buyouts. We also have a slight mix effect with strong fundraising from private debt and secondary and mandates in recent quarters, which carry a lower yet healthy fee level. IM Global Partners fees are up 4% at constant ForEx. Management fees from the balance sheet are logically down year-on-year, they are down 3% due to exits and reduced commitments in the fund as said. Let me now turn to deployments and realizations. As a group, Eurazeo deployments reached EUR 3.9 billion over 9 months, which is up 20% from the same period of last year, with transactions reflecting an expanding pan-European investment approach and our focus on structurally growing sectors. We deployed EUR 800 million in Q3 in private equity to support category leaders such as OMMAX, a digital and AI strategy consulting firm in Berlin based in Germany; Filigran, an AI-based cybersecurity firm; and Dexory, a U.K. leader in logistics, robotics and growth. Adcytherix, a developer of innovative oncology treatments and Proteor, a leader in orthotics and prosthetics in healthcare. And in real assets, we invested with MPC OSE in offshore wind farm servicing. Private debt continues to be very active with EUR 900 million deployed in Q3 in a dynamic lower mid-market segment. We are well placed to continue to grasp opportunities with EUR 7.2 billion of firepower, of which EUR 7.2 billion of third-party dry power powder. Realizations for the first 9 months stood at EUR 2.2 billion. Over the third quarter, we notably announced 2 important exits in buyouts. We sold CPK, a European champion in sugar and chocolate confectionery to Fera County Group, a leading U.S. confectionery linked to the Ferrero Group. The transaction returned around EUR 200 million of additional cash to our balance sheet and was concluded at a price above NAV. We also divested from Ultra Premium Direct, France leading direct-to-consumer pet food brand for approximately EUR 140 million, generating a 2.1x gross cash-on-cash return for the balance sheet. These transactions announced this summer have been closed in October. We also stepped-up realizations across the venture and growth funds with 2 important new exits, the German company, Cognigy and ImCheck. Finally, in private debt realization stood at EUR 600 million for the first 9 months. Several deals are expected to unfold in Q4. Together, these transactions illustrate the quality of our investments and our continued focus on generating liquidity and value for our investors and shareholders. At a time when the main focus of the industry, as you know, revolves around distributions, this is, we see a key competitive advantage for future fundraising. So let me illustrate that point, starting with buyouts. As you can see on the chart, the pace of distribution to LPs in the market has markedly slowed down in the past 5 years in a challenging and volatile macro environment. This is a topic for the industry. In this context, Eurazeo private equity buyout franchises have been outperforming clearly. Year-to-date, in 2025, Eurazeo's buyout franchise have already returned 10% of the NAV compared to around 5% for the broader market in H1 according to industry estimates. Looking at the '21, '24-time horizon, you'll find that the pace of Eurazeo rotation was 5 points above market and even 7 points focusing on the balance sheet portfolio only. As you know, the balance sheet, I'll come back to that, has already returned 14% of its NAV. Another positive catalyst, and we think this is a very important catalyst for future performance and the growth of our asset management activity is our proven ability to complete successful exits across the biotech, venture and growth franchises. After 3 landmark deals in 2024 Onfido, Lumapps and Amolyt asset, we've completed 2 important exits in Q3 2025 in excellent conditions. In growth, Cognigy, a German AI-based customer management provider was sold to NiCE, an Israeli American listed company for nearly EUR 1 billion, representing a 2.1% cash-on-cash return in a year our EGF IV fund. This is a remarkable outcome, which brings EGF IV, which has only completed its first closing already at 25% of DPI and 1.15x TVPI or MOIC. That's quite exceptional in the industry where DPI tends to be low. In biotech, our Kurma team sold ImCheck to IPSEN for up to EUR 1 billion if certain milestones are met. The transaction should generate between 3 and 7x cash-on-cash returns and created substantial value for our BioFund vintages, which bodes well for the future fundraising. Let me highlight that we now added the performance of the biotech funds in -- together with the performance of the rest of the fund. Pro forma this transaction, the DPI of Kurma BioFund III now stands at 75%. Let's focus more specifically on our balance sheet rotation. As you know, this is an essential part of our strategy to build an asset-light business model and execute on our promise to return more capital to our shareholders. With CPK and UPD, which closed in October, our balance sheet has realized EUR 1.1 billion of disposals year-to-date or 14% of last year's net portfolio value, already ahead of the total for the full year 2024 and as I said before, much above market pace of rotation. Since the beginning of 2024, we have sold around EUR 2.2 billion of balance sheet assets, i.e., since the beginning of the plan. This is around 27% of the net portfolio value at the end of 2023. We sold these assets at an average premium of 8% on our latest mark and a gross cash-on-cash multiple of 2.1x. Several processes are ongoing and should lead to transactions announced and realized through the end of the year. As you can see, all the exits we've announced and completed in 2025, including the most recent transactions, they are on the green in the bar charts, demonstrate again our ability to sell assets at or above NAV. Let me stress again that we believe this is the best proof point to assess the quality of our portfolio valuation approach and processes. Let me stress also, and this is a very important thing for us, that portfolio valuations only make sense if they are associated with a proven capability to generate liquidity. When you compare Eurazeo, always keep in mind that our DPIs are higher than the average market. Operational metrics of the companies in which our balance sheet is invested through the funds continue to be healthy. The average growth of our buyout companies was plus 6% over 9 months, continuing the trend seen in H1 in spite of a still sluggish and volatile economic environment. In growth, activity remains solid across the portfolio with 15% top line growth on average. Doctolib, the largest investment in this strategy, continues to grow strongly and announced it has already reached profitability in Q3 2025. The most recent investment in Eurazeo Growth Fund IV recorded an average revenue growth of around 37% over the first 9 months of the year, confirming their strong momentum together with the DPI of 25% and value creation in the fund, this bodes well for future fundraising. After years of strong growth, hospitality revenues logically have been stable in the first 9 months, while our infrastructure businesses continued to grow at a double-digit pace. Finally, before we open the floor to questions, a word on shareholder remuneration. This is a key commitment we've made to shareholders again in the plan '24-'27. By the end of 2025, we will have given back close to EUR 1 billion to our shareholders, approximately EUR 400 million in dividends and approximately EUR 600 million in share buyback, the equivalent of roughly 12% of Eurazeo share capital. As a remember, we had bought back EUR 200 million of shares in 2024 and doubled our program to EUR 400 million in 2025. With the acceleration of the program this summer, we have already bought back EUR 300 million, and we'll buy the remaining EUR 100 million before the end of the year. Thank you very much for listening to this call. We can now open to Q&A questions. Operator: [Operator Instructions] The next question comes from Oliver Carruthers from Goldman Sachs. Oliver Carruthers: I've got 3 questions. The first question on the realization rate. Just would you be able to help us just get a sense of what hurdles you have to clear to get to around that 20% realization rate this year? It seems from the press release, you're in late-stage negotiations for a number of assets. Is there any sense you could give on this would be great. Just really just trying to get a read on how sensitive this number could be to external factors, regulatory approval, financing, et cetera. So that's the first question. The second question, at the half year, you said neutral to slightly negative value creation for the full year with the first half obviously being slightly negative. I know there's no formal revaluation updates today, but can you give us a sense of how the balance sheet investment portfolio is tracking relative to expectations from the summer? And if you can, is it reasonable to assume 2H at this stage is tracking to be at least flat? That's the second question. And then the final question on fundraising. It looks like a good update today and noted the more than EUR 4 billion commentary for the full year. It looks like more and more of your fundraising is coming from non-European investors that stepped up quite a bit this year and even in 3Q. And any color that you can give on what's attracting non-European investors to the Eurazeo platform? Is it a broader theme of capital allocation to Europe? Or are there some other things at play would be very helpful. William Kadouch-Chassaing: Thank you very much, Oliver, for your questions. On realizations, we have several processes pertaining to different type of asset classes. So again, we are confident that we are able to trend towards our historical average. Now as you point out, there may be cases where there may be some delays between signing and realization. So, it's too early for me to tell you, given the fact that sometimes it requires some regulatory processes like CPK, we have to, of course, look through the hurdles of antitrust that was logical. And then we concluded in October. But expect that we will at least announce further deals through the end of the year and some of them will lead to realization soon after signing. Some of them may be realized slightly later. The portfolio, no, we don't reevaluate the portfolio every quarter, yet we do valuations of our funds on a quarterly basis for our clients. And we also have operational metrics, and we look at multiples and as they evolve. So, we have a sense of where it goes based on what we know, of course, we're missing -- we missed the last quarter of data points, but we already have a sense. So, we can confirm very firmly the guidance that we will be between 0 and slightly negative for the value of the on-balance sheet portfolio at the end of the year and which may lead to a neutral to slightly positive on the share count on the share basis given the share buyback. Fundraising, as you have seen, we reiterate the more than EUR 4 billion. We have good momentum across different asset classes. Your question pertains to our ability to grow internationally. Yes, there is a case that there is more LPs across the globe, not only in Asia, but in Asia, particularly in countries such as South Korea, Japan, Singapore, also China to Europe. This is also the case -- this is why I said it's not only Asia, in Canada, for example. But we, as you know, also have potential to expand in areas where we are already present, but not -- but have a potential to do more like in Middle East and in certain countries in Europe outside of our core home markets, if I may say so. We have France and generally Benelux, particularly Belgium and Luxembourg. So, there is a trend towards allocating more towards Europe. But I wouldn't say that Europe is just -- that Eurazeo is just suffering on the trend I think the main topic is that we have been able to position the company with a very differentiated value proposition. If you think about it, and you know very well the market of listed and non-listed companies, there is scarcity of platforms focused on mid-markets. And there is uniqueness in being a platform focused on European mid-market. At a time when the market is more and more polarized in the mindset of LPs, with LPs preferring to deal either with platform or some extremely differentiated monoliners with the rest of the industry being a bit more -- less attractive to LPs. We benefit from this. We benefit from being a platform with a unique positioning as a European mid-market/growth and impact-focused approach. And that's really what helps us in the marketing. People are confident with the stability and sustainability of the platform and what it can bring. And they understand very well that you can generate alpha and sometimes better alpha than in other regions in the world in European mid-market. Operator: The next question comes from Alexander Gerard from CIC Market Solutions. Alexandre Gérard: I have 2. My first question is related to the private debt fundraising year-to-date, which is down. How do you see the future regarding that asset class? And do you think that what happened in the U.S. with first brand and colors could more generally speaking, slow down the rate of fundraising in that asset class. So that's my first question. And the second question is regarding the gearing of the group. At the end of 2023, the gearing stood at 9%, which corresponded to EUR 0.8 billion in terms of net financial debt. And now the gearing has increased to 23% at EUR 1.6 billion. So how do you -- where do you see your gearing in 2027? And I mean, we have the feeling that you are returning cash to shareholders at a good rate, but maybe through a higher leverage. So where do you see your financial position going forward? William Kadouch-Chassaing: Thank you very much, Alex, for your 3 questions. Let's start with private debt. We have a very, very good momentum in private debt. And when I say we have already reached the EUR 3 billion, it means that we are above where we're going to fundraise on EPD VII above target. That would make of Eurazeo the largest asset manager focusing on lower mid-market direct lending, which is an attractive category given the yields and the margins that we can generate in the industry. We also have a good momentum in the fundraising of our asset-based focused franchise. So, if you look at this franchise, just have in mind we continue to have a good momentum, and we think we are gaining share both in deployment and as well as fundraising in countries in terms of deployment where we were less present historically like the Nordics and the DACH region or Italy. And as a primary brand franchise, we, as a result, gained share with key large LPs, consultants distributing us across the group. So that music continues to go very well. Now to your point on the U.S., what's happening in the U.S. and the risk for the industry and for the franchise. Let me say, first of all, that we don't see any sign of weaknesses in our portfolio to date, i.e., the default rates continue to be very, very low. The default rates historically, and this continues to be the case, is about 20 basis points. It has increased a little marginally, but it is very low. And if you factor in that the recovery rate is 50%, then you have a de facto loss rate, which is very, very low. So that's a very important point because what you have seen in some cases in the U.S. is actual defaults. We haven't seen that in our portfolio for different reasons we can talk about. I would be cautious on extrapolating what's happening in the U.S. In a sense, it reminds me as an ex-banker, what happened in the securitization market, which exploded in the U.S. as a prime. In fact, the securitization market was very safe in Europe, and there's been some confusion here. So we are -- what we're seeing in the U.S. pertains to me more to a more relaxed, a loser regulation in terms of banking and insurance being able to buy CLOs and some direct lending assets which may be lack of proper framework and ending with some losses on their balance sheet, which is -- which raises the question in some minds as to the potential systemic risk. We are very, very far away from that in Europe. The restriction that is put on banks and interest to invest in these asset categories continues to be strictly supervised. And that's probably not a bad thing. So, I think we're talking about 2 different dynamics. The gearing. The gearing has increased but continues to be compatible with a quasi-investment grade or investment-grade category when we do our own sort of shadow rating, talking to banks and relevant bodies. Let me stress that 17% gearing. I'm talking about pro forma, the sales and exits announced in Q3 with CPP and UPD, it's a gearing that is very reasonable. And as you know, it does include close to EUR 200 million of debt at IMGP, which is totally nonrecourse. So, from a creditworthiness standpoint, the group remains very safe. That was not your question. The question is more going forward, what do we see towards 2027. And there you know the answer. The answer is that we see that gradually that gearing will reduce. And at some point, we will end up with excess cash on the balance sheet. Now excess cash before we distribute back money to our shareholders, which is what we've done. If you adjust the gearing to the EUR 1 billion, I mentioned before, you'll see that the company has virtually no gearing pertaining to its own operations. So that is something we monitor that idea that, number 1, gearing should always be well contained. In and of itself, I think some gearing is a good thing in reality. Fundamentally, the gearing will continue to go down through 2027. And 3, even with that approach, we should be able to continue to serve our shareholders through the share buybacks. Operator: [Operator Instructions] Unknown Executive: There is no other question on the line, I'm going to ask the questions that are the text that we've received. So, we already answered some of them. I will say David Cerdan from Kepler asks, how do you see 2026 for fundraising given the changes within the industry? And what are the initiatives on this for Eurazeo? William Kadouch-Chassaing: Well, thank you, David. I don't know if you're on the line but at least thank you for your question. A bit too early to communicate to the market on 2026 fundraising. But as you may imagine we have a quite good view as to what would be on the road and what we can achieve in 2026. So, I'd say it's more to say. We consider that given the diverse product offering that we have linked to that good performance, in particular, in terms of distribution to clients, given what we said on the back of the question of Oliver regarding the appetite for European mid-market, we should continue to gain market share and pursue the place of having good fundraising and better fundraising than the rest of the market. Of course, it's absent a major crisis. It is assuming still sluggish and somewhat polarized market environment that we referred to. So that's all that I can say at this stage. Now we will come back to you with the pipeline, but we had already mentioned some of it. We will be full steam fundraising case in point for low or mid-market buyouts. That's a hot market. The previous vintage is running at more than 30% IRR, very good quartiles across all metrics. So that should be a success that goes into 2026. We will have the beginning of the full steam fundraising of our second vintage of infrastructure fund. As you know, the first infrastructure fund had fundraised much above its initial targets. The performance of the fund is very good. Hence, what I mentioned about the metrics that should be successful fundraising. And as a case in point, we will continue to fundraise on Growth Fund IV, which has done its first closing this year. Given the performance of the fund already and in spite of the fact that growth and venture more generally continues to be asset classes for which LP appetite is a bit more nuanced we should have momentum because that's quite a differentiated performance. And so forth, we'll have asset back on the road. Wealth, we should have the benefit of the new Evergreen funds launch. So, without going into what we're going to articulate when we publish our full year results with a detailed product offering that will be on the road, you can see that we feel confident we have enough to offer to the market and so more of the same. Unknown Executive: Maybe we'll stay on the fundraising. A question from Isobel Hettrick from Bernstein Autonomous. She has a question on the buyout space, given the multiples that you have currently on Eurazeo Capital on IRR, MOIC and DPI and considering that it is now 4 years old, how are you thinking about fundraising for EC VI and the ability to attract third-party investors on this future funds? William Kadouch-Chassaing: We think investors will look at EC IV, which is more mature funds. And then we look at EC V when EC V has enough maturity because beyond the vintage, you should look also at the pace of deployment. EC V is deployed roughly 50%. So, it doesn't have as of yet, the granularity and that would lead to a full meaningfulness of the metrics. So, if you look at EC V, we are in the good metrics, particularly on DPI and very decent in IRR and cash on cash. And we have good assets in EC V, but it's a bit too early to call given that some of them have been invested recently like Mapal, but also ERS and BMS have been invested fairly recently. So, they are good assets with strong operational metrics, but we have been quite prudent in remarking these assets over time. So, all that in a nutshell, will lead you rather towards 2027, maybe end of '26, but certainly more '27 for a full steam fundraising EC VI. So, we'll see how we perform at this time. But right now, we are very confident given the quality of EC IV and given the early metrics that we see within the portfolio of EC V. Unknown Executive: So, we have one question from an investor that we will answer directly because it's pretty specific. And for the moment, I don't have any other question on the text line. If anybody has an overall question to ask, you can still raise your hand. Operator: The next question comes from Alexander Gerard from CIC Market Solutions. Alexandre Gérard: 2 follow-up questions on my side, please. The first one regarding the -- your corporate development opportunities. Can you maybe update us on that front? For example, you have a look at committed Advisors that has just been acquired by Wendel. Is secondary segment that is attractive to you? And going forward, where are your priorities if you were to strengthen your expertise through M&A? And secondly, at the time of the CMD, you had set also a goal in terms of improving your operating efficiency. Can we have an update on that? Can we have examples of what you did since November 2023 to make your -- improve your operating efficiency? William Kadouch-Chassaing: Thank you. Well, it is true that for -- on the quarter, we don't update on IRAs and margin, but always good to remind us that we are committed to improve operating efficiency on the asset management. Regarding corporate development, I mean, we are at a stage where the industry is clearly being divided into large platforms with our own identified market. Again, Eurazeo as a platform, has a right to win as a leader in European mid-market, as we said. And monoliners,ome of them will continue to be very successful and some of them, quite a few of them may find difficult to continue the journey. And hence, there is a tendency to -- for people to try to find a home within the platform. So yes, we are having a number of discussions very often generated by people themselves who want to meet with us that we didn't have in the past. Does it mean that we want to do deals? Not necessarily. We consider that we have a strong strategic rationale in pursuing our organic growth. But as we said many times, there may be cases that may justify looking at M&A if that would help us speeding up the scaling of some of our strategies and acquiring new franchises, client franchises that we don't have. So of course, I will not comment more. I will not comment as to whether we've looked at committed advisers. But I will just remind you of the fact that our secondary franchise is bigger than the one that just acquired. And it's very successful as a franchise, both with LPs and with wealth, close to 50% of the fundraising of that secondary franchise is nurtured by our wealth channels. Secondary together with debt a category that you absolutely need to have if you want to develop successfully into the wealth market. And we also have a strong mandate franchise and fund franchise. So, it's more an organic journey, an expansion of the international footprint of that franchise that we're looking for. Operational metrics. So, this is not a topic for the 9 months. But as you know, we have already increased quite materially the operating leverage of the company. We added close to 500 basis points of margin between 2022 and 2024. What we said -- so we will continue -- so we already reached the bottom end of our mid-term target. You referred to the CMD. At the time, we had said between 35% and 40% FRE margin. So, we already crossed the bar of 35%. So, I'd say, as you can see, we are very focused on that. We continue to be focused on that, being mindful though that we are also a company that has significant growth opportunities. So, we've invested in strengthening our sales force. We have invested in some reinforcing of our investment strategies. So, you have to be also managing that growth opportunities because a lot of will come -- of the operational efficiency will be associated to our capacity to increase our revenues. Unknown Executive: Maybe we have 5 more minutes. I will take the 2 questions that I have online. First, a question on AI, much on the topic. Do you perceive AI as an important game changer for your participations with middle- to long-term horizon? Can you comment on your strategy concerning the evolution linked to AI? And maybe just the other one, could we expect some IPOs in 2026 for some of the assets that are exposed to the balance sheet? William Kadouch-Chassaing: AI is a very important topic for us. And it will require certainly more time than this call. So, I'll try to really summarize it. AI for us pertains to 3 things. Number one, are we as a company using what AI can offer. I'm talking about as an asset manager. The answer is we're going full speed in using AI in our middle back office conversal operations. We consider that everything we can automate. But beyond automate, we also use some -- we have some test using agentic AI. We also have training for the people in the firm, including CEOs as to how to prompt. So that's clearly a focus, and this is linked to the question of Alexander regarding operational efficiency. We also use it. We have quite a few experiences now that we've made to test the quality of it and the outcome for our investment processes. AI can be very forceful if you use it right, to generate analysis of deal flows as well as to process some basic analysis on numbers, projections, market data that's obviously quite efficient. And we always have a limit. The limit being that AI can't do something which we expect our good investors to do, which is to assess quality of management. And then there is the core of what we look at when we think about AI, which is how much opportunity to grow the companies we invest into AI can give or on the contrary, how much of disruption can AI cause in the companies we invest to, the companies we have invested into. It's very important to have in each of the franchises that we operate in investments, people focusing on that. So, we have operational partners very focused on that topic of assessing the opportunities and risk linked to AI. It is also very beneficial to be a company that is able to have investors in venture, in growth equities through buyouts and more mature company -- these people have a constant dialogue because when you are a buyout investor, talking to your colleagues in venture to see a few innovations that may lead to impacting the portfolio companies you're looking at is obviously extremely important. The same applies, by the way, to health care. The fact that we have in the same house people who do seed biotech or med-tech companies at the same time that we have buyout investors that invest in more mature health care company. If you manage to get the dialogue and we manage to have this dialogue between the teams, that's very forceful. So, AI is something that, of course, will be front and center for all the companies we invest into. Nobody will be unaffected. And there may be a case that there is some eating in the investment speed in the infrastructure of AI, but there is absolutely no doubt that AI will be front and center going forward. So, the answer is yes. And the second question was -- Unknown Executive: IPOs in '26. William Kadouch-Chassaing: Don't expect IPOs in 2026 pertaining to our portfolios. Now what we observe is that the market of IPOs has improved in the U.S. There's been some improvement as well in Europe. And we have some companies, particularly in the growth portfolio that are getting more and more good cases for a potential IPO. But the timing of which, of course, we will not commit because we don't master the markets today. So '26 may be a bit too early. Unknown Executive: As we have no further questions, I think it's time to end this call. The next step for us is on the 11th of March for our full year results. Thank you very much for attending this call, and have a nice day. Bye-bye. William Kadouch-Chassaing: Thank you very much. Bye-bye.
Operator: Thank you for standing by. My name is Gail, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lightspeed Second Quarter 2026 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Gus Papageorgiou, Head of Investor Relations. You may begin. Gus Papageorgiou: Thank you, operator, and good morning, everyone. Welcome to Lightspeed's Fiscal Q2 2026 Conference Call. Joining me today are Dax Dasilva, Lightspeed's Founder and CEO; Asha Bakshani, our CFO; and J.D. Saint-Martin, our President. After prepared remarks from Dax and Asha, we will open it up for your questions. We will make forward-looking statements on our call today that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Certain material factors and assumptions were applied in respect to conclusions, forecasts and projections contained in these statements. We undertake no obligation to update these statements, except as required by law. You should carefully review these factors, assumptions, risks and uncertainties in our earnings press release issued earlier today, our second quarter fiscal 2026 results presentation available on our website as well as in our filings with U.S. and Canadian securities regulators. Also, our commentary today will include adjusted financial measures, which are non-IFRS measures and ratios. These should be considered as a supplement to and not a substitute for IFRS financial measures. Reconciliations between the 2 can be found in our earnings press release, which is available on our website, on SEDAR+ and on the SEC's EDGAR system. Note that because we report in U.S. dollars, all amounts discussed today are in U.S. dollars unless otherwise indicated. And with that, I will now turn the call over to Dax. Dax Dasilva: Thank you, Gus, and good morning, everyone. I'm thrilled to announce that Lightspeed had another very strong quarter. Revenues, gross profit and adjusted EBITDA came in above our previously established outlook. This marks the second consecutive quarter where we have exceeded revenue and gross profit outlook metrics. In addition, we delivered positive free cash flow and saw our GTV and location growth accelerate as we continued solid execution of our strategy. Our decision to focus on our 2 core growth engines, retail in North America and hospitality in Europe is clearly working, and we are seeing fantastic momentum. From product development to landing new business, our teams are delivering at a record pace. To deliver on our strategy, we are harnessing the latest advances in AI. As an example, this quarter, we released a host of new AI-driven products and features to enhance our customers' omnichannel capabilities. We are already seeing strong adoption across thousands of use cases. Additionally, by increasingly integrating AI tools in our go-to-market efforts, we are seeing sales productivity improvements such as doubling the number of connected calls from our outbound sales reps. We continue to leverage AI thoughtfully to drive revenue, improve products and reduce costs. I want to begin today by comparing this quarter against the 3 strategic priorities we laid out at our Capital Markets Day. As a reminder, those priorities are: growing customer locations in our growth engines, expanding subscription ARPU and improving adjusted EBITDA and free cash flow. On growing customer locations. In Q2, customer locations in our core growth engines, North American retail and European hospitality were up 7% year-over-year, an acceleration from 5% last quarter with approximately 2,000 net new customer locations added in the quarter. This acceleration clearly demonstrates that Lightspeed is growing in markets where we have a proven right to win. As a reminder, our goal is a targeted 3-year customer location CAGR of 10% to 15%, and we are on pace to meet that goal. Total customer location count, which includes all of our markets, was net positive again this quarter. Expanded outbound sales efforts, increased investment in vertical brand marketing and more effective inbound spending have helped drive location growth, particularly in our growth engines. Outbound bookings in our growth engines nearly tripled year-over-year. Since the start of the fiscal year, we've grown our outbound team to approximately 130 fully ramped reps within our growth engines, each now carrying a full quota. This investment is paying off. Our outbound motion continues to drive highly targeted acquisition of our ideal customers with strong unit economics. We will keep allocating resources toward outbound to capitalize on this proven engine of growth. During the quarter, we continued to expand our presence at trade shows, a great source of lead generation for ICP customers. Our NuORDER offering gives us a unique position within the retail environment and participating in these events gives us an opportunity to both demonstrate our strong product offerings and communicate our vision for NuORDER and our wholesale network. We're also continuing to host our own signature product innovation events, where we gather customers to showcase recent product launches and industry insights. Coming up, we'll be hosting Lightspeed Edge in Paris on November 24 for hospitality customers and New York City on January 12 for our retail customers. All these efforts continue to have a halo effect on our inbound funnel as we increase our visibility with our ideal customers through trade shows, outbound targeting and Lightspeed branding on our terminals at local restaurants in Europe and retailers in North America. We had many notable customer wins this quarter. In retail, we added 40-location Crock A Doodle, which operates pottery painting franchises across Canada, Benson's Pet Center with 9 locations in New York and Massachusetts. Within NuORDER by Lightspeed, we extended our partnership with Nordstrom and added marquee brands such as Carhartt and Steve Madden. And in golf, we signed on Top of the World Communities with 3 restaurants and 2 golf courses in Candler Hills, Florida. In hospitality, we added the 2 Michelin Star restaurants Hirschen in Salzburg, Germany. The Beckford Group focuses on unique premium hospitality experiences across their 6 locations in the Southwest of England. And with 2 locations in Antwerp, Belgium, we welcomed Da Giovanni, one of the area's well-known Italian restaurants. On driving software revenue and ARPU. Q2 software revenue grew 9% year-over-year and software ARPU increased 10%. Growth in our key markets is fueling software revenue as expanding location counts and targeted outbound efforts attract larger, more sophisticated customers who tend to adopt higher-end plans. This momentum is further supported by our steady release of new innovative features on our flagship offerings. In the quarter, we released several new features. In retail, we launched multiple AI-powered tools designed to dramatically improve our merchants' online presence with minimal cost or effort on their part. We launched the Lightspeed AI showroom designed for physical retailers who want a compelling online presence without the added time commitment of running an e-commerce store. Lightspeed's AI agent takes product data hosted within the Lightspeed platform and delivers a custom-branded website and catalog to help drive store traffic. Originally released back in March in beta, Lightspeed's cutting-edge AI-driven website building tool is now available to all customers who are looking to offer a full e-commerce experience. Merchants simply describe or show Lightspeed's website builder the kind of site they want using real-world examples, and the tool builds a fully integrated professional looking online store with speed and ease. And we launched AI product descriptions. This powerful new tool significantly streamlines the manual workflow, adding new products to e-commerce sites. Retailers can customize subscriptions by adding specific instructions for tone, style and length to ensure brand consistency. Since August, this description and formatting tool has been used to create approximately 57,000 unique product descriptions. In addition to these AI-powered tools, we were very excited to launch NuORDER Marketplace. Currently, our retailers use NuORDER to connect directly to each of their brands individually, allowing them to search within that brand's product catalog. However, our retailers have to conduct searches brand by brand. With marketplace, retailers can search for specific products, colors, styles or sizes across multiple brand catalogs simultaneously to help them discover new products and better curate their offerings. Currently in beta, Marketplace will be launched soon to all eligible NuORDER customers. In hospitality, we launched Integration Hub. The hub enables our customers to easily discover, connect to and start using over 200 third-party applications within the Lightspeed ecosystem. We've seen strong initial reception with almost 1/3 of our flagship hospitality customers interacting with the hub since its launch. Adding on to the already robust capabilities available to restaurant tours through Lightspeed's AI-powered benchmarks and trends, our latest update adds new visual layers to the sales performance chart, highlighting best and worst days relative to the market and providing drill-down views for each sales metric, helping merchants to make data-driven pricing and operational decisions. Benchmarks and trends remains the anchor feature for our top-tier plan within hospitality. In August, we launched Lightspeed Capital in Switzerland, where we saw strong and immediate demand from our Swiss customers. Finally, we launched time menus to bring automation to multi-menu setups, eliminating the need for manual workarounds. We also enabled Lightspeed Order Anywhere to sync with the restaurant's Google business profile, ensuring a consistent online presence and improving discoverability. By narrowing our focus to our growth engines, we've enabled our development teams to become far more productive, and I'm thrilled with the pace of innovation we are seeing on our 2 flagship offerings. I want to take a moment to share a glimpse of what's next for Lightspeed. As you have seen with several of our recent product launches, we've been deeply investing in AI as a meaningful way to empower our customers and redefine how they run their businesses. I'm thrilled to preview our upcoming innovation, Lightspeed AI, a new way for merchants to access insights and make decisions directly within their POS. Think of this as your AI assistant with agentic capabilities. Our AI acts as a trusted partner to help our customers find answers, uncover trends and act faster than ever before, custom-built to serve our retailers and restaurateurs' needs. This is the next evolution of Lightspeed's AI journey, building on the success of products like AI showroom and benchmarks and trends and is already being tested by a select group of customers. We can't wait to share more in the coming months as AI becomes a foundational part of how we help businesses thrive. On expanding profitability. Finally, our third strategic priority was to expand profitability. And in this quarter, we did exactly that through expanded margins and improved cash flow. Lightspeed further strengthened its software gross margins to 82% and transaction-based gross margins reached 30%, with both improving year-over-year and from the previous quarter. Adjusted EBITDA of $21 million increased 53% year-over-year. Importantly, we also saw improved cash flow, delivering adjusted free cash flow of $18 million, up significantly from $1.6 million in the same quarter last year. Back in March, at our Capital Markets Day, we laid out a bold strategy with 3-year financial goals. We are now over 2 quarters into that period, and I believe our strong results are evidence that we are well on our way. Within retail, our large customers are complex retailers that need sophisticated solutions to help them order, manage and turn over their inventory. These customers need more than basic software to run their businesses. They need a light ERP solution, which is exactly what we offer. We believe no other cloud POS vendor can match the feature set within Lightspeed Retail. In addition, we stand apart with the NuORDER Lightspeed integration because with NuORDER, Lightspeed's retail POS has wholesale built right in. The end result is an unmatched ordering workflow and a flywheel effect where more brands bring in more retailers and more retailers bring in more brands. Within European hospitality, I am confident that we have the superior product offering. We are now complementing that strong offering with the go-to-market motion that is becoming best-in-class. In addition, regulatory requirements involving fiscalization are a barrier to new entrants into that lucrative market. We have a formula that is working, and we believe we will continue to excel in this region. I will let Asha take you through our financials before making closing comments. Asha Bakshani: Thanks, Dax, and welcome, everyone. Lightspeed had an exceptional second quarter with our key financial metrics and KPIs surpassing expectations. Our results are evidence that our product innovation, our aggressive outbound strategy and our strategic focus we embarked on are working. We are delivering in the areas that matter most, which sets us up well for the long term. Before I take you through the financials, I would like to highlight some key trends in the quarter that I found very encouraging. First, and perhaps most importantly, we're seeing a tremendous impact from our strategy to focus on our growth markets of North America retail and European hospitality, as you heard from Dax. Software revenue in these markets increased 20% year-over-year. GTV was up 15% year-over-year. Payments penetration was 46%, up from 41% last year, and customer locations were up 7% year-over-year versus 5% in the previous quarter. These markets make up over 65% of our total consolidated revenue. When we isolate the metrics in these markets, they reveal the true competitiveness of our offering and the strength of our platform. We are really excited about the accelerated growth we're seeing in these markets, especially since we are still early in our transformation. Second, even with aggressive investments in product and go-to-market, the company's total profitability and cash flow metrics continue to improve. Gross margins and adjusted EBITDA showed great progress, and our relentless focus on driving profitable growth helped us deliver positive free cash flow of $18 million in the quarter, up from $1.6 million a year ago, and we expect to generate breakeven or better free cash flow for the full fiscal year, a significant milestone for Lightspeed. As usual, I will walk you through a detailed look at our financials and then provide our Q3 and fiscal 2026 outlook. Total revenue grew 15%, ahead of our outlook, driven by a growing location count, software ARPU expansion and increasing payments penetration. Revenue growth was primarily generated by our growth markets of North America retail and European hospitality as more and more customers move on to our platforms and attach new modules. In addition, we benefited from improving same-store sales, thanks to a more stable macro environment. Software revenue was $93.5 million, up 9% year-over-year, with software ARPU up 10% year-over-year. Software ARPU increased due to our outbound teams attracting larger customers, new software releases and the benefit of price increases we implemented last year. Transaction-based revenue was $215.8 million, up 17% year-over-year. Gross payments volume grew 22% year-over-year and capital revenue grew 32% year-over-year. GPV as a percentage of GTV came in at 43%, up from 37% in the same quarter last year. Overall GTV grew by 7% to $25.3 billion and total average GTV per location continued to climb as we continue to sign more high-value customers. GTV in Europe benefited from favorable FX rates as the U.S. dollar weakened against local currencies. Total monthly ARPU reached a record $685, up 15% year-over-year, driven by both higher software and payments monetization. ARPU grew across both our growth and efficiency markets with growth markets outpacing the overall average. And as those locations grow, we expect a continued positive impact on overall ARPU. With respect to our efficiency markets, our goal is to maintain the revenue base through additional module attachments and expansion of financial services. As an example, this quarter in Australia, we launched Instant Payout on Lightspeed Payments for hospitality merchants. This high-margin offering allows merchants to receive their daily sales the very same day, including weekends and holidays. There also continues to be meaningful opportunities to grow payments revenue in these markets as payments penetration is at 36%, well below the 46% penetration in our growth markets. In the quarter, we were able to keep total revenue close to flat year-over-year. With respect to profitability and operating leverage, total gross profit was strong, growing 18% year-over-year, exceeding both 15% revenue growth and our prior 14% outlook, driven by strong top-line performance and expanding gross margins in both subscription and transaction-based revenue. Total gross margin was 42%, up from 41% last year, despite transaction-based revenue increasing to 68% of total revenue from 66% last year. Hardware gross margins declined this quarter due to strategic discounts and incentives to drive new business as well as free hardware provided to support customer transitions to our Unified Payments and POS offering. We delivered strong software gross margins of 82%, up from 81% last quarter and 79% a year ago. This is largely driven by increased cost efficiency. We are increasingly using AI to reduce the cost of support and service delivery. As an example, AI now resolves over 80% of inbound chat interactions on our flagships. This has allowed us to significantly reduce headcount in support, which is showing up in our expanded gross margins in software. Gross margins for transaction-based revenue were 30%, up from 27% last year. This improvement reflects growth in our capital business and in payments penetration in our international markets, where margins exceed those in North America. As we convert customers to Lightspeed Payments, we increased our overall net gross profit dollars. And in the quarter, we saw transaction-based gross profit grow 28% year-over-year. Total adjusted R&D, sales and marketing and G&A expenses grew 13% year-over-year. This includes meaningful investments we are making in field and outbound sales as well as product innovation in our growth engine. Adjusted EBITDA in the quarter came in at $21.3 million, increasing 53% from $14 million in Q2 last year, driven by continued successes from our strategic shift and our focus on AI and automation to accelerate operating efficiency. As a percent of gross profit, adjusted EBITDA was 16%, approaching the longer-term 20% target we outlined at our Capital Markets Day. I'm very happy to report adjusted free cash flow of $18 million in the quarter. Thanks to our improving profitability and disciplined working capital management, we were able to deliver positive free cash flow despite our accelerated outbound strategy and increased investment in R&D. Although free cash flow will vary quarter-by-quarter, we expect to deliver breakeven or better adjusted free cash flow for the full fiscal year. We continue to actively manage our share-based compensation and related payroll taxes, which were $17.4 million or 5% of revenue for the quarter versus $19.5 million or 7% of revenue in the same quarter last year. With respect to capital allocation and our balance sheet, we ended Q2 with approximately $463 million in cash, an increase of approximately $15 million from last quarter. Approximately $200 million remains under our broader Board authorization to repurchase up to $400 million in Lightspeed shares, and we continue to be opportunistic in evaluating further share repurchases. Total shares outstanding in the quarter were down by 10% versus the same quarter last year due primarily to the $179 million in shares repurchased and canceled over the last 12-month period. Aside from potential buybacks, our largest use of cash will be growing our merchant cash advance business. There are currently $107 million in MCAs outstanding, and we believe we can continue to grow this balance over time. With that said, we're also running the MCA business more efficiently, using less capital this quarter versus the same quarter last year despite growing revenue by 32%. This is due to our successful effort to reduce payback periods to 7 months. With respect to M&A, we remain opportunistic in the evaluation of small tuck-in acquisitions to help accelerate product development, but large-scale acquisitions are not a strategic priority for us. Our balance sheet remains healthy and positions us well as we continue our strategic focus. Now turning to our outlook. For modeling purposes, I would like to highlight a couple of factors. First, Q3 GTV is generally flat to slightly down from Q2 due to seasonality, and we expect similar performance this year. Although Q3 benefits from the retail holiday season, in Q2, we have strong performance in European hospitality as well as golf. In terms of software growth, in Q3, we will lap the price increases implemented last year. As a result, we expect software growth to slightly moderate for the second half of the year. Looking ahead, we remain confident in our ability to execute against our go-forward financial outlook shared at our Capital Markets Day in March. As a recap, we targeted a 3-year gross profit CAGR of approximately 15% to 18% and a 3-year adjusted EBITDA CAGR of approximately 35%. Given our strong performance to date, we are raising our outlook for the full fiscal year. For the third quarter, we expect revenue of approximately $309 million to $312 million, gross profit growth of at least 15% year-over-year and adjusted EBITDA of approximately $18 million to $20. For fiscal 2026, based on a strong first half of the year, we are increasing our outlook for the year. We expect revenue growth of at least 12% year-over-year, gross profit growth of at least 15% year-over-year and adjusted EBITDA of at least $70 million. With that, I'll turn the call back to Dax. Dax Dasilva: Thanks, Asha. Before we take your questions, I would like to take this time to welcome our new Board members. In July, we welcomed Glen LeBlanc, the former EVP and CFO of BCE Inc., who brings with him over 30 years of tech and telecom experience. Last month, we also welcomed Sameer Samat and Odilon Almeida to our Board of Directors. Sameer is currently President of the Android ecosystem at Google, and Odilon served as the CEO of ACI Worldwide, a global payment software and solutions provider. I look forward to working with all of them as we continue to advance our strategy and support our customers. I would also like to thank our departing Board members, Rob Williams, Paul McFeeters and Patrick Pichette for their contributions and support over the past several years. In closing, I think Q2 is clear evidence that our strategy is working. I want to thank all of the employees at Lightspeed for making this strategy a success. Without your dedication and commitment, none of this would be possible. With that, I will turn the call back to the operator to take your questions. Operator: [Operator Instructions] Your first question comes from the line of Thanos Moschopoulos of BMO Capital Markets. Thanos Moschopoulos: It seems like you're seeing a good return on your investment in outbound sales. And so in light of that, how should we think about the sales ramp? Might you look to accelerate your hiring plans for this year? And maybe too early to talk about next year, but safe to assume that you'll continue to ramp those investments heading into next year? Dax Dasilva: Thanks, Thanos. Yes. So outbound sales, overall, it's going really, really well. Our Q2 outbound bookings tripled year-over-year. So really, really pleased about that. As you know, this is the go-to-market motion that's going to allow us to really target our ICPs with precision and really have the best sales metrics. We've grown our outbound team to approximately 130 fully ramped reps right now in our growth engines, North American retail and EMEA Hospital (sic) [ European hospitality ]. And those are all carrying a full quota. We are expecting to get to 150 by the end of the fiscal year. And yes, and we are planning -- we're in the planning stage for how many reps we'll deploy in subsequent years. Thanos Moschopoulos: Okay. Great. And then maybe just a question on capital. As we think about the growth going forward? I mean, is much of that going to be driven by the launch in new geographies? And how should we think about the rollout? You mentioned Switzerland. What will be the strategy there for further expansion? Asha Bakshani: Yes. I'll take that one. Thanks, Thanos. Capital is going really, really well. You saw that come through in the prepared remarks and in the PR. We are using capital to upsell and cross-sell across the base. And in the Rest of the World portfolio, capital is one of the products that's super popular in the upsell to the merchant base. As we continue to ramp outbound and bring more ICPs into the funnel, we should continue to see capital growing quite nicely. You saw over 30% growth this year, and we should expect to see pretty solid growth into future years because the ICP customers that we're getting through in the outbound funnel are real prime customers for the capital business. They're very creditworthy, high GTV customers. And so that's -- we should expect that to help capital grow even stronger. Operator: Your next question comes from the line of Trevor Williams of Jefferies. Trevor Williams: I wanted to start with a bigger picture question on pricing. Just how you guys would frame the current backdrop at the industry level. Asha, I heard the call out on hardware discounting as more of a customer acquisition tool. I'm just curious if that's more of a proactive or reactive move to anything you're seeing competitively. Asha Bakshani: Trevor, thanks for the question. The hardware discounting is totally proactive. The hardware discounting is quite typical and common. You saw a slight uptick this quarter from what you've seen historically, and that just comes with more new locations. As we attract more and more locations in our growth portfolios, in particular, we are giving discounts to get those customers through the door. Pricing and packaging overall has been going very well for Lightspeed. We had some pretty significant price increases about a year ago, and that's what you're seeing come through partly in the growth this year. As we look forward, Dax talked a bit about all the product velocity and how strong that has been at Lightspeed. And so we keep including these new modules in different pricing and packaging. And so that evolution is going to continue, and that continues to drive quite a nice ARPU uplift for Lightspeed. Trevor Williams: Okay. No, I appreciate that. And then on the GTV growth acceleration we saw this quarter, I think you called out higher GTV location from the success with the growth engines. Anything else you can dimensionalize around same-store sales, location growth? And I know you don't guide to GTV growth, but with the momentum that we're seeing on the growth engines side, is it fair for us to assume that the trajectory that we've seen over the last couple of quarters that, that should persist going forward? Dax Dasilva: Yes. I'm going to say that same-store sales in both retail and hospitality, both in NAM and Europe were really positive this quarter. It's the best quarter for same-store sales in quite some time. And total GTV was up about 15% year-over-year in the growth engines and about 7% overall. So that's a good acceleration. It's also driven by all of the new locations. As you saw, we closed 2,000 new locations in the growth engines, which is an acceleration from last quarter. Operator: Your next question comes from the line of Josh Baer of Morgan Stanley. Josh Baer: Congrats on a really strong quarter. I wanted to dig in a little bit on investments in EBITDA and just really understand the takeaway from the change in the EBITDA guidance sort of reframe from $68 million to $72 million to greater than $70 million. So you've been -- you outperformed EBITDA again, the guide for Q3 was good. Like is there a reason to think that investments are ramping in the back half of the year and into Q4? Or yes, like how should we think about greater than $70 million? And then I just have a follow-up on OpEx. Dax Dasilva: As you can see, we're seeing a lot of traction in our growth engines. We want to continue to accelerate location counts. We want to continue to invest in our go-to-market. And so some of that -- some of our -- some of the funds are being reinvested in continuing that trajectory. I think that's important for the company. I think everybody wants to see us be able to capture share in our biggest opportunities for growth. Asha? Asha Bakshani: Yes. Thanks, Josh. I think Dax really drove that point home. We're just -- the EBITDA raise is smaller than the beats that you've seen to date only because we really want to give ourselves the flexibility to double down on investments where we're seeing that the investments pay off even more quickly than expected. And we are seeing that in several areas in our growth engines. And so the smaller EBITDA raise is really to give ourselves that flexibility to continue to invest in growth. There's a large TAM out there, and we're excited about that. Josh Baer: Okay. That makes a lot of sense. I guess a follow-up would be on just the software piece here. Software ARPU growth is higher than the total software revenue growth, but you're still adding customers on a net basis year-over-year, quarter-over-quarter. How do we put those 2 different growth rates? Asha Bakshani: Yes. Great question, Josh. The software ARPU growth is growing faster than total software growth really just results from the mix shift. As we're bringing larger and larger customers onto the platform and churning the smaller customers, you're seeing that show up in the average revenue per user per month more quickly than in the software revenue. And that's really all that's about -- and that's a good news story for Lightspeed. We're bringing more of the larger customers, higher ARPU customers onto our platform, and we're seeing the vast majority of the churn in the smaller merchants. Operator: Your next question comes from the line of Tien-Tsin Huang of JPMorgan. Tien-Tsin Huang: Just curious, any good quarter here. Any interesting observations out of the growth markets from a monthly perspective, month-to-month, that is, that informs your confidence to raise your outlook? And I'm curious, same question here for quota-carrying sales, any seasoning effects here? I'm assuming you'll see more productivity. I just don't know how that's balanced across the 130 that you have. Dax Dasilva: I think Q2 is a really good quarter for European hospitality. It's their go-to season as well as for golf. Obviously, we'll see a little bit less of those 2 elements of the growth engines in Q3. We'll see more of NoAm retail. So that's sort of how our seasonality looks in the next little while. But yes, I think we are we are seeing a real payoff of those go-to-market efforts and those growth engines. We're seeing acceleration. And I think with outbound, we're really able to target those customers that are natural fits for where our product plays, which is those higher GTV merchants in retail and hospitality. Tien-Tsin Huang: Got it. And then Dax, I'm curious I have to ask on the efficiency markets. Any change there in your thinking on strategy? Because it seems like there's some surgical things you're doing there to enhance growth or productivity there. Any change in thoughts? Dax Dasilva: I think we consider this a really big success, right? It's really helping us fuel growth in the growth engines. We see 20% software growth in our growth engines. We're happy. But as you can see, the efficiency markets are really holding. We're -- we have really positive trends on efficiency, and we're -- yes, it's maintaining what it needs to. Operator: [Operator Instructions] Your next question comes from the line of Matthew English of RBC Capital Markets. Unknown Analyst: This is Matthew on for Dan Perlin, RBC. So I have a question on NuORDER. It's great to hear the rollout of Marketplace. I was wondering if you could frame the monetization strategy of that asset and maybe the outlook for attaching payments to that B2B volume. Dax Dasilva: Yes. This is such an exciting part of the strategy, and you're seeing quarter after quarter become a bigger and bigger part of all parts of the retail story, and it's a massive part of our sales pitch now. So we are the only retail POS with wholesale built right in. You're going to see a massive rollout of our vision of this at NRF. But day-to-day in our sales calls, this is -- it is a massive benefit for the retailers in our target verticals to be able to buy from wholesale right inside our platform because we can offer a workflow that literally nobody else can offer in our space. Now that is even made more powerful by the fact that we can leverage all of our insights, our AI-driven insights and our capital products to make turns of inventory even more efficient. And now with Marketplace, it's not just the brands that you're currently working with that are available to you NuORDER, you can now discover new brands, search across brands that you haven't interacted with. And so it really opens up the world of NuORDER for our retail customers and allows them to diversify and add to their curation. So it's very, very exciting, multifaceted advances on NuORDER. We have amazing brands coming on to the platform as well, like this quarter, Carhartt is a major new addition. And I think what's exciting about that is that Carhartt also has a lot of retailers that they work with that should be on Lightspeed. And so brands are recommending retailers join the platform and retailers are recommending that their key brands are also on the platform. And as you mentioned, there's a big payments opportunity here as well. So we've got now the infrastructure in place to take advantage of that, and that's a part of our acceleration strategy with NuORDER. Operator: Your next question comes from the line of Matt Coad of Truist Securities. Matthew Coad: Really good set of results here. I wanted to touch on the locations growth. I thought really encouraging set of results, both on total locations and growth engines. I was hoping you could unpack it a little bit for us, both on gross adds in the growth engines, kind of like what subverticals maybe you're seeing outsized success in or what kind of geographies within Europe you're seeing success in? And then also curious if you could touch on churn rates. It seems like churn rates have gotten a little bit better for you guys based on our math. So any tidbits or pieces of information there would be helpful. Dax Dasilva: Yes. I think this is a major win for the company to have 2,000 new locations, an acceleration from 5% to 7% location growth in 1 quarter. As you know, our 3-year CAGR that we shared at Capital Markets Day is 10% to 15% location growth. So in 2 quarters of the transformation, we're already making major progress. And this just feeds all of our metrics, right? It just helps everything grow to have more high-quality merchants joining the platform. And so this is the #1 thing that I talk about every single day at the company as we have to bring more customers on to Lightspeed's platform. And this has become a rallying cry because we know that we can add value for these customers by having them join the platform, by having them leverage NuORDER, by having them leverage all our new AI tools and all of the deep inventory tools and restaurant management tools that we have for European restaurants as well. So in our growth engines, I would say location growth, if you look quarter-by-quarter. It's pretty evenly split across the 2 growth engines. We've got areas of seasonality, of course. When it's go time for European hospitality and golf in the summer months, there's less likely to be onboard onto a new system. They're often interested in learning about it, but to close them, it's more likely to close them in Q3. And then conversely, for retail, they're not going to want to switch systems in the middle of the buying holiday season, which is their opportunity to make the most money. So yes, we do see different opportunities, but I think we are able to -- we're still able to grow in our key verticals. So the key verticals as well for retail where we see some of the biggest opportunity is multi-brand apparel that are using NuORDER to buy from a lot of different brands. We, of course, are very, very strong in sport and outdoor, which includes some of our strongest verticals like bike and golf, but there's a lot of other different verticals that we're doing really well in like running and swimwear, et cetera. In European hospitality, we're in a number of different European countries. We've been historically strong in the Benelux and the U.K., but France and Germany are real exciting stars for us right now as well. So this is -- there's lots of areas of strength that we're going to continue to build on. Operator: With no further questions, that concludes our Q&A session. I'd now like to turn the conference back over to Papageorgiou for closing remarks. Gus Papageorgiou: Thank you, operator. Thanks, everyone, for joining us today. We will be around all day if anyone has any further questions, and we look forward to speaking to you at our next conference call in early of next year. Thanks, everyone, and have a great day. Operator: This concludes today's conference call. You may now disconnect.
Operator: Good morning, and welcome to Quarterhill's Q3 2025 Financial Results Conference Call. On this morning's call, we have Chuck Myers, CEO; and David Charron, Chief Financial Officer. [Operator Instructions]. Earlier this morning, Quarterhill issued a news release announcing its financial results for the 3 and 9 months ended September 30, 2025. This news release, along with the company's MD&A and financial statements are available on SEDAR+. Certain matters discussed during today's conference call or answers that may be given to questions could constitute forward-looking statements. Actual results could differ materially from those anticipated. Risk factors that could affect results are detailed in the company's annual information form and other public filings that are available on SEDAR+. During this conference call, Quarterhill will refer to adjusted EBITDA. Adjusted EBITDA does not have any standardized meaning prescribed by IFRS. Please refer to the company's Q3 2025 MD&A for full cautionary notes regarding the use of forward-looking statements and non-IFRS measures. Finally, please note that all financial information provided is in U.S. dollars unless otherwise specified. I will now turn the meeting over to Mr. Myers. Please go ahead, sir. Charles Myers: Good morning, everyone, and thank you for joining us on today's call. In terms of agenda, I'll discuss the highlights for the quarter, after which David Charron will take a look at the key financial results. Following David, we'll open it up for questions. Looking at the Q3 results, our performance reflects significant progress in the turnaround and marks an important inflection point for Quarterhill. Revenue increased year-over-year. Adjusted EBITDA was positive $1.4 million, a more than $4 million swing from Q2, and we generated $6.4 million of positive cash from operations. Importantly, we also grew cash on the balance sheet to more than $24 million, even while reducing debt for the quarter. As a reminder, on our Q2 call, we laid out a 4-point plan to strengthen the business, improve margins and return to consistent positive cash flow. We made significant progress on each element in Q3, which enables us to now largely pivot our focus to growth and higher-margin performance. One, during Q3, we took decisive steps to rightsize the organization and improve financial performance. We reduced approximately 100 positions, about 15% of our total workforce across both contract and full-time roles. The financial impact of this restructuring is meaningful. The majority of the changes were with our cost of sales line and should save us approximately $12 million annually. Subsequent to the quarter end, we executed a smaller reduction of approximately 20 positions focused throughout the business. The benefit of this follow-on action will begin to show up in Q4 and further strengthen our cost structure going into the new year. Throughout this process, our commitment to service delivery has not wavered. These changes are about increasing efficiency, sharpening execution and positioning the business to scale profitably, not cutting corners that would impact customers. And importantly, these actions have helped create the financial capacity and operational focus required to pivot toward growth. Two, a significant development in Q3 was the successful mediation and renegotiation of an underperforming contract, which we announced on August 31. Earlier in the year, this contract was generating approximately $1 million in monthly losses. Through the renegotiation, we have restructured the arrangement to be profitable going forward. This was the right decision for the long-term health of the company and it eliminates the largest source of operating drag we faced over the past year and allows us to redeploy capital and focus towards higher-margin opportunities. The remaining commercial matters on a second smaller contract have also improved. These are now being managed through normal course of business channels and don't constrain our outlook. With this successful changes behind us, the financial impact of legacy issues is hardly resolved, and we can increasingly focus on growing the business from a stronger foundation. Three, growing the top line with higher-margin business. In Q3, we continued to convert pipeline into revenue and are winning work with better economics. Year-to-date, we've added $137 million in change orders and wins across both business units. Our Safety and Enforcement unit delivered another quarter of top line growth and gross margins that were above 40%. The unit secured multiple contract wins, including a modernization initiative in Arkansas to improve freight movement using advanced AI-enabled inspection technology and a project in Washington State to enhance truck parking safety along the I-5 corridor. Our [indiscernible] product continues to gain market traction with recent deployments in Pennsylvania, Oklahoma, New York and Oregon. These wins demonstrate how we are capitalizing on growing demand for nonintrusive AI-driven solutions that provide real-time traffic data while prioritizing safety and privacy. In our tolling business, we were awarded follow-on work with an existing customer to expand capabilities on a major Express Lane corridor. This work expands and strengthens our long-standing relationship. These wins reinforce the confidence that transportation agencies have in our technology, our teams and our track record of delivery. Our roughly $2 billion pipeline gives us strong visibility into future growth with active pursuits in both tolling and enforcement. We're also maintaining strict commercial discipline, ensuring every contract we bid is cash positive throughout implementation is a meaningful shift that strengthens financial performance as we scale the business. Four, we're investing in next-gen technology. We continue to invest in our next-generation technology platform built on micro services and AI architecture. This platform is designed to increase the mix of recurring, higher-margin software revenue, reduce development costs through reuse and scalability and enable faster expansion into the adjacent segments of the ITS market. The platform brings important enhancements and advancements for our customers, including AI-driven vehicle identification, predictive analytics and anomaly detection to improve accuracy, reduce revenue leakage and support faster issue resolution. By unifying data from field to back office with automation and real-time insight, we are helping agencies operate more efficiently while enhancing traveler experience and safety. This work is critical to our long-term strategy, delivering more software-enabled value, expanding margins and differentiating Quarterhill as a technology leader in the industry. As evidence of our product progress, we recently demonstrated our Agentic AI customer service model to a large group of our industry customers at the IBTTA in Denver. Our outlook as we are entering Q4 with a stronger operational footing, a healthier contract portfolio and improved profitability. The work to stabilize and simplify the business is largely complete, and we are shifting more of our attention to capturing growth and expanding margins. Our priorities remain straightforward and unchanged: drive top line growth in both Tolling and Safety and Enforcement, sustain margin improvement through disciplined execution and maintain positive cash generation on a strong balance sheet. We believe successful delivery against these objectives will lead to a more resilient business and will create increasing value for our shareholders. In conclusion, I would like to thank our teams for their focus and commitment -- during this transformational period, the results demonstrate that the strategy is working, and we are turning the corner towards a more predictable, profitable growth-oriented future. With that, I'll turn it over to Dave to discuss our financial results in more detail. David Charron: Thank you, Chuck, and good morning, everyone. I'll start the financial review with a look at revenue in the quarter and year-to-date period with a reminder that all figures are in U.S. dollars. Q3 revenue was $39.7 million, up 4.5% from Q3 last year. Year-to-date, revenue was $116.7 million, up 2%. The Q3 increase was due to the growth in both the Safety and Enforcement and tolling business units. At quarter end, we continue to have significant backlog of more than $427 million, providing good visibility into revenue for the next several years. A large portion of the backlog is higher-margin revenue, which we expect will drive higher margins in the future. The gross margin in Q3 increased significantly both year-over-year and sequentially. The gross margin percentage was 26% in Q3 compared to 13% in Q3 last year and 15% in Q2 of 2025. The increase year-over-year and sequentially is due to the Q3 restructuring, the renegotiation of certain tolling contracts and continued strong margin performance from the Safety and Enforcement business unit. Total operating expenses for Q3 were $13.7 million compared to $11.3 million in Q3 last year. The increase in Q3 and the year-to-date period is primarily due to investments in leadership and resources for our project, bid and product development teams. While the restructuring we announced in Q3 was focused mainly on the cost of sales line, we see the potential to generate additional OpEx savings through rationalizations in certain third-party IT contracts as those agreements come up for renewal over the next 12 months. In addition, as Chuck mentioned, in Q4, we undertook a smaller rep of about 20 employees and whose savings will be partially reflected in Q4 and fully thereafter. Q3 adjusted EBITDA was $1.4 million compared to negative $2.8 million in Q3 last year and negative $2.7 million in Q2 of 2025. This significant improvement year-over-year and sequentially reflects the actions previously discussed regarding revenue and cost of sales as well as continued strength in the Safety and Enforcement unit. We expect our margin profile to continue to improve in future periods, though there may be some variability from quarter-to-quarter depending on the timing of new contracts and/or seasonal factors. Q3 was a strong quarter for cash flow with the company generating $6.4 million in cash from operations compared to cash used in operations of $1.7 million in Q3 last year. Cash from operations in Q3 benefited from the restructuring, the contract renegotiation and the improvement in working capital, specifically the focus on reducing unbilled revenues. Turning now to the balance sheet. Our cash balance grew sequentially to $24.1 million at the end of Q3, up from $22.7 million in Q2 of 2025. Both our convertible debentures and bank debt mature in the fall of 2026 and are classified as current liabilities. We are looking forward to having discussions with both current and potential lenders regarding the refinancing of our credit facilities, including the long-term debt and converts. These efforts reflect our commitment to optimizing our capital structure and enhancing financial flexibility. I'll now turn the call back over to Chuck for his closing comments. Charles Myers: Thanks, David. Our restructuring has delivered the cost savings we expected, and we've improved the economics on certain key programs going forward. Separately, both our business units are winning higher-margin work and our next-generation platform continues to advance towards commercialization. With this foundation in place, as I mentioned earlier, our focus shifts decisively to growth and margin expansion, building a more resilient technology-led business that consistently generates strong cash flow for our shareholders. I want to thank our employees, customers and shareholders and analysts for their continued support. This concludes our formal remarks, and I'll now turn the call over to the operator for questions and answers. Operator: Your first question comes from Gavin -- the line of Gavin Fairweather with Cormark. Gavin Fairweather: Congrats on the strong results. Maybe just on Safety and Enforcement to start. It sounds like the business has continued to perform well. Can you help us understand the size and growth and profitability of that business, if possible? And any kind of thoughts on the forward outlook? I mean it kind of feels like it's being obfuscated and maybe it's some hidden value that isn't reflected in the stock. So I think anything on that front would be helpful. Charles Myers: Thanks, Gavin. Thanks for the kind words. So that business is roughly $60 million a year. It's roughly 25% EBITDA, continues to grow nicely. We continue to focus on new products there. We're getting a lot of traction with our AI product. I see out of that. I think we're in 10 states and 60 sites at this point, and that continues to grow. We have a number of other installations in. So that business is still heavily focused in enforcement. We're working on some direct enforcement where we can provide commercial vehicle ticketing, basically ticketing autonomously without intervention from law enforcement. And then the other side of it, though, is very heavily weighted towards our AI model in terms of where we look for growth for classifying the vehicles and what we call fingerprinting them. Gavin Fairweather: That's helpful. And then maybe shifting gears to tolling. It sounds like the business posted some solid top line growth this quarter. It sounds like a bit of an inflection from earlier in the year where maybe it was down a little bit. So was that some of these new wins that you've had earlier in the year ramping up? And anything else you'd call out on the tolling top line this quarter? Charles Myers: From the tolling perspective, it has been -- I think we've mentioned we've added about -- through the end of the third quarter, we had added about $137 million in new contracts. That's both tolling and enforcement. But the business from a top line perspective is up in tolling as well. But really, it's -- I think you probably noticed there's a very dramatic improvement in our gross margins in that business as well. Gavin Fairweather: Yes. And that's kind of where I wanted to go next. I mean lots of kind of puts and takes on profitability this quarter. I think that you got some back payments from prior losses tied to the renegotiation. I don't think you got the full run rate of savings from the [indiscernible] that you did in July. I'm not sure if you've got. Charles Myers: Yes, we got... Gavin Fairweather: Revenue from renegotiations. So maybe you can just help level set us on where we are at on profitability for the tolling business and the outlook there. Charles Myers: Well, the tolling business was losing about $1 million a month. We shifted that substantially to profitable monthly with the conclusion of that contract negotiation. And we did receive some revenue that had been disputed, and we received that as well. That's booked as just normal revenue. There's nothing unusual about it. I hope that answers your question. David Charron: Maybe the other thing I'd add here, Gavin, is we had the 2 press releases after Q2. The RIF that we did, which we -- as we mentioned, was focused mostly in the tolling side of the business that helped greatly improve the gross margin there. It was -- those actions were targeted at the cost of sales area. And then as Chuck just mentioned, with the contract renegotiation, both of those really significantly helped the profitability of the tolling business. Gavin Fairweather: Very helpful. And then you've got another renegotiation ongoing or mediation ongoing with that second customer? Charles Myers: No. That's -- we're -- I think I mentioned in my -- we've gotten that where we feel comfortable with that contract, and it's just a normal course of business. Gavin Fairweather: Good. That's good to hear. Good to hear. And then you talked about the bid book at $2 billion for tolling. We did see the backlog come down a little bit in the quarter. Maybe you can discuss the timing of RFP decisions and how you're feeling about being able to build that backlog back up here going forward? Charles Myers: Well, as I say every quarter, we have a huge backlog. It goes up and down. We don't really track it. I mean you guys may track it closer than we do. A lot of it's got to do with just delivery milestones at different times. As you know, it's almost 4x our revenue. So it's pretty substantial. And the -- we kind of look at that how we think of it. We think of it as just a kind of a big chunk of money sitting on the balance sheet because as our margins improved, even the NPV of that cash flow, we think is worth well over $100 million. So it's kind of sitting there on our balance sheet. That's kind of Chuck and Dave's view of the world there, not necessarily a GAAP system. The -- so we're comfortable with the backlog. Again, we added about $137 million. We have about $2 billion in bids that we're tracking regularly. And then we have a number of large bids in progress as well. Gavin Fairweather: And then maybe just on the new tech platform. When do you think that, that will be ready for kind of release or. Charles Myers: Well, we're talking to customers right now about rolling out Phase 1. So I suspect that we'll probably get something here in the fourth quarter. Gavin Fairweather: And do you think that -- is there any kind of upsell tied to that? Can you -- any revenue opportunity there? Charles Myers: Absolutely. Now do we -- will we see significant revenue in the fourth quarter for that? No, but we could see revenue from a customer for that. We've got the -- as we -- as most people know, we've been working on this about 10 months. We've made substantial progress. We have the platform architected, the microservices platform. We have the AI-based image recognition and image review process automated in there. And we have an Agentic AI call center interface as well incorporated to that at this point. And we're now over time, we're moving some of our existing platform, the knowledge base and the functionality from our existing software into the new platform. We're also doing a substantial amount of work actually with Oracle on that using their Apex product. Gavin Fairweather: Probably if you're automating more of the customer service function, there's probably some gross margin benefit as well. Charles Myers: Yes. As you know, we're focused on being about 40% to 50% gross margin. I mean those are our targets. And our gross margins have moved up substantially. We're well over 40% right now in the Safety and Enforcement. That's definitely our goal in the tolling business as well. Gavin Fairweather: And then maybe just lastly for Dave, nice to see the unbilled revenue ticking lower quarter-over-quarter. Do you still think that there is some working capital that balance that's still to be released here? David Charron: Yes, that's right, Gavin. We might not see the same step function improvement quarter-over-quarter, but we're going to be continually focused on meeting project milestones that will release unbilled revenue, turn it into billed AR and then turning it into cash. That's the cash cycle that we're focused on. The team has done a great amount of work on this over the last, I would say, 12 to 18 months. We're just starting to see the benefit of that coming through, and we'll continue that focus. Gavin Fairweather: Congrats on the results. Charles Myers: Thanks. Operator: As we have no further questions at this time, I will turn the call over to Mr. Myers for closing remarks. Charles Myers: Thank you, everybody, and thanks for those that attended the call. As always, I'd like to big shout out to our employees. They're working hard. As we know, risks are never easy for anybody. And the company has responded unbelievably well. And thanks to our shareholders. We feel pleased where we're going, and we're going in the right direction, and we've tried to uphold our vision and the message we've been putting out for the last year. And so far, I think we're kind of on track to continue that. So thank you for your support as well to the shareholders and the analysts. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the Westwing Group SE Q3 2025 Earnings Call. [Operator Instructions] Now dear ladies and gentlemen, let me turn the floor over to your host, Andreas Hoerning. Andreas Hoerning: Good morning, everyone, and thank you for joining us for our earnings call on the third quarter of 2025. My name is Andreas Hoerning. I'm the CEO of Westwing. I'm hosting the call together with Sebastian Westrich, our CFO. Looking at today's agenda, I will begin by providing key updates on our business for the third quarter of 2025, after which Sebastian will share the details of Westwing's financial performance. After our investment highlight summary, we will be happy to take your questions. Let's take a look at the current state of Westwing. In Q3, we delivered growth and continued to improve profitability significantly. Our GMV increased by 5.4% year-over-year despite changes in product assortment. We improved our adjusted EBITDA by 73%, reaching EUR 6 million at an adjusted EBITDA margin of 6.1%. This marks an increase of 2.5 percentage points year-over-year. Free cash flow was positive at EUR 10 million in Q3, and we ended the third quarter with a net cash position of EUR 58 million. For the full year 2025, we expect free cash flow to be double-digit positive. Strategically, we are well on track with the implementation of our 3-step value creation plan. Our own product brand, the Westwing Collection grew 19% year-over-year, which resulted in an all-time high group GMV share of 66%. As part of our geographic expansion, we achieved our full year objective of launch in 10 new countries, and we continued our store expansion with the opening of 7 new stores this year. The operational progress is fully in line with our targets. We confirm our financial guidance for 2025 and are currently expecting the adjusted EBITDA at the upper end of this guidance. We also confirm our ambition for 2026, which is the return to a high-single to double-digit growth and further improved profitability. As always, let's have a look at our 3-step value creation plan, which we started executing in 2022. In terms of levers, we successfully completed the first 2 phases, the turnaround and strategy update phase, and the building of a scalable platform phase. 2025 marks a transition year for us, where we are focusing on the key growth levers of the third phase to be able to scale with operating leverage from 2026 onwards. As in the last earnings call, let me now briefly guide you through our progress across the key levers of the third phase of our plan, beginning with the latest developments of the Westwing Collection, then moving on to how we strengthen our market share in existing geographies, pushing the premium positioning of our brand and finally, the progress we've made in terms of international expansion. So starting with the Westwing Collection. The Westwing Collection is our gorgeous sustainable private label product brand, and we continue to be very pleased with its performance. It again delivered strong growth of 19% year-over-year, resulting in an all-time high group GMV share of 66%. This represented a total GMV of EUR 75 million in Q3. The strong development supports our top line as well as profitability since the products are very desirable and they allow us to achieve a higher contribution margin compared to third-party products. As we build Europe's premium one-stop destination for Home & Living, we're creating a unique product assortment for design lovers, consisting of our own brand, Westwing Collection and the best third-party design brands. We still have significant room for improvement on both sides. As outlined in our last earnings call, besides improvements in product assortment, we see offline store expansion as a lever for share gains in existing markets. In 2025, we opened a total of 7 offline stores. In Q3 alone, we successfully opened 3 stand-alone stores located in Munich, Berlin and Cologne as well as 2 store-in-stores, one in Dusseldorf and one in Copenhagen. Before I share an update on our geographic expansion, let me show you some impressions of our newly opened stores. In Munich, we opened a so-called warmup store. It is more than just a pop-up. It's a preview of our first permanent Munich store coming next year in the heart of the city. Munich is especially meaningful to us as it's where our journey began and where many of our central teams are based, enabling us to learn and refine the customer experience even faster. Next to Munich, we are also very proud to now have a permanent stand-alone store in Berlin. This is located on the iconic Kurfurstendamm, bringing Westwing to life in the heart of Berlin's western city center. On top, we opened our stand-alone store in Cologne, one of Germany's busiest shopping cities. Next to our stand-alone stores, we also opened 2 store-in-stores. One is located at Breuninger Dusseldorf on the prestigious Konigsallee. Following the successful pilot of our store-in-store concept in Stuttgart in 2024, we are proud to continue our partnership with Breuninger, arguably Germany's leading fashion and lifestyle department store chain. The other one is our very first store-in-store in Scandinavia at the iconic Illums Bolighus flagship store in Copenhagen. This opening marks a new milestone in our Nordics expansion following the successful launch of Westwing in Denmark, Sweden, Norway and Finland earlier this year. By partnering with Illums Bolighus, a destination known for timeless elegance and Danish design culture, we are strengthening our presence in the Nordics and connecting with a design-savvy audience in a uniquely meaningful way. Overall, offline stores help us to further strengthen brand presence, positioning and top line, providing a holistic shopping experience across the multi-touch customer journey supports Westwing's market share gains. In Home & Living, many customers combine online and offline experiences in their journey, especially for large furniture purchases. The latter mostly for the touch and feel and simply because basket sizes in furniture are often very large and require many touchpoints for conversion. On the next slide, you can see impressions of the official opening of our Berlin store, where we welcomed over 250 friends of the brand, key opinion leaders, press and content creators from the world of fashion, art, design and lifestyle. The event generated strong positive press coverage and a high volume of social content, amplifying our brand visibility. Let's move on from gaining market share in existing geographies and increasing our premium brand positioning to entering new markets. At the beginning of the year, we announced our plan to open 5 to 10 new countries in 2025. We are happy to announce that we successfully opened 10 new countries this year, reaching our full year objectives. As outlined in our last earnings call, geographic expansion allows us to offer our existing global product assortment to customers in the corresponding market segment for design lovers in other countries. This means selling more of the same products. All Continental European countries follow the same logic with low marginal costs of serving them, translation supported by AI, onboarding of last-mile delivery providers, local influencer marketing and performance marketing with attractive returns within a few months. Therefore, in the midterm, we aim to be present in approximately all European countries. We do not plan to open any additional countries until year-end as our focus is now fully on the most important season of the year in Home & Living. To provide for a glimpse into our 2025 country expansion, let me share some impressions of our Nordics launch event. At the end of August, we celebrated our Nordics launch with 200 guests, including brand partners and leading voices across fashion, design, art and lifestyle. From our styled steamboat experience to sculptural installations at the Westwing Villa, the event showcased our passion for timeless design and cultural connection. It generated extensive positive media coverage and inspired highly shareable social content across the region, achieving exceptional reach, both online and offline. This milestone marks the start of our journey in Scandinavia, bringing beautiful living to even more homes. Back to results. I now hand over to Sebastian for details on our financial performance. Sebastian Westrich: Thank you, Andreas, and good morning, everyone. I'm Sebastian Westrich, the CFO of Westwing. Let me start with details on our top line. Our GMV increased by 5.4% year-over-year, while revenue was at plus 3.4% year-over-year despite the negative impact of the changes to our product assortment. I want to highlight here again what Andreas mentioned earlier in this call. Our Westwing Collection business continued to grow by 19% year-over-year. Now let me also briefly comment on Q3 top line development on segment level. The DACH segment saw a revenue decline of 2.1%, (sic) [ 2.4% ], while the international segment's revenue increased by 10.8%. There are 2 major reasons for this difference in top line development. Firstly, we began introducing a largely global and more premium product assortment and related restructuring of our local business functions in the international segment as early as Q2 2024. The assortment offered in the DACH segment remained unchanged until late 2024. And as a result, last year's baseline for DACH is stronger than that of the international segment. Secondly, the international segment benefited from additional revenue generated by our geographic expansion with 10 new countries launched in the first 9 months of 2025. Regarding top line outlook for Q4, we remain cautious as the performance depends largely on the month of November, including the upcoming Black Friday sales events. Now let me continue with an overview of our profitability development. In Q3, we improved our adjusted EBITDA by EUR 3 million to EUR 6 million, which represents an increase of 73% year-over-year. In order to show profitability development before D&A, we have also included the EBIT development on an adjusted basis on the right side of the slide. It is also clearly positive at EUR 3 million and showed an even greater increase of EUR 4 million year-over-year. Excluding adjustments, Q3 showed a negative EBIT of minus EUR 4 million. The adjustment mainly includes the negative impact of a higher fair value of employee stock option programs due to the significant share price increase in Q3. The impact amounted to minus EUR 6 million, which was non-cash effective. It is important to highlight that we are actively reducing the number of outstanding stock options to reduce both dilution risk for our shareholders as well as negative P&L impact from potential further share price increases. Let us now take a look at our P&L margins. In the first 9 months of 2025, we realized an adjusted EBITDA margin of 7%. This is a significant improvement of 2.6 percentage points compared to the previous year's period in the absence of any scale effects. Let us now focus on the P&L development in the third quarter of 2025, which you can see here on the right-hand side. I am pleased to report that we improved our P&L structure in Q3 in almost all areas, leading to a strong improvement in adjusted EBITDA margin by 2.5 percentage points year-over-year to 6.1%. Our gross margin improved by 2.2 percentage points year-over-year, mainly due to strong Westwing Collection share gains. The fulfillment ratio improved slightly by 0.1 percentage points year-over-year. The fulfillment ratio includes negative effects from expansion as we accept lower logistics linehaul utilization from our central warehouse to the new countries in the beginning. This ensures short delivery times also for our customers in the new markets but comes at higher cost per order. With increasing scale, this negative effect will decrease. Overall, this led to an increase in contribution margin of 2.3 percentage points to 33.9%, a really strong result for our third quarter. Our marketing ratio increased slightly by 0.3 percentage points year-over-year to minus 13.4%. The main reason for the increase is our investment into expansion. Our G&A ratio, which includes other result, improved by 2.3 percentage points to minus 17.9%, reflecting the positive effects from our 2024 complexity reduction measures. This led to an adjusted EBIT margin of 2.6% in Q3, up 4.3 percentage points year-over-year. D&A decreased by 1.8 percentage points year-over-year, primarily driven by the full depreciation of legacy technology assets. Overall, as mentioned before, our Q3 adjusted EBITDA margin improved by 2.5 percentage points year-over-year to 6.1%. The adjustments made in Q3 were minor, except for the higher fair value of our stock option programs following the significant share price increase, which I mentioned before. An overview of these adjustments as well as the unadjusted consolidated income statements can be found in the appendix to this presentation and in our Q3 financial report. Let's move on to profitability on segment level. In Q3, which is displayed on the right-hand side of this slide, we saw a strong improvement in adjusted EBITDA margin in both segments. In the DACH segment, adjusted EBITDA margin improved by 3.6 percentage points year-over-year to 6%. In the International segment, we were able to improve our adjusted EBITDA margin by 1.2 percentage points year-over-year to 6.4%. The improvement in profitability reflects the successful implementation of our 3-step value creation plan across both segments. Let's also briefly look at our earnings per share development. What you can see on this slide is the last 12 months data since Q1 2024. The dark green bars showing unadjusted earnings per share, the light green bars showing earnings per share on an adjusted basis. Adjustment includes changes in fair value of the aforementioned employee stock option programs as well as restructuring expenses. We are happy to be able to show that the very positive development continued also in Q3 2025. The dent in the unadjusted earnings per share in Q3 stems again from the steep increase in Westwing share price in Q3. Let us now move from profitability to our balance sheet and take a look at our net working capital. By the end of Q3, net working capital stood at minus EUR 1 million, which is EUR 4 million higher compared to Q3 2024, but EUR 7 million lower versus the previous quarter. Compared to the previous year, we still had higher inventory, mostly driven by the newly introduced Westwing Collection items that we already mentioned in previous calls. Compared to the previous quarter, we managed to reduce inventory levels slightly despite the typical seasonal inventory buildup towards the high season, and we improved trade payables as well as contract liabilities. We expect net working capital to improve further in Q4 due to typical seasonal effects and the respective positive impact on cash flow. On the next slide, you can see CapEx and CapEx ratio for the first 9 months as well as for the third quarter of 2025 compared to the same period in 2024. CapEx remained broadly stable year-over-year in 2025, both for the first 9 months and in Q3 specifically. However, when comparing 2025 to 2024, we see a shift between investments into property, plant and equipment and intangible assets. While in 2025, we invested more into store openings, we were able to reduce CapEx for internally developed tech assets as we move to a SaaS-based tech platform. Let us now take a look at our net cash position. We are pleased to report a strong net cash position of EUR 58 million at the end of September, which is EUR 8 million more compared to the end of June. Overall, free cash flow was at EUR 10 million in Q3. Taking lease payments of EUR 3 million into account, we had a positive free cash flow after lease payments of EUR 8 million in Q3. Our balance sheet remains strong with no debt other than the IFRS 16 lease obligations and IFRS 2 liabilities from cash settled stock option programs. We remain confident to enable double-digit free cash flow for the full year 2025, driven by both profitability and net working capital. Given our seasonality, Q4 is expected to be the strongest quarter. On the next slide, I'll comment on the financial guidance for 2025, which we published at the end of March. Our performance in the third quarter and the first 9 months of 2025 in terms of both revenue and profitability is fully in line with our guidance. In terms of top line, we had, as expected, headwinds from our changes in the product assortment. These negative effects are expected to ease further towards the end of 2025. But as mentioned earlier, top line in Q4 depends largely on a successful November and the Black Friday sales event. In terms of profitability, we expect a typical seasonal peak in the upcoming fourth quarter. To summarize, we are well on track to deliver on our 2025 guidance in terms of revenue and profitability and also in terms of a clearly positive double-digit free cash flow. Given the strong performance in the first 9 months with an adjusted EBITDA margin of 7% so far, we currently expect to end the year at the upper end of the adjusted EBITDA guidance. This brings me to our midterm outlook, which was shared for the first time in our full year 2024 earnings call. I want to highlight again that our ambition is to return to significant growth in 2026 while continuously improving profitability. Significant growth means a high-single to double-digit growth rate driven by our expansion initiatives and the anticipated easing of negative impacts from the product assortment changes. In terms of profitability, we expect scale effects as we grow, as well as positive effects from our improved product assortment. We remain focused on executing our 3-step value creation plan with a clear goal of driving sustained improvements in profitability and cash flow. Combined with our return to meaningful growth, this will enable us to unlock the full value potential of Westwing. I'm handing over to Andreas now to conclude our presentation with our investment highlights. Andreas Hoerning: Thank you, Sebastian. Let me briefly recap the investment highlights. First, we have a unique relevant customer value proposition through the specific assortment and the way we serve our customers. Second, the market potential is huge, especially in our existing geographies, but also beyond. Third, we are developing the superbrand in design with high loyalty and true potential to grow further. Fourth, we have high and increasing margins as well as operating leverage while we scale. Fifth, we have a great balance sheet with a strong cash position and no debt, strong net working capital and low CapEx. All of this will lead us in the midterm to 10% plus adjusted EBITDA with a continued strong cash conversion. Sebastian and I are now happy to take your questions. Operator: [Operator Instructions] And we already have one person who wants to ask a question, this would be Volker Bosse from Baader Bank. Volker Bosse: Volker Bosse from Baader Bank speaking. So first of all, of course, great results and congratulations, especially that you are able to specify your guidance to the upper end in this challenging times, very an outstanding achievement. Perfect. I would have 3 questions, if I may, starting with your still decline in orders and number of active customers year-over-year. So how do you see the momentum evolving? Do you see an improving momentum, means is the worst triggered by the transformation process is behind you, so to say? I mean, your outlook on the forward-looking on these 2 KPIs, please, would be the first question. Second question is on your country expansion. Yes, great to hear that you achieved also here the upper end of your given guidance range, so to say, 5 to 10, so 10 new countries. Can you already share initial developments in the new countries? I think Portugal is most advanced as it was the first country which you opened. How do you see the acquisition of new customers and incremental sales is progressing here or in other countries? Perhaps you have first thoughts already for us on that. And the third question would be on the new physical stores, which you opened. Do you see here an increased online activity be it in click rates or be it in sales in the catchment areas of the stores. So do you have this granularity of data on hand to share basically the stores do what they are supposed to do, meaning drive sales and brand attention? Andreas Hoerning: Thank you, Volker, for your questions. And also, thank you for the congrats. We're also pleased about the development of the EBITDA. So the first question was related to decline in orders and number of customers, and your question was how this will be evolving, whether the worst is already over? So generally spoken, the decline in order and number of customers is expected to ease in the same way as the negative GMV effect from the change in product assortment is also expected to ease. And we did this in a phased approach. So first, we changed the product assortments quite heavily in -- especially in Italy and Spain, where we also closed offices and warehouses and went from a local -- very local assortment to a global assortment. And there, we saw a pretty steep decline in number of customers simply because the offering that we had there beforehand to customers was different to the one that we have today, and the churn in customers was quite significant. This has already eased in those countries quite significantly. We're actually happy with the development now. And then the subsequent development was that we also changed the product assortment in our larger markets, Germany and also CEE. By the way, so DACH and CEE a bit later. And this effect we are seeing this year this is also why we were so cautious with our guidance on top line this year. And at the moment, we are fully in line with that. And it stems from exactly your point, the number of orders and number of customers, it is the same reason. You can also see that in the increase in average order value that we are reporting because there you can see that with the shift from a more impulse buying and smaller products to more Westwing Collection and more furniture, we see a strong growth in average order value and the decline of the number of orders and number of customers as it eased in Italy and Spain, it is also easing in Germany or in DACH and in CEE. So we can expect that the worst is over, as you say. And into next year, we actually expect a much, much lower effect of that, if even any. I hope that answers your question number one. Number two was on country expansion. You were asking about the development here. So as you rightly said, Portugal was the first one. And when we look now at the countries that we opened this year, so the 10 new countries, we, of course, compare the development of those to the one that we saw in Portugal in the first months and quarters. And we're actually very pleased with the development. It's in line with what we saw in Portugal. We see new customer growth there. Everything that we report from there is obviously incremental. That's the beauty of opening new countries. And our kind of the first results in terms of absolute numbers that we won't share now. Next year, I think we will give a bit more indication because it's very early still. But when you look at the absolute numbers, we're actually really happy with what we see in Sweden, in Denmark, in Norway and in Croatia also. Despite Norway and Croatia actually being relatively small markets, but we see really nice developments there. We'll give more updates throughout next year when the numbers become more meaningful, because at the moment, though we are happy, the relation to our overall GMV is, of course, still very small. So that was the second question on country expansion. And the third one was on the physical locations on our stores. And here, you asked whether we see besides the top line that we make in the stores, whether we also see an increased online activity in the catchment areas, and that's exactly the case. We don't share any numbers on the online catchment area uplift also for the reason that we don't have an A/B test in place. What we do is we compare catchment areas with stores against the catchment areas without stores. And there, we can see a significant effect of the stores. But of course, it's not 100% proof of this effect. But for instance, when we had Hamburg and Stuttgart as the only stores in Germany, those 2 catchment areas were the best performing in the whole of Germany. The reason behind this is, obviously, what you also pointed towards is that we have sales in the stores themselves. And then we also have the effect that is what we call also a marketing effect. So when people walk past our stores, it's like a billboard that's out there or even when they walk into the store and they have a look at products, they don't necessarily decide straightaway to convert to a buyer. That often happens only after their visit to the store. We have found that, for instance, when customers decide to buy a sofa, there are roughly 30 touchpoints involved between the first -- very first one and the purchase in the end. So these are many, many online touch points and increasingly so also our offline touchpoints. But this explains why we see this catchment area uplift in the cities where we have the stores. So it's absolutely positive. I can confirm what you said, Volker. Does that answer your 3 questions? Volker Bosse: Yes. And I would have a follow-up, more general remark on your Page 23, you give an indication on '26 already, very much appreciated. On market, you have a stable or a flat arrow, so to say, or how to say. I mean the question is for -- do you see any -- do you see no market tailwind, but also no market headwinds for next year? So what is your general assumption behind your '26 guidance in regards to what is the market providing? Andreas Hoerning: Thanks Volker. Your question on market development, how we see that in 2026, I'm handing over to Sebastian. Sebastian Westrich: Volker, thanks for your question on our view on the overall market development. So we expect overall no tailwind from overall consumer sentiment and market growth. But of course, there will be regional differences. So there are some areas within Europe, CEE, for example, where I think the overall conditions are more promising compared to what we see, for example, in the DACH segment where when you look at consumer sentiment indicators, there is no real improvement. And that is why we remain cautious. And our outlook or ambition for 2026, as we already mentioned in earlier calls, is based on our strength and executing our 3-step value creation plan with the share gains in existing markets and the expansion to new countries. And so far, we feel very confident to achieve those targets based on the financial and operational progress that we achieved so far in 2025. Operator: Next question comes from Jose Antonio Perez Parada from NuWays AG. Jose Antonio Perez Parada: Congratulations again on the strong quarter. I would like to ask for -- I have a couple of questions, if that's okay, I will just land them. The first of them is if has anything changed regarding the capital allocation over the quarter or if there's anything it's important to know for the near future? The second question will be that we already understand or we see that there will be no further geographic expansions in the rest of 2025. But could you give us any notion on the direction of the geographic expansion in 2026, maybe towards any region? That's another one. And the third one is that, you told us earlier that fulfillment ratio included some negative effects from expansion. So I would like to ask you again, if you could please guide me through the underlying dynamic again. Sebastien clearly mentioned something about the centralized distribution center in Poland, but I would like to grab the logic again. That would be it. Andreas Hoerning: Thank you, Antonio, for your questions. I'm going to hand over to Sebastian for the questions on the change to -- on the capital allocation and on the fulfillment ratio. And before I do that, I'll just briefly comment on your question on expansion. So you were wondering what the expansion in 2026 might look like. We're not going to share any specifics, but our general ambition is to be present in nearly all countries in Europe. And this also includes Great Britain, but of course, Great Britain is a bit more complex because it's not in the EU, and it also requires a bit more complex logistics setup. So we will likely expand also geographically in 2026, and we'll share more details on that when the time is right to do it. Jose Antonio Perez Parada: That clearly answers my question. Andreas Hoerning: And I hand over to Sebastian for capital allocation and fulfillment. Sebastian Westrich: Okay. Yes. Thanks a lot for your question. Let me start with the fulfillment question related to our expansion countries. So linehaul means the trucks that we send from our central logistics center in Poland, for example, to Portugal, and for new markets, we decided to already send those trucks even though they might not be fully utilized. So that means, of course, that the cost per item that we ship is higher, but this allows us to ensure better shipping times for our customers. So we accept the higher costs for a better customer experience. As we scale those new countries, Portugal, Nordics, et cetera, of course, also then the utilization of those trucks improves. So the cost should go down. And this is the effect that we briefly mentioned earlier. Andreas Hoerning: And it's also the effect that we are seeing in Portugal because there we already have significant volumes. We also combine this with Spain. So in Portugal, we actually see a very low logistics costs. And the same will happen to, for instance, the Nordics region, because there we are also able to combine certain shipments. Sebastian Westrich: Then on your question on the capital allocation strategy, and if anything changed over the quarter. So no, our capital allocation priorities remain disciplined and focused on long-term value creation, of course. So in line with this approach, we have demonstrated our commitment to shareholder value already in the past when we performed some share buybacks. And we may consider further measures going forward, but this, of course, is subject to market conditions and also regulatory requirements. So overall, no change to our capital allocation strategy. Jose Antonio Perez Parada: Again congratulations on the strong quarter and lots of success for the closing of the year and the upcoming holiday season. Andreas Hoerning: Thank you so much, Jose. Operator: At the moment, there seem to be no further questions. [Operator Instructions] Once again, Jose Antonio, please state your question. Jose Antonio Perez Parada: Thank you very much. Just taking advantage of the final question. You already answered some of the question to Volker. But we understand the underlying dynamic of the customer and orders. However, if I could have a little bit more color on the underlying dynamics of customer number and number of orders, given that they decreased, for example, our expectation of number of customers was lower and the expectation of orders was a little bit lower as well. So how does it look like going forward? Or what can we expect? Sebastian Westrich: Jose, thank you for your question. Let me better understand. So the -- you want to have -- you would like to have an outlook on the development of this in the future in more specifics. Is this what you would like to have? Jose Antonio Perez Parada: Yes, that would be perfect. I fully understand the dynamic behind it that we are expecting less customers, less orders due to the less impulse buy from smaller ticket items. But how does it in general look like going forward? Or what can we expect in -- Sebastian Westrich: Yes. So what we absolutely see for the future is that we will return to active customer growth and also to the growth of the number of orders. So this is absolutely the plan, not just from the expansion countries where we, obviously, see every customer that we gain there is a new customer, right, but also for the existing markets. So we have a clear commitment also to share gains in existing markets. And this, in the end, we cannot do without also active customer growth. We believe that a better assortment, better marketing and last but not least, also our physical presence, for instance, in Germany, will drive this. And actually, we see the beginning of this. So the stores enable us also to convince our customers that we previously weren't able to convince maybe because they required an offline step in their journey to actually then purchase with us. And as we came from 9 off-line stores, for instance -- from -- sorry, 2 offline stores at the beginning of this year and are now at 9, you can imagine that the full year effect can only be seen next year and actually in the years to come because the store has a certain trajectory of the first 3, 4 years of its existence. It needs to establish itself, if you like, in a city. So this is actually one important reason why we believe that also in the existing geographies, we will be increasing the number of active customers. It's a matter of time. We believe that next year, so we're not going to give a guidance on this, but we believe that next year we'll look a lot more positive than this year due to the easing of the effect that you also mentioned beforehand and the growing effects from our expansion measures plus stores. So no specific -- we don't have a specific forecast here, but you can expect that this significantly improves. And absolutely, our commitment is to going back to increasing number of active customers and orders. Operator: [Operator Instructions] And for some final words, I would like to hand over back to the management. Andreas Hoerning: Thank you. As we haven't received any additional questions, we're ending today's earnings call. Thank you for joining, and goodbye.
Operator: Good afternoon. My name is Tyler, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Holdings' Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] I will now hand the call over to Josh Yankovich, Investor Relations. Sir, please begin. Josh Yankovich: Thank you, operator. Good afternoon, everyone, and thank you for joining us for our third quarter 2025 conference call. With me on the call today are Matt Flake, our CEO; Jonathan Price, our CFO; and Kirk Coleman, our President, who will join us for the Q&A portion of the call. This call contains forward-looking statements that are subject to significant risks and uncertainties, including among other things, with respect to our expectations for the future operating and financial performance of Q2 Holdings and for the financial services industry. Actual results may differ materially from those contemplated by these forward-looking statements, and we can give no assurance that such expectations or any of our forward-looking statements will prove to be correct. Important factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in our periodic reports filed with the SEC, copies of which may be found on the Investor Relations section of our website, including our quarterly report on Form 10-Q for the third quarter of 2025 and the press release distributed this afternoon and filed in our Form 8-K with the SEC regarding the financial results we will discuss today. Forward-looking statements that we make on this call are based on assumptions only as of the date discussed. Investors should not assume that these statements will remain operative at a later time, and we undertake no obligation to update any such forward-looking statements discussed in this call. Also, unless otherwise stated, all financial measures discussed on this call other than revenue will be on a non-GAAP basis. A discussion of why we use non-GAAP financial measures and a reconciliation of the non-GAAP measures to the most comparable GAAP measures is included in our press release, which is available on the Investor Relations section of our website and in our Form 8-K filed today with the SEC. We also have published additional materials related to today's results on our Investor Relations website. Let me now turn the call over to Matt. Matthew Flake: Thanks, Josh. I'll start today's call by sharing our third quarter results and highlights from across the business. I'll then hand it over to Jonathan to walk through our financial performance and guidance. In the third quarter, we delivered strong financial results with revenue and adjusted EBITDA, both above our guidance. We generated revenue of $202 million, representing 15% year-over-year growth and adjusted EBITDA of $49 million or a 24.2% margin. We also generated free cash flow of $37 million in the quarter. In addition to the strong financial performance, we had the best third quarter in company history from a booking's perspective. As we shared earlier this year, we expected our larger deals to be weighted toward the second half, and we saw that begin to take shape with 7 total Tier 1 and enterprise deals in the quarter. This concentration, combined with a solid mix of new and expansion wins, drove the record third quarter bookings activity. Several of the Tier 1 and enterprise wins were net new, showcasing continued momentum in acquiring new customers, and all 3 major product lines contributed to the quarter's performance. On the digital banking front, we saw continued success upmarket, including a net new win with a bank exceeding $80 billion in assets that will begin by using our platform for retail and small business. We also signed a major expansion with a $60 billion bank that started with commercial and will now add retail. As demonstrated by these wins, our single platform approach, unifying retail, small business and commercial continues to differentiate Q2, help us compete more broadly and creates meaningful expansion opportunities over time. During the quarter, we also had 2 instances where a Q2 Bank was acquired by a larger institution. And in both cases, the acquiring bank selected Q2's platform to serve the combined entity. This is an indicator of our competitiveness and the scalability of our technology, especially as bank M&A activity continues. Our fraud solutions continued to gain traction as well. We signed the largest fraud deal in company history during the quarter, a significant expansion with an existing $200 billion digital banking customer. This win was for our check and ACH fraud solution, which continues to see robust demand in the market. With the cost and complexity of fraud growing, customers are increasingly turning to Q2 as a strategic partner to help them manage risk more efficiently and effectively. We also had our strongest relationship pricing quarter of the year, highlighted by multiyear renewals with 2 top 10 U.S. banks. Our relationship pricing solutions continued to be an important lever for financial institutions seeking to optimize yield, profitability and growth across both loans and deposits. Beyond our strong sales performance, we also recently hosted Dev Days 2025, our second annual conference for partners, customers and employees, who build on the Q2 platform using our APIs and SDK. While our annual client conference, Connect, is our venue to showcase production-ready innovation and customer adoption proof points, Dev Days is an event where we share architecture and technology enhancements and explore the next frontier of our platform. At this year's event, AI was front and center, and we showcased several ways we intend to bring leading AI capabilities to our platform for the benefits of bankers, account holders, developers and our fintech partners. We demonstrated a range of planned AI offerings that illustrate the breadth of our strategy. The first was an AI Copilot that can help account holders and bank staff alike, enabling account holders to receive guidance and manage money through natural language prompts and customer service representatives to retrieve and summarize information. We demonstrated AI-assisted coding in our SDK, which makes all of our developer documentation available via conversational developer tools and will help customers, partners and even Q2 go from idea to execution faster. We shared a customer-facing extension of our internal AI assistant that indexes the vast archives of our internal Q2 knowledge and makes it available through an LLM, which we believe will help our customers self-serve and get faster customer support outcomes. And finally, we shared a new partner data integration strategy that is intended to enable us over time to turn our wealth of 1,000-plus back-end integrations and more than 200 fintech partners into a unified data and capabilities ecosystem that will empower agentic innovation. The key takeaway from Dev Days was our customers need to invest in innovation, which requires mission-critical partners with expertise in handling highly regulated data and managing complex integrations to enable AI adoption. We believe we are well-positioned to be that partner of choice, as we have a proven track record of innovation, can leverage our network of customers, partners and integrations to build new capabilities on our platform, strengthening it with every generation of innovation. Our platform and the ecosystem that surrounds it can facilitate AI innovation in financial services. As technology and financial services continue to evolve, we believe advancements in AI will flow through Q2, not around it. Looking ahead, we feel very good about the success we've had heading into the final quarter of the year. Our pipeline remains solid. We expect demand to remain strong as we close out 2025. And as Jonathan will share in a moment, we're raising our financial outlook, reflecting our confidence in our ability to deliver on the full-year expectations we set earlier this year. Before I hand the call over to Jonathan, I wanted to share some exciting updates to our leadership team, which we believe will better align our talent and efforts with our long-term strategy. First, Hima Mukkamala has been appointed as our Chief Operating Officer, expanding his role to include our service delivery and customer experience functions. In Hima's time overseeing our engineering team since 2023, he has demonstrated operational excellence and an extreme focus on AI enablement, both to drive internal efficiencies as well as external innovation. In conjunction, Kirk Coleman will continue to lead our go-to-market functions as Chief Business Officer, reinforcing his focus on sales and customer success, leveraging his deep industry expertise to advance our product strategy and next phase of growth. I want to thank Mike Volanoski, our Chief Revenue Officer, for his contributions during his time at Q2, and he will remain with us through December 12 to ensure a smooth transition. With that, let me pass it over to Jonathan. Jonathan Price: Thanks, Matt. Our third quarter results demonstrate continued strong execution across several key metrics, including revenue and adjusted EBITDA, both of which exceeded the high end of our previously issued guidance. These results highlight the progress we have made towards our profitable growth strategy, reinforced by the strongest third quarter of bookings in our history and sustained margin expansion. I will now discuss our financial results in more detail and conclude with our guidance for the fourth quarter and full year 2025, as well as an updated financial outlook for 2026. Total revenue for the third quarter was $201.7 million, an increase of 15% year-over-year and up 3% sequentially. Our revenue growth was primarily driven by subscription-based revenues, which grew 18% year-over-year and 4% sequentially. Subscription revenue as a percentage of total revenue continued to increase, ending the quarter at 82%, highlighting the ongoing shift in our revenue mix towards this higher-margin revenue stream. The year-over-year and sequential revenue growth was primarily driven by a combination of new customer go-lives and expansion with existing customers. Our services and other revenues increased 5% year-over-year, reflecting an improvement compared to the prior quarter's year-over-year trends. This growth was driven by an easier comp versus the prior year as we lap the impact from First Republic Bank, which we indicated on the prior call. In addition to the easier comp, we benefited from higher professional services revenues from core conversions. These increases helped offset ongoing declines in more discretionary professional service offerings, which remain under pressure. Total annualized recurring revenue or total ARR grew to $888 million, up 12% year-over-year from $796 million at the end of the third quarter of 2024, driven by strength in our subscription ARR, which grew to $745 million, up 14% year-over-year from $655 million in the prior year period. Total ARR growth was fueled by continued strength in subscription-based bookings across both new and existing customers. As expected, subscription ARR growth also benefited from a normalization in churn following a concentration of churn in the second quarter, and we continue to expect churn in the second half to be more favorable than the first with full year levels remaining in line with or better than historical averages. Our ending backlog of approximately $2.5 billion increased by $161 million sequentially or 7% and $485 million year-over-year, representing 24% growth. Year-over-year and sequential increases were primarily driven by expansion with existing customers as well as solid net new activity and was broad-based. We entered the year expecting enterprise and Tier 1 opportunities to be more heavily weighted towards the back half, and that proved out with strong third quarter performance in those segments, which represented the majority of our booking's growth for the quarter. And as we have mentioned previously, the sequential change in backlog may fluctuate quarter-to-quarter based on the number of renewal opportunities available within that quarter. Gross margin was 57.9% for the third quarter, up from 56% in the prior year period and above the 57.5% we saw in the previous quarter. The year-over-year and sequential increases in gross margin were driven by an increasing mix of higher-margin subscription-based revenues. We continue to expect gross margin to expand in Q4 with full-year 2025 gross margin expansion of at least 200 basis points. Total operating expenses for the third quarter were $76 million or 37.7% of revenue compared to $73 million or 41.5% of revenue in the prior year quarter and $75 million or 38.2% of revenue in the second quarter. The year-over-year improvement in operating expenses as a percent of revenue was driven by G&A, which benefited from lower personnel-related costs and higher revenues, which impacted all categories. Total adjusted EBITDA was a record $48.8 million, up 50% from $32.6 million in the prior year period and up 7% from $45.8 million in the previous quarter. We ended the third quarter with cash, cash equivalents and investments of $569 million, up from $532 million at the end of the previous quarter. As we indicated on the prior call, the third quarter included a material cash payment, which drove the slight sequential decline in cash flow. In the third quarter, we generated $46 million in cash flow from operations, driven by improved profitability and continued effective working capital management and delivered $37 million in free cash flow. We continue to anticipate the fourth quarter will be our strongest free cash flow quarter of the year, consistent with typical seasonality. As announced in our press release, Q2's Board of Directors authorized a share repurchase program for an amount up to $150 million. Given the significant progress we have made on improving the balance sheet and our cash flow generation, we believe we are in a strong position to exercise all components of our capital allocation strategy. These priorities include investing in the business to elongate our subscription growth trajectory, evaluating opportunities for highly synergistic inorganic growth, retiring our convertible debt and opportunistically utilizing the share repurchase program over time. Let me finish by sharing our fourth quarter and updated full year 2025 guidance. We forecast fourth quarter revenue in the range of $202.4 million to $206.4 million, and we are raising full year revenue to the range of $789 million to $793 million, representing year-over-year growth of 13% to 14% for the full year. We forecast fourth quarter adjusted EBITDA of $47.2 million to $50.2 million and are raising our full year 2025 adjusted EBITDA guidance to $182.5 million to $185.5 million, representing 23% of revenue for the full year. Looking ahead, we are also providing an updated financial outlook for 2026. We expect full-year subscription revenue growth of approximately 13.5%, which is up from the approximately 13% we previously provided, reflecting the strong bookings momentum we've seen year-to-date and the durability of our subscription model. Total non-subscription revenue is expected to decline in the mid-single digits year-over-year in 2026, driven by ongoing secular pressure in bill pay and discretionary services revenue. In addition, we expect our full year 2026 gross margins to be at least 60%, and we expect adjusted EBITDA margin expansion of approximately 250 basis points. As a result, we are increasing our 2024 to 2026 3-year annualized average adjusted EBITDA margin expansion target to 450 basis points, up from our previous expectation of 360 basis points. Finally, based on our performance to date and anticipated second half strength, we reiterate our full year free cash flow conversion outlook of at least 90% for 2026. In summary, we delivered a strong financial performance, which exceeded the high end of our previously issued guidance. This performance, coupled with our outlook for the remainder of the year, has given us the confidence to raise our full year guidance on both revenue and adjusted EBITDA for 2025 and our improved 2026 outlook. We remain dedicated to delivering growth, profitability expansion and strategic capital allocation and believe that our results to date collectively illustrate our progress and potential as we continue to evolve our business and drive shareholder value. With that, I'll turn the call back over to Matt for his closing remarks. Matthew Flake: Thanks, Jonathan. Before we open it up for questions, I'll close with a few final thoughts. In summary, Q3 was another good quarter defined by strong financial results and record third quarter bookings. The record bookings execution was driven by broad-based sales performance with 7 total Tier 1 and enterprise wins. We also shared some exciting developments in our AI journey, showcasing several solutions in development at our Dev Days event that demonstrated how we're using leading-edge AI technologies to empower our customers, their account holders and partners in the months and years to come. Looking ahead, our record 3Q bookings performance and the strength of our pipeline gives me confidence that we'll close the year strong and enter 2026 positioned for continued subscription revenue growth and an improved profitability outlook. Thank you. And with that, I'll turn it over to the operator for questions. Operator: [Operator Instructions] And your first question comes from the line of Parker Lane with Stifel. J. Lane: Congrats on the quarter. Matt, some changes on the management team that you outlined here. I guess, coming off of bookings, a record bookings quarter here for 3Q. Maybe just talk about why now is the right time to make some of these changes to the structure of that organization? And what you expect the biggest changes we'll see in the near term are under the new leadership here? Matthew Flake: Yes. Thanks, Parker. For us, it's -- yes, you guys live quarter-by-quarter. We didn't just do this overnight. We've been trying to structure the business in a way to align the technical resources where our delivery support, the people that build the product and host the product are aligned because so much of that is connected to the engineering team. And so Hima is a proven commodity for us. We've been really impressed with him. Kirk hired him as a big advocate for him. And then putting Kirk in a position to do go-to-market and the product side of things, where he has deep experience. He's been a buyer. He's been a seller. He's been on our side as well. So it's just a perfect fit at this time, and we wanted to get it done before the end of the year, so we could put our plans together for '26 and beyond. So it's -- coming off a strong quarter just happened to be what happened. But really excited about these changes, and I think they put us in a position to really accelerate our products, our go-to-market as well as our initiatives around AI. And I'm sorry, what was the other part of the question? J. Lane: I think you touched on most of it there, Matt. Maybe just to pick up on AI, you highlighted some of the new development from the Dev Days. Obviously, AI is a huge focus area for every industry. But just wondering, if you look at year-end markets, what sort of appetite there is there, and more importantly, budget there is around AI? How much of a prioritization is this in your end markets? And what are you expecting the timeline to be there for contributions and benefits to your deal cycles as a result of it? Matthew Flake: Yes. Keep in mind, we've been using AI for fraud and cross-selling and products like that for a while. Our buyers were the most conservative business people in the country, arguably in the world. And so they are leaning in and learning. We're having a lot of conversations around it. We're trying to understand the problems they want to solve from a product's perspective. And so that's how you educate yourself and build the right products. The Dev Days, obviously, there's a lot of activity there. So encouraged by their engagement with us, and we think there's a lot of opportunity there. When it folds into the revenue and the cost side of things, I'm not in a position to share that at this point, but we definitely think there's going to be a lot of opportunity there on both of those lines. Operator: Your next question comes from the line of Terry Tillman with Truist. Terrell Tillman: Matt, Jonathan, Kirk and Josh, my first question, you actually have -- you beat me to it a little bit. I was going to have a lot to ask about AI. So you had a lot in your prepared remarks, and then, Parker had a good question on it. I guess, maybe another question kind of coming at this AI kind of angle or opportunity is, you talk about a single platform approach and how folks tend to cross-pollinate across commercial, small business and retail. Do you see maybe a quickening of the pace of, hey, we really need to clean up our digital banking front end though if we really want to do this AI stuff the right way? I'm not trying to put words in your mouth, but do you see this as potentially helping kind of accelerate some of this kind of brownfield replacement opportunities for digital banking before they actually buy some of these AI tools? And then I had a follow-up. Matthew Flake: Yes. I think a couple of things to understand about what I think are differentiators in our space, in particular. Everybody has horizontal and vertical software in the trash right now. I would point out some things about our industry in particular. Number one, I think incumbency and trust are both factors that provide meaningful and durable advantages for us. We have hundreds of customers. We have thousands of long-standing integrations to complicated back-office systems that require constant care and feeding. We have 20 years of compliance frameworks around securing the data that is accumulated on our single platform, as you mentioned, for retail, small business and commercial banking workflows. I think financial institutions need, and are going to require, a trusted partner to help them adopt AI safely and responsibly when you're talking about the buyers we're dealing with. And from -- and then there's a data and distribution advantage we have. We have 27 million end users, average of 3 accounts per user with probably an average of 7 years of history. That includes posted transactions, balances, payments, behavioral data, demographic data. And we're going to continue to use that data to enhance our customers' end-user experience, back-office operations, fraud prevention, cross-selling capabilities, efficiencies for us. And then you have a vast partner network that we believe will continue to work with us to distribute their AI solutions focused more on use cases that we will work to integrate into our workflows and complement the digital banking experience. And so that, coupled with the announcement we made today around the structure of this company in a way that it'll empower us to capitalize on the strategic advantages over the coming years. For us, the customers and Q2 team are excited about this opportunity. We just have to execute on our plans, which we have a track record of doing. So there's a lot of opportunity there. We're using it internally, externally with customers and everything else, and we're seeing real progress in that area. And we don't anticipate to sit on our hands and wait for somebody to come do this. But I do believe the incumbency and the trust aspect and the data and the distribution capabilities are significant tailwinds for us in this race. Terrell Tillman: That's great to hear. And I guess, I don't know if this is for you, Matt or Jonathan. And I'm not usually wanting to start looking at numbers and asking numbers questions on the calls. But it does look like it was a pretty substantial uptick versus the prior year on like RPO. And I know the subscription ARR picked up some, and I know some of this was kind of churn timing from last quarter. Where I'm going with this is we knew second half or we thought second half would be stronger than the first half on just the seasonality of your bookings. But I usually think of 4Q as the big quarter. Is there any tilt that's different potentially this year in 3Q to 4Q bookings? Matthew Flake: No, we are cautiously optimistic about the fourth quarter. We're focused on getting deals done. We have a lot of activity. I see a lot of good indications, but I don't know anything until it's done, but we are -- the pipeline is strong. We didn't drain it in the third quarter, and we're going to -- we intend to execute on those and continue to build the pipe for '26. Jonathan Price: Terry, the only thing I'd add is, as we talked about at the beginning of the year, the mix of first half versus second half was going to -- we predicted would be slanted towards Tier 1 and enterprise in the second half. The third quarter was a great start to the second half in that regard because we did see a really strong performance in that upper tier in that Tier 1 and enterprise segment and saw from a sub's ARR bookings perspective, by far, the strongest quarter of the year as that -- as we expected. And as Matt said, no feeling like we borrowed from the fourth quarter. So I feel good about the opportunity moving forward, but we got to execute on it. Operator: Your next question comes from the line of Andrew Schmidt with KeyBanc Capital Markets. Andrew Schmidt: Guys, good to be back on the call. Great results here. Great to see the sub ARR acceleration on top of a tougher comp. I wanted to ask about just the 2026 sub's ARR growth of 13.5% you outlined. Continue to see good long-term growth trends. But I guess you have to make some assumptions when you're providing that outlook. Obviously, you have good visibility given the recurring revenue base, but there's cross-sells, there is existing user growth and things like that. Maybe you could talk through just some of the assumptions that are in there. And then also, you commented on the bank M&A environment. Historically, it's been a positive for Q2, and we seem to kind of be in the sweet spot here given the current environment. Maybe talk about whether that's layered into those assumptions or whether that could be incremental? Jonathan Price: Yes. Thanks, Andrew. So, to hit the first part of the question, when we think about sort of the 13.5% for 2026 subscription revenue growth, that's mostly informed by the bookings outcomes year-to-date and the mix of those bookings, which gives us good visibility into 2024. When you think about what we do in the fourth quarter of this year, smaller deals, cross-sell, renewal activity, that can have an impact. But the bulk of it, we have visibility into based on actual bookings that we've obtained so far year-to-date. So we feel really good about that number, have conviction. And most importantly, the performance in the third quarter gave us the confidence to lift it from what we had predicted and communicated all throughout the year at 13% up to 13.5%. So it has assumptions around ongoing performance in line with what we've done when it comes to the near time to revenue levers, like cross and renewal activity, but there's no sort of incremental impact from the net new stuff that we're experiencing -- expecting significant impact in '26. From an M&A perspective, that's a little bit different. There, we don't really build that in from the standpoint of upside for our subscription revenue base. We do have some visibility, and we certainly make assumptions around services work tied to M&A. And I think that's informed a little bit in some of the non-subscription line item guidance we gave on the '26 front. But to the extent that goes more in our favor than it has historically, that would be upside to the plan. But we've seen a pretty strong year from an M&A standpoint. I mean, Matt talked about 2 deals this year, where we won up into the acquirer tech stack and for the combined bank, which is a great sign for us. But overall, M&A activity from a services perspective has been pretty high in 2025. And so we expect that to continue in 2026, but not necessarily to see the same growth we saw year-over-year relative to 2024. Andrew Schmidt: Perfect. And then if I could -- if I just could ask about just quickly on pricing, it's been a topic of conversation with investors. And I think typically, Q2 has been premium priced just given the value that you bring to clients. But maybe to comment if you're seeing anything different in the environment since it has been a discussion that's come up, not specifically Q2, but just broader in terms of the industry. But any comments there would be helpful. Matthew Flake: No, there's nothing abnormal. I mean, a lot of people that don't have the feature functionality we have, they use price as a tool to try to win deals. And sometimes banks go for that. We have a lot of discipline around that. We will walk from a deal if it doesn't fit our economic model and hope to pick them up later. But there's no significant change on the pricing side of things from what we've seen from people. Operator: Your next question comes from the line of Matt VanVliet with Cantor Fitzgerald. Matthew VanVliet: Curious on -- given your recent success of upselling, cross-selling your existing customers, how should we think about the renewal cohort over the next 5 quarters or so? Any differences in sort of the shape or size of the cohorts coming up for renewal? And within that, is there any outsized opportunities where maybe you're already on retail to sell commercial or commercial to sell retail and things of that nature? Jonathan Price: Yes. Thanks, Matt. I'll take that. I mean, to your last point, yes, we have lots of those opportunities, and that certainly make up some of the larger, what we call internally, cross-sales significant deals that are in the pipeline. But when it comes to the makeup of the '26 renewal cohort, we did -- we talked about this earlier in the year. But when you look at the performance on renewals in '23 and 2024 combined and look at the composition of that cohort and compare it to the '25-'26 cohort, it really is very, very similar, both in terms of number of opportunities and the mix within them. So we feel really good. It's not -- and it's not as though the renewal performance so far in 2025 has borrowed from '26 or anything like that. So we feel really good for the fourth quarter of 2025 and throughout '26 that the opportunity set in front of us, both in terms of number of deals and the size and shape of them, are comparable to what we've done in recent periods. Matthew VanVliet: Great. And then, as you look at the opportunity for Innovation Studio, not needing to build every little agent or AI widget out there by leveraging partners, seems like a big opportunity. And maybe as banks are a little more willing to accept AI technology is sort of where we're going, should we think about Innovation Studio maybe even further accelerating here now that you have at least one product in virtually all your customers? And how should we think about the overall revenue contribution in '26 versus still being a couple of years away from real materiality? Matthew Flake: Kirk, why don't you take the Innovation Studio product question, and then, Jonathan can take over. Go ahead. Kirk Coleman: Yes. From an Innovation Studio perspective, really 2 important points in there. One is that if we sort of think about our existing partner ecosystem and the new partners we're bringing to the ecosystem, it continues to be really important for them to have a partner like us who has great technology, great distribution, but also kind of like this very strong technical backbone on which to build their solutions to because you can have these features and functions that these fintechs deliver. But if you don't have all the data, all the APIs, all the integrations that we do, you really can't get as far with them. So that continues to be really important. If we think about it from an AI perspective, what we're seeing is those partners are really kind of continuing to come to Q2 to co-develop and distribute their AI solutions. And that's not just our existing fintech ecosystem, but it's also what our customers are building for themselves and also new players that you might see in the market like the services companies and others that want to build kind of specialized AI agents that they can distribute into the financial services. Again, all of that is really important for our Innovation Studio because if you think about the legacy financial services infrastructure, if you don't have a partner like us, it's really hard to scale any kind of solution into that environment. So that's where we see a lot of strength currently. Jonathan Price: And what I'll add up from a revenue growth perspective, '24-'25, we've seen phenomenal revenue growth from the Innovation Studio ecosystem. And you're right, we are seeing some use cases that are pretty exciting in terms of the adopted fintech partners and the entire ecosystem all thinking about AI in terms of their own point solutions and then us getting the benefit of that as there's adoption inside the platform. So we're excited about it. We think '26 will be another great year of growth from an Innovation Studio revenue perspective. And as a reminder, like that is very high-margin revenue. We're only recognizing it on a net basis. So it's a valuable revenue stream to us, and we are building a go-to-market apparatus and investing in the go-to-market team to try and capture that growth opportunity that you're asking about, Matt. Operator: Your next question comes from the line of Ella Smith with JPMorgan. Eleanor Smith: So first, I was hoping to ask about seasonal trends. Are there any seasonal trends to note when it comes to cross-sell from existing customers? And how long does it usually take cross-sell commitments to hit your revenue line? Matthew Flake: From a seasonality perspective, yes, the fourth quarter is usually our biggest cross-sell opportunity. It's the end of the year, people trying to fill out their budgets. I was really happy with the third quarter. Some of that was from our Connect conference that built up and the excitement from seeing the products. And then the fourth quarter should be as strong as cross-sell opportunity. Jonathan Price: Yes. And from a time-to-revenue perspective, unlike net new, these can go to revenue much, much faster. It just varies depending on the product. And so some of the stuff can get live really quick, especially when you're talking about cross-selling, let's say, an Innovation Studio partner that's already in production to certain products that maybe there is a, call it, 3- to 6-month timeline on the outside, in some cases, if it's not sort of a cross-sell of the digital banking component like retail to commercial or vice versa. So if it's an ancillary product, the timelines are faster. Eleanor Smith: That's very clear. And for my follow-up, can you speak to the appetite of existing and prospective customers to reinvest in technology? Is it changing given it's a somewhat lower interest rate environment? Matthew Flake: The demand environment has been strong, and it remains strong. I think interest rates, there's still uncertainty about what they're going to do. I think from a customer perspective, whether it's a bank or a credit union, they don't want to be caught in the situation they were in, in the 2012 to 2022, which is they were doing the loans, but they didn't have the operating accounts. So they learned their lesson, and they're trying to get the best digital banking, retail, small business, commercial solutions so that they can get the operating accounts when the lending environment comes back. And so they want to have the best product, and that's why we continue to win in that space, and I think we're going to continue to. So demand is strong, and I anticipate it continuing to be strong even as rates go down, assuming they will. Operator: Your next question comes from the line of Cris Kennedy with William Blair. Cristopher Kennedy: Just wanted to follow up on the gross margin outlook for next year. Can you just talk about some of the levers that you have to get to that 60% target? Jonathan Price: Yes. For sure, Chris. So the single biggest lever that we will see driving that upside in 2026 is the completion of our cloud migration project on the digital banking side. And so we'll be completing that here at the end of '25, very early in 2026. And so as we exit the data centers, you see that depreciation roll off, the very clear cost savings coming off. And then, as you think about operating in the environment that we're in from a cloud perspective, there's just so much opportunity for learning that environment and operating with more elasticity, more understanding of how to be efficient in that new world. And so we feel really good about the guidance we've given. But there's also all the other things that go into that in terms of revenue mix, AI efficiencies, all the things we're doing across support and delivery to become more efficient that are all accruing into that gross margin line. Operator: Your next question comes from the line of Alex Sklar with Raymond James. Jessica Wang: This is Jessica on for Alex. So sort of touching on what you've been saying about the strength in your risk and fraud solutions and your cross-sell, how should we be thinking about the contribution of risk and fraud to -- as a percentage of bookings year-to-date relative to previous years? Jonathan Price: We've never discreetly given projections around risk and fraud because so much of that solution is embedded within digital banking, but we can say that the growth of that business exceeds that of most of the other product lines that we have. And so you are seeing a greater mix in 2025 than we have historically in terms of the contribution from the fraud tech solutions. And I can say, as we think about the plans for 2026, we see a demand environment that suggests that will continue. Jessica Wang: Got it. And also, thinking about -- so we've been hearing some concerns in the end market about credit risk over the last couple of months. I think earnings have been turning up better than feared. But can you provide some color on what you're seeing from the health of your customer base? And any changes in demand patterns in terms of your solutions that may be are more focused on the credit side? Matthew Flake: Kirk, why don't you take that? Kirk Coleman: Yes. On the credit -- so if you sort of look broadly, and we -- again, we pull all the call reports on all of our customers. So we watch this really closely. The banks are really well reserved right now. I think we would start to start there, and that's -- if you look back kind of like even on a 10-year basis. So what we see is, although there's been a couple of banks that have had to report some losses here recently, if you kind of look more broad-based, even in those banks, they were well reserved to be able to handle those losses that they reported. And so right now, credit quality is actually holding up pretty well. Those credit provisions look like they're in a healthy range. What we see in our PrecisionLender relationship pricing line of business, continues to be very strong in terms of the demand for that product as customers are thinking about how do I reprice relationships as the interest rate environment changes, particularly since there's still a little bit of uncertainty in terms of exactly how that's going to play out and as they're thinking about '26 and what their growth trajectories look like. So don't see any red lights on the credit front yet. Operator: Your next question comes from the line of Charles Nabhan with Stephens. Charles Nabhan: Congrats on the results. A couple of quarters ago, you gave some real good metrics around the cross-sell opportunity between retail and treasury management. And I wanted to revisit that to get a sense for how much runway or wood there is to chop within the customer base in terms of cross-selling those 2 products. Also, I wanted to touch on whether you're seeing more uptake of both commercial and retail solutions on your newer deals. Jonathan Price: Yes. Thanks, Chuck. Yes. No, that's a metric we track closely. It's a huge -- you call it TAM or SAM opportunity inside our customer base. When you think about cross-sale of significance, what we call it internally, we still have, call it, in a customer -- Tier 1 customer base, so financial institutions over $5 billion in assets. Only 10% of them have all 3 of retail digital banking, commercial digital banking and PrecisionLender or relationship pricing as we call it now. And so that is a huge cross-sell opportunity. And that dovetails well into your second point. We still see a good mix of deals that start with commercial, go to retail. We had a great one like that this quarter, and we see that all the time. But you also have some really good. We had a great net new win that went for the full platform. And so it just -- it depends, and both of those were Tier 1 institutions. So it just depends on the strategy and the timing and the budget of the financial institution. But we feel really good about that. That's why we win a lot. That's a big differentiator for us. And again, from a cross-sell perspective, that continues to be a huge opportunity given how few of our Tier 1 institutions have all those different products. Charles Nabhan: Got it. And as a follow-up, I wanted to talk about your product roadmap and get a sense for how you balance M&A, partnership and organic growth as well as what specific products or areas you might look to as a means of either enhancing your existing functionality or broadening your TAM? Matthew Flake: Yes. I mean, I think the platform, we look at it and say, on the retail side, we want to make it more personalized for users as they log in and they can have things that are relevant to what their day looks like. From a business perspective, we want to continue to -- we want to add that functionality as well. Plus we want to add deeper commercial functionality that allows people -- the banks to go help there -- to go acquire larger businesses in their region. Fraud, obviously, we're investing heavily in that. Innovation Studio gives us a lot of scale in a lot of different products. And then, also the ability for us to cross-sell and market products. And then you have AI tied to all of this, whether it's operating efficiency for the bank, agentic AI to help people understand what they need to do. So there's all of these products that we have. We have a core modernization strategy with Helix. There's a lot of different things that we're doing that are going to expand our TAM and kind of grow with our customers as they try to get into new areas and sign new customers and gather more deposits. So strategically, we are really well positioned. Kirk, if you have anything to add, feel free to add. I don't know if I broadly covered it. Kirk Coleman: No, I think you broadly covered it. I mean, again, what we see from our customers, and we've had 3 really great customer events over the last 45 days, and they reinforced this in addition to our Customer Advisory Board, but they're really looking to us to help guide them through this current stage of innovation. We brought them through digital, we brought them through mobile, we brought them through cloud. We're going to bring them now into AI. And so having that trusted partnership and really being very interactive with us in terms of the feedback that they give us and the feedback we give them in terms of what the roadmap should look like is a really powerful kind of flywheel for us. Jonathan Price: And Chuck, to the first part of your question around build versus buy versus partner, I mean, we think about that all the time. It's an equation where we want to be able to exercise all of those different levers. And obviously, we're building products, and the Innovation Studio ecosystem along with some of our long-standing partnerships pre-Innovation Studio, we have a very robust partner strategy. And then when it comes to buying, I think it's obviously a part of our long-term strategy and one we've exercised in the past. But the bar has been raised for what it would take for why we need to own an asset and how we think about valuing the asset and what the financial criteria of those businesses would need to be. So all 3 of them are relevant, and Matt and Kirk covered the areas where we would be interested, and that would be the same in the context of M&A. Operator: Your next question comes from the line of Dan Perlin with RBC Capital Markets. Daniel Perlin: I just wanted to touch base on kind of the macro, kind of the state of what's been happening here as of late in that there's a bit of a dislocation, I think, happening with one of the large core providers. They're going to go through a lot of, I would say, change over the next couple of years in terms of their core consolidation. And I know we're not specifically talking everything on your business. But I'm just wondering how much kind of the derivative fallout from that could create some really interesting RFP opportunities for you guys over the next couple of years. And just how would you frame that in that context? Matthew Flake: Yes. Historically, as I've seen core consolidation happen over the last 25-plus years, it generates opportunities for us. So when a bank is forced to -- or credit union is forced to switch off of the general ledger they're running on, it pushes them to go evaluate all their technology and what they want to do because it's such a disruptive thing for them. So I -- RFP volume, I looked at it before, is similar to what it was last year right now, but this stuff is just kind of hitting the market now. So it's something to watch. Obviously, we're paying attention to it. For us, we know all the prospects in banks and credit unions. We're calling on them all the time, marketing to them and keeping our name in front of them. So when they do decide to take a look, hopefully, we get called. That's the objective. So other vendors have different challenges. We've all had challenges at different times. And I don't -- I expect those to get fixed. And so we can't rest on our laurels and think some of that stuff is going to be a problem. And so we're going to continue to attack the market we're going after and use our product and our customer experience and our culture as a differentiator. Daniel Perlin: Yes. No, that's great. Just a quick follow-up. On the '26 guide, if I'm just looking at the numbers, and they may differ a little bit, but like it looks like the incremental margin on EBITDA somewhere in the high 40s, low 50s versus kind of in the 60s kind of where you are maybe going to land this year. Again, maybe there's a little bit of squishiness in the numbers. But net-net, it looks like it's coming down a little bit. Is that because there's like this investment opportunity cycle that you're going into, especially given the fact that you've got this migration on the gross margin side, and it does feel like there's plenty of other opportunities for leverage? So I'm just wondering what's maybe a little bit more embedded in that. Jonathan Price: Dan, let me make sure I'm getting your question right. Are you referring to Q4 EBITDA? Daniel Perlin: No, '26 guide EBITDA, 250 basis point margin expansion year-on-year. Just the incremental margin on that would suggest it's probably closer to 50 versus maybe 60 that you're going to land on in 2025. Jonathan Price: Yes. I got to make sure I'm following you. When we look at our 2024 to 2026 financial framework, one of the metrics we talked about was EBITDA margin expansion. And what we talked about there was the 3-year average, '24 to '26 would see 360 basis points of improvement on average. With 2024 in the bag, and 2025, the guide we just provided, both well over 500 basis points of expansion each of those years, the implied 2026 EBITDA margin expansion before the color we gave today was quite low. It was sub-100 basis points in terms of the implied '26 margin expansion. In providing that 250 basis points of expansion, I think what we're trying to show is we actually expect more operating leverage in 2026 than what those numbers implied. So hopefully, that helps. I just -- I didn't reconcile that to the 40 to 50 number you were talking about. Daniel Perlin: Yes. No, that -- believe me, I'm not knocking on the 250 basis points. That's a great number. I was just referring to the incremental margin associated with that embedded for '26 versus '25, but we can have that in our follow-up call. Thank you. Jonathan Price: Okay. Operator: Thank you. There are no further questions at this time. This concludes today's call. Thank you all for attending, and you may now disconnect.
Operator: Greetings, and welcome to the Americold Realty Trust Third Quarter 2025 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Rich Leland. Please go ahead. Rich Leland: Good morning, and thank you for joining us today for Americold Realty Trust's third quarter 2025 earnings conference call. In addition to the press release distributed this morning, we have filed a supplemental financial package with additional detail on our results. These materials are available on the Investor Relations section of our website at www.americold.com. This morning's conference call is hosted by Americold's Chief Executive Officer, Rob Chambers; and Jay Wells, our Chief Financial Officer. Management will make some prepared comments, after which we will open up the call to your questions. Before we begin, let me remind you that management's remarks today may contain forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties that may cause actual results to differ materially from those anticipated. These forward-looking statements are based on current expectations, assumptions and beliefs as well as information available to us at this time and speak only as of the date they are made. Management undertakes no obligation to update publicly any of these statements in light of new information or future events. During this call, we will also discuss certain non-GAAP financial measures, including NOI, constant currency, net debt to pro forma core EBITDA and AFFO, among others. The full definitions of these non-GAAP financial measures and reconciliations to the comparable GAAP financial measures are contained in the supplemental information package available on the company's website. Please note that all warehouse financial results are in constant currency unless otherwise noted. Now I will turn the call over to Rob for his prepared remarks. Robert Chambers: Thank you, Rich, and thank you all for joining our third quarter 2025 earnings conference call. Before diving into the third quarter results, I would like to congratulate George Chappelle on his well-earned retirement after a long and successful career. He originally stepped into the Americold CEO role coming out of the disruptions from COVID and outlined the 4 key priorities that you have heard us talk about on our previous calls, a focus on providing excellent service to our customers, improving the retention, training and productivity of our workforce, growing our service margins and building out a robust pipeline of attractive development opportunities. I had the opportunity to work side-by-side with George along the way as we made significant improvements across all of these areas. They are now part of our company DNA and remain a foundational component of our strategy. Personally, I also benefited from having George as a mentor as he helped prepare me to lead Americold into the future as part of the Board's succession plan. Over the past 2 months, I've visited several geographic regions, both domestically and internationally, connecting with our teams and reinforcing our shared values and priorities. In addition, I've spent considerable time engaging with many of our top customers and strategic partners, most of whom I've had a relationship with for many years. The strength of these relationships, combined with our global scale and presence at all key nodes in the cold chain provides us with attractive and unique future growth opportunities. While I will continue to pursue many of the strategies we have established over the past 4 years, I believe we also have the ability to lean further into the areas of the business that we think provide the best long-term opportunities, such as growing our market share in the fast-turning retail sector, expanding our quick service restaurants or QSR business to new geographies and pursuing growth in attractive and underpenetrated markets where occupancy rates are high. I also believe that my background and experience in logistics provides a unique perspective. Throughout my history with Americold, I have played a large role in shaping our commercial strategies and business rules. This includes pursuing longer-term fixed committed contracts, which function more like a traditional real estate lease versus transactional arrangements. Although there is a large and important operational component to our business, our foundation is a REIT, and we benefit from the stable cash flows that come from having a large and valuable network of strategically located mission-critical assets. As a reminder, over 80% of our assets are owned. This is a key differentiator for Americold, both from a customer perspective and in terms of long-term value creation for our shareholders. Our customers value us for the high quality and diversification of our real estate assets. Among our top 25 customers who represent approximately 50% of our warehouse revenue, 100% of them use multiple facilities across our network with an average of 17 sites each. Most of them also store product with us in multiple nodes of the supply chain. This is a somewhat unique advantage for Americold versus our competition as we are one of the few players in the industry that has a significant presence at all 4 nodes of the cold storage food supply chain, which includes production advantage facilities, 4 distribution sites, retail distribution centers and port facilities. This is often underappreciated by investors, so let me spend a moment describing each of these facility types in more detail, along with some of their advantages. First is our network of production advantaged, or production attached facilities. These warehouses are located close to where food is being harvested or produced, such as Russellville, Arkansas; Sikeston, Missouri and Wichita, Kansas. They receive product directly from our customers' manufacturing facilities, and we often provide a variety of value-add services at these locations such as tempering, boxing and blast freezing before storing the product. Because these facilities are critical to our customers' production and distribution strategies, they generally only service 1 or 2 customers, operate under long-term fixed commitment agreements and tend to have some of the highest economic occupancy rates in our network as our customers want to protect the space. These facilities also see the highest gap between physical and economic occupancy, which is expected given the value our customers get from controlling the space around their production facilities. Given the geographic locations, longer-term agreements and higher level of customer intimacy, these relationships often last for decades, making them highly immune from speculative capacity. Our automated expansion in Russellville, Arkansas, for example, was completed in 2023 and is committed to a single customer under a 20-year agreement. This site has won numerous awards since launching and was recently named Cold Storage Facility of the Year from Refrigerated & Frozen Foods Magazine. Production advantaged facilities today make up about 30% of our capacity and revenue, and we view them as very valuable assets in our portfolio and an attractive area for future expansion. The next node in the cold chain is 4 distribution centers. These facilities are almost exclusively multi-tenanted with product from various food producers and are typically located near large population centers in key distribution corridors such as Atlanta, Dallas, Eastern Pennsylvania, Southern California and Chicago. This is also where the vast majority of the speculative development has been deployed over the last few years, creating more pricing competition compared to the other supply chain nodes. We estimate that over the last 4 years, approximately 3 million pallet positions have been added in North America, most of which is in this node, representing over 15% of incremental capacity. Due to the more transactional nature of these facilities, coupled with the speculative development and pricing competition, this is where we have seen the most pressure on fixed commitment renewal levels and rates, and we expect these headwinds to continue throughout next year. About 50% of our capacity and 40% of our revenue is derived from 4 distribution centers. Despite the excess capacity in the 4 distribution node, our strong operating platform and focus on customer service does provide Americold with a competitive advantage. One great example is our recently launched Allentown expansion, which was underwritten on strong demand from existing customers and is ramping nicely since being completed last quarter. We have a similar development underway in Dallas, where we are building automated capacity attached to an existing conventional facility that is rail served. This is a unique value proposition that other speculative developments can't offer. And we are leveraging our existing customer relationships in the region, along with our track record of operational excellence to make this building a success. Next, food product often leaves these 4 distribution locations many times on an Americold brokered refrigerated truck and are sent to a retail distribution center where the retailer takes ownership of the product. Product typically enters the facility on hold pallets from the manufacturer. When a grocery store needs replenishment, our teams will pick the product at the case level and the cases are then reassembled into multi-manufacturer and multi-SKU custom pallets based on the store order. The product is then staged and loaded in a way that mirrors the truck delivery route. The vast majority of this business today is currently in-sourced by the retailer as it's operationally intensive and a missed order can result in a stock out and missed sales. This is where Americold has built a strong leadership position. We have decades-long relationships with some of the largest retailers in the world and have built a reputation for mastering this complex work, which is out of reach for most cold storage providers. Similar to production advantage locations, these facilities typically have a single tenant and operate under longer-term agreements. Given the high services content and fast-turning nature of this business, these facilities have much higher levels of NOI per pallet position than any other node. Approximately 10% of our capacity and 20% of our revenues are retail distribution centers today, and that number is growing. You may remember that earlier this year, we announced an acquisition in Houston to accommodate a new fixed committed win with one of the world's largest retailers. We're expanding our capabilities overseas. And last quarter, we highlighted 2 new retail wins in Europe with 2 of the largest supermarket operators in Portugal and the Netherlands. We also have a strong presence in Australia and New Zealand and serve several customers in the retail and QSR space. Given that most of this retail business is in-sourced today, this is a great opportunity for Americold to continue to grow despite the market pressures impacting other parts of the business. The fourth node in the cold chain is port facilities. These warehouses tend to be multi-tenanted with limited fixed commitments as product is typically only in the warehouse for a short period of time before moving to the next location. This is an area where we have also seen speculative development as ports are the next logical choice for a new market entrant after the key logistics corridors. We've seen this occur recently in markets like Jacksonville, Charleston and Savannah. Port facilities in total are about 10% of both our capacity and our revenues today, but we're actually taking a somewhat different approach to new port opportunities and looking to leverage the expertise of our strategic partnerships that new entrants to the market aren't able to access. A great example is our development in Port Saint John in Canada, done in collaboration with CPKC and DP World. Later this month, I'll be traveling to Dubai to further celebrate the grand opening of our import/export hub at the Port of Jebel Ali, which was also built in partnership with DP World. These world-class partnerships provide us with opportunities to build unique supply chain solutions, and we're expecting strong customer interest for both facilities. While each node of the supply chain is mission-critical infrastructure, I hope you can see why we place particular importance in the benefits of both the plant attached and retail distribution facilities. Despite the current headwinds facing our industry, we believe our presence in these 2 nodes differentiates Americold from our competitors and provides us with potential opportunities to further expand our leadership position as the vast majority of our competitors don't have these customer relationships, network or operational expertise to capture these opportunities. Turning to our financial results for the quarter. I'm pleased that our third quarter results were in line with our expectations, delivering AFFO per share of $0.35. Despite the ongoing industry challenges from lower consumer demand and increased supply, our teams remain focused and continues to execute very well. We are fortunate to have 2 experienced leaders overseeing our regions. Bryan Verbarendse, who succeeded me as President of the Americas, has extensive experience in retail and wholesale grocery supply chain operations, which is instrumental to gaining additional market share in the retail distribution node of the supply chain. Richard Winnall, our President of International, has done an excellent job of capturing new business opportunities, particularly in the QSR space, which Australia excels at. The Asia Pacific region has seen their total warehouse NOI increase by approximately 16% year-to-date and their economic occupancy is well over 90%. The macro environment, however, remains a challenge and recent customer commentary has reinforced this view that demand remains constrained, especially with lower-income consumers. On our last call, we detailed several headwinds that are simultaneously converging, both on the demand side as consumers continue to struggle with food inflation, elevated interest rates, tariff uncertainty and governmental benefit reductions as well as on the supply side as our industry absorbs the speculative capacity that has recently come online. We believe these factors will continue to impact pricing and occupancy throughout 2026, and we have started to see this reflected in our renewal activity over the past several months. However, I think it is important to point out that we do believe these headwinds will be largely transitory. On the excess capacity side, for example, we have already seen a slowdown in new development announcements, and we are past the peak of new deliveries. Many of these competitors do not have a sustainable long-term business model. And some of these new market entrants have already begun to exit. We are also not standing by waiting for conditions to improve. Our business development teams are out meeting with customers to identify new sales opportunities, while also expanding our aperture into potential new sectors, including both food and nonfood categories. We are also actively managing our real estate portfolio, exiting certain facilities, while also evaluating triple net lease arrangements to help strategically drive occupancy levels across our network. We remain confident in the long-term trajectory of the cold storage industry. Our value proposition and assets are unique and difficult to replicate, especially in an industry that is critical to the global food supply chain. This provides an exceptional opportunity for increased shareholder value when volumes ultimately recover. Now I'd like to turn the call over to Jay to review our financial results and outlook for the remainder of the year. Jay Wells: Thank you, Rob, and good morning. First, I'd like to discuss the results for the quarter, then our capital position as well as our outlook for the remainder of the year. As Rob mentioned, third quarter AFFO per share came in at $0.35, which was in line with our expectations. Same-store economic occupancy was 75.5%, down year-over-year, reflecting the continued demand pressure that we have seen in the market and flat sequentially to the prior quarter. Same-store throughput increased slightly sequentially from Q2, largely due to the start of the annual agricultural harvest as expected. Same-store NOI contracted from the prior quarter, primarily due to the seasonal increases in power costs, in line with our guidance, and we continue to diligently control our expenses. While the fundamentals of the business remain pressured, the team continues to execute well. Despite the competitive pricing environment, our rent and storage revenue per economic pallet increased on both the sequential and year-over-year basis, as we continue to balance both price and occupancy. In addition, our services revenue per throughput pallet also increased both sequentially and year-over-year. Customer churn remains in the low single digits, while rent and storage revenue from fixed commitments held steady at 60%, maintaining the record level that we achieved earlier this year. As a reminder, we may see some quarterly fluctuations in this metric. However, 60% remains our long-term goal based on the fact that approximately 70% of our revenue comes from our top 100 customers, and most of them see the benefits of the fixed commitment contract structure. At quarter end, net debt to pro forma core EBITDA was 6.7x with approximately $800 million of available liquidity. We remain disciplined and prudent in our capital allocation decisions, focusing on customer-driven and strategic partnership projects that are lower risk and also allow us to grow with our customers. Our development pipeline remains strong with approximately $1 billion of attractive opportunities. However, maintaining our dividend and investment-grade profile remains a top priority, and we are balancing our development pipeline accordingly. We remain committed to our 10% to 12% ROI benchmark before committing capital to any project. We are also continuing to make strong progress on our portfolio management initiative. We exited 3 facilities during the quarter with a target to exit an additional 3 in the near term and additional facilities under review. Most of these sites are leased and customer inventory is often moved into nearby owned locations. This is part of a robust process we have in place to review all low occupancy sites across our portfolio. As we look to the remainder of the year, our customers continue to communicate that they are hesitant to build inventory until they see a sustained increase in demand. This aligns with the assumptions in our current guidance framework. Therefore, we are reiterating guidance for the remainder of the year. While we believe most of the headwinds in the industry are transitory, we do expect them to create pressure on both pricing and economic occupancy in 2026. As Rob mentioned, most of the pricing pressure has been in the 4 distribution node, which is about 40% of our business and where the industry has had the most speculative developments. We anticipate that this excess capacity will be absorbed over time, and we have seen a few instances of this already, but we think it could take a couple of years for this to be fully resolved. In the interim, we anticipate that pricing gains will moderate in the fourth quarter and could be a headwind of about 100 to 200 basis points next year. From an occupancy standpoint, we believe physical occupancy has stabilized, but we do see some risks in economic occupancy and expect next year's contract renewals will likely be at lower space commitments as customers continue to manage inventory tightly in this low demand environment. As a result, we anticipate that total economic occupancy could decrease by approximately 200 to 300 basis points next year. Despite these near-term headwinds, we continue to be confident in the long-term strength of the business. Cold storage revolutionized the way that people eat, and the industry is a foundational component of the end consumers' day-to-day lives. We own a portfolio of mission-critical infrastructure that is well diversified across all nodes of the cold chain, and we believe that we are the best operator in the business. As these headwinds gradually abate, we are positioned to reap the rewards of the investments we have made over the past 2 years in labor, operational excellence, IT systems and our commercial leadership. Now I will turn the call back over to Rob for some closing remarks. Robert Chambers: Thanks, Jay. While the current environment presents no shortage of challenges, the strength of our management team and diversification of our real estate gives us a strong competitive advantage in the market. Our value proposition remains strong, and we are managing the business to set ourselves up for the long-term success, leaning into opportunities and finding new ways to grow. The presence of the previously discussed headwinds does not diminish the importance and value of our operational excellence, deep customer relationships, industry expertise and mission-critical scale and diversification. I think it is important to highlight that Americold today is trading at a significant discount to our intrinsic value, and this is supported by several different measures. From a replacement cost perspective, it would be impossible to acquire the land and replicate the 5.5 million pallet positions in our real estate portfolio for anywhere near our current $8 billion enterprise value, not to mention the incremental value of our operating system and experienced team of associates. We are also currently trading at a historically high cap rate of around 10%, which is unusual for a business like ours that owns mission-critical infrastructure backed by long-term agreements, fixed committed contracts with high credit quality tenants. And finally, we have an enterprise value to EBITDA multiple that is well below valuations for most of our publicly traded industrial and commercial real estate peers. My job, along with our management team and all of our associates around the world is to operate this business to maximize the value of these assets for the benefit of our customers and shareholders, and I believe we are taking the right actions to ultimately deliver outsized earnings growth. With that, I'll turn the call over to the operator for questions. Operator? Operator: [Operator Instructions] And our first question comes from Samir Khanal with Bank of America. Samir Khanal: I guess, Rob, when I look at the KPIs in the quarter, occupancy and pricing did improve sort of when you look at it year-over-year, but throughput got a little bit worse. I guess how should we think about kind of throughput over the next 12 months? And maybe sort of expand on kind of what you're seeing on the ground over the last couple of weeks? Robert Chambers: Sure. Thanks, Samir. So yes, from a throughput perspective, I mean, I think we still hear from our customers that the same thing that they're saying on their earnings releases, which is demand is challenged, largely because of lower and middle-income consumers that are still significantly under pressure from all of the factors that I mentioned in my prepared remarks. And so while there still should be some seasonal demand for Thanksgiving and for Christmas, it is muted. And that's largely what we had anticipated. And as we go forward into next year, we're not yet at a point where we feel like we can predict an inflection point. And so we think throughput will still be challenged as we go into next year. What we're hearing from customers on the ground is similar to what I just described. I think you've got customers that are hesitant, to be honest with you, to build inventory in the current environment until they really see a sustained increase in demand. And so as we're going through our discussions for next year, we factored all of that into some of the foundational elements that Jay talked about on the call in terms of what our expectations are for next year. Jay Wells: And if you look at sequentially, last call, I did talk that we'd see a little bit of lift sequentially in throughput, which we did. And that was really driven by the start of the harvest season and us starting to see those products come into our sites. And then next quarter, you will see we have a small lift in occupancy, about 100 bps, give or take, and that's really driven by the harvest season, too. So actually, throughput sequentially came in right around where we expected it. Samir Khanal: Got it. And then, Jay, I guess, when I look at your guidance and also all the assumptions you have there, most of the items were unchanged, but interest expense did come down. So all else being equal, I mean, we should have probably seen an increase in AFFO, but that didn't go up. So maybe provide some color around this. Jay Wells: Yes. Sure. If you also look, it's a little bit, there was a move in classification from other income over to interest expense. So you'll see that the other income went down a similar amount. So overall, net-net, it didn't benefit AFFO. Operator: And our next question comes from Greg McGinniss with Deutsche Bank (sic) [ Scotiabank ] . Greg McGinniss: This is Greg McGinniss with Scotia. I appreciate your ability to kind of project the business into the back half of the year. I'm curious on the margins that you're seeing quarter-over-quarter, some margin decline year-over-year as well. What are you doing to control the cost in the business? And what are your expectations there going forward? Robert Chambers: Sure. So on the margin side of the business, with lower occupancy and lower throughput, obviously, that's going to challenge your margins a bit and you don't get the same leverage across your fixed cost base that you like to see when volumes go the other way. But we continue to do a really good job of controlling costs. We've been able to manage and match our direct labor to our throughput in a way that I think has really helped boost handling margins. We've delivered handling margins in excess of 12% and are on track for that, which was our goal when we came into the year and continues to be outsized relative to historical margins on that side of the business. I think that we are seeing really good progress and results out of Project Orion. And so we're continuing to implement that across the regions and Europe will be a big beneficiary of that as we go into next year. And then every single year, we have productivity targets that we set for our operations team. We have 2 great leaders of the P&L, like I mentioned on the call, and Bryan Verbarendse and Richard Winnall, who are very skilled and experienced at driving productivity through the Americold operating system and our technology platform. So I think we're going to be able to continue to control costs in a way that will allow us to deliver margins that we're comfortable with. Jay Wells: And on call, I discussed, we do have a very robust process of evaluating all of our low occupancy sites. We did remove another 3 sites this quarter with more targeted. And as we continue to do that, that's also taking cost out and will help us maintain our margin levels. Greg McGinniss: Great. And I just wanted to follow-up as well on the pricing impact expected from new occupancy -- sorry, new supply delivered over the last few years. Are you -- is Americold going to need to adjust fixed commitment pricing down as those contracts expire given the supply that's hit? Robert Chambers: Well, I think you see that reflected in our prepared remarks in terms of what Jay outlined for our expectations as we go into next year. What I'd say is the team has done a remarkable job over the last few quarters. We've been in a tough demand environment now for a while, and you've seen us be able to maintain the fixed commitment levels at that goal of 60%. You've seen growth in pricing, both on the storage and the handling side over the last several quarters. But there are certainly some markets and some nodes. We called out the 4 distribution centers in particular, where there's pressure on both of those KPIs, both from a pricing standpoint and from a fixed commitment standpoint. So we've chopped a lot of wood in terms of getting through a lot of our contract renewals during this tough environment, but there is more to go. And in certain instances, we're seeing some of the fixed commitments get tightened up. We generally don't see our customers moving away from fixed commitments because they do want to protect the space. They understand the value. But in instances where their physical inventory has decreased to a point where they can bring down the fixed commitment a bit, we've seen some of that, and we've planned for that in terms of some of the building blocks that we outlined in the prepared remarks. Operator: And moving next to Michael Carroll with RBC Capital Markets. Michael Carroll: I guess, Rob, in prior quarters, you highlighted a pretty sizable sales pipeline that reflected roughly 8% of total revenues. I know your updated guidance range has assumed that this comes online in later periods kind of pushing out to 2026. I mean is that still the case? I mean, are these customers still going to bring product into your facilities? Or has that kind of pulled back and that sales pipeline kind of got smaller over the past few quarters? Robert Chambers: Thanks, Mike. The sales pipeline has been a bright spot. I'll tell you; we're going to have a very good sales year this year. It will be a record for us in terms of new business wins. It's definitely been slower to materialize than we had originally planned. And in some cases, a lot of these programs are not immune to the same challenges that the rest of the business has had. So as they come into Americold, they come in, in lower amounts than what were originally anticipated or contracted for. So it's still a highlight for us. I think new business. The team has done a great job acquiring it. But in the end, we have seen some of that offset by both reductions in the base business and just traditional customer churn. Michael Carroll: Okay. And then on the fixed commitment side, is that -- should we expect more of those contracts to be up for renewal in the beginning of the year? I mean is there kind of seasonality? Or is it kind of spread out throughout the year? Robert Chambers: That really is spread out through the year, Mike, is the contract terms tend to be based on when they're signed. So it's contract years more than it is fiscal years. So you'll see, I would say, a relatively consistent renewal cadence throughout the course of the year versus anything outsized in one quarter or another. Operator: Your next question comes from Michael Griffin with Evercore ISI. Michael Griffin: Rob, I want to go back to your comments just on the fixed commits and how you're negotiating with them, realizing that maybe you're prioritizing the stability of those cash flows that we might consider traditional REIT income types, so to say. But would you say that you'd be willing to give a bit on pricing in order to secure a longer-term commit? Or maybe walk us through the push and pull of a longer fixed commit contract versus what the pricing might be there? Robert Chambers: Yes. I mean we balance all of those things. I mean we're looking at existing profitability. We have all the tools to be able to understand what market rates are, what profitability is by activity. We have a great activity-based pricing model. And so any time you have conversations with customers about a contract renewal, there's going to be dialogue around price, around volume, around length of contract, around business across the network. So we balance all of those things to try to make sure that we're doing the right thing to maximize the value of those agreements and ultimately be able to defend our market share, while also maintaining the appropriate level of profitability. So there's not -- I think the most important thing to say is there's not a one-size-fits-all strategy there. You have to take each agreement kind of as they come and understand where the current profitability is and what levers you can push and pull to get the right outcome for both us and our customer. Michael Griffin: That's some helpful context. And then maybe, Jay, you talked about the facilities that you're taking offline. What happens there from a P&L perspective? Are you capitalizing the costs associated with those facilities now? And what would be the ultimate plan for those? Would it be reposition it, sell it? Maybe walk us through that a bit. Jay Wells: Thanks for the question. Many of these are leases, and it really is end of lease term that we evaluate them. So overall, once we remove all the pallets from the facility, those types of costs will go below the line. They are capitalized, but they're generally pretty minimal at that point in time. But it is predominantly lease facilities that are either being repurposed by the landlord, removed for residential purposes, so a variety of different uses. So it's mostly a small amount moves below the line when they become inactive assets, but that's only for a very short period of time. Robert Chambers: And obviously, the benefit from our standpoint, too, beyond reducing some of the costs and eliminating some maintenance expense is the fact that you get to move a lot of the existing customers from those leased facilities into owned infrastructure, and that provides a nice benefit. Operator: And our next question comes from Blaine Heck with Wells Fargo. Blaine Heck: Rob, you talked about spending considerable time engaging with customers and strategic partners. Can you just talk a little bit more about what you learned on the customer side, particularly how they're thinking about cost pressures on their businesses and what impact that's having on their inventory planning versus kind of the lower demand environment that has been mentioned several times as kind of the driver of that inventory management going forward? Robert Chambers: Sure. So I mean every customer is looking at ways, obviously, to find opportunities to be efficient as they look out and they say that demand may be softer for a longer period of time than what anybody had originally anticipated. I think from the discussions with most of our customers, what they are really having their internal discussions and debates about are when is the right time to build inventory. This, as an example, would be the typical time of the year that you would see significant builds in inventory to support what are seasonal spikes in demand. What is a bit of a different approach at the moment are some of our customers saying, we're going to try to manage these shorter-term or seasonal spikes in inventory with the existing product that we already have in the system. So they're hesitant to build because nobody wants to be in a position where they have excess inventory like what happened, say, 18 months to 2 years ago, where many of the food manufacturers got their workforce rebuilt and back into their production plants, overbuilt and then took a long time to bleed down that inventory because they were in an environment where the demand just wasn't there. And so the internal conversations that most of our customers are having is looking out over the course of the next few quarters and saying, what are some of the indicators they can see to show that maybe any of the increases from a demand perspective are sustainable, and it would allow them to ultimately start building. The other big question that a lot of our customers on the food manufacturing side are having is when is the right time to introduce new innovation, new products, new SKUs. Those are things that we very much look forward to because obviously, as you see more innovation, more SKUs, that drives incremental safety stock. So I think our customers are trying to have those conversations. And then lastly, I would say it would be what levels of promotional activity are really going to drive volume. So all of our customers do want to continue to invest in their product. They have over the last few quarters in a variety of ways with mixed success, to be honest with you. I think when customers have historically made the investment in their product to support promotional activities, they've probably seen better results than what they've seen over the last few quarters. And that's simply because the cost of food has gone up at such a pace that even a slight discount off of that elevated price isn't enough to stimulate demand. So those are really the 3 questions that our customers are having every day with themselves and with the retailers. Blaine Heck: Okay. That's really helpful context. Secondly, you talked about some of the newer competition in the industry that don't have a sustainable long-term business plan. I think you mentioned some of them already exiting. I guess when do you think you see those exits really accelerating? And how much of that product is likely to be the quality and potential price that you're comfortable with and maybe an acquisition opportunity? Robert Chambers: I mean it's certainly something that we believe will become opportunistic over time. We're just not there yet. So most of the new market entrants that have come in really thought about, okay, let's get some scale. And then I think they were potentially encouraged by a lot of the acquisition activity that have been happening going back a few years and thought that, that would be a great exit strategy. With that not in the cards at the moment, it puts a lot of pressure on that business model. And so when you don't have the same level of, let's say, network that Americold has or you don't have the same operating system we have or the technology stack that we have, there's not a lot of levers to win new business. Prices may be one. But if you start deeply discounting space to fill up your buildings and you can't get to a point where you're at full occupancy, the P&L looks very bad. And I think that's where we are for a lot of these new market entrants. How much and how long folks want to deal with that is certainly not our call. But we're not in a position where we're going to be bailing any of the new market operators out. And so I think we're in a position where we can sit focus on driving our business, focus on growing our relationships with customers. And over the next few quarters, as some of that maybe results in more capitulation, then we're here to listen. But at this point, we're focused on driving our business. Operator: And moving on to Michael Goldsmith with UBS. Michael Goldsmith: You talked about how it could take a couple of years for the excess capacity to be absorbed. So what are the assumptions that you're using to arrive at that conclusion? And how can you best position yourself to navigate that sort of backdrop? Robert Chambers: Sure. So we called out in our prepared remarks that we've seen what we believe is in excess of 15% of additional capacity that has been added. And this is an industry that, for a long time, had grown more with GDP and population growth. And so if you just do that math, it would be a few years for it to be absorbed. I think as we continue to gain market share, that certainly helps absorb some of the capacity. I think as I've said, with the business models or the business plans that a lot of these new market entrants had, if those business models don't work, and we really believe that a lot of them are struggling at the moment. That potentially accelerates the ability for Americold to play a role in absorbing some of that capacity. And then outside of that, I think the other thing that's important to keep in mind is Americold is not standing still in this environment. We have a lot of different ways to open the aperture in terms of how we drive new business into our portfolio, which isn't just waiting for the core kind of frozen food on the manufacturer side to grow. We're going aggressively after retail business, which is largely in-sourced. We're going aggressively after quick service restaurant business that today we play a very little role in. I think there's opportunities to look at triple net lease deals that historically we've been not as open to because we want to do both the storage and the operation. I think there are commodities outside of just food. So there's a lot of things that we're in early stages of exploring. And I think as some of those initiatives ramp up, we'll see our own capacity fill up, and we'll see the ability to potentially take some of those capacity in the. Michael Goldsmith: Appreciate that color. And my follow-up is on pricing. You're telling low occupancy facilities. Can you talk a little bit about the pricing from like low occupancy facilities is something that may be more full? Robert Chambers: Yes. I mean it really does depend on a lot of different things. It's -- our customers signing up for commitments, are they signing up for longer-term agreements? So it can be a pretty big variety across the board. I think we understand well, given our size and our scale, what market rates are in many of the different geographies. And so what we tried to articulate on the call was that when we look at it across the nodes of the supply chain, which we think is a great way to talk about this business, the ones that are under the most pressure are the 4 distribution locations. That's where most of the speculative capacity has been added. And so we are being more thoughtful about the way that we defend our market share and win new business in those geographies. And the net of that is the potential outcome that Jay outlined in his prepared remarks. Operator: And Nick Thillman with Baird has our next question. Nicholas Thillman: Rob, I appreciate all the commentary on all the different nodes, but one knock that generally is put on Americold is just the age of the portfolio relative to all the new builds and optimization of networks and kind of the effect there. I was wondering if you could break down or dig a little bit into -- you're talking about the new supply issues just broadly in the forward distribution node. But if you look at the portfolio age and you look at sort of your composition, how does that all break down? Is it pretty similar across all 4 of those? Or is it maybe a little bit more skewed one way or the other? Robert Chambers: Yes. I don't -- to be honest with you, I don't have the numbers right off the hand. So I don't want to share anything without all the facts. But I do want to say that the first point we would disagree with vehemently. We spend a tremendous amount of effort, dollars, time maintaining these facilities. Our buildings are world-class. They provide a great service to our customers, and they're mission critical. If anything, other than that was the case, you would see Americold losing market share, not gaining market share. And so because we've got the team that we have in place that maintains these facilities, we're very proud of our network. It's led to Americold being able to lead the industry from commercial excellence in terms of the most fixed commitments and the pricing type gains that we've been able to achieve over the last few years. All of that is because of the mission-critical high-quality infrastructure that we have. And so we would vehemently disagree with anyone that says that the age of our network is a knock on Americold. Nicholas Thillman: No, that's very helpful. And then I wanted to get your -- pick your brain a little bit on the comments. Jay, you mentioned sort of the hurdle rates for new developments. And as we look at your development schedule just over the last 3 years, haven't necessarily hit the stabilized yields yet even for like the 3-year vintage assets. So I want to kind of pair that with Rob's comments on driving shareholder value, thoughts about -- and the discount in the stock price. I guess where does stock share repurchases kind of rank in the deployment side of things as we look at capital allocation going forward? Robert Chambers: So let me start, and then I'll hand it off to Jay. I think when we look at our development projects, the important thing to keep in mind is that these projects largely are not immune to the macro environment that impacts the broader network. So any time we're building a facility, whether it's dedicated or multi-tenanted, if our customers' volumes are going to -- are down, that's going to impact the current returns. We still have a very high degree of conviction that our development projects will meet our stabilized returns and underwriting. It just takes a longer period of time in this environment. And we're very encouraged by the significant improvements that we've made in our development platform over the last few years in terms of the team that we've been able to bring in. And you see that reflected in the fact that just over the last 2 quarters, as an example, we've delivered multiple projects on time and on or under budget. So feel very good about the development platform when it comes to some other capital allocation decisions. Jay anything else? Jay Wells: No. I said a couple of things on my prepared remarks. Number one, we have got to provide the growth requirements for our customers for our partnerships with CPKC, with DP World. That is a must do to maintain our customer base and our great partnerships that we have. And then second, I mentioned on the call, maintaining our dividend, maintaining our investment-grade profile our top priorities also. So really, we're balancing those 2 items in development pipeline and maintaining our dividend and our investment-grade portfolio based on our current leverage. Operator: We'll go next to Mike Mueller with JPMorgan. Michael Mueller: A couple of questions. So for the first one, for the 200 to 300 basis points of economic occupancy erosion for the year that you're talking about for '26, should we think of that as being ratable throughout the year or starting off worse and ending the year better, which is obviously better for '27 or just kind of vice versa? And the second question is, I apologize if I missed this. You talked about the economic occupancy down. But for '26, is it safe to say that you're expecting year-over-year pricing to be negative as well for services and storage? Robert Chambers: Sure. On the pricing side, yes, what we called out there is we think that it could be a headwind next year of 100 to 200 basis points. We'll continue to do our general rate increases. But when we think about what it takes on the renewal side of the equation, when we take -- think about what it takes on driving new business and defending our market share, we think when we aggregate all those things, we could see it being a potential headwind for next year. So that's on the pricing side. Jay Wells: And that's across both storage and services to answer your question. And then when you look on the occupancy side, it really is going to come as Rob talked throughout the year as we redo our fixed commit. So there will be some headwind to start the year, but we also have a little wrap headwind from this year. So I would say we're not giving specifically quarterly guidance at this point on our occupancy. We feel at this point of doing our budget, very confident that the guidance I gave on the call is appropriate. But quarterly, you have a little bit of wrap because we've seen some headwinds to start this quarter and next quarter that will flow in. But hard to say exactly how to phase it throughout the year at this point. Robert Chambers: Yes. I think the point, Mike, is we don't do annual resets of these. So it's not like, hey, on January 1, all of our contracts reset. We negotiate our agreements as they kind of come online throughout the course of the year. When we sign an agreement, that tends to -- that date that we sign the agreement tends to be the annual kind of check-in point for when we -- when contracts ultimately are renewed. So it's not on a calendar basis. It's more on a contract year basis. Michael Mueller: Got it. So -- but that's 100 to 200 average. And if you're talking about the ratable contract, I guess, negotiations occurring throughout the year, it just seems that you would end the year possibly at a lower point than that 100 to 200. Is that a fair statement? Or am I kind of off on that? Robert Chambers: No, no, that's not how we're thinking about it. We're not really thinking about ending next year below those -- the points that -- or the metrics that Jay called out in the script. I think the way to think about that is that's the annual impact of it. Operator: Moving next to Todd Thomas with KeyBanc Capital Markets. Todd Thomas: I guess I just wanted to follow up first on that line of commentary around economic occupancy. I guess, as we look at expirations over the next few years, is there a potential risk of further decreases in economic occupancy beyond 2026 if demand does not improve much in the quarters ahead or if conditions do not really pick up from here? Robert Chambers: I mean we're really not at a point now where we're talking about anything beyond what we think is going to potentially happen in 2026. I mean you see the renewal schedule. So our agreements with the large customers. So again, 70% of our revenue comes from our top 100 customers. They tend to be the ones that sign longer-term agreements. Those agreements are anywhere between 3 and 7 years. So they average 4 to 5. So every year, there's going to be a tranche of contracts that come up for renewal, and they're all based on what the current market conditions are at the time. So if the environment improves, we think it becomes certainly a tailwind for us. And if the environment doesn't, it could become a headwind. Jay Wells: And keep in mind, we have been in a difficult environment for a while now. So we've already rolled through several renewals of agreements already, and we really see next year as being really the key year to get through the predominant amount of these type of agreements in the current difficult environment. Todd Thomas: Okay. And then, Rob, you spent some time talking about the current portfolio mix today. There was a lot of commentary sort of back and forth around some of the different nodes. And I was just wondering if you can expand your comments around that in terms of emphasizing capital deployment, whether you plan to sort of reshape the complexion of the portfolio. I guess, how should we think about the portfolio mix going forward? And are there any significant changes that we should anticipate to that mix? Robert Chambers: So we wanted to highlight that we put particular importance on those production advantage in the retail locations because those are areas where we feel like we've established leadership positions that are very difficult for anyone else to come in and replicate. I mean on the production advantage side, there's a tremendous amount of benefit there in terms of those agreements tend to be longer term, fixed commitments. And it takes relationships with the big key customers that have been built over decades to really get them to trust you to build or run their plant advantage or plant attached sites. So we think there's opportunity to continue to grow at that node. Retail is also an area where we're going to lean more into. It's very opportunistic from the standpoint of the fact that most of this business is in-sourced today. And there's a moat around it because you have to have a great operating platform to be able to deliver the type of service in retail that's required from that group of customers. So I think you'll see us probably lean more into those 2. Certainly, we're not very interested in adding speculative capacity in the 4 distribution locations right now, given what we've seen occur over the last few years. And then even in the port facilities, we're really going to focus our efforts if we're going to grow in that node by aligning to the strategic partnerships not just adding speculative capacity, but adding capacity that's in conjunction with our 2 strategic partners that creates a value proposition and an ecosystem that nobody else can match. Operator: And moving next to Brendan Lynch with Barclays. Brendan Lynch: Maybe just following up on that last one. Rob, in your prepared remarks, you mentioned you're considering expanding into other food and nonfood categories. Maybe you could expand upon that a bit. Robert Chambers: Sure. So again, I mean, there are certain categories that we're already in like retail and QSR that we want to lean more into. But we do hear from our customers that there's opportunities, as an example, to co-locate some of their dry product closer to where their frozen or refrigerated products are. So we're having dialogue about that to potentially absorb some capacity. There are other markets like floral, pharma, components that all need refrigerated that today, we essentially do-nothing in. Pet food is a fast and growing market that we view as opportunistic. So as we look at opening the aperture here to continue to drive occupancy, I think we have a lot of avenues that today, we're just dipping our toe into that could be very opportunistic and look forward to talking about more of that over the next few quarters. Brendan Lynch: Great. That's helpful. And then it looked like your power costs didn't really increase that much year-over-year in the same-store pool. Can you talk about any related risk that you see coming related to power cost increases going forward and what protections you have in place? Robert Chambers: Yes. I think, look, on power, I think we're doing a lot to drive power costs down in the business. We have solar programs. We do a lot of the maintenance programs that we have are focused on driving down power, the LED lighting type of initiatives that we have are all focused on ways that we can take cost out. We -- some of the continued maintenance that includes the rapid open and closed doors helps to save on power. So we've got a lot of different initiatives that drive those down. And I think the other thing that we've done a nice job of over the last few years is making sure that to the extent that we do see power increase in certain markets, that would be considered a cost change that's largely beyond our control that we would look to pass on. Operator: And ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.
Luca Pfeifer: Hello, everyone, and welcome to our third quarter 2025 results call. This event is being recorded. Our speakers today will be our CEO, Marcelo Benitez, and Bart Vanhaeren, CFO of the company. The slides for today's presentations are available on our website, along with the earnings release and our financial statements. Now please turn to Slide 2 for the safe harbor disclosure. We will be making forward-looking statements, which involve risks and uncertainties and which could have a material impact on our results. On Slide 3, we define the non-IFRS metrics that we will reference throughout this presentation. And you can find reconciliation tables in the back of our earnings release and on our website. With those disclaimers out of the way, let me turn the call over to our CEO, Marcelo Benitez. Marcelo Benitez: Good morning, everyone, and thank you for joining us. This has been another strong quarter for Millicom. Before we begin, I want to express my heartfelt appreciation to all members of the TIGO team. Your dedication and purpose-driven execution are at the heart of these results. Once again, thank you. In the third quarter, we accelerated top line growth while maintaining strict cost discipline. This reflects the consistent execution of our double [indiscernible], delivering the best customer experience with maximum efficiency. We also advanced on our strategic agenda completing the Uruguay and Ecuador acquisition and closing the SBA tower transaction. Three milestones that strengthened both our balance sheet and regional footprint. Organically, service revenue grew 3.5% year-over-year, supported by mobile subscriber growth and ARPU expansion in prepaid. Most importantly, we remain firmly on track to deliver our $750 million equity free cash flow target for 2025. Let's now review the key milestones from the quarter. Our relentless focus on commercial execution continues to deliver solid results, both in consumer segment and in the business segments. On B2C, we added nearly 250,000 postpaid mobile customers and about 60,000 new home subscribers. In B2B, the momentum remains strong. I'll touch on that shortly. Thanks to the discipline in capital allocation and operational efficiency, we delivered record profitability. Adjusted EBITDA reached $695 million, with an all-time high 48.9% margin. This translated into equity free cash flow of $243 million. We closed the quarter with net leverage of 2.09x or 2.33x proforma excluding the infrastructure sale. We remain fully committed to maintaining leverage below 2.5x even as we integrate Ecuador and Uruguay in Q4. Let's now look at performance by segment and geography. Our mobile business delivered its strongest organic growth since 2021, with mobile service revenue up 5.5% year-over-year. Growth was driven by ARPU expansion in prepaid as we align pricing with inflation and by steady migration from prepaid to postpaid. Our postpaid base grew 14%, reaching 8.9 million customers while prepaid volumes remained stable. These results demonstrate the strength of our commercial model, focused on delivering the best network experience, focus on channel productivity, pre to post migration and fixed mobile convergence. Turning to our home business, our second largest segment. As we mentioned a moment ago, we added 60,000 new customers, up 5.4% year-over-year, supported by our convergence strategy, which bundles multiple services under one plan. This approach enhances customer value and keeps churn in the low single digits. Home service revenue was essentially flat year-over-year, a marked improvement from the nearly 5% decline a year ago. The strong foundation built in recent quarters positioned us for positive revenue growth on the next quarter. Please turn to the next slide for a review on our B2B business. Our B2B segment continues to gain momentum. Service revenue reached $231 million, up 5.3% year-on-year in constant currency. Small business clients grew 10%, totaling over 400,000. Our digital services remain a key growth engine. Revenue rose 10%, led by cloud, cybersecurity and SD-WAN growing around 35% year-over-year. In short, B2B is scaling profitable and remains a compelling growth platform for Millicom. Let's now review our performance in our largest market in Colombia. Colombia delivered another strong quarter. Postpaid customers rose 12% year-over-year, while prepaid also grew. In Home, customers increased 12%, reaching 1.6 million HFC and FTTH connection driving Home service revenues up 5.7%, a full turnaround from 2022. Overall, service revenue grew 6.5% and EBITDA margins expanded 447 basis points to 43.5%. This demonstrates how profitable growth is now firmly embedded in our Colombia business. Turning to Guatemala, we continue to perform exceptionally well. Guatemala continues to set the bar for operational excellence. Postpaid customers grew 20%, driving mobile service revenues up 4.6%. Exceptional efficiency led to operating cash flow growth of 22% year-on-year, reaching a record of $204 million, a remarkable achievement. Please turn to the next slide to look at Panama. In Panama, postpaid customers grew 15%, supporting 7.1% mobile service revenue growth. We achieved our record EBITDA margin of 52.2%, underscoring Panama's position as one of our most efficient operations. Let's now turn to Slide 12. We are very proud to have completed acquisitions of Uruguay and Ecuador. Two countries that share our purpose of connecting people and driving digital progress across Latin America. These acquisitions broaden our footprint to 11 countries and enhance earnings quality through greater scale and macroeconomic stability. Uruguay adds 700 cell sites, 33% market share and $246 million in annual revenues, with $93 million of adjusted EBITDA. Ecuador brings approximately 2,500 cell sites, 30% market share generating almost $490 million in revenues and $161 million in adjusted EBITDA. With these two additions, we integrate an investment-grade country and a dollarized economy into our portfolio, enhancing stable cash generation and unlocking meaningful synergies through original scale. We're energized by these opportunities. They strengthened our position as the leading pure play telecom operator in Latin America. Before we move on to the financials, I'd like to take a few minutes to update you on where we stand with our strategic projects and legal matters. First, as we shared last quarter, we've now completed the sale of our tower companies in El Salvador and Honduras. The Lati tower transaction totaled about $975 million marking a successful conclusion of our infrastructure monetization plan. With this, we've achieved what we set out to do, unlock value for our stakeholders and stay fully focused on what we do best, delivering connectivity. Turning on Costa Rica, I am pleased to share that we've settled our long-standing litigation with Telefonica. This was related to the 2020 acquisition attempt. This brings important closure and allows us to move forward with clarity and focus. Separately, the Costa Rica regulator has decided to prohibit our proposed combination with Liberty Latin America that we announced on August 1, 2024. Sutel is concluding that the potential competitive effects could not be adequately mitigated by the remedies proposed by the parties or by any additional conditions that Sutel could impose. This decision was unexpected as both parties have engaged extensively with Sutel throughout the review of the process to develop a set of commitments that we firmly believe addressed any potential concerns. We respectfully disagree with this decision. And for this reason, we have filed a formal appeal on October 22, and we'll continue to pursue all available options. We remain confident that the transaction will deliver meaningful benefits to customers, enhance competition and contribute positively to Costa Rica's digital development. Now regarding the ongoing DOJ investigation, we recorded a $118 million provision this quarter. That figure reflects our current expectation of the financial impact of resolving the matter. Because the process is still ongoing, we cannot comment further at this stage, but we expect to share more details shortly. Finally, let me touch on Colombia, where things are moving steady on both fronts, EPM on one hand has officially launched the privatization process for its stake in TIGO-UNE under Law 226 and everything is progressing as expected. At the same time, the regulatory process for the Coltel acquisition is advancing well. We are now waiting for a minimum price disclosure for the stake held La Nacion and we continue to expect both EPM and Telefonica transactions to close in the first quarter of 2026. With that, I will now hand it over to Bart, who will walk you through the financials in more detail. Bart Vanhaeren: Thank you, Marcelo. Let's now turn to our financial performance for the quarter, starting on Slide 15. Service revenue for the quarter totaled $1.34 billion, representing a year-over-year decline of 0.5%. This was no surprise considering the application of IAS 21 for Bolivia, which this quarter negatively impacted service revenues by $74 million compared to last year. When excluding the FX impact, underlying service revenue growth actually accelerated from 2.4% year-on-year growth in Q2 to 3.5% year-on-year growth in Q3, reflecting the continued momentum of our commercial initiatives and strong operational execution across our markets. We also continued to deliver solid results in our prepaid to postpaid conversion strategy, resulting in local currency, double-digit postpaid growth numbers while prepaid revenues continued to grow by low single digits year-over-year in local currency, supported by a stable prepaid customer base. This growth reflects our ability to attract new clients and broaden the top of the funnel, reinforcing the strength of our commercial engine. Importantly, we delivered another quarter of margin expansion with organic adjusted EBITDA increasing by 23.8% year-over-year to reach a record $695 million. It's worth noting that the year-over-year increase in adjusted EBITDA was influenced by a onetime restructuring and M&A charges in 2024. When normalizing for this effect, adjusted EBITDA still grew by 10% year-over-year. This increase translates into an adjusted EBITDA margin of 48.9%, another all-time high for the company. As Marcelo highlighted earlier, accelerating top line growth while maintaining cost discipline remains a core pillar of our strategy. Finally, equity free cash flow rose by 18.1% for the last 9 months when compared to the same period last year, reaching a total of $638 million, marking yet another milestone for the company. Next, I would like to walk you through our performance by region, starting on Slide 16. In Guatemala, local currency service revenue grew 3.6% year-over-year, reaching $366 million for the quarter. This solid performance represents a significant improvement over last year's top line growth driven primarily by our mobile strategy, which focused on effective customer base management and increasing ARPU through the successful migration from prepaid to postpaid plans. Colombia delivered another strong quarter, with service revenue expanding 6.5% year-over-year to $364 million, almost surpassing Guatemala for the first time in our corporate history. This growth was fueled by an expanding customer base, particularly in postpaid, robust performance in B2B and a material turnaround in our home business, supported by intensified commercial efforts aligned with our strategic priorities. In Panama, service revenue remained largely flat year-over-year at $170 million. When compared to Q3 2024, we added nearly 65,000 postpaid subscribers to our customer base. These gains were partially offset by a decline in B2B revenue, stemming from government contracts, which were executed earlier in 2024. In Paraguay, we achieved $143 million in service revenue, increasing 3.5% year-on-year. This solid growth was mainly achieved through expansion in both our prepaid and postpaid customer base and relatively stable ARPUs. In Bolivia, service revenue in constant currency accelerated to 6.1% year-over-year, reaching $84 million for the quarter. And for the first time since the onset of the devaluation, we recorded a quarter-over-quarter increase in service revenue. We remain cautiously optimistic about continued currency stabilization. Service revenue in other markets increased 1.4% year-over-year, reaching $217 million for the quarter as robust top line growth in El Salvador and Nicaragua was partially offset by soft results in Costa Rica. As mentioned in my introduction, we're very pleased with the overall profitability achieved during the quarter with adjusted EBITDA for the group reaching a record margin of 48.9% as shown on the Slide 17. All of our largest operations delivered year-over-year margin expansion. Let's now review the performance of each country in more detail. Starting with Guatemala, adjusted EBITDA grew 6.2% year-over-year, reaching $236 million for the quarter. This strong result was driven by a combination of service revenue growth and operational efficiencies. As a result, Guatemala reported a record adjusted EBITDA margin of 56.6%, up 147 basis points compared to the same period last year. In Colombia, adjusted EBITDA increased 17.3% year-over-year to $161 million. This performance reflects the robust top line growth discussed earlier, coupled with disciplined OpEx management. It's worth noting that last year's EBITDA was impacted by approximately $5 million in severance payments. I want to take the opportunity to congratulate our team in Colombia for their tireless efforts and outstanding results. Panama delivered a 10.4% year-over-year increase in adjusted EBITDA, reaching $93 million, driven by cost savings from efficiency programs. As a result, adjusted EBITDA margin expanded by 480 basis points, reaching a record 52.2%. Paraguay also expanded its profitability when compared to the same period last year. The team achieved an 11.8% year-over-year increase, reaching a total of $76 million for the quarter with adjusted EBITDA margins expanding to 51.4%, reflecting continued operational discipline and growth in our customer base. In Bolivia, adjusted EBITDA increased 21.8% on a constant currency basis year-over-year to $42 million for the quarter. The margin expanded by 649 basis points to 49.7%, primarily thanks to our ongoing focus on cost efficiencies and dedollarization efforts. Finally, adjusted EBITDA in our other segments which include El Salvador, Nicaragua and Costa Rica increased 7.7% to $108 million as we continue to deliver operating leverage across all 3 countries. As a reminder, we have here Nicaragua and Honduras with margins above 50%, making a total of 5 countries out of 9 with margins above 50% and Bolivia actually getting very close. Let's now turn to Slide 18 for a review of our equity free cash flow. In the third quarter of 2025, equity free cash flow totaled $243 million to reach $638 million over the last 9 months, representing an increase of 18.1% year-on-year. Now when comparing to the same quarter last year, we see a $28 million decrease, which is primarily attributable to a mix of strategic investments and timing-related factors as we are trying to stabilize equity free cash flow over all quarters. Positive contributors were adjusted EBITDA was up $110 million year-over-year, in line with our increased profitability and $73 million one-off impact in 2024 mainly related to restructuring and M&A costs. Finance charges improved by $10 million, thanks to lower debt levels, favorable FX movements and reduced commissions on U.S. dollar purchases in Bolivia. Offsetting these gains were the following detractors. Cash CapEx increased by $50 million, mainly due to changes in working capital. Trade working capital and others decreased $66 million mainly due to the aforementioned litigation settlement with Telefonica related to the 2020 Costa Rica acquisition attempt as well as timing of payables. Spectrum payments were up $12 million, reflecting the phasing of coverage obligations in Colombia and taxes paid increased $10 million, primarily due to the higher profitability. Now please turn to Slide 19 for a more comprehensive view of our deleveraging during the quarter. We reduced our leverage from 2.18x to 2.09x, a solid improvement of 9 points quarter-over-quarter. This was primarily driven by our strong equity free cash flow generation of $243 million, as just discussed. On the other hand, we paid $125 million dividend in line with our approved dividend policy and recorded $80 million in exchange rate impacts due to the appreciation of our local currency debt. These items together added approximately 0.1x to our leverage. Overall, the quarter reflects disciplined capital allocation and continued progress toward our long-term balance sheet objectives. Before reviewing our financial targets, I wanted to highlight that we have finalized the Lati business divestment announced in October 2024. As a reminder, the total consideration for the Lati divestment was approximately $975 million. Let's now review our financial targets for the year. We're very pleased with our performance year-to-date and remain on track to meet our year-end leverage target of below 2.5x as well as our equity free cash flow goal of around $750 million. As a reminder, this leverage target excludes the impact of any strategic M&A transactions executed during 2025. I'd also like to emphasize that we are maintaining our free cash flow target despite the adverse effects of the currency devaluation in Bolivia, as well as the one-off legal settlements discussed. We're excited about what lies ahead and remain fully committed to delivering continued top line growth and sustainable margin expansion. With that, let me turn the call back to Luca. Luca Pfeifer: We'll now begin with a question-and-answer session. As a reminder, if you would like to ask a question, please let us know by e-mailing us at investors@millicom.com and we will add you to the queue. Our first question comes from [indiscernible] HSBC. What is the Ecuador and Uruguay transactions leverage? Where do you expect to be at the end of the year? What is the net impact from these transactions in year's cashflow? Bart Vanhaeren: Yes. Good question. So our leverage now is 2.09x. If you would normalize for the tower transaction, that would have been 2.33x. Now, so 2.09x, we closed Uruguay that adds about 0.1x. We closed Ecuador at about 0.1x as well. So pro forma, we are close to 2.3x as of Q3, if you would normalize for the tower transactions. Luca Pfeifer: Thank you. In Ecuador, there was a spectrum renewal news. Would the burden of payment fall on Millicom? Bart Vanhaeren: So we have -- there are 2 parts of the spectrum renewal. In fact, one is a license renewal, which comes with all the spectrum that was attached to the original license that was approximately $115 million that has been paid by Telefonica as a condition precedent to closing of the transaction. However, there is an upcoming 5G auction that will come probably in the beginning of next year, end of this year, and we expect mid- to mid-high double-digit million dollar spectrum charges payable somewhere in the first half of 2026. Marcelo Benitez: And important to say that this was a prerequisite to close the transaction. And with this renewal and also the availability of the 5G spectrum in Q1 strengthened our position to first focus on strengthen the network as it is the priority in our playbook. So we are very pleased to have enough spectrum to start operating in Ecuador. Luca Pfeifer: Thank you. Could you please provide more details on the DOJ provision? What is the issue related to? And when can we expect there to be a resolution? Marcelo Benitez: Well, there is no much to say more than what we already said in the call. Basically, we are in the process with the DOJ with regards of the litigation. The provisions that we printed this quarter is what we expect is going to be the outcome. And as I said, we will come back with more details shortly. Luca Pfeifer: Perfect. What is driving the higher tax provision in Nicaragua? Bart Vanhaeren: So in Nicaragua, we had tax litigation ongoing. We have been, like many other legacy liabilities, we have used this quarter to clean up and close a lot of matters, not different in Nicaragua. We settled with the administration on the payments of the delta of what we settled with and what is already paid and provisioned is that increase. That payment will come partially in Q4, partially in Q1 to -- for the finalization of the settlement. Luca Pfeifer: Perfect. Marcelo, what is the future course of action in Costa Rica and if the appeal for the regulatory decision gets rejected? Marcelo Benitez: Yes. Starting on Costa Rica, we really believe that this merger was very, very good for the country and for the industry. Costa Rica, it's a very stable economy, has a very predictable macro. But more importantly, they do have a lot of appetite for digital infrastructure. That is at the core of what the country needs. And in order to have that, Costa Rica needs to have strong operators. That's why we propose to merge on a JV with Liberty in Costa Rica. Unfortunately, the decision of the Sutel was against this merge. We are appealing that with the arguments that I already said, this is good for Costa Rica. Having said that, we need to also focus on what is under our control. And what is under our control is to go back to our operating model more focused on the commercial grid that we have in other countries. We are going to invest again reinforce our infrastructure and then also reinforce our channels and bring that operation back to growth with strong focus as we have in all the other operations in cost efficiencies. So that is what's under our control, and that is where the focus is going to be expecting, of course, a more better news from the Sutel. Luca Pfeifer: Next on the line is Livea Mizobata from JPMorgan. Livea Mizobata: I have a couple. The first one, could you provide an outlook for CapEx for 2026? How are you seeing this line behaving on the next year? And the second one, we would like to explore a little bit more the margin expansion across the board. We are seeing several countries expanding a lot of margins this year, particularly this quarter. Is this still mostly related to your efficiency program? Or are there more initiatives that we should be seeing that will continue to impact your margins going forward? Specifically, I would like to touch on Colombia because we see an impressive margin gain there. So do you see eventually room for Colombia to join its 50 clubs that you talked so much? So like could we see the Colombia market also raising margins and reaching that level? Because we saw an impressive market there -- market improvement there, right? Marcelo Benitez: Thank you, Livea, for your question. I mean the 50 club, it's ready to receive more members. It's a club where you can get in and you can never get out. So I will start with Colombia. What happened in Colombia is purely organic. We accelerate the top line growth. The direct cost had a decrease quarter-on-quarter based on our efficiency initiatives. So that brings operating leverage at the gross margin level. And additionally to that, we kept the OpEx flat, even though we are investing a lot in commercial activities to fuel growth. So that's where the profitability is coming is mainly operating leverage if you talk about organic terms. But if you go on dollar terms, also you have some points of growth coming from the currency -- the strengthen of the Colombian pesos currency. When we look at the group level, it's a little bit of a different story. It's a mix between organic growth that is more or less very similar to Colombia's operating leverage, but we do have some one-offs around $70 million year-over-year that had to do with severance and M&A costs that we had last year and we don't have this year. On CapEx, we -- when we started this new journey of efficiency, we always said that we invest with a lot of granularity. So we look at where the demand is. That's how we came from $1 billion CapEx to a $700 million CapEx. So we are very comfortable with that envelope because this model is refining as we speak. So we have a very, very strong network performance with a lower cost. So our expectation is to maintain the envelope at around $700 million. Luca Pfeifer: Our next question comes from Eduardo Nieto from JPMorgan. Eduardo Nieto Leal: So I had one around your leverage but more so looking further just because now you have more clarity on the closing of some of the acquisitions and including the one in Colombia. So just wanted to get your thoughts on where leverage should peak also considering your dividends, your potential settlements of legal matters. Just thinking where you're comfortable to get in terms of net leverage? And then a second part of that question is in terms of your debt or your financing needs, right? You have some maturities, especially in 2027, more in 2028, you have more M&A to close next year. So just wondering what you see as financing needs and what that could look like in terms of international capital markets, if you see a potential to change the mix between HoldCo debt, OpCo debt. And just any color that you can share on that, please? Bart Vanhaeren: Thank you, Eduardo. So on the leverage 2.09, I think we mentioned already Uruguay and Ecuador each had about 0.1 to the leverage. So around we get to 2.3x. EPM would add another 0.20 in between 0.20 and 0.25. So with that, we get close to the 2.5. And then Coltel will get possibly above that, depending, obviously, on how EBITDA evolves, our cash flow evolves, et cetera. If that happens, we do believe that depending on the speed of our integration cost that we would reduce that pretty quickly below the 2.5x again. On the debt side, we still have more than $900 million cash on balance sheet today. So for the immediate upcoming payments, we do have the liquidity. We will do some tactical debt issuance, mostly focused on local currency debt as we like it. Today, we have 50% of our debt in local currency. And we're continuing to look for opportunities. I can already tell you, we raised $200 million in local currency in Uruguay. That's probably the largest corporate debt issuance in Uruguay. And we've been welcomed fantastically by everybody down there. Next year, we will look at, again, at liability management, cleaning up some earlier maturities possibly and look at our debt curve. This year, we really wanted to focus on cleaning a number of things up, closing the transactions, getting the -- see what we receive in terms of debt structure. And next year, we'll start to look back at a regular liability management. Eduardo Nieto Leal: Just one quick follow-up. Are you comfortable, I guess, with the mix between the amount of debt that you carry at the HoldCo versus the OpCos that mix that you have today? Bart Vanhaeren: Yes, we have 40% of our debt as of Q3 balance sheet date in HQ. As I said, we are already raising $200 million additionally in Uruguay that was post the Q3 closing. And we have a few others in the pipeline to continue to increase. I'm comfortable where we are. But as a strategy, I want to have a maximum of local currency unless it's prohibitively expensive. So that's how we look at that. Luca Pfeifer: Next question comes from Gustavo Farias from UBS. Gustavo Farias: Two questions on my end. So the first one, if you could give us any color on the new countries you just entered Uruguay and Ecuador, how are you looking at extracting those synergies from the operations, maybe any color on what would be the main drivers to drive margins up? The second question, last quarter, you commented about a trend of price increases across countries mostly driven by postpaid migration. So if you could give us an update on how that's evolving lately? Marcelo Benitez: So thanks, Gustavo, for your question. I mean these are 2 very different countries. In the case of Uruguay. Uruguay is a very developed country with high consumption per user. A lot of data demand, very much postpaid. So there are 3 operators there. As you know, you have the state-owned operator, then you have Claro -- us and then Claro. So first, the network in Uruguay is pretty strong. So we are going to focus on developing ARPU as we did in the other countries by focusing on prepaid to postpaid with a small prepaid base. We want to expand the prepaid base a little bit and also play into the devices field because that's where the demand is in Uruguay. They have a lot of appetite for very high-performance handsets. Having said that, in parallel, and that is the first chapter of our playbook is efficiencies. So we are going to implement what we have implemented in all the countries, the purchase order controls from $0, contract renegotiations and also focused operation on what we do best, deliver the best connectivity. So the same playbook applies to Ecuador, but the environment in Ecuador is different. There, we do need to invest in network quality and network expansion. As I said, this spectrum renewal and the new acquisition of Spectrum give us a good new spectrum in 700 that it's going to immediately affect positively on the quality of our network. But we need to expand also the coverage, especially in Guayaquil and the coast, where more than 50% of the people live. So that is the strategy. It's the same playbook, but there is some prework to do in Ecuador, in network, in strengthening the network, and it's more commercial in Uruguay. I hope this answers your question, Gustavo. Luca Pfeifer: The next question comes from Andres Coello from Scotiabank. Can you comment on why you did not participate in the spectrum auction in Paraguay and comment on the competitive environment as new entrants is expected to launch 5G coverage soon. And in addition, can you provide an update on the closing of the deal in Colombia? Marcelo Benitez: I will take the first one, you take the second. So in Paraguay, basically, the conditions were not there for us to participate in the spectrum -- in the spectrum tender. We do -- we have a very, very good relationship with the regulator. There is now a bit of a process on whether the new acquirer can keep the spectrum. We respect that process and we trust the regulator that the regulator is going to do the right thing. Having said that, there are other segments that are available. So we are working with the government segments in 2.6 and also in 700 megahertz. So we're working to get that spectrum for 5G. There is no way TIGO will not have 5G in Paraguay, and that is clear for us, and it's clear for the government as well. So on the new entrant, we do believe that to become a real player from scratch in a country like Paraguay, you need more than spectrum. And we -- as we welcome always competition, right, only with 5G is very, very difficult to have a full telco and not even talk about convergence play. So we don't see at this point of time any threat for any serious competitor in a new competitor in Paraguay. Bart Vanhaeren: And as well as with a limited availability or percentage of 5G-capable phones over the total number of phones in the country. Going to the question about the closings in Colombia. As you know, there's multiple transactions in one. So let me peel the onion. So on one side, we have the transaction with EPM, our partner in our existing operation. They have disclosed the minimum price. We made some communications around that earlier in Q2 that we would participate in the auction process. There's --it's a privatization law called Law 226, 2 phases. Phase 1 is now ongoing. This is where the shares are offered to Sector Solidario, think about employees pension funds. That's a process that takes 2 months. It will be done early December, after which there will be an auction organized and that process takes less than a month. So this is well on track to close around year-end, early Q1. Then we have, on the other side, the deal with Telefonica is done, signed and has a number of conditions precedent for closing, which is merger approval. That merger approval is ongoing. We're having constructive discussions with the regulator and expect to have a resolution in Q4 about the merger. And then the second condition, precedent is also to have a deal with La Nacion, who is a third shareholder of Coltel. And we expect, as we hear, they are getting to the end of their process, establishing the minimum price with similar that EPM had earlier in the year. And then they can launch Phase 1 of the Law 226 process immediately behind us. So that's a 2.5 month to 3-month process once they launch the Law 226 process. And there again, we are expecting everything works out that we could close both transactions in Q1, knock on wood, let's see how it goes. Luca Pfeifer: Excellent. Thank you, Bart. Our next question comes from David Lopes from New Street Research. David-Mickael Lopes: Congratulation for the quarter. Most of my questions have been answered actually, but maybe just a couple of follow-ups. On the Costa Rica deal, I was wondering if you could comment a bit on the remedies. Why were they not enough? And why were they? And do you have any idea how long the appeal process takes usually I guess, pretty hard to answer if you have any idea of view. And then you mentioned about the spectrum in Ecuador. And I was wondering what are the other auctions coming in the future in the rest of the portfolio? And maybe last question on competition in Guatemala -- and you're posting good numbers. And I thought a few quarters ago, there was a bit more competition from Claro. So again, your numbers are good. So I was wondering how has competition evolved in Guatemala? Marcelo Benitez: So on remedies on Costa Rica, it was a surprise, David, for us to hear the argument from Sutel on why the remedies were not enough. We have been very proactive and very diligent also not only with Liberty, but also working with external consultants and experts on the matter. We did not see any rational argument to say that there is no remedies that can really make this transaction to happen. It's some kind of unprecedent to say that there is no way that this is going to happen but we do respect the regulator, and we do respect the formal channels, and that's why we are appealing. And we hope that the Sutel will reconsider its position. With regards to spectrum, now the -- well, you have first the renewal that was done. So that is one block of spectrum, then you have the 5G spectrum that's going to happen now in Q1. So that's, I think, about it for the short term, but it's more than enough to, one, strengthen our existing infrastructure, mainly with 700 megahertz, that is the new spectrum that we're going to bring in. And also to start developing the 5G coverage where the handset availability is there, right? So, I think that is extremely positive and on a very good timing for us. With respect to Guatemala, we are fighting point of sale by point of sale as we do with infra CapEx investment and capital allocation. We also are very, very granular on how we fight in the commercial. Remember that Guatemala is a purely prepaid market. So the war is being done in the point of sale every day. So where we were attacked at the beginning of the year. And it was very natural and predictable that this was going to happen was where Claro started to build new coverage, and we had very high market share, for example, in Quetzaltenango. So what the reaction we did was not a mainstream reaction because that was not necessary, but specifically in the regions where we were attacked. So this is working. It's a combination of working with the point of sale, strengthening the channels, strengthening a little bit the offer and also improving the network that is at the core of the consumer experience. So that's what we did in Guatemala. And now we are coming into a more stable place with the results and with the numbers. Luca Pfeifer: Thank you very much, everyone. This concludes our question-and-answer sessions. We will reconnect with you and the market for our fourth quarter results on February 26. Thank you very much. Marcelo Benitez: Thank you. Bart Vanhaeren: Thank you.
Operator: Greetings, and welcome to the Solstice Advanced Materials Third Quarter 2025 Earnings Call [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mike Leithead, Vice President, Investor Relations. Thank you. You may begin. Michael Leithead: Thank you, and good morning, everyone. Welcome to Solstice's Third Quarter 2025 Earnings Call. Solstice completed its spin-off from Honeywell on October 30 and is now listed on the Nasdaq Stock Exchange under the ticker SOLS. We are excited to be with you today for our first earnings call following the spin. We released our third quarter 2025 financial results earlier this morning. Today's presentation, including non-GAAP reconciliations and our earnings press release are available on the Investor Relations portion of Solstice's website at investor.solstice.com. Our discussion today will include forward-looking statements that are based on our best view of the world and our businesses as we see them today and are subject to risks and uncertainties, including the ones described in our SEC filings. Turning to Slide 3. Joining me today are David Sewell, our President and CEO; and Tina Pierce, our CFO. David will open today's call with highlights of our third quarter results. Tina will then review our segment performance and financial outlook before turning the call back to David for closing remarks. We will then be happy to take your questions. With that, I'll now turn the call over to David. David Sewell: Thank you, Mike, and thank you, everyone, for joining us today. First, I'd like to recognize this significant milestone for Solstice as we host our first earnings call following our spin-off from Honeywell. Exactly 1 week ago today, we rang the opening bell at the NASDAQ to mark the beginning of our next chapter. The excitement was palpable throughout the day, not only from those participating in the celebration on site, but from all of our employees who cheered us on from their locations around the world. I can't stress enough how grateful I am to each of our team members who dedicated their time and talents to make that milestone possible and to the entire Solstice team who continue to deliver for our customers. As you'll hear on today's call, even as we were in the final stretches of preparing the business to operate as an independent entity, we continued to deliver strong financial results. As we discussed at our Investor Day last month, Solstice has a strong track record of peer-leading growth, fueled by our technology platforms and underpinned by strong secular growth trends in the end markets we serve. Our third quarter performance builds on this track record, delivering year-over-year net sales growth of 7%. This growth reflects both strong demand for our products as well as the significant value that our differentiated product platform provides our customers. During the third quarter, we also maintained our best-in-class margin profile, delivering adjusted stand-alone EBITDA margins of 24.3%. Our strong margin profile is driven by our commitment to operational excellence, capital efficiency and the specialty nature of our portfolio. During our Investor Day last month, we discussed how we are refining our operating model to focus on commercial excellence, drive productivity and optimize return on invested capital. Following our spin-off, Solstice's pro forma capital structure reflects a prudent net leverage profile estimated at approximately 1.5x, allowing for financial flexibility and the ability to continue reinvesting in high-return growth areas of the business. As we strive to unleash growth, we will be allocating capital with clear priorities and discipline, specifically in areas such as semiconductor materials, nuclear conversion, protective fibers and cooling technologies where we believe Solstice has a clear right to win. We believe this will enable us to make the key investments needed to accelerate our growth and profitability. Finally, with a strong third quarter, we are well positioned for the remainder of the year and are on track to deliver on our full year 2025 guidance. Turning to Slide 5. I'd like to discuss in more detail a few key highlights from our third quarter 2025 consolidated results. In the third quarter of 2025, Solstice recorded $969 million in net sales, up 7% year-over-year. Notably, in our Refrigerants & Applied Solutions segment for the quarter, robust demand for refrigerants drove 22% year-over-year net sales growth for that business as we are capitalizing on the HFO transition. In Electronic and Specialty Materials, we achieved top line growth in both Electronic Materials and Safety and Defense Solutions, which underscores the continued value that we provide our customers with our differentiated offerings across the businesses. Beyond the reported sales figure this quarter, underlying momentum continues to build in the business from key secular trends in the attractive end markets we serve. In alternative energy services, which is our nuclear conversion business, our backlog grew 12% sequentially, reflecting both favorable order activity and benefits in price. In Electronic Materials, we saw our order book strengthen throughout the quarter and see positive momentum carrying into the fourth quarter, further solidifying our optimism around our position in the growing AI, semiconductor and data center landscape. Adjusted stand-alone EBITDA for the third quarter of 2025 was $235 million, reflecting a 5% decrease year-over-year and an adjusted stand-alone EBITDA margin of 24.3%. This was largely due to anticipated transitory costs, including certain items related to our spin-off as well as the expected technology transition from HFCs to HFOs. As discussed during our recent Investor Day, this leads to our full year baseline guidance of 25% EBITDA margins, which we are well in line to achieve. Finally, while we reported a net loss attributed to Solstice of $35 million for the third quarter of 2025, the decrease year-over-year was primarily driven by the impact of higher income tax expense resulting from frictional taxes associated with the spin-off. We estimate these discrete tax items added approximately 80 percentage points to our effective tax rate this quarter. As we complete our transition to operating as a stand-alone public company and move past some of these discrete transitory items related to our spin-off, we are very confident in our opportunity for margin expansion and long-term trajectory for growth to drive improved profitability. Turning to Slide 6. I'd like to discuss in more detail the puts and takes impacting our year-over-year net sales and adjusted stand-alone EBITDA performance. Beginning with our net sales of $969 million for the quarter. Organic net sales growth was 5%, including 2% from volume growth and 3% due to pricing. This primarily reflects volume growth and favorable pricing in refrigerants, which was partially offset by lower volumes in Healthcare Packaging and Research and Performance Chemicals. Our net sales growth also included a 2% increase due to foreign currency translation. Turning to our adjusted stand-alone EBITDA of $235 million for the quarter. The decrease year-over-year was driven by approximately $10 million of anticipated transitory costs discussed earlier, which primarily fell in the ESM segment as well as a year-over-year shift in refrigerants product mix, primarily within the stationary end market. This industry shift reflects a significant increase in demand for our low global warming potential refrigerants for stationary applications due to the ongoing regulatory transition towards next-generation HFO solutions. While this transition translates to a year-over-year margin decline, we foresee much greater longer-term benefits for our business due in part to our industry leadership in this space. As an example, as the installed base of stationary units using HFO blends continues to grow, we would expect to see benefits from an emerging aftermarket, which represents approximately 50% of our refrigerant product mix today. Our adjusted stand-alone EBITDA margin declined by a little less than 3 percentage points year-over-year, remaining healthy at 24.3%, inclusive of an approximate 100 basis point impact from transitory costs that I mentioned earlier. Offsetting the negative impacts I just described were modest price and cost timing benefits for the quarter. I hope this gives you a clearer idea of the puts and takes impacting our business in the short term. We are pleased with our ability to continue to deliver a healthy and attractive margin profile, and we are on track to deliver against our 2025 revenue and EBITDA guidance. With that, I'll now turn it over to Tina Pierce, our CFO, to discuss our segment results for the quarter in more detail. Tina Pierce: Thank you, David. Now let me talk in a bit more detail about the results in each of our 2 segments, beginning with Refrigerants and Applied Solutions on Slide 7. Overall, the segment achieved $687 million in net sales for the third quarter of 2025, reflecting 9% growth year-over-year. The growth is composed of 8% organic net sales growth and 1% increase due to foreign currency translation. The segment posted $243 million in adjusted EBITDA for the third quarter of 2025, down 3% year-over-year and adjusted EBITDA margin of 35.4%, down 431 basis points year-over-year. As David mentioned previously, this decrease was primarily driven by stationary refrigerants product mix, which more than offset positive flow-through in both -- both in volume and pricing. Transitory cost had a negligible impact in the segment. Looking at performance for our subsegments, Refrigerant net sales increased 22% year-over-year to $400 million, driven by both favorable pricing and volume growth. As David mentioned, our refrigerants business experienced a significant increase in demand for our low global warming potential refrigerants for stationary applications due to the ongoing regulatory transition towards next-generation HFO solutions. We also saw modest growth in auto during the quarter and continued to strengthen our aftermarket position. Building Solutions and Intermediate net sales were $175 million, down 3% year-over-year. Although continued softness in the construction market impacted performance, we remain focused on driving LGWP solutions and on continuing our strong operational execution to ensure we are well positioned to serve our customers upon a return to more normalized demand in key end markets. For Healthcare Packaging, net sales were $49 million, down 14% year-over-year. The decline was due to lower volumes resulting from some destocking we saw in the pharmaceutical end market. Despite this headwind during the quarter, we're confident in our strong market position through our Aclar brand of high-barrier packaging materials. We also remain excited about the long-term growth trajectory for our low global warming potential medical propellant and our ability to leverage our expertise to support the growing need for low GWP inhaler solutions. Lastly, our alternative energy service business had $63 million in net sales, down 2% year-over-year. While the year-over-year sales comparison was impacted by customer timing, underlying business momentum continues to accelerate with our AES backlog up 12% during the quarter to $2.2 billion as of September 30. Now turning to our Electronic and Specialty Materials segment on Slide 8. The segment achieved $282 million in net sales for the third quarter of 2025, reflecting 2% growth year-over-year, largely attributable to favorable foreign currency translation. Flat organic sales growth consisted of increases in Electronic Materials and Safety and Defense Solutions as well as Research and Performance Chemicals pricing, offset by Research and Performance Chemicals volume declines. The segment posted $47 million in adjusted EBITDA for the third quarter of 2025, down 15% year-over-year and adjusted EBITDA margin of 16.7%, down 319 basis points year-over-year. The decrease was primarily driven by anticipated transitory cost items that David mentioned earlier. Looking at the performance of our subsegments, Electronic Materials net sales increased 4% year-over-year to $103 million, driven by volume growth. As David mentioned earlier, we saw improving order patterns throughout the quarter and expect growth momentum to carry into fourth quarter in our key sputtering targets and thermal interface materials offerings. We are investing for growth in this business as we outlined at our recent Investor Day, which should ensure we are well positioned to capitalize on key secular trends for semiconductors, AI and data centers. Safety and Defense Solutions had $53 million in net sales, up 6% year-over-year, driven by volume growth. This growth was fueled by strong demand for both armor and medical fiber applications during the quarter. We remain encouraged by the growth of this business as we look to invest in furthering our Spectra capabilities. Finally, Research and Performance Chemicals net sales declined 2% year-over-year to $126 million. This decline was primarily driven by lower volumes, partially offset by favorable pricing. Moving to Slide 9 to discuss Solstice's balance sheet and capital management. Our financial health continues to be bolstered by significant cash flow generation and cash conversion. As outlined in our recent Investor Day, we remain focused on reinvesting in the business, especially in key high-return growth areas. Our capital expenditures were $248 million for the 9 months ended September 30, 2025, a 23% increase compared to the prior year due to planned increases in capital spending to drive long-term growth. Adjusted stand-alone EBITDA less CapEx for the 9 months ended September 30, 2025, was $520 million, a 7% decrease compared to the prior year period as higher capital expenditures more than offset the increase in stand-alone adjusted EBITDA. Despite the anticipated decrease year-over-year, this still equates to strong cash conversion of 68% for the 9 months to date. Turning to our capital structure. We have a very strong balance sheet with a conservative leverage profile and ample liquidity. Following the execution of the spin-off on October 30, our total long-term debt was $2 billion, and we had cash and cash equivalents of approximately $450 million, resulting in net debt of approximately $1.6 billion and an estimated net leverage ratio of approximately 1.5x based on our trailing 12-month stand-alone adjusted EBITDA. Our capital structure reflects the strong outcome from our debt raise earlier this year. Our $2 billion of long-term debt is comprised of $1 billion Term Loan B at SOFR plus 175 basis points and $1 billion of 5.625% senior notes due in 2033. We also had $1 billion of availability under our revolving credit facility, which combined with the cash on our balance sheet results in approximately $1.5 billion of total liquidity. Moving forward, we will continue to deploy capital in line with the capital allocation priorities we outlined at our Investor Day. These include investing in high-return organic growth projects, maintaining a strong balance sheet and a strong liquidity position, accelerating growth through selective M&A and finally, returning excess capital to shareholders. Turning to Slide 10. I'd like to discuss our financial guidance, which we previously provided at our Investor Day. Based on our results discussed today and expectations for the fourth quarter, we are on track to deliver our full year 2025 guidance. This includes net sales between $3.75 billion and $3.85 billion, adjusted stand-alone EBITDA margin of approximately 25% and capital expenditures between $365 million to $415 million. As you will likely note, this implies an adjusted EBITDA and margin decline in the fourth quarter, reflecting remaining transitory cost, refrigerant seasonality and near-term actions to position us for strong growth in 2026. We do not expect fourth quarter results to represent the true trajectory of our business performance going forward, and we are excited about the momentum we are seeing into 2026. I'd now like to pass it back over to David for some closing remarks. David Sewell: Thank you, Tina. Please turn to Slide 11. As Tina just mentioned, we are on track to deliver on our full year 2025 guidance. Our outlook is based on our belief in Solstice clear right to win and future prospects that are supported by strong secular trends, a clear path ahead for resilient and long-lasting growth and a refined operating model that enables our strategy to unleash that growth. We are committed to unlocking growth by expanding our leadership positions through investing in our capabilities, expanding our deep customer relationships and enhancing our proven growth engine. Our third quarter results reflect the burgeoning benefits of our strategy as demonstrated through our strong top line. We will also deploy our refined operating model to continue driving operational excellence. Our model focuses on our innovation and commercialization processes to maximize customer value and drive growth. It steers us to commercial excellence through best-in-class practices around pricing, margin management and customer centricity. It also aligns us towards disciplined capital deployment and optimization, efficient supply chain and logistics management and manufacturing excellence. We're confident that this operating model will enable us to further our strategy and unleash our growth potential. I'm also confident that our near-term transition positions us well to benefit in the medium and long term. As a stand-alone company, we have the ability to focus our capital spend on the highest return projects with an aim to improve margins and drive organic top line growth. We believe ongoing momentum in areas such as refrigerants, semiconductor materials, protective fibers and nuclear validates our decision to invest in these areas, which are well aligned with our growth strategy. Looking beyond 2025, we already are finding opportunities and actioning items to improve our cost profile. This should provide a long-term pathway for margin improvement, furthering our financial strength. Finally, we have a strong liquidity position and financial flexibility that is enabling us to invest for high-return growth at a time when many others in the chemical space are pulling back. We apply a disciplined capital allocation strategy that strengthens our ability to serve customers and reflects a focus on investing in growth while maintaining a strong and flexible balance sheet. We have both the financial flexibility and strategic focus to enable organic and inorganic investments that drive technological innovation, improve customer proximity, bolster our industry leadership and expand that leadership as we pursue our differentiated growth strategy. With over 130 years of innovation at the intersection of chemistry, engineering and material science, our business has built a deeply rooted legacy. We have demonstrated long-standing leadership across multiple innovation cycles, not just keeping pace with the market, but defining it. I couldn't be more excited as we embark on our future as an independent company. We look forward to sharing additional updates in the months ahead. With that, we are now happy to take your questions. Operator: [Operator Instructions] Our first question comes from the line of John McNulty with BMO Capital Markets. John McNulty: Congratulations on the split. So I wanted to get into the AES segment a little bit more. Even since your Capital Markets Day, there's been growing enthusiasm kind of around the nuclear markets. And I guess we can see that even today in your backlog expanding. I guess, can you help us to understand a little bit more about what drove that backlog increase? Was it primarily price? Was there more volume coming in? And also how you can capture volume growth going forward? I know you've got the big debottleneck that's coming on, but it seems like you may be close to sold out even post that. So I guess, how do we think about the growth for this business given the enthusiasm and excitement around nuclear right now? David Sewell: John, thanks for the question. And the backlog increase, we saw a 12% backlog increase, to your point. That was new orders, not pricing. And we are aligned with our capacity expansion with the volume anticipated demand that we see. However, there has been a lot of recent announcements of expansion investments. So we're following that very closely. And if we need to continue to expand manufacturing capabilities, we'll be able to do so to meet the demand. But it's an exciting growth opportunity for us long term, and it's really nice to see all of these announcements and investments that have been made in the marketplace. John McNulty: Got it. Okay. No, that's helpful. And then just as a follow-up, the refrigerants business, it seems like it's actually -- despite the volume or the top line side, it seems like it's a little bit more of a drag on EBITDA than I guess we were expecting it to be. I guess can you help us to unpack that mix shift like kind of negative headwind? And I guess, how does that set you up as you're looking to 2026? Can we see the refrigerants EBITDA and the margins inflect up at that point? David Sewell: John, you're exactly right. It's really driven by the short-term transition from HFCs to HFOs and really more specifically from 410A transitioning to 454B. And we did anticipate the margin contraction during the initial transition, which is within the forecast of that 25% year-over-year margin. But what we see moving forward is we'll finish up the transition, pricing has stabilized. And then as we get into 2026, we'll start to see the aftermarket kick in. And as we've talked about, that's a little bit higher margin business than our OEM business. So we see the opportunity growing in margins. We just need to get through the transition, and this was an expected transition that we had. And I think you'll definitely see it in the fourth quarter and then start really reducing the beginning of the year. And then as -- we'll give a forecast in 2026, but we should be out of the transition as we get in further into '26. Operator: Our next question comes from the line of Kevin McCarthy with Vertical Research Partners. Kevin McCarthy: Congratulations on your first public quarter, exciting stuff. David, I wanted to pick up on your prior thought. At the Capital Markets Day on October 8, you set forth an EBITDA growth trajectory in the mid-single-digit range for the medium term. And I understand you'll probably give more specific guidance next quarter. But as we think about that mid-single-digit glide path, might it apply to 2026 as well? Or do you think there are either transition issues or market issues that you're seeing that would cause it to be below or above that range? How are you thinking about that growth trajectory for the next year or so? David Sewell: Yes. Thanks for the question, Kevin. We'll certainly, to your point, give 2026 guidance when we report fourth quarter. But the way we think about it and have we -- and again, we're on track for how we see it is exiting the year around that 25% margin and then our growth rate will come from there. So we don't feel like there'll be continued downside. We feel like the 25% is our baseline, and that's where we'll be able to grow from with the growth secular trends that we're seeing that get us pretty excited. Michael Leithead: And Kevin, this is Mike. I would just build on that a little bit. As you'll see in the appendix, we included a slide to sort of help people bridge through some of these transitory costs. As David mentioned, most of these will be behind us as we exit the year. So we really do feel comfortable that as we get into '26, a lot of these margin impacts are not expected to carry over. Kevin McCarthy: Very good. And to follow up on that, Mike, I was noticing on Slide 13 in the appendix, it looks like you're baking into the fourth quarter about 300 basis points having to do with plant downtime. So David, can you elaborate on that? Is that having to do with maintenance or inventory management efforts? And maybe you can talk about what's down and what the effects might be on a segment level, please? David Sewell: Yes. So Kevin, it's a combination of both planned downtime and some unplanned downtime. The planned downtime was mostly in Baton Rouge and Geismar, but that was fully baked into our forecast. We did have some unplanned downtime. It was an issue with the reactor. That was in our ESM business. The good news is we're fully operational. Everything is up and running, but we did incur some costs in that in the third quarter, and we will incur some costs and impact on that in the fourth quarter. But again, good news is fully operational, and we'll have it behind us once we get through the fourth quarter. Operator: Our next question comes from the line of Josh Spector with UBS. Joshua Spector: I want to follow up on that last question. Just -- so if you look through your slides and kind of how you guys have talked about the second half, you have $30 million in transitory costs you're calling out from corporate. It seems like you're calling out a lot of this plant and downtime impact as perhaps more temporary at maybe $20 million, $25 million. Are those things that we should be adding back base case to next year? And if that number is wrong, what would you point us to instead? Tina Pierce: Yes. Josh, so really, the anchor is the guidance that we provided. And so that's the $950 million of EBITDA for 2025, which is approximately a 25% margin rate. So what we've highlighted here on Page 13 is, yes, the $30 million of transitory cost, those will definitely not reoccur. We had $10 million -- approximately $10 million in quarter 3, and then you can see there's approximately $20 million in Q4. And this involved a hedge. We are part of the broader Honeywell hedging program. That has been discontinued effective at the time of the spin. And then as we stood up our new freight and logistics organization, there were some changes in the estimates associated with that. All of that is behind us now. And then as David alluded on the plant downtime and absorption, all of the plants are up and operating now. So we don't anticipate that going forward. And then the final factor there is just seasonality, and that's largely our refrigerants business. That business tends to be a little bit heavier in second and third quarter. So that's the third reason for the step down. But overall, we continue to remain confident in the guidance that we provided at our Investor Day. Joshua Spector: Okay. And just going back to the RAS segment and some of the moving pieces on margins. I guess one piece I don't understand is that you're seeing a big margin and EBITDA impact in the second half from the transition, but it doesn't really seem like you saw that anywhere to the same degree in the first half. So I don't know if there's a difference in mix half-on-half that has a bigger impact. And I guess, importantly, when we're thinking about first half '26 and the margins that you reported, is there a headwind that we need to anticipate there that's a negative for EBITDA? Or is that already largely baked in and we can grow off of that? David Sewell: Yes, Josh, it's a good question. There's a couple of pieces here that I'll walk through on the refrigerants. In 2024, 410 market was really tight, and that pricing has since stabilized. So we are up against that from a year-over-year standpoint. But the other piece that's a factor is we have such strong demand and to ensure we could supply our customers, we did import from overseas to meet that demand and keep our customers running. And when we did that, there was a little bit of a margin impact for obvious reasons, but we felt it was more important to satisfy the needs of our customers. So we did see some margin contraction with that. The good news about that is we are fully stabilizing our supply chain to meet the demand needs. So we don't anticipate having that as we go into 2026. Operator: Our next question comes from the line of John Roberts with Mizuho Securities. John Ezekiel Roberts: I don't think we have the 2 quarters of 2025 first half separated yet. That's fair. So maybe to follow on, on that question, will the transitory headwinds be big enough that the March quarter will be down? I don't even know what our March quarter 2025 was to compare against. But will you be able to flip to up? I know you don't want to give guidance for 2026 yet, but just directionally, will those headwinds be big enough that we'll still have a down March 2026 quarter? David Sewell: No, we should be through the transitory costs through -- by the end of the year. We will have the TSAs that we talked about at our Investor Day that go through most of 2026. So we will have those costs. We'll have a little bit of the transition from HFCs to HFOs leaking into the first quarter, which are anticipated. But by and large, those transitory costs should be behind us. John Ezekiel Roberts: And when will we get the split for the first half of 2025 results, so we'll have the comparisons? Michael Leithead: Yes, John, it's Mike. So yes, we will be able to break that out for you in short order here going forward. Operator: Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Leithead for his final comments. Michael Leithead: Great. Well, look, we really appreciate everybody joining us today for our first earnings call as a public company. If you need anything, please reach out to the IR department and happy to help. So thank you, and have a good day. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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 Q3 2025 Conference Call for AirBoss of America. [Operator Instructions] I would now like to turn the call over to Gren Schoch, Chairman and Co-CEO. Please go ahead. Peter Schoch: Thank you, Eric. Good morning, everyone, and thank you for joining us for the AirBoss Third Quarter results conference call. My name is Gren Schoch. I'm the Chairman and Co-CEO of AirBoss. With me today are Chris Bitsakakis, our Chairman -- sorry, our President and Co-CEO; Frank Ientile, our CFO; and Chris Figel, our EVP and General Counsel. Our agenda today will start with a review of the operational highlights of the quarter, followed by a discussion of our financial results before we open the conference line to questions. Before we begin, I would like to remind listeners that our remarks today contain forward-looking statements, including our estimates of future developments. We invite listeners to review risk factors related to our business in our annual information form and our MD&A, both of which are available on SEDAR plus on our corporate website. Also, we discuss certain non-GAAP measures, including EBITDA. Reconciliations of these measures are available in our MD&A. And finally, please note that our reporting currency is U.S. dollars. References today will be in U.S. dollars unless we indicate otherwise. With that, I'll now turn the call over to Chris Bitsakakis for the operational review. Chris Bitsakakis: Thank you, Gren, and good morning, everyone. AirBoss experienced some real positive traction in Q3 2025 compared to Q3 2024, mainly driven by significant increases in AirBoss Manufactured Products defense products business, partially offset by reduced volumes at AirBoss Rubber Solutions. During the quarter, AirBoss maintained its focus on risk mitigation plans, including further cost reductions and efficiency improvements to build both momentum at ARS and AMP while continuing to navigate obstacles related to economic and geopolitical challenges, including market softness, the U.S. government shutdown, tariffs, inflationary pressure and the potential for further escalating in retaliatory tariffs. Uncertainty is expected to persist in the short to midterm with volume recovery difficult to anticipate as any recovery could be impacted by further tariffs, duties, other restrictions or trade or geopolitical and economic challenges. The company commenced the relocation of its facility in Jessup, Maryland to Auburn Hills, Michigan, a key step in improving long-term efficiency at AirBoss Manufactured Products. This transition will consolidate operations and is expected to reduce fixed costs and better align AMP's defense production. Now given the cross-border nature of the company's operations, a significant portion of the products manufactured by the company in Canada are sold into the United States and may be subject to current or pending tariffs as well as additional tariffs, which could be enacted. Despite the fact that the majority of AirBoss products are covered under the USMCA, CUSMA, the company continues to evaluate and execute on contingency plans to deal with any future potential challenges that may present themselves as CUSMA gets renegotiated. Despite the increased economic uncertainty, disruption of trade flows and increased costs and strains on supply chains, management remains focused on the successful conversion of key opportunities to support future growth. ARS experienced continued softness in Q3 2025 compared to Q3 2024. Compared to last year, the segment experienced both revenue contraction and reduced margins, driven by overall softness in most customer sectors, primarily caused by the shifting tariff situation as customers in the United States continue to manage their exposure created by tariffs on global supply chains. ARS remains committed to executing on its strategy to deliver strong results by focusing on specialized products, expanded production of a broader array of compounds and enhanced flexibility in securing and launching new accounts. As a segment, ARS continued to invest in research and development during the quarter to support enhanced collaboration with customers while preparing to launch new products. AMP experienced notable improvement in Q3 2025 compared to Q3 2024, primarily due to the defense products business continuing deliveries on previously announced contracts and a focus on its footprint optimization to help support profitable growth. Despite the disruptions associated with the U.S. government shutdown, management at AMP maintained its focus on operational improvements during Q3 2025 with further initiatives focused on fixed cost reductions and continued work with key customers to leverage opportunities aligned with its growth initiatives. The defense products business continues to work closely with its suppliers and government partners to mitigate the previously announced delays to the Bandolier program with deliveries resuming in the final weeks of Q3 2025 and into Q4 2025 with completion expected in early 2026. The rubber molded products operations were impacted by continued volume softness related to the original equipment manufacturers, the OEMs, due to evolving impact of tariffs in the automotive sector. This business continued its focus on managing costs and a commitment to drive efficiencies and best-in-class automation as well as diversification of its product lines into adjacent sectors. Despite the many ongoing challenges in the U.S. industrial economy, year-to-date, AirBoss consolidated performance has shown significant improvement year-over-year. EBITDA is up by $13 million. Adjusted EBITDA is up by $9 million. Cash from operating activities up $24 million. Net debt is down by $16 million from the beginning of 2025. And most importantly, net debt to trailing 12 months adjusted EBITDA has dropped from 4.67x at the end of Q3 2024 to 2.7x at the end of Q3 2025. These metrics are strong indicators that the efficiency improvements across the enterprise, along with successful launch and execution of new program awards are driving strong improvements year-over-year for AirBoss. While our short- and medium-term actions are driving measurable improvements, the company's long-term priorities continue to be the growth of the core rubber solutions by emphasizing rubber compounding as the core driver for sustainable growth and productivity, focusing on innovation and custom rubber compounding while aiming to expand market share through organic and inorganic means. At the same time, driving a growth strategy in AMP is critical for us as we focus on an expanded range of rubber molded products and making sure that we are well positioned to take advantage of increased defense spending globally. AirBoss continues to focus on these long-term priorities while investing in core areas of the business to expand a solid foundation that will support long-term growth on the foundation of the recently implemented efficiency improvements. I will now pass the call over to Frank for the financial review. Frank? Frank Ientile: Thanks, Chris, and good morning, everyone. As a reminder, all dollar amounts presented today are in U.S. dollars, except for dividends per share, which are in Canadian dollars. Percentage changes compare Q3 of 2025 to Q3 of 2024, unless otherwise noted. To be respectful of your time today, I will aim to be brief in my summary of our Q3 2025 results. Starting from the top line, AirBoss' consolidated net sales for Q3 2025 were $100.4 million, an increase of 4.4% from the prior year. The increase was primarily due to higher volumes at manufactured products, partially offset by lower sales at Rubber Solutions. Consolidated gross profit for Q3 2025 increased by $0.4 million to $16.5 million compared with Q3 of 2024 and consolidated adjusted EBITDA for Q3 2025 increased to $7.3 million from a prior year of $6.4 million. In both cases, the increases were driven by improved volume and mix at manufactured products, partially offset by volume softness at Rubber Solutions. Turning now to our individual segments. Net sales in the AirBoss Rubber Solutions segment for Q3 2025 decreased by 5.5% to $51.5 million from $54.5 million in Q3 2024. Volume decreased by 7.9% with decreases in most sectors. Tolling volume was down 43.8%, while non-tolling volume was down 6.7%. Gross profit at AirBoss Rubber Solutions for Q3 2025 decreased by 23.9% to $6.3 million from $8.3 million in Q3 2024. Gross margin percentage decreased to 12.2% of net sales from 15.1% of net sales in Q3 2024. The decreases were due to unfavorable mix and lower volume driven by market softness, economic uncertainty, partially offset by managing controllable overhead costs and continuous improvement initiatives. Net sales at Manufactured Products for Q3 2025 increased by 27.7% to $58.1 million from $45.5 million in Q3 2024. The increase was mainly due to improved sales in the defense products business in addition to improved sales in the rubber molded products business. Gross profit at Manufactured Products for Q3 2025 increased to $10.2 million from $7.8 million in Q3 2024. Gross margin percentage increased to 17.5% of net sales from 17.1% of net sales in Q3 2024. This was primarily the result of improvements in the defense products business operational cost improvements and reduced overhead costs executed in the quarter, in addition to favorable volume and product mix in the rubber molded products business. Turning again to the consolidated results. Free cash flow for Q3 2025 was $4.9 million compared to negative $2.9 million in Q3 of 2024. During Q3 2025, the company invested $3.6 million in property, plant and equipment versus $1.6 million in Q3 of 2024. The capital expenditures were related to cost savings initiatives, growth initiatives and minor plant upgrades within ARS and AMP. By the end of Q3 2025, our net debt balance was $82.9 million versus $98.9 million at the end of 2024. We expect to fund the company's 2025 operating cash requirements, including required working capital investments, capital expenditures and scheduled debt repayments from cash on hand, cash flow from operations and committed borrowing capacity. The company has a revolving credit facility that provides for a maximum borrowing up to $125 million with a $25 million accordion. As of September 30, 2025, the total available borrowing capacity under this facility was $76.4 million with $41.3 million drawn. With that, I will now turn the call over to Chris. Chris? Chris Bitsakakis: Thank you, Frank. To wrap up, Q3 2025 demonstrates the resiliency and adaptability of the AirBoss team. We are executing against our strategic priorities, streamlining operations, investing in innovation and reinforcing our balance sheet to ensure sustainable growth and value creation. As we move into 2026, our focus remains clear: delivering consistent cash flow, advancing our defense programs and taking advantage of the recently announced increases in defense spending throughout the world, expanding specialty rubber solutions and continue to improve operational efficiency across all our businesses. Operator, at this point, we can open up the line for any Q&A. Operator: [Operator Instructions] Your first question comes from the line of Ahmed Abdullah with National Bank Capital Markets. Ahmed Abdullah: Just to start, for the AirBoss Rubber Solutions, how are volumes tracking early in Q4? Are you seeing any signs of a rebound, acknowledging what you mentioned in terms of macro uncertainty having an impact there? Chris Bitsakakis: You'll notice that the Q3 revenue in ARS was actually a slight improvement over Q2. So we started to see a rebound already in Q3, even if it's fairly slight. And we've also been able to bring on new customers that are launching in Q4. So we feel that there is some room for optimism there. The only issue with that is quite often, December is a bit of a strange month, as you know, Ahmed, because of holidays and that sort of thing and the November holidays for Thanksgiving. So if you consider the net numbers in Q4, we're not prepared at this point to provide any guidance for that. But like I said, Q3 represented a slight rebound from -- if you would consider Q2 the trough, and we are launching new customers in Q4. So the other part of that is a lot of people are analyzing what's going on in the U.S. industrial base and quite a bit of the slowdown that we're seeing across all the customers that we have, including the big tire companies, truck tire sales are, as you probably know, way down so -- which is why the tolling business, not just for us, but all of our competitors has virtually disappeared. But as the supply chains get rebalanced from all these tariffs around the world and the customers no longer have the inventory that they need to build their products, we expect a rebound. We're just not sure exactly when we'll see that in any sort of material way. But like I said, if you look at the numbers, Q3 was a slight improvement over Q2. Ahmed Abdullah: Yes, that's fair. I mean you're also entering the easier comps going forward. So we would hope a rebound would materialize at that point. On the defense business, how much of this quarter saw part of the Bandolier recommencing deliveries? Because you do mention that it started in the last few weeks of 3Q. So I'm just trying to gauge how much of the Bandolier has contributed here. Chris Bitsakakis: Yes, it's very small. We were able to -- as we had announced a problem with the supply chain of a key raw material ingredient for the Bandolier, which we were able to solve that problem in conjunction with our customer and our suppliers during Q3. So we resumed shipments, but it's a fairly lengthy revenue recognition for those shipments. So we expect to see a fairly strong spike in Bandolier sales for Q4 based on the resumption of our shipments late Q3. Ahmed Abdullah: Okay. And when you announced that contract, it was $45 million. And you had mentioned that $20 million was already shipped prior to that. Are you still expecting $25 million of that to still be shipped out in Q4 and into early 2026? Chris Bitsakakis: Yes, that's right. As you can imagine, we're playing a little bit of catch-up from that little delay that we had to take to solve that issue. So we're trying to drive the revenue to the left as much as we can. But again, with the fact that it's a fairly lengthy delivery process, we're not exactly sure how much of that will be in Q4 versus Q1. But the numbers that we had reported on previously, we expect to fulfill in that same time frame. Operator: There are no further questions at this time. I would now like to turn the call back over to Chris Bitsakakis for closing remarks. Please go ahead. Chris Bitsakakis: Great. Thank you very much. I appreciate everybody's time this morning, and we look forward to speaking to you again after our year-end numbers are available in early 2026. Thank you. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining, and you may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the TerrAscend Corp. Third Quarter 2025 Financial Results. [Operator Instructions] This call is being recorded on Wednesday, November 6, 2025. I would now like to turn the conference over to Valter Pinto. Please go ahead. Valter Pinto: Thank you, operator, and good morning. Welcome to the TerrAscend Third Quarter 2025 Financial Results Conference Call. Joining us for today's call are Jason Wild, Executive Chairman; Ziad Ghanem, President and Chief Executive Officer; and Alisa Campbell, Interim Chief Financial Officer. Our remarks today include forward-looking statements, including statements with respect to the company's outlook, including the company's expected financial results for the fourth quarter of 2025 and the estimates and assumptions related thereto. The company's expectations regarding its growth prospects in new and existing markets such as Ohio and New Jersey, its M&A strategy, anticipated timing and benefits regarding the sale of the company's assets in Michigan and the expectations regarding regulatory reform and the potential benefits thereof. Each forward-looking statement discussed in today's call are subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements, and reported results should not be considered as an indication of future performance. Additional information regarding these factors appear under the heading Risk Factors in the company's Form 10-K filed with the Securities and Exchange Commission and other filings that the company makes with the SEC from time to time, which are available at sec.gov, on SEDAR+ and the company's website at terrascend.com. The forward-looking statements in this call speak as of today's date, and the company undertakes any obligation to update or revise any of these statements. Also during the call, the company may present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in the company's earnings press release and our quarterly report on Form 10-Q for the quarter ended September 30, 2025, which you can find in the company's Investor Relations website or on the SEC and SEDAR+ websites. I'd now like to turn the call over to Mr. Jason Wild. Jason, please go ahead. Jason Wild: Good morning, everyone, and thank you for joining us. Third quarter revenue from continuing operations totaled $65.1 million, flat year-over-year and in line with the expectations we communicated on last quarter's earnings conference call, while gross margins improved 110 basis points year-over-year to 52.1% and adjusted EBITDA margin improved to 26.1% as compared to adjusted EBITDA margin of 25.9% for the same period last year. Gross margin and adjusted EBITDA margin for the quarter also increased sequentially 210 basis points and 150 basis points, respectively. We generated positive cash flow from continuing operations of $7.1 million for the third quarter after net tax payments of $5 million during the quarter and positive free cash flow of $4.9 million. This marks our 13th consecutive quarter of positive cash flow from continuing operations and ninth consecutive quarter of positive free cash flow. Consistent performance in the Northeast markets of New Jersey, Pennsylvania and Maryland were the key drivers of these results. In New Jersey, we maintained our leadership position according to BDSA. And in Pennsylvania, 4 of our 6 stores ranked among the top 10 statewide. In Maryland, our success story continues with a 14.8% increase in revenue year-over-year and gross margin in the high 50s. As we mentioned during our last earnings call, in the second quarter, we made the strategic decision to exit the Michigan market. As expected, this move has unlocked value for TerrAscend, both in terms of additional cash flow generation and enabling the team to focus on our higher-value markets. The divestiture transactions currently consist of all cash deals and all proceeds will be applied to pay down existing debt. Ziad will provide additional details. While our team has worked tirelessly on finalizing our exit from Michigan, we remain focused on our M&A pipeline. In New Jersey, we are working through the closing of our Union Chill dispensary, a well-situated dispensary with limited competition within 10-mile radius, which will bring our total dispensaries in the state to 4. Union Chill currently generates over $11 million in annualized revenue and will be immediately accretive to EBITDA and cash flow. We plan to vertically integrate Union Chill after closing, which is expected to further enhance margins, provide our full array of state-leading products and brands to local customers and enhance our leading market share position in the state. We anticipate the acquisition will be approved soon and look forward to providing more details at the appropriate time. We are evaluating additional opportunities in New Jersey and have a robust pipeline, which we continue to work through in a disciplined manner. During the quarter, we completed a $79 million non-dilutive upsizing to our senior secured syndicated term loan with Focus Growth. The majority of the proceeds were used to retire existing debt across other lenders and the remainder is designated for future growth initiatives. This financing extends the maturity of all of our senior secured debt until late 2028. It also provides us access to an additional uncommitted term loan of up to $35 million for strategic M&A. This transaction reflects Focus Growth's confidence in TerrAscend's vision and strategy, and I'd like to thank their team for their continued support. On the topic of regulatory reform, we are closely monitoring developments at both state and federal levels. There is real potential for reform under the Trump administration. As we have mentioned many times, we have operated and will continue to operate our business independent of federal reform. In PA, we continue to have conversations with lawmakers to gather support for the passage of an adult-use bill. When adult-use implementation happens, we will be prepared to meet the increase in demand by bringing additional capacity online at our 150,000 square foot facility. Our PA canopy space is larger than the canopy at all of our other facilities combined. In summary, TerrAscend has a unique pathway to growth organically and through M&A due to our deep presence in our existing markets and a wide open map for further expansion. Not only have we demonstrated consistent delivery of positive operating and free cash flow for many consecutive quarters, but our steady improvement in operational efficiency has yielded us margins amongst the leaders in the industry regardless of size. Considering the improved performance of our existing business, strength in the balance sheet, having no sale leasebacks, over $36 million in cash, the potential for Pennsylvania to convert to adult use and multiple attractive acquisition opportunities, we believe that our equity is significantly undervalued. With that, I'll now turn the call over to Ziad to provide an update across our key markets. Ziad? Ziad Ghanem: Thank you, Jason. Let me walk everyone through our performance in each of our key markets this quarter, beginning with New Jersey. In the third quarter of 2025, we maintained a leadership position in the state according to BDSA. Both retail and wholesale revenue were stable quarter-over-quarter. We are proud that all 3 of our stores in New Jersey rank in the top 15 stores in the state with our store in Phillipsburg being #1 out of nearly 250 licensed dispensaries according to LIT Alerts. Our Kind Tree and Legend brands have consistently remained in the top 10 across the state even as the number of brands in the market have doubled to more than 200 in the past year. With the launch of our new pre-rolled assortment, we grew category sales by 32% and improved our share and rank quarter-over-quarter. Kind Tree Cherry Slushee is our best seller and a statewide favorite, ranking #8 out of over 3,000 flower products sold in Q3 according to BDSA. The performance in New Jersey is driven by the quality and consumer appeal of our brands. In the state, our penetration rate and average order size remains stable, and we continue to sell into an increasing number of stores across the state. As Jason mentioned, in early May, we signed a definitive agreement to buy Union Chill in New Jersey, an $11 million revenue run rate dispensary, which upon closing will bring our total number of dispensaries in the state to 4. Long term, we intend to acquire up to an additional 6 dispensaries in New Jersey, extending our retail footprint to the maximum of 10 in the state. Turning to Maryland. We entered this market in 2021 through the acquisition of a small cultivation facility with negligible revenue and then acquired 4 dispensaries during the first half of 2023. Maryland generated another record revenue quarter in Q3, outperforming the market's 2% decline in sales in the state according to BDSA. During the third quarter, retail revenue decreased slightly quarter-over-quarter, while wholesale revenue increased slightly. Our verticality and increased efficiencies have allowed us to maintain our gross profit margin in the mid- to high 50s since the fourth quarter of 2024, with this quarter improving to nearly 58%. The expansion of our Hagerstown facility drove immediate gains in flower sales and share, and our Kind Tree pre-roll sales have doubled since Q1. We delivered positive growth in vapes and extracts and gained share with our Valhalla edibles brand for four consecutive quarters. Our Cumberland and Salisbury stores are top 5 dispensaries in the state according to LIT Alerts. This is yet another reflection of our operational excellence, the quality of our products, customer service and retail experience. Today, we are on an approximate $75 million revenue run rate in the state. In Pennsylvania, during the quarter, 4 of our 6 Apothecarium stores rank in the top 10 across the state. TerrAscend's market share is around 5% of total Pennsylvania cannabis revenue, even though our stores make up only 3% of the total state store count. Said differently, we are capturing more market share per store compared to our competitors. Our vape sales grew 11% quarter-over-quarter and our Ilera branded tinctures consistently rank among the top 10 products in the category according to BDSA. Last week, I spent a day in Pennsylvania with Mike Tyson, meeting with Governor Shapiro, Senators and House Representatives from both parties, answering questions and gathering more support for the passage of an adult-use bill. I remain optimistic that the bipartisan bill will be passed. We have a fully built out large-scale cultivation and manufacturing facility in Pennsylvania with no need for additional investment. In Q4, we are bringing additional capacity online in preparation for the prospects of an adult-use launch. Turning to Ohio. We entered the state during the second quarter, becoming the fifth U.S. state we operate in. The third quarter represented the first full quarter of revenue contribution from Ratio Cannabis, a well-situated and profitable dispensary, which is now fully integrated into our existing operations. Our goal in Ohio is unchanged, to assemble a leading retail footprint by acquiring high-quality stores at the right price, just as we did in Maryland. This will allow us to leverage our existing infrastructure and SG&A to drive higher profitability. Regarding Michigan, as Jason mentioned, we are actively engaged in selling our Michigan assets, and it's going according to plan. I'm proud of the team's effort in working through the exit and exercising diligence and strength as we negotiated transactions for our assets. The majority of our assets are already under contract and awaiting regulatory approval, and we continue to expect the exit to be substantially complete by the end of 2025. In closing, TerrAscend continues to show strong numbers across the board. Our business remains solid due to strong business fundamentals, a targeted M&A strategy, no material debt maturing for the next several years, consistent positive operating and free cash flow quarter-over-quarter, best-in-class sponsorship and a strong leadership team. Given all this, I am more confident in our future than I have ever been. With that, let me turn the call over to Alisa to provide more detail on our financial results for the third quarter of 2025. Alisa? Alisa Campbell: Thanks, Ziad. Good morning, everyone. Thank you for joining. I'll take you through our financial results for the third quarter of 2025. The results that I'll be going over today have already been filed on both SEDAR+ and with the SEC, and all results that I will reference today are stated in U.S. dollars. Given our announcement in Q2 of our decision to exit the Michigan market, all financials discussed today reflect results from continuing operations unless otherwise noted. Net revenue for the third quarter of 2025 was $65.1 million compared to $65.2 million for the third quarter of 2024, which was in line with the expectations communicated on last quarter's earnings conference call. Retail revenue increased 3.4% year-over-year. The increase in retail revenue was driven by organic growth in Maryland and a full quarter of sales from the recent Ratio acquisition in Ohio, which was offset by price compression in the New Jersey market. Wholesale revenue declined 6.7% year-over-year, which was driven by organic growth in Maryland and offset by a decline in New Jersey, while Pennsylvania remains steady. It is worth noting that New Jersey wholesale revenue increased sequentially. Gross profit margin for the third quarter of 2025 improved to 52.1% as compared to 51% for the third quarter of 2024, driven by continued strong performance in New Jersey, Maryland and Pennsylvania. G&A expenses for the third quarter of 2025 were $21.3 million and 32.8% of revenue compared to $24.7 million and 37.9% of revenue in the third quarter of 2024. GAAP net loss from continuing operations for the third quarter of 2025 was $9.9 million compared to a net loss of $15.8 million in the third quarter of 2024. Adjusted EBITDA from continuing operations was $17 million for the third quarter of 2025 or 26.1% of revenue compared to adjusted EBITDA from continuing operations for the third quarter of 2024 of $16.9 million or 25.9% of revenue. Turning to the balance sheet and cash flow. Cash and cash equivalents were $36.6 million as of September 30, 2025. Net cash provided by continuing operations in the third quarter of 2025 was $7.1 million after net tax payments of $5 million during the quarter. This represents the company's 13th consecutive quarter of positive cash flow from continuing operations. CapEx spending was $2.2 million in the third quarter, mainly related to expansions in the Maryland and New Jersey facilities. Free cash flow was $4.9 million in the third quarter of 2025, representing the ninth consecutive quarter of positive free cash flow. During the quarter, the company closed on an upsized senior secured syndicated term loan of $79 million, the majority of which was used to retire existing indebtedness with the remainder designated for future growth initiatives. As part of this transaction, the company executed an additional uncommitted term loan facility in the aggregate principal amount of up to $35 million for future M&A. As Jason mentioned, as the Michigan deals begin to close this year, the proceeds will be used to pay down existing debt, reducing our interest expense in 2026 and beyond. During Q3, the Board of Directors authorized the company to renew and replenish its normal course issuer bid to repurchase up to USD 10 million of the company's common shares from time to time over a 12-month period. Looking ahead to Q4, we expect revenue and gross margins to be similar to the results we reported in Q2 and Q3. In closing, our third quarter results marked another period of solid revenue and gross profit margin performance with adjusted EBITDA margins among the best in the industry for our size. In addition, we have now delivered our 13th consecutive quarter of positive cash flow from continuing operations, and our ninth consecutive quarter of positive free cash flow. We look forward to sharing our continued progress on the business during the next quarterly call. This concludes our prepared remarks. I'd now like to turn it over to the operator for questions. Operator: [Operator Instructions] Your first question comes from Frederico Gomes with ATB. Frederico Yokota Gomes: First question on Maryland. You said you're outperforming the market, but you also saw a 2% decline in sales in the state overall. I'm just curious what's driving that decline in sales in the state? Is it price or volume? If you could comment on that? And then secondly, what's the growth outlook here that you see for your business, specifically in Maryland, just given that decline in state sales? Ziad Ghanem: Fred, just to be clear, and we apologize if the script was not ready. The 2% decline was the state decline, not TerrAscend. We continue to be on a $75 million run rate in Q3, similar to what we had in Q2. Our wholesale business after we expanded our cultivations continue to grow in the state. Looking into Maryland, we are starting to see some retail stores opening, but we haven't seen any impact on our business yet. The cycle where the state is being 2 years behind New Jersey, we expect it at some point to be similar dynamic where our wholesale growth makes up for any pressure in Maryland. But we are looking in 2026 to expand cultivation further because of the reception of our brands, the new product performance and the order size and the new penetrations we're seeing from a wholesale perspective. Fred, does that answer your question? Frederico Yokota Gomes: Yes. Yes, I appreciate that. And then I guess the second question, just on New Jersey. I guess, can you just talk about the -- maybe the delay in terms of closing that transaction there? And then secondly, how is the M&A environment looking there for your target of additional 6 dispensaries? Are valuations coming down or are pretty much in the same place that they were before when you talked about it? Ziad Ghanem: Yes. Starting with Union Chill, we're not happy with the delay. There's still full alignment between the seller and the buyer. It's driven by the regulatory body. We've been active with answering questions. We do believe, as we mentioned on our script, that we will be on the next agenda, and we expect to get approval and closing this year on Union Chill. As far as the pipeline, the pipeline is still robust. The dynamic is still very similar. The valuation is still very attractive, and the deals are accretive, and we are negotiating same format that we have negotiated with Union Chill. But then to expand more on M&A, for us, going deeper in New Jersey continue to be in the core of our strategy, but also expanding in new states and going deeper in other states is -- will be a major play for us in 2026. There are a few assets that perform very well independently for some of the companies who have faced balance sheet troubles. Those assets need homes, and we are prepared to house some of those assets, and we are excited about some of those. So we expand -- we expect, in 2026, a major part of our growth in addition to some of the organic growth to come from some of those transformative deals. And we can't wait to share more news on that. Operator: Your next question comes from Kenric Tyghe, Canaccord Genuity. Kenric Tyghe: So very encouraging comments around Pennsylvania. It certainly sounds like a warmer discussion. What do you believe is driving the change in tone? I mean, I realize it's a stretch with Virginia expected to start legalized adult-use sales next year, but Pennsylvania really is increasingly looking like something of an outlier. Can you provide any more insight around the discussions or the change in tonality around those discussions? Ziad Ghanem: Yes, Kenric, first, welcome back. Good to have you back and look forward to our discussions. Pennsylvania is a very important state to us. Before I talk about the regulatory environment, I want to remind what we said on our prepared remarks, our cultivation facility in Pennsylvania is fully prepared. We have expanded it fully. And with a plane switch -- flip of a switch, we can expand and increase that capacity by up to 100%. In Q4, in this quarter, we plan to turn some of that facility on and bring in more inventory. And we're in a position that allows us to do this. I'm super proud of the team of the inventory level that we have. We're at an all-time best inventory level with all of it being healthy inventory. My optimistic -- or being optimistic about Pennsylvania did not only come from last week being with the champ in Pennsylvania, talking to the Governor, Senators, Representatives from both sides of the aisle, but from multiple visits that myself and many of our peers have done in Pennsylvania. And we've heard from many decisions makers that there's not a cannabis challenge in Pennsylvania, there's a political challenge. And the political challenge continue to play to our favor because the budget has not passed yet, and it's almost at a record delay. So connecting all the dots from all those meetings, I believe that it's not if, it's just when. And the biggest takeaway that I saw last week and made me feel that optimistic is if the President reschedule cannabis at a federal level, then that would be the catalyst that will flip Pennsylvania almost immediately, in my opinion. And that confidence is along some of the M&A comments that I've done is what's given me the confidence to expand our capacity in Pennsylvania with sensitivity analysis that if one event happened or more than one event happened, what would we do? And I feel pretty good about our plan. Kenric Tyghe: Great color. And just on that rescheduling since you mentioned it. Asking the M&A question another way, to what extent in quarter did all the rescheduling chatter perhaps cloud or color the timelines on Michigan divestitures or your target acquisitions in each, New Jersey and Ohio? Jason Wild: Yes, I would say the rescheduling conversations have not had any impact on our divestiture conversations in Michigan or any other M&A conversations. I think everybody over the last several years has learned to sort of run their M&A and operate their business regardless of what we're seeing from the rescheduling perspective just because it hasn't happened, and it's been delayed for a lot longer than people have expected. Operator: [Operator Instructions] Your next question comes from Andrew Semple, Ventum. Andrew Semple: Congrats on the results here. First off, I just want to maybe call out that a few other of the larger MSOs appear to be getting more constructive on M&A. I know TerrAscend has been fairly early on this and certainly engaged in -- or prospectively engaged in a number of conversations. Are you starting to see some increased competition on M&A deals? And has there been any change in prospective valuation multiples as a result? Just want to get a sense if that's getting more competitive out there. Ziad Ghanem: Andrew, thank you for your comments. But from an M&A perspective, for an optimal discussion and negotiation of M&A, a few factors needs to exist. You have to have the advantage of having an open map and having the ability to go in the state, whether it's deeper or new state. You have the ability -- you have to have the ability to have the balance sheet and the support from your lender for accessibility, and we have that and then have the ability to integrate and move quickly, but also stay disciplined. We are doing all this, and we have the advantage of doing all this. In some places, we do see some competition. In other places, we see less competition. But we don't make our decision based on competition at all. We make our decision based on the value we bring to our shareholders, and the deal has to be accretive. And the third filter we have that we cannot afford to inherit any buddy's problem or balance sheet cancer or anything that we've worked so hard as a company to get where we are. Jason Wild: Yes. Andrew, the only thing I'd add is, the competitive tension has not increased over the last few months. We're not seeing any more on the deals that we're relatively far down the road on, or do we think that we might be able to get over the finish line. We have not been dealing with a high level of competitive tension with other bidders that are sort of bidding us up. I mean if that does happen, then we just walk away, but it really has not -- we haven't encountered that. Andrew Semple: Great. That's helpful. And then maybe turning to cost controls. Well done on that this quarter. I guess, excluding share-based comp, your kind of cash operating expenses have been continuing to decline as a percentage of sales. And it's been that way for a number of quarters. I'm just wondering how much further that could go and whether you see room for continued operating leverage opportunities within the business. Ziad Ghanem: Yes. Andrew, I'm so proud of the team for the discipline to get us where we got on our cash-based expense. We've done a robust exercise starting from a zero-based budget, looking at every line, asking, is that a nice to have, must-have. And the team has done a lot and put a lot of their plate and continues to perform and do well, and I couldn't thank them enough. The way I look at cash-based expense, we are where we need to be, $20 million on a $65 million revenue with the absence of leverage for our scale is a place I'm happy. Will we be able to save more? Yes, but it wouldn't be hitting the bottom line. It would be more safe to invest. One area that I am focused on is the wholesale business, is investing in platforms, investing in infrastructure, investing in analytical platform that supplement and complement our ERP. So it would be a little saving to reinvest it, but I would say this is where our cash-based expense would be. Now as we bring in more revenue from an M&A perspective, we are prepared to add disproportional expenses. So think about labor model and leases being around 12% to 15% on every $10 million that we bring in. So that will continue to push that efficiency in OpEx below that 30%, but being around 30% is a target that we declared, and I committed and promised to the Board, and we delivered on. Operator: [Operator Instructions] There are no further questions at this time. I will now turn the call over to Jason Wild. Please continue. Jason Wild: Thank you so much for joining us today. I'm really proud of this team and what we've accomplished this quarter and what we've accomplished actually over the last several quarters. We will see you on the next quarterly conference call in March. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Thank you for standing by. My name is Janice, and I'll be your conference operator today. At this time, I would like to welcome everyone to the ACI Worldwide Inc. Third Quarter 2025 Financial Results. [Operator Instructions] And I would now like to turn the conference over to John Kraft. You may begin. John Kraft: Good morning, everyone, and thank you for joining our call. On today's call, we will discuss ACI's third quarter 2025 results and our financial outlook for the remainder of the year. We will take your questions at the end of the call. The slides accompanying this webcast can be found at aciworldwide.com under the Investor Relations tab and will remain available after the call. As always, today's call is subject to safe harbor and forward-looking statements. You can find the full text of these statements in our presentation deck and earnings release, both available on our website and filed with the SEC. Joining me today are Tom Warsop, our President and CEO; and Bobby Leibrock, our CFO. Before I turn it over, I did want to share that we will be attending some investor conferences, including Citi's 14th Annual Fintech Conference in New York City on November 18, Stephens Annual Investment Conference in Nashville on November 20, and the UBS Global Technology and AI Conference in Scottsdale, December 3. With that, I'll turn the call over to Tom. Thomas Warsop: Thanks, John. Good morning, everyone, and thank you for joining our Q3 earnings call. I'm going to share some key takeaways, and then Bobby will review our financials and guidance before we take your questions. We've spent the last couple of years investing in our leading software and working hard to structurally reshape ACI for accelerating growth and financial predictability. Q3 was another strong quarter for ACI and another proof point that our efforts are working. We delivered 7% year-over-year total revenue growth with double-digit recurring revenue growth in the quarter. For the year so far, both total revenue and adjusted EBITDA are up 12%, reflecting consistent execution and operational efficiency across the business. Given this momentum, we're again raising our full year guidance, and Bobby will share more about that shortly. As I've mentioned on prior calls, our team is working hard to reduce some of the variability introduced by our historic term license software business model. While we can't completely eliminate it, our focus on getting deals closed earlier in the year, movement toward more ratable pricing structures in our Payment Software segment and consistent growth in our biller business is helping lessen the quarter-to-quarter variability. We're continuing this effort, and I expect to continue to see benefits. Looking at our segments, the Biller business continues to perform well, with Q3 revenue up 10% compared to a year ago. We're seeing particularly strong growth in the utility and government verticals. Our Payment Software segment delivered 4% growth compared to last year, and it's up 12% year-to-date with the strong start we had to 2025. We continue to see strong demand from both traditional banks and established payment processors as well as from up-and-coming fintechs. Bottom line is the winners in the marketplace are investing, and they're often choosing ACI for their software needs. I've been talking about our ACI Connetic platform for several quarters now, and I'm happy to report we signed our first new ACI Connetic customer in Q3, Solaris, a German fintech and bank. We were very selective in choosing our first customer, as I've indicated we would be, and we're committed to working closely with the Solaris team to successfully implement the technology across their system. They are an ideal partner focused on the future and on dramatically improving their business, supported by our industry-leading technology and services. Solaris CEO, Carsten Holtkemeyer, was a featured speaker at our recent Payments Unleashed event in New York, and he talked about the many challenges and opportunities in the financial services industry and specifically about how we are working together to take advantage. Looking ahead, Connetic's architecture and capabilities are resonating with customers who are looking to modernize and simplify their payments infrastructure. We have expanded our pipeline. We've deepened relationships with existing customers, and we're excited about what's ahead as we roll out this compelling new platform. In addition, we made a small but important acquisition of a European-based fintech Payment Components that provides software for financial messaging translation, orchestration and integration. Although the direct impact to our revenue will not be material, the software they provide and the great team of technologists that have now joined us will augment our AI-first initiatives and help accelerate the development road map of our ACI Connetic offering. We will continue to be opportunistic in our approach to M&A grounded in disciplined capital allocation. I also want to point out our ongoing commitment to returning capital to shareholders and point you to our other announcement today. Year-to-date, we've repurchased 3.1 million shares for $150 million. And just today, we announced the increase of our repurchase authorization to $500 million. Stablecoin has obviously been another hot topic in our industry and on our recent earnings calls. Just a few weeks ago, we announced a partnership with BitPay, which supports our ability to unlock even more potential as cryptocurrencies and stablecoins continue to grow in importance. This partnership strengthens our existing commitment to digital currency innovation by expanding our payments orchestration platforms and established capabilities for our customers. I mentioned Payments Unleashed briefly, and let me take a moment to give you a bit more insight on this great event. Payments Unleashed was ACI's premier payments summit and a celebration of our 50th anniversary. We brought together some of the brightest minds, thought leaders, innovators and visionaries to discuss the future of payments. Topics included stablecoins, real-time payments, AI, modernization strategies for banks, merchants and billers. The feedback was overwhelmingly positive, and we're proud to be at the center of these important conversations. On the topic of thought leadership, ACI has also been active in the media. Most recently, I joined Bloomberg TV's Crypto show to share our perspective on stablecoins and its role in cross-border real-time payments. A couple of weeks earlier, I discussed similar topics, including the role of Europe in the growth of stablecoins on CNBC's Squawk Box Europe. This is all part of a focused campaign to make ACI's points of view clearer and more widely shared. Expect to see me and the entire ACI leadership team much more often. Before I turn it over to Bobby, I'd also like to touch on the ongoing Board refreshment that has continued to be a priority for us. We recently appointed Todd Ford and welcome back Didier Lamouche as independent directors. Todd's many years as CFO of high-growth software technology companies in combination with Didier's successful track record of leadership in global technology companies will add value to our Board and additional support for our management team as we focus on accelerating sustainable growth, delivering industry-leading software solutions and generating shareholder value. Overall, we're pleased with our progress and optimistic about the remainder of 2025. And none of what we're doing would be possible without the hard work of our team members. I want to thank our talented team for their steadfast commitment to our customers and to all of our stakeholders. As I mentioned earlier, our strategy to sign contracts earlier in the year continues to pay off, and our pipeline remains robust. We will continue to focus on increasing shareholder value through operational excellence and technology leadership, solidifying the durability of our improving growth. With that, I'll turn it over to Bobby to walk through financials and guidance. Robert Leibrock: Thank you, Tom, and good morning, everyone. I'll start with our third quarter financial results and then cover our year-to-date performance and outlook. Q3 was another solid quarter, and we exceeded our expectations. Total revenue was $482 million, up 7% year-over-year and up 6% adjusted for foreign exchange. Recurring revenue was $298 million, up 10% and represents 62% of our total revenue. Adjusted EBITDA came in at $171 million and was up 2% year-over-year. Both of our segments contributed to this growth. The Biller business continues to perform well with revenue of $198 million, up 10% year-over-year. Segment adjusted EBITDA for Biller was $32 million, a 4% increase. In Payment Software, revenue grew 4% to $284 million, and adjusted EBITDA was $182 million, up 1%. We're pleased with our recurring revenue momentum, which was $100 million in Q3 and accelerated to 9% growth year-over-year. Looking now at the first 9 months of the year, we generated $1.3 billion in total revenue and $346 million in adjusted EBITDA, both up 12% compared to the first 9 months of last year. That growth is the same as reported and adjusted for foreign exchange, so no impact from currency fluctuation. This strong performance reflects consistent execution across the business and the strong start we had in first quarter license sales. Payment Software revenue year-to-date grew 12% and adjusted EBITDA grew 13%. This includes growth across issuing acquiring, merchant, fraud management and real-time payments. Biller revenue is also growing 12% year-to-date and adjusted EBITDA grew 4%. Our revenue momentum is driven by our continued bookings strength. Net new ARR bookings year-to-date grew 50% to $46 million, and new license and services bookings grew 8% to $189 million. And as Tom mentioned, we were pleased to welcome Solaris as our first Connetic customer. These results reflect the execution focus across our team and the growing customer demand across both segments. Turning to the balance sheet. We ended the quarter with $199 million in cash and a net debt leverage ratio of 1.3x. We continue to generate strong underlying cash flow with $201 million cash flow from operations year-to-date. That compares to $232 million last year and reflects the anticipated timing of receivables and tax payments between periods. We also repurchased approximately 400,000 shares in the third quarter, bringing our year-to-date total to 3.1 million or about 3% of our shares outstanding. As Tom mentioned, we have increased our share repurchase authorization to a total of $500 million, underscoring our commitment to returning capital to shareholders. Based on this strong year-to-date performance and a healthy fourth quarter pipeline, we are again raising our 2025 guidance. We now expect total revenue to be in the range of $1.73 billion to $1.754 billion, up from our prior range of $1.71 billion to $1.74 billion. We expect adjusted EBITDA to be in the range of $495 million to $510 million, up from our previous guidance of $490 million to $505 million. As I complete my first full quarter as ACI's CFO, I want to thank the team for their seamless collaboration and disciplined execution. Over the past few months, I've had the opportunity to engage with employees across ACI and more deeply with our Board. I've heard directly from our customers and partners and had a chance to meet many of you, both current and prospective investors. And after these first few months, I'm even more energized by the opportunity ahead for ACI. I've been impressed by the strength of our team, the quality of our technology, and the clarity of our strategy. This is a strong, well-run company, and I'm excited to be part of it. I'm also very pleased with the operational discipline and financial controls across ACI. There is a strong tone from the top, both our Board and Tom, and we have the processes and assurances to back it up. We are prudent in how we manage financial risk. For example, as you know, our Payment Software business operates across approximately 90 countries with nearly 75% of revenue generated outside the U.S. While this demonstrates our global scale and leadership, we've always managed this exposure carefully and transparently. In hyperinflationary markets, we transact almost entirely in U.S. dollars to mitigate risk and we consistently disclosed the impact of foreign exchange on our results, providing visibility into our underlying operational performance. Looking forward, we remain focused on maintaining a proactive dialogue with the investment community. Transparency remains a top priority, and we're actively exploring ways to provide even greater clarity into our business and the progress we're making. I look forward to spending more time on the road again in Q4, continuing the conversation and deepening our engagement with investors. Tom, back to you. Thomas Warsop: Thanks, Bobby. We're proud of our performance in Q3, and we're energized by the momentum that we have heading into Q4. Our strategy, execution and innovation, especially with ACI Connetic, position us well to enter 2026 on track to achieve our longer-term targets. Thank you for your continued support and for your continued interest in ACI. We're ready to take some questions. Operator: [Operator Instructions] Your first question is coming from the line of Trevor Williams from Jefferies. Trevor Williams: I wanted to start on pricing. Tom, maybe bigger picture, I'm curious how you would frame the runway for pricing as a lever within the longer-term growth algo. I know it's something you've talked about increasing monetization has been a focus over the last year plus. So I'm curious kind of where you still see the most opportunity? And then any way to put into perspective how impactful pricing has been this year relative to '24, maybe the historical growth algo? Any context around that would be helpful. Thomas Warsop: Yes, sure. Thanks, Trevor. So it's a lever that we always pull as appropriate against the value that we provide to our customers. We -- essentially, we always get a price increase when we do a renewal or when a customer needs additional volume. And I think we -- I'm sure you and I have probably talked about the way we structure the capacity purchases by customers. We try to encourage through our pricing model, we encourage customers to buy as close to exactly the number of transactions they need as possible because if they need to come back and buy more, they're more expensive. So there's a lot of levers that we pull there. I don't see that fading at all. In fact, as we add more value with new versions of software as we start to move customers on to Connetic, the value we add is higher, and we expect to get our fair share of that. So this is an important lever. It's been an important lever in '24 and '25. You specifically asked about those. It's always been an important lever. But '24, '25, it's been an important lever, will continue to be. And I think we're just excited about continuing to add new, more valuable features, functions and capabilities for our customers and then getting our share. Trevor Williams: Okay. Understood. And then on Payment Software, just as we're getting closer to '26, anything we should be mindful of in terms of the cadence of renewals, just thinking whether renewal cadence has been a tailwind to '25, if that potentially abates in '26? Any context you could give us around that would be helpful. Robert Leibrock: And Trevor, I'll jump in. This is Bobby. So one -- let me put it in the context of our backlog, and I'll give you the total number. We were healthy growth, again, double digits in our $7.1 billion 60-month backlog. And that's across both Payment Software, as you asked about, and our Biller business. As I look into 2026, as I mentioned, we feel good about continuing to be on track for our longer-term high single-digit growth model and EBITDA tracking along that revenue growth. As you think about the cadence of the renewals, as you put it, we got off to a great start here in the beginning of this year, overall growing 25% and almost 50% in Payment Software. That level is something we're continuing to be focused on to have deals spread out throughout the year. But I do expect things to be more balanced throughout the quarters next year, especially against that compare against the first quarter. So in terms of cadence of renewals next year, we feel good about achieving our longer-term growth model. But I do expect it to be the levels we have this year, more balanced from a SKU standpoint. Thomas Warsop: Yes. Trevor, just one more comment on that. I sometimes get the question, is it highly variable year-to-year, the volume of renewals? And if you just do the average math, obviously, it's -- if you have 5-year terms, you think kind of 20% per year. It's not exactly 20% per year, but it isn't that far off. So we don't -- the good news, I think, is that we don't have huge variability year-to-year. A little bit, yes, but we feel very comfortable managing that relatively small level of variability. Trevor Williams: Okay. Great. So it sounds like there's not going to be some major change in the percentage of the portfolio that's renewing next year that we need to be mindful of. You're on track for the high singles. So all that sounds good. Operator: Your next question is coming from the line of Jeff Cantwell from Seaport Research. Jeffrey Cantwell: Congrats on the signing of your first Connetic client. Would you mind just telling us high level about the progression from here? Maybe talk about the pipeline. Do you think you'll start seeing more contracts signed from here? And what is the timing on when that converts into revenue? Any thoughts on sizing or the magnitude of that revenue would be great. Thomas Warsop: Yes. So we're really excited actually about the pipeline. These are big decisions, Jeff, first of all, thanks for the question. Good to talk to you. But we've -- these are complicated decisions for financial institutions and fintechs. And as I've -- hopefully, I've been clear that we want to make sure we get the right first few customers. So we've got a strong pipeline. It's getting stronger literally every month as we look at it. So I feel great about that. Obviously, we never know the exact timing of when sales are going to happen, but they're progressing really well. So we'll continue to keep everybody informed as we add new customers. And you were asking specifically about the -- when it converts to revenue. The first couple of these are highly likely to be SaaS models where we're hosting the solution on behalf of our customer. And those -- the way that revenue model works is when the implementation is finished and transactions start to flow, that's when we'll see the revenue. So it will be a few months in the case of this first customer, several months, but we feel great about that. And I expect the first few will probably be like that. Robert Leibrock: Yes. I think -- and Jeff, if I can add to Tom's comments. The other comment I'd say is this is the first proper Connetic customer that will start getting revenue as we onboard but it's not a large discrete amount, but it is across every one of our customer conversations. We talked about Payments Unleashed and those conversations we had 2 weeks ago, it was across every one of them. And right now, we're focusing on our European and U.S. capabilities for Connetic. We'll have more of a global rollout through the medium term. But every customer in Mexico loves it. Every customer in Asia we talk to is excited about it. So I like the effect that Connetic has had to raise those conversations and encourage customers and get them to commit to the continued long-term ACI relationship they've had. Thomas Warsop: Absolutely. Jeffrey Cantwell: Okay. Great. And then you made a lot of moves during the quarter. So I want to ask you about a couple of them. Can you talk more about the payments components acquisition, why you wanted to capitalize on that opportunity, what that does for you? How should we be thinking about the revenue contribution for your results going forward? And also, can you elaborate on the BitPay announcement? Maybe just explain what that unlocks for ACI? Is that domestic, international? I'm just trying to get a sense of how that becomes part of the story and what we should expect to see from here on that one as well. Thomas Warsop: Yes. Thanks, Jeff. So I would say super high level, they're similar. The reasons that we did both the BitPay partnership and the Payment Components acquisition, they're similar in that they allow us to accelerate progress in terms of adding or enhancing capabilities in our solutions so we can go faster through the partnership and the acquisition, different capabilities, obviously. But the BitPay partnership, we already have a lot of capabilities around crypto and stablecoin. We talked a little bit about that on the last call. We have good capabilities. BitPay allows us to improve those -- the way that we serve our customers in those really important and increasingly important areas. And they -- frankly, that partnership allows us to add a few things that we didn't have. And so it's really an enhancement of the tools that we already have. We're excited about it. I think BitPay is excited about it. So that's a great one, good strategic reason to do that. So we're excited about that. On the Payment Components, we were faced with a decision as we continue to build out and enhance ACI Connetic, we needed world-class payment message translation and orchestration. And we either had to build some of the capabilities that Payment Components has or we needed to buy them. And we did tons of research, lots of due diligence. We really think highly of the Payment Components team and the capabilities and software that they already have, ready to go on the shelf was exactly what we felt we needed for ACI Connetic. So it's not -- it's a small acquisition, as I said, but really important strategically. We didn't buy it for immediate revenue growth. We bought it because the capabilities they have and the talent they have is a great add to ACI. So we do not expect to say to you next quarter, oh, Payment Components added a bunch of revenue. That's not the reason we did it. But it makes ACI Connetic more impactful and gets us where we want to go faster. That's why we did that. Operator: Your next question is coming from the line of George Sutton from Craig-Hallum. George Sutton: A highlight at Payments Unleashed for me was Scotty's Connetic presentation and demo. And it seemed clear to me that, Tom, when you originally announced this, it was really meant for an SMB type of a customer, potentially a mid-market customer. And it would appear that this is now potentially an offering that could be delivered to virtually any size. Can you just talk about that? Thomas Warsop: Yes, absolutely, George. Thanks for joining us. So you're 100% right. And when we were talking about the -- what new markets could we potentially tap or new segments could we potentially tap with ACI Connetic, if you're thinking about really new, then it really was focused on the -- it still is focused on the mid-market because they -- those customers may not have made enough investment or have enough experience and expertise to take advantage of the historical ACI offerings. So that -- from a new market perspective, that was true. We always expected that large financial institutions, large merchants would eventually be ready to take advantage of ACI Connetic and what we're building. So we always believe that what I -- maybe I should say it this way, we didn't want to get people too excited about that opportunity because that's going to take some time. These very big banks, for example, they've made so much investment in their infrastructure, and they have so many processes and ways of doing things that making a change to a new platform, no matter how good it is, is a big, big, big change. So we absolutely see what you said, which is this is super appealing to a large customer, a large potential customer. Absolutely, yes. I think the early adopters are likely to be a little bit smaller, but we are in active conversations with people -- customers along that whole continuum. I couldn't think of the right word, along that whole continuum. So we have smaller financial institutions, smaller merchants, we have midsized and we have very, very large. They're all interested in the capabilities, and we're just trying to work with them to make them comfortable and get them ready for the transition. George Sutton: Got you. And just one other question on Biller. It sounds like utilities were really a key component of the growth this quarter. Can you just talk about your win rates and what you're broadly seeing in terms of opportunities for continued growth there? There's definitely a movement we see in the market from bespoke solutions to kind of moving to an outsourced model like yours. So just curious your thoughts and that would be helpful. Thomas Warsop: Yes, sure. So I think we highlighted that utilities and government were very -- a big contributor to the growth in this quarter. That's been true through the year. But we see very good pipeline and pipeline growth across all of the verticals that we serve. So we feel good about the business. I agree with what you just said that there continues to be a real interest and a move away from -- I think you called them bespoke, good the name as any, solutions per Biller to outsource. And that's been happening for quite a long time. It continues to happen. Obviously, that's the reason that we're so excited about this business. We have a great offering, great client base. And what we're -- our new customers are all going on to our Speedpay ONE platform, which is our new -- I don't know if you saw that one, George, at Payments Unleashed, but we also had a demo of Speedpay ONE, which is our new cloud-native solution around Biller. And it's exciting. And so we're putting new customers on that platform. It gives them much faster time to market for new capabilities, better experience for the consumers, better experience for the Biller themselves. So we're really excited about that. We're happy with the performance of the segment, and we're just focused on accelerating that growth. Robert Leibrock: Yes. Maybe I'll just add one comment on Tom, too. I think I mean besides the financials that you'll see, George, right, 10% in the period and a backlog that's growing at the same level going forward. The other part I'd say, I met with a lot of those same customers you asked about at Payments Unleashed in the utility space. The reason they're coming to us and some of the top players is the complexity is increasing. And that's what a player like Speedpay can actually bring to them is to address that complexity that some of those bespoke ones can't. So that -- in terms of win rates, that's one of our bigger competitive advantages I see in that segment and one of the reasons we're winning more. Operator: Your next question is coming from the line of Alex Neumann from Stephens Inc. Alexander Neumann: Just to double-click there, there's another great quarter for Biller with double-digit growth. I was wondering if you could just provide some additional detail on the drivers of growth there, whether it's new customers, volume, price and maybe the relative contribution there? And then just the same for the Payment Software segment, which had some nice growth over which was a pretty tough comparison this quarter. Robert Leibrock: I can jump in, Alex. One, it's pretty broad-based across both. I'll start with the second part on Payment Software. As I mentioned in my opening comments, all key cylinders, all key solution areas are growing in that -- across that business on a year-to-date basis. In the third quarter, we saw a great contributing -- contribution from the issuing and acquiring space. We saw real-time and fraud in Q2, they had really blowout quarters there on a year-to-date basis, all growing. You go into the Biller side of it, it's -- I would emphasize it's new customers and retention. The price lever I view -- there was an earlier question that Tom was answering around pricing. I view that as untapped potential in our billing business actually. I view it more as success rates on getting new customers, onboarding them and expanding those into more use cases across there. Operator: [indiscernible] Q&A session. I will now turn the conference back over to the company for closing remarks. Please go ahead. Thomas Warsop: Well, thanks, everybody, for joining us. We do look forward to catching up with individually -- with you guys individually in the coming weeks at the various events that we mentioned earlier. Have a great day. Robert Leibrock: Thanks, everybody. Operator: Ladies and gentlemen, that concludes our today's call. Thank you for joining. You may now disconnect.
Operator: Welcome to the Eurazeo 9 Months 2025 Trading Update Presentation. Today's conference will be hosted by William Kadouch-Chassaing, Co-CEO. [Operator Instructions] Now I will hand the conference over to the speaker. Please go ahead. William Kadouch-Chassaing: Thank you very much. Good morning. Thank you all for joining this call. I'm pleased to welcome you to our trading update for the first 9 months of 2025. To remind everyone, for the trading update, we don't update the NAV that will be done at the end of the year, but I'm, of course, ready for questions you may have on the topic. In a nutshell, Eurazeo continues to gain market share in asset management. We had another quarter of dynamic fundraising and AUM growth outperforming the market. Second, we continue to outperform the market in realizations and distributions, which is, as you know, a key differentiating factor in the current market environment. And third, the quality of our balance sheet portfolio remains strong with healthy operational metrics across the board and realizations confirming our ability to monetize our balance sheet above its carrying value. Let me start with fundraising. We raised EUR 3.2 billion from our clients in the first 9 months of 2025, which is 4% above last year and well above market as global fundraising is estimated to be down this year at about 10% according to PitchBook, you may find as well other sources that will go in the same direction. This confirms our ability to gain market share in a more and more competitive and polarized market. This also highlights the quality of our investment franchises, the relevance of Eurazeo positioning as a focused European mid-market investment platform as well as the strength of our distribution capacities. Indeed, we make progress both with institutional and with individual clients. In terms of asset classes, whilst private debt continues to perform strongly, our private equity franchises have connected well. Private equity fundraising in Q3 was fueled by our secondaries and mandates franchise on top of our earlier successes in H1 in buyout, growth and impact. Our PE fundraising is up 38% year-to-date. Private debt, as I said, had a very good quarter with EUR 800 million raised in Q3 alone, mainly in direct funding. Our flagship EPD VII has already raised around EUR 3 billion in total. On wealth solutions, we raised close to EUR 700 million in the first 9 months, which is 7% more than last year. We just announced that we have received the regulatory approval from the launch of our new evergreen funds in the prime line, EPIC in private debt and EPSO in secondaries. They will support our growth ambitions in Europe. Given our current momentum and pipeline for the rest of the year, we are confident, I should say, very confident that fundraising in 2025 will exceed EUR 4 billion. We continue to expand and internationalize our client franchise, which is a key strategic objective that we had articulated in our Capital Market Day back in November 2023. We added 29 new institutional clients since the beginning of the year on a base of 440. This is a significant number. 74% of inflows came from international LPs in the first 9 months of the year, a share that continues to grow year after year, as you can see on the chart, with notable successes in Asia, Middle East and the rest of Europe. Our wealth solutions franchise also continues to grow at a steady pace with new distribution partners onboarded and already close to 10% of flows outside of our home market for the first 9 months of 2025. Overall, AUM growth and particularly fee-paying AUM growth illustrate the dynamism of our asset management business. Total assets under management were up 5% in the first 9 months, reaching EUR 37.4 billion. Third-party AUM only, which is a key focus of our strategic plan are up 11%. Fee-paying AUM were up 7% at nearly EUR 28 billion with third-party fee-paying AUM growing at also 11%. Let me stress that we believe this is above market growth. The decrease in balance sheet-related AUM reflects the successful implementation of our capital allocation strategy. Management fees stood at EUR 316 million for the first 9 months. Fees from third parties are up 5% overall, excluding catch-up fees and ForEx impact and fees from the balance sheet are down 3% year-to-date due to recent exits and reduced commitments in the funds as per the plan. On private market, we experienced strong inflows, which I just referred to, as shown by the rise in fee-paying AUM. It was partly offset by planned rate step-downs in older vintages that have been venture growth and buyouts. We also have a slight mix effect with strong fundraising from private debt and secondary and mandates in recent quarters, which carry a lower yet healthy fee level. IM Global Partners fees are up 4% at constant ForEx. Management fees from the balance sheet are logically down year-on-year, they are down 3% due to exits and reduced commitments in the fund as said. Let me now turn to deployments and realizations. As a group, Eurazeo deployments reached EUR 3.9 billion over 9 months, which is up 20% from the same period of last year, with transactions reflecting an expanding pan-European investment approach and our focus on structurally growing sectors. We deployed EUR 800 million in Q3 in private equity to support category leaders such as OMMAX, a digital and AI strategy consulting firm in Berlin based in Germany; Filigran, an AI-based cybersecurity firm; and Dexory, a U.K. leader in logistics, robotics and growth. Adcytherix, a developer of innovative oncology treatments and Proteor, a leader in orthotics and prosthetics in healthcare. And in real assets, we invested with MPC OSE in offshore wind farm servicing. Private debt continues to be very active with EUR 900 million deployed in Q3 in a dynamic lower mid-market segment. We are well placed to continue to grasp opportunities with EUR 7.2 billion of firepower, of which EUR 7.2 billion of third-party dry power powder. Realizations for the first 9 months stood at EUR 2.2 billion. Over the third quarter, we notably announced 2 important exits in buyouts. We sold CPK, a European champion in sugar and chocolate confectionery to Fera County Group, a leading U.S. confectionery linked to the Ferrero Group. The transaction returned around EUR 200 million of additional cash to our balance sheet and was concluded at a price above NAV. We also divested from Ultra Premium Direct, France leading direct-to-consumer pet food brand for approximately EUR 140 million, generating a 2.1x gross cash-on-cash return for the balance sheet. These transactions announced this summer have been closed in October. We also stepped-up realizations across the venture and growth funds with 2 important new exits, the German company, Cognigy and ImCheck. Finally, in private debt realization stood at EUR 600 million for the first 9 months. Several deals are expected to unfold in Q4. Together, these transactions illustrate the quality of our investments and our continued focus on generating liquidity and value for our investors and shareholders. At a time when the main focus of the industry, as you know, revolves around distributions, this is, we see a key competitive advantage for future fundraising. So let me illustrate that point, starting with buyouts. As you can see on the chart, the pace of distribution to LPs in the market has markedly slowed down in the past 5 years in a challenging and volatile macro environment. This is a topic for the industry. In this context, Eurazeo private equity buyout franchises have been outperforming clearly. Year-to-date, in 2025, Eurazeo's buyout franchise have already returned 10% of the NAV compared to around 5% for the broader market in H1 according to industry estimates. Looking at the '21, '24-time horizon, you'll find that the pace of Eurazeo rotation was 5 points above market and even 7 points focusing on the balance sheet portfolio only. As you know, the balance sheet, I'll come back to that, has already returned 14% of its NAV. Another positive catalyst, and we think this is a very important catalyst for future performance and the growth of our asset management activity is our proven ability to complete successful exits across the biotech, venture and growth franchises. After 3 landmark deals in 2024 Onfido, Lumapps and Amolyt asset, we've completed 2 important exits in Q3 2025 in excellent conditions. In growth, Cognigy, a German AI-based customer management provider was sold to NiCE, an Israeli American listed company for nearly EUR 1 billion, representing a 2.1% cash-on-cash return in a year our EGF IV fund. This is a remarkable outcome, which brings EGF IV, which has only completed its first closing already at 25% of DPI and 1.15x TVPI or MOIC. That's quite exceptional in the industry where DPI tends to be low. In biotech, our Kurma team sold ImCheck to IPSEN for up to EUR 1 billion if certain milestones are met. The transaction should generate between 3 and 7x cash-on-cash returns and created substantial value for our BioFund vintages, which bodes well for the future fundraising. Let me highlight that we now added the performance of the biotech funds in -- together with the performance of the rest of the fund. Pro forma this transaction, the DPI of Kurma BioFund III now stands at 75%. Let's focus more specifically on our balance sheet rotation. As you know, this is an essential part of our strategy to build an asset-light business model and execute on our promise to return more capital to our shareholders. With CPK and UPD, which closed in October, our balance sheet has realized EUR 1.1 billion of disposals year-to-date or 14% of last year's net portfolio value, already ahead of the total for the full year 2024 and as I said before, much above market pace of rotation. Since the beginning of 2024, we have sold around EUR 2.2 billion of balance sheet assets, i.e., since the beginning of the plan. This is around 27% of the net portfolio value at the end of 2023. We sold these assets at an average premium of 8% on our latest mark and a gross cash-on-cash multiple of 2.1x. Several processes are ongoing and should lead to transactions announced and realized through the end of the year. As you can see, all the exits we've announced and completed in 2025, including the most recent transactions, they are on the green in the bar charts, demonstrate again our ability to sell assets at or above NAV. Let me stress again that we believe this is the best proof point to assess the quality of our portfolio valuation approach and processes. Let me stress also, and this is a very important thing for us, that portfolio valuations only make sense if they are associated with a proven capability to generate liquidity. When you compare Eurazeo, always keep in mind that our DPIs are higher than the average market. Operational metrics of the companies in which our balance sheet is invested through the funds continue to be healthy. The average growth of our buyout companies was plus 6% over 9 months, continuing the trend seen in H1 in spite of a still sluggish and volatile economic environment. In growth, activity remains solid across the portfolio with 15% top line growth on average. Doctolib, the largest investment in this strategy, continues to grow strongly and announced it has already reached profitability in Q3 2025. The most recent investment in Eurazeo Growth Fund IV recorded an average revenue growth of around 37% over the first 9 months of the year, confirming their strong momentum together with the DPI of 25% and value creation in the fund, this bodes well for future fundraising. After years of strong growth, hospitality revenues logically have been stable in the first 9 months, while our infrastructure businesses continued to grow at a double-digit pace. Finally, before we open the floor to questions, a word on shareholder remuneration. This is a key commitment we've made to shareholders again in the plan '24-'27. By the end of 2025, we will have given back close to EUR 1 billion to our shareholders, approximately EUR 400 million in dividends and approximately EUR 600 million in share buyback, the equivalent of roughly 12% of Eurazeo share capital. As a remember, we had bought back EUR 200 million of shares in 2024 and doubled our program to EUR 400 million in 2025. With the acceleration of the program this summer, we have already bought back EUR 300 million, and we'll buy the remaining EUR 100 million before the end of the year. Thank you very much for listening to this call. We can now open to Q&A questions. Operator: [Operator Instructions] The next question comes from Oliver Carruthers from Goldman Sachs. Oliver Carruthers: I've got 3 questions. The first question on the realization rate. Just would you be able to help us just get a sense of what hurdles you have to clear to get to around that 20% realization rate this year? It seems from the press release, you're in late-stage negotiations for a number of assets. Is there any sense you could give on this would be great. Just really just trying to get a read on how sensitive this number could be to external factors, regulatory approval, financing, et cetera. So that's the first question. The second question, at the half year, you said neutral to slightly negative value creation for the full year with the first half obviously being slightly negative. I know there's no formal revaluation updates today, but can you give us a sense of how the balance sheet investment portfolio is tracking relative to expectations from the summer? And if you can, is it reasonable to assume 2H at this stage is tracking to be at least flat? That's the second question. And then the final question on fundraising. It looks like a good update today and noted the more than EUR 4 billion commentary for the full year. It looks like more and more of your fundraising is coming from non-European investors that stepped up quite a bit this year and even in 3Q. And any color that you can give on what's attracting non-European investors to the Eurazeo platform? Is it a broader theme of capital allocation to Europe? Or are there some other things at play would be very helpful. William Kadouch-Chassaing: Thank you very much, Oliver, for your questions. On realizations, we have several processes pertaining to different type of asset classes. So again, we are confident that we are able to trend towards our historical average. Now as you point out, there may be cases where there may be some delays between signing and realization. So, it's too early for me to tell you, given the fact that sometimes it requires some regulatory processes like CPK, we have to, of course, look through the hurdles of antitrust that was logical. And then we concluded in October. But expect that we will at least announce further deals through the end of the year and some of them will lead to realization soon after signing. Some of them may be realized slightly later. The portfolio, no, we don't reevaluate the portfolio every quarter, yet we do valuations of our funds on a quarterly basis for our clients. And we also have operational metrics, and we look at multiples and as they evolve. So, we have a sense of where it goes based on what we know, of course, we're missing -- we missed the last quarter of data points, but we already have a sense. So, we can confirm very firmly the guidance that we will be between 0 and slightly negative for the value of the on-balance sheet portfolio at the end of the year and which may lead to a neutral to slightly positive on the share count on the share basis given the share buyback. Fundraising, as you have seen, we reiterate the more than EUR 4 billion. We have good momentum across different asset classes. Your question pertains to our ability to grow internationally. Yes, there is a case that there is more LPs across the globe, not only in Asia, but in Asia, particularly in countries such as South Korea, Japan, Singapore, also China to Europe. This is also the case -- this is why I said it's not only Asia, in Canada, for example. But we, as you know, also have potential to expand in areas where we are already present, but not -- but have a potential to do more like in Middle East and in certain countries in Europe outside of our core home markets, if I may say so. We have France and generally Benelux, particularly Belgium and Luxembourg. So, there is a trend towards allocating more towards Europe. But I wouldn't say that Europe is just -- that Eurazeo is just suffering on the trend I think the main topic is that we have been able to position the company with a very differentiated value proposition. If you think about it, and you know very well the market of listed and non-listed companies, there is scarcity of platforms focused on mid-markets. And there is uniqueness in being a platform focused on European mid-market. At a time when the market is more and more polarized in the mindset of LPs, with LPs preferring to deal either with platform or some extremely differentiated monoliners with the rest of the industry being a bit more -- less attractive to LPs. We benefit from this. We benefit from being a platform with a unique positioning as a European mid-market/growth and impact-focused approach. And that's really what helps us in the marketing. People are confident with the stability and sustainability of the platform and what it can bring. And they understand very well that you can generate alpha and sometimes better alpha than in other regions in the world in European mid-market. Operator: The next question comes from Alexander Gerard from CIC Market Solutions. Alexandre Gérard: I have 2. My first question is related to the private debt fundraising year-to-date, which is down. How do you see the future regarding that asset class? And do you think that what happened in the U.S. with first brand and colors could more generally speaking, slow down the rate of fundraising in that asset class. So that's my first question. And the second question is regarding the gearing of the group. At the end of 2023, the gearing stood at 9%, which corresponded to EUR 0.8 billion in terms of net financial debt. And now the gearing has increased to 23% at EUR 1.6 billion. So how do you -- where do you see your gearing in 2027? And I mean, we have the feeling that you are returning cash to shareholders at a good rate, but maybe through a higher leverage. So where do you see your financial position going forward? William Kadouch-Chassaing: Thank you very much, Alex, for your 3 questions. Let's start with private debt. We have a very, very good momentum in private debt. And when I say we have already reached the EUR 3 billion, it means that we are above where we're going to fundraise on EPD VII above target. That would make of Eurazeo the largest asset manager focusing on lower mid-market direct lending, which is an attractive category given the yields and the margins that we can generate in the industry. We also have a good momentum in the fundraising of our asset-based focused franchise. So, if you look at this franchise, just have in mind we continue to have a good momentum, and we think we are gaining share both in deployment and as well as fundraising in countries in terms of deployment where we were less present historically like the Nordics and the DACH region or Italy. And as a primary brand franchise, we, as a result, gained share with key large LPs, consultants distributing us across the group. So that music continues to go very well. Now to your point on the U.S., what's happening in the U.S. and the risk for the industry and for the franchise. Let me say, first of all, that we don't see any sign of weaknesses in our portfolio to date, i.e., the default rates continue to be very, very low. The default rates historically, and this continues to be the case, is about 20 basis points. It has increased a little marginally, but it is very low. And if you factor in that the recovery rate is 50%, then you have a de facto loss rate, which is very, very low. So that's a very important point because what you have seen in some cases in the U.S. is actual defaults. We haven't seen that in our portfolio for different reasons we can talk about. I would be cautious on extrapolating what's happening in the U.S. In a sense, it reminds me as an ex-banker, what happened in the securitization market, which exploded in the U.S. as a prime. In fact, the securitization market was very safe in Europe, and there's been some confusion here. So we are -- what we're seeing in the U.S. pertains to me more to a more relaxed, a loser regulation in terms of banking and insurance being able to buy CLOs and some direct lending assets which may be lack of proper framework and ending with some losses on their balance sheet, which is -- which raises the question in some minds as to the potential systemic risk. We are very, very far away from that in Europe. The restriction that is put on banks and interest to invest in these asset categories continues to be strictly supervised. And that's probably not a bad thing. So, I think we're talking about 2 different dynamics. The gearing. The gearing has increased but continues to be compatible with a quasi-investment grade or investment-grade category when we do our own sort of shadow rating, talking to banks and relevant bodies. Let me stress that 17% gearing. I'm talking about pro forma, the sales and exits announced in Q3 with CPP and UPD, it's a gearing that is very reasonable. And as you know, it does include close to EUR 200 million of debt at IMGP, which is totally nonrecourse. So, from a creditworthiness standpoint, the group remains very safe. That was not your question. The question is more going forward, what do we see towards 2027. And there you know the answer. The answer is that we see that gradually that gearing will reduce. And at some point, we will end up with excess cash on the balance sheet. Now excess cash before we distribute back money to our shareholders, which is what we've done. If you adjust the gearing to the EUR 1 billion, I mentioned before, you'll see that the company has virtually no gearing pertaining to its own operations. So that is something we monitor that idea that, number 1, gearing should always be well contained. In and of itself, I think some gearing is a good thing in reality. Fundamentally, the gearing will continue to go down through 2027. And 3, even with that approach, we should be able to continue to serve our shareholders through the share buybacks. Operator: [Operator Instructions] Unknown Executive: There is no other question on the line, I'm going to ask the questions that are the text that we've received. So, we already answered some of them. I will say David Cerdan from Kepler asks, how do you see 2026 for fundraising given the changes within the industry? And what are the initiatives on this for Eurazeo? William Kadouch-Chassaing: Well, thank you, David. I don't know if you're on the line but at least thank you for your question. A bit too early to communicate to the market on 2026 fundraising. But as you may imagine we have a quite good view as to what would be on the road and what we can achieve in 2026. So, I'd say it's more to say. We consider that given the diverse product offering that we have linked to that good performance, in particular, in terms of distribution to clients, given what we said on the back of the question of Oliver regarding the appetite for European mid-market, we should continue to gain market share and pursue the place of having good fundraising and better fundraising than the rest of the market. Of course, it's absent a major crisis. It is assuming still sluggish and somewhat polarized market environment that we referred to. So that's all that I can say at this stage. Now we will come back to you with the pipeline, but we had already mentioned some of it. We will be full steam fundraising case in point for low or mid-market buyouts. That's a hot market. The previous vintage is running at more than 30% IRR, very good quartiles across all metrics. So that should be a success that goes into 2026. We will have the beginning of the full steam fundraising of our second vintage of infrastructure fund. As you know, the first infrastructure fund had fundraised much above its initial targets. The performance of the fund is very good. Hence, what I mentioned about the metrics that should be successful fundraising. And as a case in point, we will continue to fundraise on Growth Fund IV, which has done its first closing this year. Given the performance of the fund already and in spite of the fact that growth and venture more generally continues to be asset classes for which LP appetite is a bit more nuanced we should have momentum because that's quite a differentiated performance. And so forth, we'll have asset back on the road. Wealth, we should have the benefit of the new Evergreen funds launch. So, without going into what we're going to articulate when we publish our full year results with a detailed product offering that will be on the road, you can see that we feel confident we have enough to offer to the market and so more of the same. Unknown Executive: Maybe we'll stay on the fundraising. A question from Isobel Hettrick from Bernstein Autonomous. She has a question on the buyout space, given the multiples that you have currently on Eurazeo Capital on IRR, MOIC and DPI and considering that it is now 4 years old, how are you thinking about fundraising for EC VI and the ability to attract third-party investors on this future funds? William Kadouch-Chassaing: We think investors will look at EC IV, which is more mature funds. And then we look at EC V when EC V has enough maturity because beyond the vintage, you should look also at the pace of deployment. EC V is deployed roughly 50%. So, it doesn't have as of yet, the granularity and that would lead to a full meaningfulness of the metrics. So, if you look at EC V, we are in the good metrics, particularly on DPI and very decent in IRR and cash on cash. And we have good assets in EC V, but it's a bit too early to call given that some of them have been invested recently like Mapal, but also ERS and BMS have been invested fairly recently. So, they are good assets with strong operational metrics, but we have been quite prudent in remarking these assets over time. So, all that in a nutshell, will lead you rather towards 2027, maybe end of '26, but certainly more '27 for a full steam fundraising EC VI. So, we'll see how we perform at this time. But right now, we are very confident given the quality of EC IV and given the early metrics that we see within the portfolio of EC V. Unknown Executive: So, we have one question from an investor that we will answer directly because it's pretty specific. And for the moment, I don't have any other question on the text line. If anybody has an overall question to ask, you can still raise your hand. Operator: The next question comes from Alexander Gerard from CIC Market Solutions. Alexandre Gérard: 2 follow-up questions on my side, please. The first one regarding the -- your corporate development opportunities. Can you maybe update us on that front? For example, you have a look at committed Advisors that has just been acquired by Wendel. Is secondary segment that is attractive to you? And going forward, where are your priorities if you were to strengthen your expertise through M&A? And secondly, at the time of the CMD, you had set also a goal in terms of improving your operating efficiency. Can we have an update on that? Can we have examples of what you did since November 2023 to make your -- improve your operating efficiency? William Kadouch-Chassaing: Thank you. Well, it is true that for -- on the quarter, we don't update on IRAs and margin, but always good to remind us that we are committed to improve operating efficiency on the asset management. Regarding corporate development, I mean, we are at a stage where the industry is clearly being divided into large platforms with our own identified market. Again, Eurazeo as a platform, has a right to win as a leader in European mid-market, as we said. And monoliners,ome of them will continue to be very successful and some of them, quite a few of them may find difficult to continue the journey. And hence, there is a tendency to -- for people to try to find a home within the platform. So yes, we are having a number of discussions very often generated by people themselves who want to meet with us that we didn't have in the past. Does it mean that we want to do deals? Not necessarily. We consider that we have a strong strategic rationale in pursuing our organic growth. But as we said many times, there may be cases that may justify looking at M&A if that would help us speeding up the scaling of some of our strategies and acquiring new franchises, client franchises that we don't have. So of course, I will not comment more. I will not comment as to whether we've looked at committed advisers. But I will just remind you of the fact that our secondary franchise is bigger than the one that just acquired. And it's very successful as a franchise, both with LPs and with wealth, close to 50% of the fundraising of that secondary franchise is nurtured by our wealth channels. Secondary together with debt a category that you absolutely need to have if you want to develop successfully into the wealth market. And we also have a strong mandate franchise and fund franchise. So, it's more an organic journey, an expansion of the international footprint of that franchise that we're looking for. Operational metrics. So, this is not a topic for the 9 months. But as you know, we have already increased quite materially the operating leverage of the company. We added close to 500 basis points of margin between 2022 and 2024. What we said -- so we will continue -- so we already reached the bottom end of our mid-term target. You referred to the CMD. At the time, we had said between 35% and 40% FRE margin. So, we already crossed the bar of 35%. So, I'd say, as you can see, we are very focused on that. We continue to be focused on that, being mindful though that we are also a company that has significant growth opportunities. So, we've invested in strengthening our sales force. We have invested in some reinforcing of our investment strategies. So, you have to be also managing that growth opportunities because a lot of will come -- of the operational efficiency will be associated to our capacity to increase our revenues. Unknown Executive: Maybe we have 5 more minutes. I will take the 2 questions that I have online. First, a question on AI, much on the topic. Do you perceive AI as an important game changer for your participations with middle- to long-term horizon? Can you comment on your strategy concerning the evolution linked to AI? And maybe just the other one, could we expect some IPOs in 2026 for some of the assets that are exposed to the balance sheet? William Kadouch-Chassaing: AI is a very important topic for us. And it will require certainly more time than this call. So, I'll try to really summarize it. AI for us pertains to 3 things. Number one, are we as a company using what AI can offer. I'm talking about as an asset manager. The answer is we're going full speed in using AI in our middle back office conversal operations. We consider that everything we can automate. But beyond automate, we also use some -- we have some test using agentic AI. We also have training for the people in the firm, including CEOs as to how to prompt. So that's clearly a focus, and this is linked to the question of Alexander regarding operational efficiency. We also use it. We have quite a few experiences now that we've made to test the quality of it and the outcome for our investment processes. AI can be very forceful if you use it right, to generate analysis of deal flows as well as to process some basic analysis on numbers, projections, market data that's obviously quite efficient. And we always have a limit. The limit being that AI can't do something which we expect our good investors to do, which is to assess quality of management. And then there is the core of what we look at when we think about AI, which is how much opportunity to grow the companies we invest into AI can give or on the contrary, how much of disruption can AI cause in the companies we invest to, the companies we have invested into. It's very important to have in each of the franchises that we operate in investments, people focusing on that. So, we have operational partners very focused on that topic of assessing the opportunities and risk linked to AI. It is also very beneficial to be a company that is able to have investors in venture, in growth equities through buyouts and more mature company -- these people have a constant dialogue because when you are a buyout investor, talking to your colleagues in venture to see a few innovations that may lead to impacting the portfolio companies you're looking at is obviously extremely important. The same applies, by the way, to health care. The fact that we have in the same house people who do seed biotech or med-tech companies at the same time that we have buyout investors that invest in more mature health care company. If you manage to get the dialogue and we manage to have this dialogue between the teams, that's very forceful. So, AI is something that, of course, will be front and center for all the companies we invest into. Nobody will be unaffected. And there may be a case that there is some eating in the investment speed in the infrastructure of AI, but there is absolutely no doubt that AI will be front and center going forward. So, the answer is yes. And the second question was -- Unknown Executive: IPOs in '26. William Kadouch-Chassaing: Don't expect IPOs in 2026 pertaining to our portfolios. Now what we observe is that the market of IPOs has improved in the U.S. There's been some improvement as well in Europe. And we have some companies, particularly in the growth portfolio that are getting more and more good cases for a potential IPO. But the timing of which, of course, we will not commit because we don't master the markets today. So '26 may be a bit too early. Unknown Executive: As we have no further questions, I think it's time to end this call. The next step for us is on the 11th of March for our full year results. Thank you very much for attending this call, and have a nice day. Bye-bye. William Kadouch-Chassaing: Thank you very much. Bye-bye.