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Operator: Good day, and thank you for standing by. Welcome to the Crane NXT Third Quarter 2025 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, Matt Roache, Vice President of Investor Relations. Please go ahead. Matt Roache: Thank you, operator, and good morning, everyone. I want to welcome you all to the third quarter 2025 earnings call for Crane NXT. Before we begin, let me remind you that the slides we will reference during this presentation can be accessed via the Investor Relations section of our website at cranenxt.com and a replay of today's call will also be available on our website. Before we discuss our results, I encourage all participants to review the legal notice on Slide 2, which explains the risk of forward-looking statements and the use of non-GAAP financial measures. Additionally, we refer you to the cautionary language at the bottom of our earnings release and in our Form 10-K and subsequent filings pertaining to forward-looking statements. During the call, we will also be using non-GAAP financial measures, which are reconciled to the comparable GAAP measures in the tables at the end of our press release and accompanying slide presentation, both of which are available on our website in the Investor Relations section. With me today are Aaron Saak, our President and Chief Executive Officer; and Christina Cristiano, our Senior Vice President and Chief Financial Officer. On our call this morning, we'll discuss our third quarter highlights and our operational and financial performance. We will also provide an update on our 2025 financial guidance as well as some initial thoughts on our 2026 outlook for each segment. After our prepared remarks, we will open the call to analysts for questions. With that, I'll turn the call over to Aaron. Aaron Saak: Thank you, Matt, and good morning. I appreciate everyone joining today's call to review our third quarter results. I'd like to start by recognizing our NXT team members around the world for their continued dedication and for delivering another quarter of strong execution. As shown in the highlights on Slide 3, our third quarter performance was in line with our expectations with sales growing approximately 10% year-over-year and adjusted EPS of $1.28. Our strong free cash flow resulted in a conversion ratio of 115% in the quarter, which puts us on track for our full year target range of 90% to 110% conversion. In Q3, we continue to build momentum in strategic growth areas. Growth in our international currency business continues to exceed our expectations. And in the third quarter, we saw several new customer wins, including a prominent country in Latin America. This raises the total number of new denominations that specify our micro-optics technology to 9 year-to-date, putting us on track to achieve the high end of our target of 10 to 15 new denominations for the full year. Additionally, our international currency backlog remains at near record high levels, and our third quarter sales were stronger than our original forecast. As we continue to see growth in orders, we're taking several co-actions to increase production to support our customers. Given this sustained momentum, we're raising our full year sales guidance for SAT and NXT overall. In our U.S. currency business, the Federal Reserve recently released its print order for 2026, including a significant increase in demand for higher denomination banknotes containing our advanced security features. Based on this favorable mix, we expect this business to grow in the high single digits next year. Additionally, we're excited for the release of the new $10 bill with the redesign program advancing as planned. In CPI, our service business continues to expand its offerings outside of traditional cash equipment. And in the quarter, we achieved 2 significant wins with customers for installation and ongoing service of kiosk. These wins are contributing to mid-single-digit ARR or annual recurring revenue growth in service and building a resilient business for the long term. We're also continuing to execute our strategy to expand upon our market-leading positions. In September, we signed an agreement to acquire Antares Vision, a global leader in detection, inspection and track and trace technologies for the life sciences and food & beverage sectors. The acquisition of Antares Vision is another important step, building out our portfolio with differentiated technology offerings and aligning NXT to markets with secular tailwinds. We also continue to make strong progress in our integration efforts within the authentication business. As part of our planned product rationalization and 80/20 actions, we're in the process of upgrading several existing customers from the legacy De La Rue Authentication offerings to our micro-optics technology, improving our margins and our customer stickiness over the long term. Finally, like many other companies, we continue to manage the impact that tariffs and broader macroeconomic uncertainties are having, particularly in our CPI short-cycle businesses. Balancing the strong performance in SAT with the outlook for demand in CPI, we're narrowing our full year EPS guidance to a range of $4 to $4.10. Moving to the next slide, I'd like to spend a few minutes discussing the significant announcements we made since our Q2 earnings call. First is our announcement to acquire Antares Vision, providing Crane NXT with a leading position in the $2 billion life science and food and beverage track and trace and detection technologies market. These markets benefit from strong tailwinds driven by the continuous rise of counterfeiting and the need for greater quality assurance and compliance with government regulations. Antares Vision brings to NXT a differentiated portfolio of advanced detection and inspection systems. It also offers field and remote service capabilities for new equipment, commissioning and aftermarket services, very similar to our service business in CPI. Finally, the company offers market-leading track and trace software to ensure the safety and authenticity of products to consumers, brands and governments. We're moving forward with customary regulatory approvals and expect to close the first phase of the transaction in December. In this first transaction, Crane NXT will acquire an approximate 30% stake in Antares Vision from its largest shareholders. After this closing, we will launch a mandatory public tender offer to all remaining shareholders. Now as a reminder, Crane NXT has secured voting agreements with the largest shareholders of Antares Vision, which assures our ability to take the company private after the completion of the mandatory tender process. Antares Vision is another key milestone in our journey as we continue to build a resilient company through our disciplined M&A process. Over the past 2.5 years, we've taken significant actions to reduce our exposure to cash-centric end markets. And with the acquisition of Antares Vision, we'll have approximately 60% of the portfolio focused on cash-related products and services, down from approximately 80% at the time of separation. These steps strengthen the long-term durability of Crane NXT and align our portfolio to secular tailwinds to accelerate growth. Moving to Slide 5. Another key announcement we made in September was our outlook for the U.S. currency business based on the Federal Reserve Board's release of their annual currency order for 2026. We're very encouraged by the projected increase in volumes for higher denomination banknotes, specifically $10s, $20s, $50s and $100 bills. These notes contain higher levels of security features in the substrate and in the case of the $100 bill contain our proprietary micro-optics technology. The expected order volumes of these notes, partially offset by a reduction in volumes for lower denomination banknotes will result in our U.S. currency business growing at high single digits in 2026. Additionally, we continue to move forward with scaling up for the launch of the new $10 bill with production scheduled for mid-2026 ahead of the expected public launch. Finally, I'm excited to announce our team has made significant progress working with the Bureau of Engraving and Printing on the design of the new $50 bill scheduled for release in 2028. As a reminder, the design of each bill is a multiyear process, starting with design and pilot production before moving to full-scale production ahead of the release to the public. More to come on these developments as we move into 2026. So with that, let me now hand the call over to Christina to review our third quarter performance in more detail. Christina Cristiano: Thank you, Aaron, and good morning, everyone. I'd also like to start by saying thank you to our associates around the world and to express our appreciation for your continued efforts. Starting on Slide 6, we delivered third quarter results that were in line with our expectations. Sales were approximately $445 million, an increase of approximately 10% year-over-year, driven by the impact of acquisitions, favorable FX and continued strong performance in currency. Core sales increased approximately 1%, reflecting accelerating growth in SAT, partially offset by expected softness in CPI. Adjusted segment operating profit margin of approximately 28% was up approximately 50 basis points year-over-year, driven by higher SAT volume and improved mix in currency. Free cash flow conversion was approximately 115% in the quarter, and we continue to expect full year conversion to be in the range of approximately 90% to 110%. Finally, we delivered adjusted EPS of $1.28. Moving to our segments and starting with CPI on Slide 7. Sales of approximately $216 million were down approximately 4% year-over-year as double-digit year-over-year growth in gaming was more than offset by declines in other short-cycle end markets, primarily vending, where like other companies, we continue to face headwinds related to the ongoing macroeconomic and tariff uncertainty. Even with this lower volume, we were able to maintain an adjusted operating margin of approximately 31%, reflecting the benefits of cost reduction measures, pricing and productivity. Looking ahead, we expect sequential margin accretion in the fourth quarter, driven by continued operating discipline, resulting in CPI's full year adjusted operating margin to be between 29% and 30%. Turning to Security and Authentication Technologies on Slide 8. In the third quarter, sales were approximately $229 million and grew approximately 28% year-over-year, including acquisitions. Core sales increased approximately 9% year-over-year, driven by higher volumes and favorable product mix in currency. The volume growth in currency was driven by our ability to optimize our supply chain to produce more banknotes. We are also benefiting from the recent investments we made in our facilities to increase production. Adjusted segment operating profit margin of approximately 24% increased by approximately 250 basis points year-over-year, reflecting the benefit of acquisitions and strong performance in currency. We continue to outperform in currency, maintaining record high backlog levels with approximately 20% organic backlog growth year-over-year. This, along with our strong supply chain execution and ongoing investments to increase production gives us confidence to raise our full year sales guidance. Moving to our balance sheet on Slide 9. We ended the third quarter with net leverage of approximately 2.3x, which we expect will be approximately 2.9x at the full close of the Antares Vision transaction. As we mentioned earlier, we are on track to achieve adjusted free cash flow conversion of approximately 90% to 110% for the full year. This strong free cash flow generation will enable us to pay down debt while continuing to invest in organic growth. Now I'd like to provide an update to our 2025 guidance as shown on Slide 10. Given our continued momentum in SAT, we are increasing our full year sales growth guidance to a range of 9% to 11% from the previous range of 6% to 8%, reflecting the outperformance in currency, partially offset by a reduced sales outlook for CPI. We are also updating our adjusted segment operating profit margin to approximately 25% for the full year from approximately 25.5% to 26.5%, primarily driven by the flow-through of lower CPI volumes and additional costs we are incurring as we increase our international currency production. With these updates, we are narrowing our adjusted EPS guidance to a range of $4 to $4.10. Looking ahead, I'd like to provide our early thoughts on 2026 sales. In SAT, we expect mid-single-digit core growth, driven by favorable product mix in our U.S. currency business and continued strong performance in international currency, supported by our robust backlog and investments to increase our production. We expect core growth in the Authentication business to be mid-single digits, benefiting from increased pricing discipline and cross-selling opportunities. In CPI, we expect flat to low single-digit growth overall with service growing in the mid-single digits. In our hardware products business, where we serve the gaming, retail and financial services markets, we expect flat to low single-digit growth. Finally, we expect vending to be approximately flat year-over-year, reflecting the ongoing impact of tariffs on demand. We'll provide additional guidance for 2026 during our Q4 earnings call early next year. Now I'll turn it back to Aaron for his closing remarks. Aaron Saak: Thank you, Christina. In closing, I want to reiterate a few key points from our call today. First, our Q3 performance was in line with our expectations with strong revenue growth, healthy margins and excellent free cash flow conversion. Second, we continue to build momentum in our strategic growth areas. International currency continues its strong performance, and we're taking actions to maintain our momentum. We're very excited about the trajectory of the U.S. currency business with high single-digit growth expected in 2026, along with the launch of the new $10 bill. Our authentication integration is on track, and we're converting more customers to our advanced micro-optics technology. In CPI, we're making good progress growing ARR in our service business into new higher-growth end markets. And finally, we're taking meaningful steps to expand NXT into adjacent markets with growth tailwinds with our recent announcement to acquire Antares Vision. Well, we've been busy, and we're focused on executing our strategy to be a market leader, providing trusted technology solutions that secure, detect and authenticate our customers' most valuable assets. With all of these actions, we are well positioned to accelerate growth in 2026 and beyond. And I'm excited to share that we'll host an Investor Day on February 25 in New York City, where we'll share more details on our strategy, growth opportunities and financial priorities. And I look forward to seeing many of you there. In closing, thank you for your time this morning, and I'd like to again thank our dedicated team around the world for their commitment to our customers, our communities and all of our stakeholders. And so with that, operator, we're now ready to take our first question. Operator: [Operator Instructions] Our first question is from Matt Summerville of D.A. Davidson. Aaron Saak: Matt, a couple please. Matt Summerville: So first on the currency side of the business, if you're booking in the '27 is it safe to assume you're effectively sold out for '26? And if that's the case, how does this inform what you're doing from a capacitization standpoint in currency overall, whether it be in Malta, whether it be in Sweden or whether it be in New Hampshire? And I guess how much more factory floor flexibility do you have today to accommodate the growth? Aaron Saak: Thanks for that question, Matt. And you're right, currency and particularly international currency has just been a standout for us here in 2025. And we're really bullish on the outlook as we look forward. Some customers are wanting orders now shipped into '27. So we're taking that. So I wouldn't quite say to use your words, we're sold out for '26. I would say we are very confident in the backlog and the position it's put us in, in '26 to actually take some of these actions you're referring to. And it's really due to a combination of things. It's both customers reordering their current micro-optic designs. It's also customers moving forward faster to redesign their currency to get ahead of counterfeiting and specking in our micro-optics. And so where we're at today is we're looking at both organic investments in the near term. That's primarily OpEx in terms of adding people and optimizing our own production. It's also working with outside partners. And to your question, that's procuring substrate materials where that makes sense for us, that's a lower margin part of the business. So that's where we'd want to go out to the market with partners. And then also looking at partners as they would do some printing of banknotes for us as well. I believe as we look forward, and as you know, Matt, we're going to look at continued investments in those core micro-optic facilities where we've already made investments and have the ability and space to increase production. And that's something we're certainly looking at for 2026 and beyond. And quite frankly, it's a great investment and a great return for our shareholder investing in core growth. So we're really excited about that as well. So I think we're in a very good place. But as you can appreciate, we're taking it very seriously our role here of keeping governments fully loaded with their currency. And that's really coming in our international business and through primarily emerging markets. And while the backlog is high, the funnel and the sales outlook is equally high, which gives us high confidence in this business as well. Matt Summerville: As a follow-up, maybe just touch on if USD is growing high single digits, I guess why wouldn't -- if you have all this international goodness, including volume and value rising, market share gains, new redesigns with micro-optics coming faster and the backlog and the order trends you're talking about in the funnel, how does that not equate to a healthier organic outlook for SAT in 2026? Aaron Saak: It's really 2 things, Matt, and it's a good question. It's the balance of your first question, which is looking at how we're optimizing the supply chain and just overall production. So those are trade-off decisions that we're making. And then the second, and it's simply the math is, we're going to have really strong comps to compete against in 2026 just due to this overperformance and how international currency is exceeding our expectations. So in that way, it's just simply the comps. And we just want to have a very prudent, balanced approach as we're setting this outlook going into 2026. Operator: Our next question is from Bob Labick of CJS Securities. Bob Labick: So I wanted to start with CPI. Could you maybe dig a little further into what was the delta versus expectations in vending? Kind of what happened now between now and a few months ago in expectations? And is this a kind of signal of a larger change? Or is this just a lumpiness cyclicality? Or how should we think about that change? Aaron Saak: Yes. Thanks, Bob, for that. And maybe I'll just put that in context the CPI overall to give you some added color. And I think the real point we want to make is we're taking just a very prudent approach to the outlook going forward, particularly in Q4 and to Christina's prepared remarks for 2026. To your question, when we think about vending, this has just been ongoing order softness after the price increases that we enacted due to tariffs. And in Q3, that business was down in the high single digits. And so we expect it to be down in Q4 as well. And it's just continuing delays of customers sweating the assets, pushing out the decisions to buy as we raise prices. So our assumption here, and again, to take a prudent approach is that's not going to change into Q4. At some point, that dynamic does have to change. But again, we just want to level set for 2026. I think the real standout here for us in the quarter when you back up the CPI is gaming with strong double-digit growth in Q3, performed as expected and good order growth in gaming as well. And then our services business, where we've done a lot of investments to improve productivity and add some new service tools in is growing at mid-single digits. and we expect that for the full year. We expect full single-digit growth next year as we're winning new service contracts, improving our ARR outside of the legacy CPI equipment. And that's very optimistic outlook than we have for our CPI service business going forward. I think the other hardware businesses and vending will continue just to have a very balanced, prudent approach to the outlook based on what's happening macroeconomically. Bob Labick: Okay. Great. And then just, I guess, for my follow-up, you mentioned in your prepared remarks, you're starting the kind of upgrading De La Rue sales by adding micro-optics versus their previous security products. Can you maybe dig into that, talk about how that works, what the opportunity is and how it impacts P&L and margins over time? Aaron Saak: Yes. Yes, Bob, and I appreciate that. This is an area and I'm really excited where we're heading and appreciate the hard work the team in authentication has done since we closed De La Rue in May. So through Q3, it's really just 4 months that we had De La Rue in the portfolio. And from day 1, really pre day 1, we've always focused on synergies and executing those, both operational and commercial. And this one that we're talking about here is a little bit of a combination of both, where we originally came in and identified some legacy De La Rue holographic products and went in and did our CBS approach here using our 80/20 toolkit to decide to sunset some products and transition customers to micro-optics. That will be complete as we exit midyear next year. And what we're finding is very good success, moving these customers from a very good technology that De La Rue had, but into really the leading, most differentiated anticounterfeiting technology in our micro-optics. And with that, we're going to see a significant lift in gross margin with those customers as well as increased stickiness because they moved into a very proprietary product. When you put that all together, Bob, we're on track for our synergies that we have communicated. In fact, this program is slightly ahead of schedule and feels very good in the traction that we're getting. And we expect to your question on margins, as we get into the fourth quarter, our authentication business is going to be in the high teens in the fourth quarter in terms of OP. And for all of next year, we're going to be exiting the year approaching 20% operating profit on track to what we said we were going to do last quarter. Operator: Our next question is from Damian Karas of UBS. Damian Karas: I wanted to ask you guys for a little bit more clarity on the redesigns of the -- in the U.S. currency business. So you mentioned the $10 will ramp production kind of in the middle of next year. So are you basically in kind of wait-and-see mode until you get the green light on launching or kind of anything else on your plate until then with respect to the $10? And then on the $50 note that you mentioned you're starting to work for which will ultimately launch in 2028. Help us just understand like the financial model around these redesigns on that $50, is that just like a cost item for you guys right now as you're spending on R&D and I guess, SG&A? Or would you actually start capturing some revenue in these early stages? Aaron Saak: Yes. Thanks, Damian. And again, we're just -- I appreciate the question, incredibly excited about what's happening in this U.S. currency business. As you know and have been following us for a while, which we appreciate, it's been a long time coming, but we're at that inflection point as we get into 2026. The $10 program is just really on track. We have upgraded our equipment, as you know, in the first quarter. We've been running qualification pilot runs as we're exiting this year and working closely with the BEP on the order forecast. So we're all ready mid next year to go in what I would just call full-scale production mode of the new $10 bill. That's going as planned, right on target. And I had the opportunity just a week ago to visit our facility in Dalton, Massachusetts with the team, and they've just done a phenomenal job getting ready for the launch of the $10. So again, I would just say going as planned. We consider that in the outlook Christina mentioned for 2026. As it relates to the new $50, I think this is just an important milestone in the continued decade-long progression of this new U.S. currency series and another key proof point in what it's going to mean as we progress for the SAT segment. In terms of where we're at right now, Damian, I don't expect or should you expect or anyone any real financial impact from it in 2026 or even as we get a little bit into '27. What's important here is that we're in the design phase, working with the Bureau of Engraving and Printing and the Fed on incorporating more advanced security features into that bill than currently exists today in the 50, very similar to what we did with them for the 20. And I think that will be more apparent once the BEP and the Fed announces the new design, which we would expect sometime, let's say, in the middle part of 2026. In terms of just what it means for us, I always go back as we've discussed to you just look at the variable printing cost of the current denominations where the current $100 cost about $0.10 in variable cost. The $50 and $20 are somewhere between $0.05 and $0.06. That delta, while it's just a few pennies, obviously, on several billion banknotes is a material number, and most of that is due to advanced security features, some of which are ours. So that just gives you some bookends on how to think about it. As we get into certainly '26 and in our Investor Day, we'll provide a little more context on what that means for us when you look out these next few years. We feel very good, very excited about where this is headed, Damian. Damian Karas: That's really helpful. And then I'd like to follow up on CPI. It sounds like really it's just vending that's kind of the incremental source of weakness in the lower guidance there. Would you happen to be able to give us a sense on your CPI orders in the third quarter? Like if you excluded vending, what were the rest of the orders overall trending on a year-over-year basis? And I guess just kind of thinking about as we get past these vending headwinds, do you think that the CPI overall is kind of back in growth territory when we get into the first quarter of the next year? Aaron Saak: Yes. That's a good question, Damian. I think I'd go back to Christina's comments that we just want to be prudent on the outlook to your last point there in 2026 with kind of a flat to low single-digit growth dynamic in CPI. More specifically, when you think about the orders that came in, again, our service business, I'll start with that, is going well. There's always a backlog of service orders that's growing commensurate with the mid-single-digit growth that we're seeing in the business. We expect to fully see that and keep investing in it going forward. Gaming, which is part of our hardware business, up double-digit orders, which, again, is consistent with where we were expecting and how that market is playing out. So that feels good. So really the balance is -- and the biggest to the point you made is vending. So again, if we see some positivity, whether that be from tariffs or just generally needing to trigger buys for normal wear and tear, that will have some positivity for us, but we're, again, being prudent on that outlook. And then I think retail for us has been a little bit of a mixed results with the OEMs. Some are performing better than others, and you could see that in some public results this week, still strengthen our customs go-to-market, but net-net, that OEM business is the biggest and the results are mixed, making them down for us to be specific here in Q3. And financial service in terms of the equipment orders down a little bit in Q3 as well. And we think that's just what a lot of other companies are seeing in some shorter cycle businesses just a little uneasiness in the macro environment, and that's playing out in just some incremental delays in ordering in those 3 areas. Operator: Our next question is from Michael Pesendorfer of Baird. Unknown Analyst: This is [indiscernible] on for Mike. So I just wanted to follow up on the upgrading of some of the De La Rue to micro-optics. Are you -- and part of the 80/20 application there, is there walkaway revenue that we need to be considering as we move into next year? What kind of pushback are you getting from customers? And maybe a little bit of color on the receptivity from kind of the sunsetting of the holographic product and moving toward the micro-optic and more proprietary technology? Aaron Saak: Yes. Thanks, [indiscernible]. I think this is a really good area to your question of just how we're executing the integration as we had expected. In terms of the 80/20 process, which I think you're very familiar with, -- in terms of material impact on revenue, there is none. It rounds to 0 effectively because we're seeing not only most customers transitioning to the new technology, which comes at a better price point and better margins, those who won't be, again, nets out effectively for us. So the beauty here is we simplified the offering. We have a better and more simplified supply chain, higher margins and create stickiness with the customers. Generally, with very few exceptions, the receptivity is excellent. And most customers are happy for us to be bringing more advanced technology to them and walking them through what it can mean for their products. And that's been true of the entire authentication integration from the first acquisition of OpSec to now putting OpSec and De La Rue together to form a holistic one company. The customer receptivity to this has been very good, and that gives us a lot of confidence that the thesis here is correct as we've created a true market leader in authentication technologies. Unknown Analyst: Got it, Aaron. That color is super helpful. Maybe switching gears to CPI. Just based on the pieces that you gave us for the 2026 framework, how should we be thinking about the impact to margins as we move into 2026, given the elevated contribution from service in terms of growth rate relative to some of the other pieces of that portfolio and obviously, what's going on with vending. How should we be thinking about the margin trajectory in that segment as we move into 2026 and that mix impact? Christina Cristiano: Well, maybe I'll start and then I'll turn it over to Aaron. And just -- it's worth repeating that we have high confidence in our full year target of 29% to 30% margin for CPI. So continuing to have very disciplined operating execution even with the lower volumes that we're experiencing. And as we said in our prepared remarks, we expect that softness to continue. We're taking a prudent approach to our outlook for next year. But we also expect to continue driving this very disciplined CBS cadence. And so you can expect to see our margins in the same range, if not just a little bit higher with accretion from the synergies that we're driving and the execution of pricing and productivity initiatives. Aaron Saak: Yes. Thanks, Christina. Just to add a little more to what she said. As a service business is very profitable for us. And so that is a positive impact for us in and across CPI as well as it's a very sticky ARR business. So we like that very much, and we're going to keep growing that, as you can see in our results and our outlook. The focus for the hardware business and our vending business is really about maintaining the high operating margins that we have in that 29% to 30% range. As Christina said, I think this is excellent work by the team despite some softness in the top line that we're maintaining this near 30% margin. And that's execution of productivity, cost, CBS toolkit, et cetera. And then I'd be remiss not to say that another hallmark of this business that comes from hardware and bidding is great free cash flow, really an excellent free cash flow profile. And that's another key metric as we look at CPI to maintain the high margins, continue to generate this very strong free cash flow and continue to invest and grow our service business and drive recurring revenue. That's really the playbook of CPI as we get into '26. Operator: Our next question is from Bobby Brooks of Northland Capital Markets. Robert Brooks: In your expectation of the high single-digit revenue growth for the U.S. currency business next year, does that bake in the uplift of what I think is safe to assume a content uplift in the new $5? I'm just trying to get a gauge on if there could be upside to that outlook when the new design is initially revealed. Christina Cristiano: Bobby, I'll start on that one. And let me just for a point of clarification, it's the $10 note that we're redesigning right now that will be launched next year, that we're super excited about. And so the high single-digit guidance is really based on the order that came out earlier in the quarter from the Federal Reserve, which had that favorable product mix, as you remember, toward the higher denomination notes. And that includes the $10 note in there as well as increased volumes for the $20, $50 and $100 bill. So we're super excited for that program to launch next year. And as a reminder, the timing of that is out of our control. We're not controlling that release, but we are prepared to do our production, as Aaron said in the prepared remarks, towards the middle of the year. And so we'll expect to start seeing that production happening in the back half of next year. Robert Brooks: Got it. So it seems like it doesn't necessarily bake in what an uplift in content might look like on $10? Christina Cristiano: Yes. No, it does include the $10 note based on that order. And it's -- remember, it's a small piece of what's happening next year just based on the timing of the launch, right? So if we bring in production in the middle of the year, it's not a full year. But we have high confidence in that sales guidance range that we gave of high single digits for U.S. currency. Robert Brooks: Got it. I appreciate the color. And then -- so on the international currency sales, obviously, that remains red hot. And in your prepared remarks, you had mentioned that 3Q was stronger than you had forecasted. And I was just curious, is that really a result of just timing like countries saying what we wanted in November, we actually want delivered in September? Or is it them having ordered, let's say, 100,000 notes and then they're coming back to you and say, "Hey, we actually want 100,000, 110,000 notes." I'm just trying to understand the drivers of the upside there intra-quarter. Aaron Saak: Yes. Bobby, I'll take it and hand it over to Christina. It's a little bit of customers wanting the currency faster, and we've been working to find ways to get it to them earlier. And that goes back to my comments, I think, in one of the questions around the different actions we're taking to just improve shipments or increase shipments, both using our own internal productivity tools and adding resources and also increasingly working with some partners, which come at a little bit of a higher cost, which is what you're seeing in the segment financials. We don't think this is changing. And it's simply based on the facts of this backlog remaining. And as you can see, we're getting more orders to fill the backlog that we're shipping and our sales funnel is incredibly strong. So -- what's happening here, we strongly believe is a dynamic where more customers, particularly in emerging markets, are needing more currency to the first part of your question. At the same time, they're accelerating the redesign process to add more anti-counterfeiting features. And that was a key reason for the big win that we announced in our prepared remarks in Latin America was to help a country that was motivated and accelerated the redesign to get our very high-end anti-counterfeiting features. And we're seeing that play out in particularly emerging markets all over the world. I hope that helps, Bobby. Robert Brooks: Extremely helpful. I appreciate the color. And if I could just squeeze in one more. Of the 8% core sales growth in SAT, that was really strong, but was that really entirely driven by the increase in international currency? Or were there any authentication wins or expansions that were a part of that core sales growth as well? Christina Cristiano: Yes. Thanks for that question. It's primarily international currency, Bobby, but we did see some favorability in volume and mix in the U.S. currency side of the business and authentication continues to perform as we expected. Operator: Our next question is from Damian Karas of UBS. Damian Karas: Just a few follow-up questions. First, I wanted to ask you about Antares. What's -- how should we be thinking about the business organization in a world in which you have Antares, just thinking about like future segmentation. And would you expect to include Antares in your initial 2026 guidance when you report fourth quarter earnings in a few months? Aaron Saak: Thanks, Damian. And I'll answer the first part and hand it over to Christina for the second. I'd tell you, I just am incredibly excited by the announcement we made a few weeks ago on Antares. I think it's a very key milestone that I think you know in this evolution of the company that's further strengthening our position and it's not only expanding our TAM, but aligning us in the markets with very clear secular tailwinds with a clear technology leadership position in both equipment services and software. So we're on track to the normal process of regulatory approvals that we discussed. When that comes to an end, we'll make our first tranche of investment that will be about 30% of the company. We want to wait, see that through and really not get ahead of ourselves into any segment or alignment discussions, just let that process naturally play out, as you can probably appreciate. And as we get into certainly early next year in our Investor Day and our Q4 earnings call, as that progresses, we'll solidify the alignment as well as some of the guidance. But Christina, I'll let you take the other half of that. Christina Cristiano: Yes. And I'll just reiterate how excited we are to bring Antares into our portfolio. In terms of guidance, I think we will not include Antares in our initial guidance. We'll wait until the close happens at some point in 2026 after that public tender process is completed, and then we'll do an update to the guidance at that time. Damian Karas: Okay. Great. That all makes sense. And then, Aaron, I wanted to ask you a little bit about the strength you're seeing in the service business in CPI and building out that service footprint. Could you just remind us, are these kind of like generalist service contractors that are kind of doing service across the various end markets and customer base? Or are there any particular end markets where you're seeing a lot of this service stand out? Aaron Saak: Yes. Thanks, Damian. I would say these are not -- perhaps based on the definition, general service technicians. These are very highly skilled and trained not only in CPI equipment, but in ancillary equipment, other people's equipment, typically in the front end of stores, checkout areas, kiosks and things of that nature. When you look at our service business today, again, it's about 15% of CPI growing mid-single digits. It's actually spread across many end market verticals. So -- and that's the key to the margins and the optimization of the business that we have good density in a geographic area where we're deploying the service technicians. So today, based on the legacy of that business, about 60% of it is concentrated in financial services. That's really aligned to the legacy CPI and Cummins-Allison products that came into the portfolio in 2019. The rest, though, are in other areas like gaming, retail, vending even end markets. So it's really a nice breadth of offerings that we have kind of with the same type of equipment. And our key wins this -- that we announced this quarter are all with kiosks. So these have nothing to do with cash and coin operations. These are the type of kiosks you see, whether you're at a doctor's office or a retail establishment, a checkout in a particular restaurant, et cetera, that just being normal service contracts and maintenance. And so it's an ARR type business for us now, growing and actually diversifying with all of these wins, which is why I'm particularly optimistic about what the team is doing. Operator: I am showing no further questions at this time. I would now like to turn it back to Aaron Saak for closing remarks. Aaron Saak: Thank you very much, operator. Well, as we conclude today's call, I'd just like to again thank the entire Crane NXT team for all of their hard work and their dedication over the past quarter. As you've seen today, we've taken and continue to take significant steps to evolve the company, and that will continue as we go forward. And as a reminder, we look forward to telling you more about this in our journey ahead during our upcoming Investor Day on February 25 in New York, and I look forward to welcoming you all there. So thank you again for your time this morning and all of your questions, and I hope you have a wonderful week. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Hello, and thank you for standing by. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to the EnerSys, Inc. Q2 [ Quarter ] 2026 Earnings Webcast and Conference Call. [Operator Instructions] Now I would like to turn the call over to Lisa Langell, Vice President of Investor Relations and Corporate Communications. Please go ahead. Lisa Langell: Good morning, everyone. Thank you for joining us today to discuss EnerSys fiscal second quarter results. On the call with me are Shawn O'Connell, EnerSys' President and Chief Executive Officer; and Andi Funk, EnerSys Executive Vice President and Chief Financial Officer. Last evening, we published our second quarter results with the SEC, which are available on our website. We also posted slides that we will be referring to during this call. The slides are available on the Presentations page within the Investor Relations section of our website. As a reminder, we will be presenting certain forward-looking statements on this call that are subject to uncertainties and changes in circumstances. Our actual results may differ materially from these forward-looking statements for a number of reasons. These statements are made only as of today. For a list of forward-looking statements and factors which could affect our future results, please refer to our recent Form 8-K and 10-Q filed with the SEC. In addition, we will be presenting certain non-GAAP financial measures, particularly concerning our adjusted consolidated operating earnings performance, free cash flow, adjusted diluted earnings per share and adjusted EBITDA, which excludes certain items. For an explanation of the difference between the GAAP and non-GAAP financial metrics, please see our company's Form 8-K, which includes our press release dated November 5, 2025. Now I'll turn the call over to EnerSys CEO, Shawn O'Connell. Shawn O'Connell: Thank you, Lisa, and good morning. Please turn to Slide 4. During the call today, we will provide an overview of our second quarter results, share progress on our EnerGize strategic framework, update you on the latest demand trends we are seeing in our diverse end markets and provide guidance for our third quarter. Please turn to Slide 5. Our performance in the second quarter was strong, with net sales up 8% year-over-year. Earnings growth outpaced revenue growth, driven by favorable price/mix more than offsetting higher costs, resulting in both adjusted operating earnings and EBITDA being up 13%. Excluding 45X benefits, adjusted diluted EPS on our base business was up 15% versus prior year on the higher earnings as well as our lower share count. Our net sales and adjusted diluted EPS both marked new Q2 records driven by strong growth in data center, industrial and A&D. We are seeing positive trends in the majority of our markets, albeit with some lumpiness. Energy Systems led the way this quarter with year-over-year sales growth seen across all end markets, data center, industrials and communications as well as continued margin improvement. Motive Power improved sequentially, but was lower versus prior year as expected on suppressed volumes. Specialty delivered notable performance improvement, nearing double-digit AOE margins on A&D revenue and margin expansion. Free cash flow in the quarter was particularly strong, and we are pleased to return $78 million in capital to our shareholders this quarter through share repurchases and dividends. Please turn to Slide 6. Through our EnerGize strategic framework, we are optimizing our core, invigorating our operating model and accelerating our growth. We are reallocating resources to higher impact projects, and we are focusing on where we have a right to win. We're putting in place the structure that enables our people to focus, specialize and execute with agility and speed. We've made great progress over the past 2 quarters, and I'm excited to update you on these recent highlights. First, the reduction in force actions we announced in July are nearing completion and support our efforts to rightsize the organization. Early benefits are materializing from the $80 million annual cost-saving initiative and the realization of these savings will grow in the third and fourth quarters. Next, we launched our 3 centers of excellence: lead-acid, power electronics and lithium, which are leveraging innovation and best practices across these critical areas to deliver products faster and lower costs. We are already beginning to see ensuing benefits. As an example, our exceptional performance in Energy Systems was bolstered by improved agility from our Power Electronics Center of Excellence. The CoE cut validation time on new components from weeks to days using in-region audits and smarter collaboration. This effort, along with other optimization improvements in our Missouri plants and SIOP helped to support a major communications customer. We delivered a solution within 1 quarter on an initiative that previously could have taken up to 18 months. This is just one instance of how our transformation initiatives are improving execution and accelerating revenue growth. We are also leveraging AI to drive increased efficiency. For example, our lead-acid Center of Excellence has implemented AI-trained inspection cameras and software. This tool enables us to identify defects in battery plates faster and lower scrap rates. We are increasing our rigor around new product introductions and CapEx investments, reallocating resources to focus on higher return opportunities and executing with greater speed. As a data point, our capital spending in the quarter was reduced to 30% to $21 million from $30 million in Q2 '25, even with much of the spend this quarter coming from projects we started last fiscal year. Aligned with our new product road map for lithium technology, we are evaluating our make versus buy options for our lithium cell supply, which includes our planned lithium cell factory. Recent discussions with relevant government officials have been constructive, and we expect to provide an update to you on our new lithium factory plans next quarter. Please turn to Slide 7. In the second quarter, we fully offset the tariffs realized in our P&L through proactive supply chain actions and pricing strategies. As we've previously shared, approximately 22% of our U.S. sourcing is from countries affected by direct tariff costs. Our estimated direct tariff exposure is now some $70 million annualized for fiscal year '26. This has improved from our prior estimate of $94 million as a result of supply chain mitigation activities. While we anticipate ongoing volatility and further policy shifts, we remain confident we will be able to fully offset the impact of tariffs to our P&L. Our task force continues to proactively mitigate direct and indirect exposure of tariffs, enhance supply chain optionality and assess impact on demand. Please turn to Slide 8. Market uncertainty abated somewhat in the quarter. However, our order book does not yet reflect normalized market conditions. We expect that improving macro conditions and increasing clarity on public policy will continue to support more stable dynamics in the coming quarters. Q2 orders [ pared ] back sequentially after strong orders in Q1, which illustrates the dynamic conditions we are currently seeing in the market. In Q2, backlog in Specialty was up, supported by strong demand in A&D. However, backlog was down in Motive Power on a mix of tariff uncertainty and a return to pre-COVID buying patterns, with levels of book and ship business continuing to increase. Energy Systems backlog is stable. In communications, we are seeing more spending on network refreshes than network expansions. We remain encouraged by the opportunities these customers are reviewing to replace large inventories of older equipment out in the field. Data centers continue to be a key growth vector for EnerSys. While deployment timing can vary by project, demand in this market remains strong. As part of our strategy to accelerate our growth, we are focusing on opportunities to leverage our leading lead-acid market share and expand our share of wallet through new product introductions in this segment. The data center market is in the early phase of a multiyear growth cycle driven by the rise of AI and the increasing need for energy resilience. The dynamic geopolitical environment continues to drive an increase in global defense budgets and demand for next-gen power technologies for both tactical and mobile soldier applications. A&D activity in the quarter was robust with visibility to increasing sales for upcoming quarters as the government personnel and spend disruptions settle. Although the Class 8 market remains soft, we saw some improved demand signals in transportation with significant order inflection both sequentially and year-over-year. Please turn to Slide 9. We are proud to have published our fiscal year 2025 sustainability report in October, highlighting how we are delivering measurable energy savings, improving efficiency and reducing costs for EnerSys and our customers. It emphasizes our commitment to communities, operational excellence and our role in supporting global energy resilience. The report reflects the progress we've made and how our sustainability journey aligns with EnerGize, demonstrating how strategic improvements in energy usage, data and systems management drive both efficiency and financial performance. My vision for EnerSys is clear: to embed sustainability, resilience and operational excellence into every part of our enterprise. These principles are not just strategic. They are foundational to delivering long-term value to our customers, communities and shareholders. Please turn to Slide 10. We are excited to announce that we plan to hold our next Investor Day on June 11, 2026, in New York City. We look forward to sharing more details and progress on our strategic road map and longer-term financial targets with you then. In summary, our progress this quarter reflects not only strong execution, but also a shared commitment to continuous improvement and collaboration across the company. We are positioning EnerSys for long-term sustainable success in delivering solutions for our customers and generating value for our shareholders. Now I'll turn it over to Andi to discuss our financial results and outlook in greater detail. Andi? Andrea Funk: Thanks, Shawn. Please turn to Slide 12. Net sales came in at $951 million, up 8% from prior year and a record high for our second quarter, driven by a 3% positive impact from organic volumes, 3% positive price/mix, a 1% tailwind from FX and a 1% benefit from Bren-Tronics. The sales growth was driven by strength across most of our end markets. We achieved adjusted gross profit of $277 million, up $23 million year-on-year and up $16 million, excluding 45X benefits. Q2 '26 adjusted gross margin of 29.1% was up 70 basis points sequentially and up 40 basis points versus the prior year. Excluding 45X, adjusted gross margin was up 80 basis points sequentially and mostly flat versus the prior year. Our adjusted operating earnings were $130 million in the quarter, up $15 million versus prior year with an adjusted operating margin of 13.6%. We had a $40 million benefit from 45X in the quarter. Excluding those benefits, adjusted operating earnings increased $8 million, or 10% with an adjusted operating margin of 9.5%, up 20 basis points versus the prior year. Adjusted EBITDA was $146 million, an increase of $17 million versus the prior year, while adjusted EBITDA margin was 15.3%, up 70 basis points versus prior year. Adjusted diluted EPS was $2.56 per share, an increase of 21% over prior year. Excluding 45X, it was $1.51 per share, up 15% versus prior year, both representing record highs for our fiscal second quarter. Our Q2 '26 effective tax rate was 10.5% on an as-reported basis and 23% on an as-adjusted basis before the benefit of 45X compared to 19.4% in Q2 '25 and 21.4% in the prior quarter on geographical mix of earnings, which can vary quarter-to-quarter. We expect our full year tax rate on an as-adjusted basis before the benefit of 45X for fiscal year 2026 to be in the range of 20% to 22%. Let me now provide details by segment. Please turn to Slide 13. In the second quarter, Energy Systems revenue increased 14% from prior year to $435 million, primarily driven by stronger volumes, along with favorable price/mix and a slightly positive FX impact. Adjusted operating earnings increased 38% from prior year to $34 million, reflecting the benefits of the increased volume and favorable price/mix. Adjusted operating margin of 7.7% increased 130 basis points versus prior year. As Shawn mentioned, we saw unique wins in this business during the quarter that we expect to normalize next quarter. We remain confident in our margin trajectory with upside from here as data center demand and ongoing communications recovery should allow us to generate operating leverage and higher margins with additional support from our structural cost reductions. Motive Power revenue decreased 2% from prior year to $360 million, as anticipated, with lower volumes from macro headwinds more than offsetting favorable price/mix and FX tailwinds. Motive Power adjusted operating earnings were $48 million, down $10 million versus prior year, primarily on those lower volumes. Adjusted operating margins were 13.3%, down 240 basis points versus the prior year. Maintenance-free product sales increased 14% year-on-year and were 29.9% of Motive Power revenue mix compared to 25.8% in Q2 '25. Looking forward, we expect Motive Power volumes to regain year-over-year growth in the third quarter as the macro settles. We expect lithium sales to make up a bigger portion of this growth, which will temporarily pressure margins on higher cost pass-through from both China tariffs as well as elevated costs, which we will experience until lithium sales reach higher volumes. Longer term, Motive Power is well positioned for growth, supported by electrification, automation and strong demand for our maintenance-free and charger solutions. Specialty revenue increased 16% from prior year to $157 million, largely driven by a 7% increase in organic volumes and a 7% benefit from the Bren-Tronics acquisition as well as a 1% increase from FX and price/mix. We remain impressed by the contributions from Bren-Tronics and the cultural fit between our companies, both of which have surpassed our initial expectations. As we acquired Bren-Tronics in the second quarter of our fiscal '25, the results will be included in our ongoing operations in future quarters. Q2 '26 adjusted operating earnings of $15 million were nearly double that of the prior year when we entered the transportation down cycle. Adjusted operating margin of 9.2% was up 380 basis points. We continue to see the near-term opportunity of margin expansion in specialty, driven by robust A&D demand and ongoing TPPL cost and delivery gains from automation under our lead-acid CoE. Please turn to Slide 14. Operating cash flow of $218 million, offset by CapEx of $21 million, resulted in strong free cash flow of $197 million in the quarter, an increase of $194 million versus the prior year same period. This increase was bolstered by the receipt of our U.S. federal tax refund. Free cash flow conversion in the quarter was 288%. Excluding the benefit of 45X to earnings and cash, free cash flow conversion was still an impressive 196%. Primary operating capital increased slightly to just over $1 billion during the quarter on higher sales, with our working capital efficiency measured internally by primary operating capital as a percentage of annualized sales, improving 120 basis points versus prior year and 130 basis points sequentially. As we invigorate our operating model, we will continue to focus on delivering value from enhanced working capital discipline enabled by our CoEs. As of September 28, 2025, we had $389 million of cash and cash equivalents on hand. Net debt of $842 million represents an increase of approximately $61 million since the end of fiscal '25. Our leverage ratio remains well below our target range at 1.3x EBITDA. Our balance sheet is very strong and positions us to invest in growth and navigate the current economic environment. During this period of heightened geopolitical uncertainty, we anticipate maintaining net leverage at or below the low end of our 2 to 3x target range, providing us with ample dry powder for our capital allocation choices and to absorb any macroeconomic dynamics that may impact us. Please turn to Slide 15. During the second quarter, we repurchased 636,000 shares for $68 million at an average price of under $107 per share. We also paid $10 million in dividends. Since quarter end, we repurchased an additional 325,000 shares for $37 million, leaving approximately $960 million in a buyback authorization as of November 4th. We continue to be opportunistic in our share buyback activity, particularly as market conditions remain volatile. Our buybacks, in addition to the dividend, underscore our long-standing commitment to returning value to our shareholders. We continue to evaluate accretive bolt-on acquisitions such as Bren-Tronics and Rebel, that align with our disciplined strategic and financial criteria and are focused on strengthening customer intimacy, expanding share of wallet with our leading positions in exciting end markets and advancing our transformation progress. Please turn to Slide 16. As we navigate the current environment of mixed end market demand trends, we are optimistic but cautious about the near-term outlook. Year-over-year, our Q3 outlook reflects OpEx improvement from realization of our restructuring efforts, healthy demand in data center and A&D, improvements in Motive Power and relatively flat communications revenue following a particularly strong Q2. For the third quarter of fiscal 2026, we expect net sales in the range of $920 million to $960 million, with adjusted diluted EPS of $2.71 to $2.81 per share, which includes $35 million to $40 million of 45X benefits to cost of sales. Excluding 45X, we expect adjusted diluted EPS of $1.64 to $1.74 per share, up 46% at the midpoint of the range. Our CapEx expectation for the full fiscal 2026 is approximately $80 million. As a reminder, we expect to realize $30 million to $35 million of net savings in fiscal year '26 related to our cost reduction initiatives. While we are pleased with the EnerSys' overall trajectory and are seeing positive momentum across several growth areas, we believe it remains prudent to keep full year quantitative guidance paused due to the dynamic macro environment and its downstream effect on customer buying patterns. That said, we reaffirm our expectation that full year adjusted operating earnings growth, excluding 45X, will outpace revenue growth. We remain confident in the earnings power of our business and our ability to navigate through evolving policy and macroeconomic conditions. With this, let's open it up for questions. Operator? Operator: [Operator Instructions] And your first question comes from the line of Sherif Elmaghrabi with BTIG. Sherif Elmaghrabi: When you talk about demand pull-ins and customers shifting their spending as they manage tariffs, can you tell us what end markets are most impacted? And what do you need to see from some of these customers that would give you more long-term visibility? Shawn O'Connell: Sherif, this is Shawn. I think the big pull-in that we had was in the communications sector. But I don't think it was relative to tariff activity. It was more that customer front-loading their year and opportunity because they were involved in a large acquisition that was going to dominate the second half of their year. So we -- the good news with that is with our centers of excellence, we were able to accommodate them and move very quickly to help them do that. And it provided a little lumpiness in our order book in that front-loading did have a result of a higher Q2. But beyond that, it's not that difficult for us to manage. I will also say in Motive Power, what we're seeing is a restoration of our book and ship business which incidentally was sort of the character of that business for decades where you have a higher percentage of book and ship in the period and a lower percentage of backlog. And as we mentioned in our prepared remarks, [ we're ] started seeing a restoration back to that, which really supports our ability to do quick ship out of our factories. We've spent a lot of time putting that in place. So we don't see a lot of volatility in terms of tariff activity with these pull-ins, as we did in the first quarter. It's more just customers reacting to their localized order demand patterns. Andrea Funk: And Sherif, if I could just add one comment on to that. Shawn is absolutely correct. But the only other comment I'd make with the tariff environment is our customers, particularly on the large capital spending. So buying motive power forklifts or buying Class 8 trucks, that's where we think there's some, I would call it, hesitation in the market. I don't know if you saw the Hyster-Yale release yesterday, they called out a 4% reduction year-on-year on lower forklift truck volume, and they specifically said from ongoing economic uncertainty dampening customers' bookings over the past several quarters. We feel that also. And fortunately, our business isn't affected as much because we have a diversity of end markets. And also we do the replacement cycle as well as the initial battery in the first truck. Sherif Elmaghrabi: Got it. And when we think about lithium driving elevated costs, is that about operating leverage as sales ramp? Or is this kind of an interim phenomenon until the new cell plant comes online? Andrea Funk: Yes. There's actually 2 aspects to that. First of all, obviously, most of the lithium cells right now come from China across the market. So that elevates the cost of lithium batteries in the U.S. in particular. And so we've got that higher cost pass-through, which affects the value proposition. And then we're still in early -- we're ramping up right now, but we're still in early innings. Our lithium battery sales, for example, in the Americas were up 45% in Motive Power. But because we're not yet at full out one, 2 shifts, we're not able to operate at the maximum efficiency that you have when you reach a certain volume level. So even independent of the sourcing of the cells, our pack assembly costs are elevated for the short time until we reach more standardized volumes. Operator: And your next question comes from the line of Brian Drab with William Blair & Company. Brian Drab: Could we first just talk about gross margin? And I think you mentioned it somewhat on the call, but the step down somewhat sequentially and like what are the main drivers of that? I think it's some of the absorption issues, Andi, that you just mentioned. But going forward, how should we think about gross margin at least directionally? And are we going to get back to the levels that we saw in the second half of '25? Andrea Funk: Brian, thanks for the question. Just to clarify, sequentially, we had a pickup in gross margin, both with and without 45X. Are you referring to a specific segment? Brian Drab: No. I'm probably looking at a model that we're just in the process of updating. But can you just comment on the outlook then, how we should think about gross margin from here? Andrea Funk: Yes. So we certainly have price/mix improvements happening across all of our lines of businesses, as you saw in this quarter as well. We've got some mix improvements. There's some dynamics segment by segment. For example, we talked about Motive Power, depending on how quickly lithium ramps, that does put some pressure on gross margin because you have higher cost pass-through as with tariffs in general. But there's no reason to not expect ongoing continuous improvement in gross margin similar to what we've been seeing. Brian Drab: Okay. Got it. Yes. No, I'm looking at updated numbers now. I'm just seeing -- I'm seeing 28.7%. Is that right? Andrea Funk: So if I look at actual reported gross margin, we're at 29.1% versus 28.4%... Brian Drab: Adjusted... Andrea Funk: Adjusted, excluding -- yes, adjusted, maybe that's right. If you exclude 45X, we're at 25% versus 24.1% in Q1. So we look at it both ways. Brian Drab: Okay. It was just much higher in the second half of fiscal '25 unless I'm really off. And I'm wondering, are we going to get -- with some of the cost cutting and all these initiatives and as the capacity -- as the utilization ramps up, these levels that you saw in the second half of '25, is my main question. Andrea Funk: Sure. Good point, Brian, because you bring up an important aspect. In Q3 of '25, it was a 33% reported gross margin. But if you recall, we had the 45X electroactive material catch-up that had prior periods in it. If you look at gross margin, excluding 45X, it was at 24.7%. So again, Q2 was at 25%. Q4, we had -- there was a lot of -- it was a great quarter. But of course, we had also mentioned there were a lot of onetime items that wouldn't repeat. That was at 26.7% and was on much higher volume as well. So the 24.7% in Q3 '25 and then we were at 25% last quarter, and 25% this quarter, I think it's a nice, steady trajectory. And the additional tariffs will certainly give a little bit of pressure with the higher cost pass-through. And there's a nice trajectory in front of us. So I think it's a bright spot. Brian Drab: Okay. And then can you just talk about data center for a second, just how much revenue are you generating in data center? What was the growth rate specifically in data center? And what products are you winning the most with there? And is this including like lead-acid batteries that are being sold in conjunction with generators? Or is it more your stand-alone UPS products? And would love an update there. Andrea Funk: Sure. I can give some of the numbers and then maybe Shawn can follow-up a little bit with the specific products. As you know, in data centers, it is mostly lead-acid and some UPS systems that we have right now with, again, work underway, with Mark leading our engineering efforts for some new product introductions, which we're excited about. That's not yet in the current quarter. Current quarter data centers year-on-year were up 29%. And in the first quarter, they were up 14%. So obviously, it really continues to be a bright spot for us with a lot of opportunities going forward. And Shawn, I don't know if you have anything to add. Shawn O'Connell: Yes. I would just say -- I would say, you have the same thing occurring in the data center environment that we have in Motive and other places and that our TPPL products are resonating very well. We have a leading lead-acid market share that is quite compelling. So most of the products, to Andi's point, are like our HX product line that is valve-regulated technology. And then TPPL is growing at a similar CAGR to what you would have seen in Motive Power and NexSys. And then to Andi's point, I just want to give a little shout out to Mark Matthews. We have a very commercially minded CTO, who's also a lithium expert. And today, the business that he comes from, A&D, we deal in 9 chemistries of lithium, very advanced technological applications. And so Mark's applying that knowledge. Also, our lithium CoE is moving so much faster than it ever has. And he's quickly -- we have some -- we will update you in future quarters on some NPI activity, that's very encouraging to expand that lead-acid market share into other products like lithium. But today, it's lead-acid. Operator: And your next question comes from the line of Chip Moore with ROTH Capital Partners. Alfred Moore: I want to ask -- on communications outside of that large customer that was front-loading, just maybe you can speak to what you're seeing in that end market in terms of less break and fix, but more network build-out and some pull-through on power electronics? It sounds like you think margins should go higher from here, but just any more color? Shawn O'Connell: Yes, Chip, I didn't want to over-index on the pull-in there. The pull-in is just a good sign of what's going on. And the reason for the pull-in, we talked in the prepared remarks about network refresh. And what I'd like to point out is with all of the rise in data and data that -- whether it's the AI or other use cases, the overall aggregate volume of data that has to move around the planet is increasing. And so when we talk about network refresh, it isn't just about updating aged equipment. It's about putting equipment in that can handle the traffic and handle the increase in data traffic. And when we do that, it's also -- that equipment tends to be more power hungry and require more advanced solutions. So I would tell you that we're seeing fairly encouraging demand signals across that marketplace. And while it may not be the 2G or 3G or 4G consistent build-out that we've seen in the past, what we see is users sort of picking -- our customers picking their spots and how they're going to participate in that next evolution in demand. So I would tell you, it's very good. It's not a -- we're seeing singles and doubles. We're not seeing network build that I would call the home run. But again, very encouraging demand signals across communications. Alfred Moore: Great. Very, very helpful color. If I could ask one more, probably more specialty A&D, but just the government shutdown is -- any impacts there or any risks as we look forward? And it doesn't sound like it, but I'd be curious to get your thoughts. Shawn O'Connell: Yes. I would tell you that we've had -- it's sort of a mixed bag. We've had good discussions with our government counterparts relative to our lithium plant and the DOE folks seem to be in the office and working. On the other hand, we saw some of the impacts of the shutdown are main defense type warehouses that aren't as active. But generally, across the board, I'll tell you that the impact has not been substantial. And we're seeing just extraordinary activity in what Andi mentioned the Bren-Tronics folks and how pleased we are with that acquisition. They're doing a great job. They're seeing quite a bit of demand. And then I'll also tell you, we have -- because of our technology position in thermal batteries -- there's only about 3 companies in the U.S. that make thermal batteries, and we have a leading position in advanced technology for thermals. And we're just seeing excellent demand signals across about 12 programs. And what those -- just so you can conceptualize what that is, those are the types of batteries that are used for all -- when you hear talk about hypersonics and advanced defense applications, it's being powered by EnerSys lithium cobalt technology. And so we're very encouraged by that. So I would tell you, overall, A&D demand for us in spite of the lumpiness and the shutdown looks very good. Operator: And your next question comes from the line of Noah Kaye with Oppenheimer. Noah Kaye: So it seems like restructuring benefits starting to hit their run rate here, some additional levers being pulled as well on productivity and just overall increased focus on thoughtful resource allocation. So as we think about how that translates to operating margins, what's sort of a fair way to think about the trend in Energy Systems and kind of overall operating margins, even on a sequential basis for what's implied for 3Q, but just sort of directionally, where should they be heading? Shawn O'Connell: Well, I'll start, and I'll give it to Andi to talk more specifically on numbers. But I would tell you that what we're seeing in the CoE realignment is that we have a target-rich environment to continue to work on our costs and gain efficiencies. There's a lot of positive momentum in Keith's business in Energy Systems. I will tell you that they have more opportunities to continue to increase their efficiency there. So we're going to stay on that path. And one of the reasons we're excited to have Keith join us is just because he has that strong operator background, and you're seeing it in the numbers. But we continue that -- we fully expect that trend to continue. And then what I'll also tell you, along the lines of the CoEs, I've been making a concerted effort to get down to Missouri once a month personally and work with the team and walk the factory floor there. And every one of our metrics is improving from OEE to decreasing scrap rates to increased productivity. So the team is doing a fantastic job. You're seeing the evidence of the focus that people aren't too spread thin. They can specialize focus on doing what matters, and that's our bread and butter. So again, we expect that those efficiencies continue. It's early days. We're very encouraged. Andi, do you want to add to that? Andrea Funk: Yes. Thanks, Shawn. As we said on the last call, we had expected that Q1 would be the low point of the year. And in fact, with our dramatic improvement in Q2, that just demonstrates that. Obviously, Q-on-Q adjusted EPS, excluding 45X, was up $0.41 or 37%. Our underlying business is really good. It's actually more compelling than we would have even said a quarter ago. We anticipate full year AOE growth, excluding 45X, will continue to outpace revenue, which obviously implies, Noah, that we'll continue to have margin expansion. I'll give you a little bit of color for each one of the segments of what we're expecting. But as a reminder, our cost reduction program, which was $80 million, $70 million of OpEx and $10 million of manufacturing will start kicking in more. We had a couple of million dollars this quarter, but it's really going to start ramping up in Q3 and Q4. Energy Systems, we're on the path to continuing to improve the margins there. Cost actions have been taken, and there's more work that's central to the strategy. We're seeing steady volume growth for data centers. The comms network refresh is continuing. And while we don't think that might happen this year, but we're confident a build-out has to happen to be able to get all of that AI data delivered into users' hands like you and I. So we think that's going to be more at a measured pace, but ongoing. And the services area is also a key focus for us and has been improving. And Motive Power, as we mentioned, market conditions, hesitant is probably the best word to describe it. But from a positive standpoint, maintenance-free conversions are going great, although lithium might be a little bit of a headwind on margins in the near term. Our soft book-to-bill is a little bit of a concern, I'll be honest. We're not sure how much of that is return to pre-COVID buying patterns versus just this hesitancy that we're talking about. So we're keeping an eye on it. But if you recall, longer term, we've got the Monterrey closure happening next year. We've got our new TPPL and lithium offerings coming online, new chargers, the BESS on the horizon. So we feel really good longer term. And if you look at some of the industry data on Motive Power, I think what you're seeing is very consistent with what we're seeing as well, a little bit of hesitation near term, but no concerns longer term for that business. Specialty, not unreasonable to expect double-digit AOE by next quarter and beyond as our A&D business continues to gain strength. The aftermarket and transportation is starting to pick up, right, from a low starting point. The lead CoE is driving cost improvements, that Shawn mentioned when he's visiting Missouri, it's going well through the automation. And then just as clarity, we don't expect Class 8 to pick back up this year yet. So, I think generally speaking, I'd say the margin improvement, bottom line you saw this quarter is not unreasonable to expect that same level on an ongoing quarterly sequential basis near term. Noah Kaye: That's perfect and comprehensive color. And I'm glad you mentioned the Class 8 aftermarket, which is something that we thought of as a great growth lever for the company and kind of watching for inflection. It sounds like you do expect some growth even this quarter. Maybe just frame up for us where that business stands now? What's sort of driving now improved traction? Any way to think about magnitude of contribution, how meaningful a growth driver this can be? Andrea Funk: Yes. No, we don't give -- we don't specifically guide down to those -- that seg markets. But I will say that we -- the aftermarket business is picking up double-digit. It's just off a slow starting point, and some of that's being offset by the OEMs. But if you look in the aggregate for Specialty, we did have some nice order books for our transportation. Q3 orders sequentially were up 26% and 20% year-on-year. Again, a lot of that is coming from the aftermarket. But you have to remember, it's coming off a low base. So it's not an area that we're -- we expect is going to make a meaningful movement to our bottom line numbers in the short-term. Manufacturing improvement is helping that as well. And the lead CoE will also help us with, I think, more success in transportation longer term. Shawn O'Connell: Yes. And I think Andi mentioned it earlier, and it's just something to just sort of, I think, repeat a bit. If you think of new trucks in Class 8, if the new trucks aren't being built at the same rate, then fleet operators are going to have to do more to keep old trucks on the road or existing fleets on the road, and that bodes well for us. So just like in the forklifts, Andi mentioned that if you're looking at material handling order rates for new trucks, it's more suppressed than we are because we have the replacement and the ability to help them keep those fleets in the warehouse and fleets on the road. So we -- that's part of our -- this renewable component of battery where we'll get a second bite or third bite at the apple with the fleet that -- when new trucks aren't being sold. So I think that's a piece of it. Noah Kaye: Okay. Perfect. If I could sneak one more in. Just outstanding cash generation this quarter, even exclusive of the tax refund, leverage back down to 1.3x. A lot of dry powder for that buyback. Just how are you thinking about repurchase activity here? And maybe kind of update us on your M&A opportunity set as well? Andrea Funk: Yes, sure. Thanks, Noah. We are really pleased with the cash flow generation. And I will say that's an area with invigorating our operating model that we are being intentionally more disciplined and focused on as a management team. So I'm very excited about the outcome of the effort that we've had. So it's a $1 billion buyback, we intend to continuing buying back stock. It's part of our ongoing basis. We generate a lot of cash, and we're committed to returning value to our shareholders. And I would say in periods of dislocation between our stock price and intrinsic value, which we believe is the case now, we're going to continue to buy back at elevated levels. We do want to keep a portion of our available capital capacity to be opportunistic with M&A activities. M&A will continue to be part of our growth strategy going forward. But we don't have anything specific to announce right now. Shawn, I don't know if you want to add any color to that? Shawn O'Connell: Yes, I would just say generally, we -- with all of the focus on operating rigor, I want to make sure we're not giving the impression that we're not going to deploy capital. We're just going to deploy it for high-quality investment opportunities. We have a few M&A opportunities in the pipeline that we think are compelling. But again, for us, it's going to be free cash flow margin and increasing free cash flow margin and then deploying that for the right ROIC, and we're going to stay opportunistic. So I think you can expect us to deploy that discipline and rigor to those opportunities. But definitely, we're going to put that cash to work. And to Andi's point, whether that's buying our own shares when they're undervalued or investing internally in our business for the right opportunities and certainly M&A. Operator: There's no further questions at this time. I will now turn the call back over to Shawn O'Connell for closing remarks. Shawn? Shawn O'Connell: Thank you, Mark. I'd like to thank everybody for joining us on the call today. We look forward to updating you again next quarter. Hope you have a great day. Operator: That concludes today's call. You may now disconnect.
Operator: Hello, and welcome to the Privia Health Third Quarter 2025 Results Conference Call. Please note that this call is being recorded. [Operator Instructions] I'd like to hand the call over to Robert Borchert, SVP of Investor and Corporate Communications. Please go ahead. Robert Borchert: Thank you, Chris, and good morning, everyone. Joining me are Parth Mehrotra, our Chief Executive Officer; and David Mountcastle, our Chief Financial Officer. This call is being webcast and can be accessed through the Investor Relations section of priviahealth.com, along with today's financial press release and slide presentation. Following our prepared comments, we will open the line for questions. Please limit yourself to one question only and return to the queue if you have a follow-up so we can get to as many questions as possible. The financial results reported today are preliminary and are not final until our Form 10-Q for the third quarter and 9-month periods ended September 30, 2025, is filed with the Securities and Exchange Commission. Some of the statements we will make today are forward-looking in nature based on our current expectations and view of our business as of November 6, 2025. Such statements, including those related to our future financial and operating performance and future business plans and objectives, are subject to risks and uncertainties that may cause actual results to differ materially. As a result, these statements should be considered along with the cautionary statements in today's press release and the risk factors described in our company's most recent SEC filings. Finally, we may refer to certain non-GAAP financial measures on the call. Reconciliation of these measures to comparable GAAP measures are included in our press release and the accompanying slide presentation posted on our website. Now I'd like to turn the call over to Parth Mehrotra, our CEO. Parth Mehrotra: Thank you, Robert, and good morning, everyone. Privia Health continued to execute very well across all aspects of our business through the third quarter of 2025. This momentum positions us for continued success in 2026. Today, I'll summarize our business and financial highlights, and David will discuss our financial results and updated 2025 guidance before we take questions. Privia Health's consistent results, operational execution and differentiated business model have clearly demonstrated our ability to perform in all types of market environments. We delivered very strong results across our value-based care book, including the Medicare Shared Savings Program for 2024. New provider signings and implementations remain strong across all of our markets, which provides great visibility for 2026. Implemented Provider growth of 13.1% and value-based attribution growth of 12.8% year-over-year helped support practice collections growth of 27.1% in the third quarter. Adjusted EBITDA increased 61.6% with EBITDA margin as a percentage of care margin expanding 720 basis points to reach 30.5%. This outstanding performance gives us confidence to raise our 2025 outlook above the high end of our previous ranges. In September, Privia Health agreed to acquire an accountable care organization business from Evolent Health for $100 million in cash, plus an earn-out of up to $13 million based on 2025 MSSP performance. This business will add over 120,000 value-based care attributed lives across existing and new states in MSSP as well as various commercial and Medicare Advantage arrangements. The transaction offers a compelling synergy for Privia as the ACO participating providers will have an opportunity to join Privia's medical groups for a full technology and service platform. The transaction is expected to close by year-end 2025, pending regulatory approvals, and we expect it to positively contribute to adjusted EBITDA in 2026. Privia's national footprint now includes 5,250 Implemented Providers caring for over 5.6 million patients in more than 1,340 care center locations operating in 15 states and D.C. Our balanced and diversified value-based care organization now serves over 1.4 million patients through more than 100 commercial and government programs. Our total attributed lives increased close to 13% from a year ago. This was broadly driven by new provider growth and our entry into Arizona. Commercial attributed lives increased more than 12% from last year to reach 864,000. Lives attributed to CMS Medicare programs were up 12%. Medicare Advantage and Medicaid attribution increased more than 12% and 18%, respectively, from a year ago. This diversified value-based care book gives us the confidence to build scale and profitability without depending on any one particular contract. With the ACO business acquisition, Privia's total attributed lives will expand to more than 1.5 million. We remain highly focused on generating positive contribution margin in our value-based contracts as we pursue attribution growth, manage risk and implement clinical and operational enhancements in our medical groups. Our consistent performance over the past few years is a testament of our approach to value-based care and the strength of our actuarial underwriting, physician-led governance structure and clinical operations. Our physicians and providers continue to strive to reduce costs, improve patient well-being and deliver value to our commercial and government payer partners. Now I'll ask David to review our recent financial results, balance sheet strength and our updated 2025 guidance in more detail. David Mountcastle: Thank you, Parth. We continue to see very strong performance across our value-based care book, especially in the Medicare Shared Savings Program. Across our 9 ACOs and MSSP in 2024, Privia managed over $2.5 billion in medical spend. Our aggregate savings rate of 9.4% was up from 8.2% in 2023. Total shared savings of $234.1 million increased 32.6% from a year earlier. This demonstrates our continued success in increasing savings and profitability while adding value-based and downside risk lives and contracts. After CMS' share, Privia's gross shared savings was $160.1 million, a 36% increase over 2023. This is the amount recognized in practice collections and GAAP revenue. In the Mid-Atlantic region, we operate one of the country's largest ACOs caring for about 60,000 patients. We delivered savings of 11%, which for the fifth year in a row was the highest savings rate of all ACOs with greater than 40,000 attributed lives. Privia Health's strong operational execution and growth continued through the third quarter. Implemented providers grew 125 sequentially from Q2 to reach 5,250 at September 30, an increase of 13.1% year-over-year. Implemented provider growth, along with strong value-based performance and solid ambulatory utilization trends, led to practice collections increasing 27.1% from Q3 a year ago to reach $940.4 million. Adjusted EBITDA, which is reconciled to GAAP net income in the appendix, increased 61.6% over the third quarter last year to reach $38.2 million, representing 30.5% of care margin. This is a 720 basis point margin improvement year-over-year as we posted better-than-expected results across our value-based care book, which helped generate significant operating leverage across both cost of platform and G&A. For the first 9 months of 2025, practice collections increased 19.6% to $2.6 billion. Care margin was up 16.7% and adjusted EBITDA grew 43.5% to reach $94.1 million. Our business continues to generate very strong free cash flow. Pro forma cash at the end of the third quarter was $409.9 million with no debt. This assumes the deployment of $100 million by year-end for the ACO business acquisition and the net cash received from CMS for the 2024 MSSP performance year. Year-to-date pro forma free cash flow, excluding cash deployed for business development transactions, was $104.4 million. Assuming no further deployment of capital for business development, we expect to end the year with at least $410 million in cash. This continues to position us with significant financial flexibility to take advantage of opportunities in the current market environment. Our outstanding year-to-date performance positioned us to once again raise our 2025 outlook. Using the midpoints of our new 2025 guidance, implemented providers are expected to increase 11.2% year-over-year to reach 5,325 by year-end. Attributed lives growth is expected to be approximately 12.5%. We expect practice collections to grow 17.1% and care margin 13.2% at their respective midpoints. We are also guiding to adjusted EBITDA growth of 32% at the midpoint and expect more than 80% of full year 2025 adjusted EBITDA to convert to free cash flow. Privia's consistent long-term growth and profitability across economic, health care and regulatory cycles validates the strength of our differentiated business and economic model and consistent execution by our provider partners and our employees year after year. Our momentum and diversified book of business has positioned us well to drive organic provider growth and increase operating leverage for long-term adjusted EBITDA and free cash flow growth as we build our national footprint. We look forward to continuing to serve our physicians, providers and health system partners and their patients on our long-term journey together. Operator, we are now ready to take questions. Operator: [Operator Instructions] And your first question comes from the line of Joshua Raskin with Nephron Research. Marco Criscuolo: This is actually Marco on for Josh. Actually, I had one on your MSSP performance. So given the very strong results for that program in 2024, I was just wondering how you plan to guide to that in the future. Does the outperformance in 2024 now just get factored into the baseline for future planning? Or are there any reasons why we should consider that year to be above the go-forward run rate? Parth Mehrotra: Yes, I appreciate the question, Marc. So I think we're going to be pretty consistent with how we've done it over the past 7, 8 years. We take into account all the data we received from CMS, look at our attribution, see any changes to the program structure, fee rates, et cetera, just factor all that in. We look at the results and if we perform well relative to benchmarks, all that just does get factored into the next year. So every year when we report, we are updating for prior year and then also updating current estimates for the current year. So all that's factored into the guidance. So you can see with our outperformance, that includes both factoring in for '24 actual results as well as updated view on '25. Operator: Your next question comes from the line of Elizabeth Anderson with Evercore ISI. Elizabeth Anderson: Congrats on the quarter and the good MSSP results. Could you talk to us about the one, the sort of go forward for the 4Q? I know you obviously had the outsized gains in the third quarter, but sort of how are you seeing the core business performing as we go into the fourth quarter? And on prior calls, you talked about over $130 million of EBITDA for 2026. I don't know if you could comment on sort of where you're seeing that number now. Parth Mehrotra: Yes. Thanks, Elizabeth. Appreciate it. So look, I think we continue to see very strong trends. There's no reason to believe the momentum changes in Q4. We don't give quarterly guidance. We're just focused on annual results, given when value-based care results flow in into the year. There's a very specific reason we just avoid the quarterly guidance or implied outlook and so on and so forth. I think we're being our usual prudence in terms of implied guidance for Q4. So I think we'll just see how the year goes. We just didn't want to get ahead of ourselves given we've had a pretty outstanding year, year-to-date Q3. And then I think, look, I mean, the updated guidance, we are sitting close to $120 million for 2024. I think we're going to keep targeting 20% growth off of that where we closed this year into next year. We'll just see how we close the year, hopefully strong and then close the Evolent transaction like we noted, factor all that in, see updated results on the value-based book across all categories as we enter later this year, early next year, factor all that in and give guidance in February like we do. But there's no reason to believe. I mean, we've had one of our best years, and I think the momentum should help us take that forward like we noted in our prepared remarks, that positions us exceptionally well for a pretty strong '26. Operator: Your next question comes from the line of Whit Mayo with Leerink Partners. Benjamin Mayo: Okay. When I look at revenues or practice collections per provider, it's just up a ton this quarter. And I know it's just a metric, but can you just talk about the factors influencing the strong fee-for-service growth? I know you don't give same-store volumes, but just the revenues are growing so much faster than the implemented provider growth. Parth Mehrotra: Yes. Thanks for the question, Whit. So I think it was pretty broad-based. We saw that across the fee-for-service book, utilization trends and then also value-based book where if the actual results come in ahead of accruals, all that gets factored in the practice collections. We added a couple of markets. Arizona is now fully factored in. When we give original guidance, we don't include BD like we noted. And once we close the transaction, all that gets factored in. Indiana has got implemented, that got ramped up. So I think you're seeing the momentum across the business, same-store new provider growth, new markets, good value-based book, and it just speaks to the momentum in the business. When all of these things hit, you get results like this and it flows down EBITDA free cash. So I think we're really pleased as to how it's played out. Operator: Your next question comes from the line of Matt Gillmor with KeyBanc. Matthew Gillmor: Parth, I wanted to ask about the synergy opportunities with the Evolent Health ACO. How are you thinking about the pathway to enhancing the savings rate from Evolent's ACO up to previous performance? And then also, can you provide a couple of comments about the physician base, which I think is relatively large, around 1,000 physicians. Just give us a sense for what those practices look like and the appetite to join the Privia Medical Group. Parth Mehrotra: Yes. Thanks for the question, Matt, and kudos to calling the deal out like a year ago when we hadn't even started conversations. Look, I think you noted all of them. I mean our thesis is this is a core part of our business. We've done MSSP for 10 years. We think we can offer a lot more to these provider groups. Obviously, there's a synergy opportunity in our existing states where we have medical groups, we have a full infrastructure. We'll have a pretty tangible ROI for many of the practices that can join us. And so there's that cross-sell opportunity. I don't think it plays out just in the next quarter or 2. I think this thing takes a few years to play out as practices -- some of the larger practices make that fundamental decision to join our medical groups. It's an entirely different business value proposition. And then I think it gives us good opportunity to -- we're now going to enter 6 new states with a lighter model with just in the ACO, but then there's an opportunity for us to find anchor providers and others that we can actually establish our medical group and then implement our full suite and enter these states. And so I think we're going to focus on both of those. And then obviously, improving the performance of the ACO at hand is kind of job #1. So they are at a certain level of shared savings rate with CMS. You've seen our performance across our other ACOs as we've consistently improved that. We have 4 or 5 ACOs that are now close to double digit or higher than double-digit savings rate. So I don't think, again, that plays out in the near term. But over time, our hope is we can improve performance. So there are multiple levers to get synergies out of the business. We haven't closed the transaction yet. So we'll just go through that. And hopefully, that gives us good tailwinds over the next 2, 3 years as we play out that thesis. Operator: Your next question comes from the line of Andrew Mok with Barclays. Thomas Walsh: This is Thomas Walsh on for Andrew. Hoping you could discuss some of the moving pieces in the capitated business this quarter, including the step-up in revenue, prior year claims development and any change in membership? Parth Mehrotra: Yes. Thanks, Thomas. So I think we have a pretty small capitated book, about 20,000 to 22,000 lives. So I think that's just to note that. And then this was a small book that we retained on a capitated basis when we kind of restructured these contracts a couple of years ago, given our view on the broader MA environment. And our hope was that we would perform well in the book that we are keeping. So I think you're seeing that play out. I think it's effectively the factors that you would expect on the revenue side, given attribution, risk adjustment and then obviously, performance relative to that on the cost side with all our programs just performing a little bit better than what we expected, which was the hope. So you're seeing that play out. I don't think it fundamentally changes our view on capitation and how that plays out going forward. We continue to believe having shared risk model with payers, providers, Privia, like we've said on our previous calls. We just think that's the most optimal structure. All the pressures in MA continue to persist as most of the analysts on the call have written pretty extensively about V28 and star scores, utilization trends, none of that is changing fundamentally. So I think we're going to be pretty cautious on capitated MA, but we're really pleased with the book we have, and we'll continue to optimize it for profitability and continue to give that value to both our payer partners and our providers. David Mountcastle: Yes. And just to add to that, for the quarter, there was a little bit of timing of data and a little bit of retroactivity back to 1/1. So I would say we're looking at probably Q3 is the high mark for the year and wouldn't expect that exact trend to continue into Q4. Operator: Your next question comes from the line of Matthew Shea with Needham & Company. Matthew Shea: Congrats on the nice quarter here. I wanted to ask about kind of the go-forward growth algorithm. Historically, you've stuck to a cadence of 1 to 2 markets per year. You demonstrated that this year. Evolent obviously adds more than 1 to 2 markets immediately. So curious, how does the acquisition change the cadence of new markets? Is it fair to expect you will pause for a bit while you process through integrating those assets? Or just how does the deal change the growth algorithm? And then you also commented on the flexibility, the cash position gives you at this point. So just curious what your appetite for incremental M&A is? Parth Mehrotra: Yes. I appreciate the question, Matt. So I don't think anything changes fundamentally. We continue to have a pretty good business development pipeline. Evolent gives us access to 6 new states, but it's not with the full model as we just were talking about. So I think -- when we talk about a new state, it's implementing the full model with our medical groups, risk entities, full services platform. So I think that will be the cadence. I think we have a pretty strong cash balance, $400-plus million even at the end of the year despite spending $200 million this year. I think we're going to continue to take advantage of all the dislocation in the market. A lot of companies that got started public, private have struggled for different reasons. I don't think new money is chasing some of these models, which is great for us. A lot of TAM opens up as some of these models struggle, physicians come out. So I think we're going to continue to be pretty aggressive with BD and try to take advantage of this opportunity and window and keep growing our TAM, keep growing our business and compounding it. So again, but we're going to be disciplined on price, on the types of deal we do as we have been in the past. So I think we'll just continue with the cadence all across. So there's no fundamental change in how we think about our growth algorithm. Operator: Your next question comes from the line of Jailendra Singh with Truist Securities. Jailendra Singh: Congrats on a strong quarter. I want to stay on the topic of MSSP, clearly, strong results there. But the landscape in general, I mean, we have come across multiple companies who were previously only focused on the ACO REACH program and now exploring ways to shift MSSP given all the uncertainties in the ACO REACH program. Is that -- how does that change the landscape for you guys? I mean, on the same topic of M&A, do you think that could be an opportunity for you to look at some of these entities who might have done okay on ACO REACH but now are uncertain about the future? Just give us a flavor about the landscape this might be having some impact on. Parth Mehrotra: Yes. Thanks, Jailendra. I think it ties to the previous question. I think there's a lot of dislocation the barriers to entry to start a REACH or an MSSP ACO were pretty low. But then executing on it and scaling it and making it profitable is where I think all the secret sauce is. I mean there's no IP in health care services. So I think as new money does not flow in and people are not willing to put in good money behind bad money and some of these models struggle to get profitable or scale, I think all of those give us good opportunities. I mean, at the end of the day, if you look at Slide 12, like we are chasing 2 units that drive this business, providers, the patients they cover our lives and then how many of those are in some value-based arrangements. So as I think some of these entities struggle, the physicians come out or we have an opportunity to buy some of these entities at a reasonable price, I think we're going to look at all of those. The transaction we did with Evolent is an example of that. I mean they didn't do REACH, but I mean, there was a pretty big value-based care book available. And I think the transaction was good for both parties. We got it at a reasonable price. They had something that was noncore to them. So I think we're going to look for those kind of opportunities. But I think, like we said, we're going to be pretty aggressive across the Board in looking for opportunities to keep growing. Operator: The next question comes from the line of Jeff Garro with Stephens. Jeffrey Garro: I want to ask how we should be thinking about the evolution of your relationships with payers as we head into the next calendar year and you might be finalizing any of the negotiations or contractual arrangements with those counterparties towards year-end. Has your execution on value-based care from both the cost and quality perspective changed those conversations dramatically? Or should we continue to think about it as kind of incremental gains towards value-based care as you show the high level of service that your providers offer? Parth Mehrotra: Yes, I appreciate the question, Jeff. I think it's a great question. Given the breadth of our relationship across commercial, MA, Medicaid, our -- these are ongoing discussions. It's not like we have contracting discussions at one point of the year because like we said, we have over 100 VBC contracts, they're close to 200 commercial contracts, including commercial value-based. So the discussions are really broad-based. And these happen at the state level, just given how the industry works. But then as we really perform well in one state, we have case studies, we have a history of performance. The payers understand what we've done for them in one state. And so as we enter a new state or we have some of the younger states, I think those conversations help us. So there's a local level discussion. There's a national level discussion. We include multiple aspects to contracting. So when we go and negotiate a fee-for-service contract, it includes a value-based element to it, even on the commercial book, the MA book, the Medicaid book. So I think it's a differentiated value proposition that very few companies in the space have at the scale and breadth that we do. And so I think we continue to work with the payers. They are seeing strong results. We offer them a very low-cost provider network, a delivery network, and that's the right side of history in terms of where -- what you have to do to reduce cost, improve outcomes, improve patient well-being, so on and so forth. So I think it's great to see that play out over 4, 5, 6, 7 years. So you have empirical tangible results to show. And I think that continues to differentiate us. And I think it's not only with the payers, it's with provider groups, it's with the government. So I think all of that bodes pretty well for us as we continue the momentum. Operator: Your next question comes from the line of Ryan Langston with TD Cowen. Ryan Langston: On the MA CAP performance, I think I heard you say there was some favorable retro pickup. I guess, could you maybe help us frame how much of that was sort of core performance versus onetime in nature? And then just on the current number of MA lives, 20,000 to 22,000, if you wanted to, is there an opportunity to increase the number of those lives in the current contracts that you have? Or would you sort of have to move outside of those and sign additional contracts to grow lives? Parth Mehrotra: Yes, I appreciate the question. So I think it was a bit of both on the first part. It's also relative to our accruals, what the actual results are. I mean we've been very, very prudent and thoughtful on how we accrue just given the environment, given everything you heard from the payers. So we were fairly prudent in our assumptions. But then at the same time, we just don't take a step back on actually performing in those contracts and then we hope for the best. And I think what you saw was the team did a pretty good job. Now it's a pretty small book. It's like we said earlier, it's 20,000 to 22,000 lives, 1 or 2 states, a couple of payers. So we really focused on what we needed to do to reduce cost, improve outcomes and then have the results we did. So I think it was a bit of both in terms of great performance in the year. Now like we said, I don't think we're going to continue to assume that some of the headwinds in MA just go away. So I think we'll continue to be prudent in our accruals going forward. And if results are better, then you'll see the outperformance again, but I think that's the tactic we're just going to keep. And then I think in terms of increasing attribution, look, I think it's going to be both things. I mean we're looking to increase same-store attribution growth in existing states with existing contracts with existing doctors. We add new providers in the same state, so -- and in the same geography. So if we have an MA contract in a few ZIP codes, we add new providers there, that attribution adds to it. And then we're going to obviously try to enter into new MA contracts in existing and new states as well. So I think you'll see a combination of all of that. Our approach is to continue to increase lives across the value-based book, MA, MSSP, Medicaid, commercial and because that's the chassis for the business and the economic model. So I think you're going to continue to see us just increase lives as fast as we can. Operator: Next question comes from the line of A.J. Rice with UBS. Albert Rice: You have a unique window on a bunch of different payer classes, coverage categories. And I wonder, there seems to still be quite a bit of disruption in underlying utilization trends. Is there anything you're seeing to call out there? There's also been speculation that as people base coverage changes going into the new year, there might be some acceleration on utilization during the fourth quarter. Are you seeing any of that in how people are approaching your primary care operations and so forth? Parth Mehrotra: Yes. Thanks for the question, A.J. So as we've done previously, I think it's important to distinguish between ambulatory utilization, physician practice offices in the communities versus in the hospitals and post-acute and so forth. And so I think we continue to see elevated trends across the Board. I don't think there's any reason to believe that those trends reduce. We'll just see how Q4 plays out and whether all the changes in some of the programs and whether attribution might change with Medicaid or exchange population. It's not really big for us. But I think that impacts more of the post-acute and acute side of things versus ambulatory. But we'll see how that plays out. But I think our underlying assumption is going to be pretty elevated. And so we plan for that in the value-based book. It bodes well for us on the fee-for-service side. So I think that's our view. Operator: Your next question comes from the line of Constantine Davides with Citizens. Constantine Davides: Maybe just Parth changing gears a little bit here, but you've more than doubled the number of providers on the platform in the past 5 years. Can you maybe talk about Privia's ancillary capabilities and how they've evolved over this time frame as you've added new markets and particularly new specialties and increased density in more mature markets. So just again, how your ability to continue to scale the platform is maybe driving your thinking about some of the ancillary services you provide to your groups? Parth Mehrotra: Yes, I appreciate the question, Constantine. So it's a really good point. I think, look, our strategy is enter a state, get density of providers and then run the entire playbook for the whole line of business, all patients, all payers, all lines. And as we develop that density, there's a lot of opportunity for us to get into things like labs, pharmacy benefits, ASCs potentially, clinical research, anything that goes through our practices because we are operating integrated medical groups, risk entities, full tech and services platform. We've got all the data. The medical groups make the decisions collectively with the Privia team. And so there's a lot of saving opportunities that we can offer to the payers, incremental revenue opportunities we can offer to our medical groups and our provider practices. And so you'll see us pursue all that. Now it varies by state depending on density. So it's not going to be homogenous. But across all of those lines, we look to monetize the platform and scale it. So -- and I think that leads to the great economic model where incremental revenue just flows down the P&L as we monetize the network. And I think that's one of the underappreciated parts of our business as to how we can -- how well we can do that. So you're seeing that play out in the thesis. Again, like Slide 12 speaks for itself. If you look at the provider growth, collections growth, care margin, EBITDA, free cash flow, and that's a fully expensed P&L for all sales, marketing, BD, software development, everything. And we are approaching close to target margins. Overall, as a company, we're at 26% EBITDA to care margin. When we went public 5 years ago, we said we're going to target 30% to 35%. I mean, we're pretty much there over the next few years. So I think you're seeing the whole thesis play out as a result. Operator: Your next question comes from the line of Jessica Tassan with Piper Sandler. Derek Gross: This is Derek Gross on for Jess. I had one on Evolent Care Partners. We believe that they had a $220 million a year partial capitation contract with Blue Cross Blue Shield of North Carolina. Do they have any other contracts like this? And did the acquisition include management of this contract or just the MSSP business? Parth Mehrotra: Yes, I appreciate the question. So like as we noted in our press release, when we did the deal, we bought the entire business, all contracts that included commercial and MA as well in addition to MSSP. And so yes, we assume that contract. We're not going to get into details of any specific contract and lives in it or revenue dollars and so forth, like we don't do it for the rest of our book. We'll include them as part of our whole entire platform and how we report it on Slide 6. But yes, we've inherited those contracts, and it's part of our core strategy to just add to lives in each of the circles that you have on Slide 6, and that will add to the MA lives there, and we'll continue to hope to perform as expected or better over time. Operator: Your next question comes from the line of Daniel Grosslight with Citi. Daniel Grosslight: Congrats on another strong one here. If I look at the implied guide for 4Q on a year-over-year basis, it seems like you're projecting limited profitability growth. It's about low single digits and some margin compression. Parth, I know you mentioned that just given where you are in the year, you do continue to guide conservative. But I'm just curious if there's any investments that you're making in 4Q that may be weighing on margin. And I also just wanted to confirm if IMS contributed anything to profitability this quarter? Or are you still expecting that to start contributing in 4Q? Parth Mehrotra: Yes, I appreciate the questions. Yes. So there's no investments. There's nothing -- there's no anomaly. We're just being prudent. We don't want to get ahead of ourselves just given the strong results. If all that momentum continues, hopefully, we'll close the year pretty strong. And so IMS -- and to your second question, IMS will contribute in Q4 and going forward once they were implemented in September. So I think that hasn't contributed. So I think -- look, we expect Q4 to be strong. We'll see how it plays out. Hopefully, it's better than expected. We just had the magnitude of outperformance in the first 3 months -- first 3 quarters that -- like we said earlier, like we don't give implied guidance. We don't guide by quarter. I think we're just looking at the full year. On each of our operating metrics, we are well above the high end. So if it continues at the trend that we expect it to, hopefully, you'll see all that outperformance continue. Operator: Your next question comes from the line of Jack Slevin with Jefferies. Jack Slevin: Congrats on the quarter. Most of my questions have been asked already. So maybe just a tidying up one on the numbers. In previous years, when you've had significant outperformance or a strong lead in? I know you've had sort of higher variable comp or bonuses that have come through in either the fourth quarter or on a cash basis hitting early in the following year. Is there anything we should be looking out for on that front as we look at 4Q and 1Q coming up? Parth Mehrotra: Yes, I appreciate it, Jack. So yes, that's all factored in the guidance. So as we look at our scorecard that you can see in the proxy every year based on the metrics, we accrue for that level of outperformance and bonus accruals and so forth. So that's all in the accrued bonus line on the balance sheet. That's reflected in the P&L. So that's all fully expensed already. And despite that, you're seeing the outperformance. So yes, that will lead to some increased cash outflow in Q1. So you'll expect that. But I mean, that's a result of great business. So the interests are pretty aligned with the shareholders here in terms of how much free cash and EBITDA we generate. Operator: Your next question comes from the line of David Larsen with BTIG. Jenny Shen: This is Jenny Shen on for David. Congrats on a great quarter. I just wanted to ask about the New Big Beautiful Bill Law. Any thoughts on impacts to Privia, any impact on your Medicaid book, even though it's small? Parth Mehrotra: Yes. Thanks for the question, Jenny. So as you noted, I mean, the 2 main areas there were Medicaid and the exchange populations, and both of those are pretty small for us. We don't take any downside risk on Medicaid. It's a pretty small percentage of collections for our practices. We'll see how the patient mix changes, but we don't expect any big changes, any fundamental issues. Practices run at capacity, lives move. I don't think people give up their primary care. It's pretty essential to their well-being and getting back to work and things like that or kids going to school with pediatricians or women getting their care with our OB. So I don't think all of that changes much for us. We'll just see how the shifts happen, but it's happened in the past. But -- so we don't expect any meaningful impact to us given just our business model and mix. Operator: Your next question comes from the line of Ryan Daniels with William Blair. Ryan Daniels: Congrats on the strong year-to-date performance. Parth, I wanted to go back to some of your comments on ancillary services. And I'm curious in particular, I know a few years ago, you signed a partnership with surgery center chain. We've got some potential changes to the inpatient-only list. I'm curious if that, in particular, would be a bigger growth opportunity in kind of managing referrals and point of care for the organization going forward. Parth Mehrotra: Yes, I appreciate the question, Ryan. I think absolutely, as we build out, I mean, we're consciously focused to building a multi-specialty medical group for that reason. Downstream, 80% of the costs are downstream from the PCP, give or take, as you know. So I think as we continue to build out density in different states, that's a core focus for us. I think that comes with opportunities for outpatient surgeries, ASCs, managing more of the total cost of care and partnering with these physicians. So I think as we continue to build out our network in each state, get density, I think you'll expect us to continue to expand in that area. Again, I don't think we're going to be very surgical heavy just given the nature of our business. But I do think folks being taken chronically ill patients, whether it's cardiology, pulmonology, CKD, things like that, I think we're going to keep looking at it selectively. Ortho is another big area. So I do think you'll expect us to continue to do it. It's -- again, it's not going to be homogenous by state. But as we build out the medical groups, that's a big lever to control cost of total care. Operator: And your last question comes from the line of Craig Jones, Bank of America. Unknown Analyst: This is [ Joaquin ] on for Craig. So you have astutely shifted down risk in MA during the first 2 years of V28. What are the odds you think we could see some kind of V29 in the next few years? And what would make you more comfortable taking more risk in MA? Parth Mehrotra: Yes, I appreciate the question, [ Joaquin ]. I mean it's pretty much similar to what we've said earlier. I think we just have to see how it plays out. It's just tough to predict when V29 comes, it doesn't come, what are the specifics on it. We've continued to believe that a shared risk model between the payers, the providers, somebody like a Privia in the middle is the right approach. You have to be thoughtful. These are long-term contracts. The patients don't change their PCPs. You're trying to manage their total cost as they are growing older, they're growing sicker. I don't think any one entity can perform well at the expense of the other on a long-term sustainable basis. So I think you can get anomalies in the middle when somebody is trying to grow their business with some benefit design changes on the payer side or provider enablement entities throwing a lot of money to just get physicians in some risk contracts. And you then see blowups happen like we did in the last 2, 3 years. So we just think the best long-term sustainable model is alignment of interest and everybody having share in the game. And that's what we're going to focus on. I think everybody got too infatuated with this how capitation work and does it have to be 100% downstream at the provider entity level versus the payer. And we just believe in a different approach, and I think that's just more sustainable. So the job to be done is not going to change. You're going to have an aging population that is growing sicker, older and ultimately dying. I mean that's the truism of humanity, unfortunately. So I think if that's the problem at hand, you need doctors in the community to do the work on behalf of the payers. Like the payers, unless they have a care delivery arm, they're not taking care of people. So I just think you need interest aligned and you need to have contracts that reflect that. Physicians need to be paid to get that job done, and that's the lowest cost setting first point of contact. So I think for all those reasons, no matter what the changes are, once we get some equilibrium over the last 2, 3 years, excess has won down, benefit design is getting more normalized. And so we'll just continue to work with our payers to have a sustainable contract to do our job and get paid for it. Operator: And there are no further questions. Please go ahead, sir. Parth Mehrotra: Thank you for listening to our call today. We appreciate your continued interest and look forward to speaking with you again in the near future. Operator: This concludes today's conference call. Thank you all for joining, and you may now disconnect.
Unknown Executive: [Interpreted] Good morning, everyone, and welcome to Iochpe-Maxion Third Quarter 2025 Earnings Release Video Conference. I'm Rodrigo Caraca, Senior Investor Relations Manager, and I'll be conducting today's video conference. Present in the video conference today and available for the Q&A session are Mr. Pieter Klinkers, CEO; and Mr. Renato Salum, CFO. We inform you that this video conference is being recorded and will be made available in the company's Investor Relations site along with the respective presentation. We highlight that Mr. Pieter will conduct the presentation in English. [Operator Instructions] Before moving on, we would like to clarify that statements made during this video conference related to the business perspectives for the company, projections and operating goals and financial goals constitute beliefs and assumptions from Iochpe-Maxion's management based on information currently available to the company. Future considerations are not performance guarantees because they involve risks, uncertainties and assumptions regarding events in the future that may or may not occur. I will now give the floor to Mr. Pieter Klinkers, CEO. Please proceed, sir. Pieter Klinkers: Hello, everybody. Thank you for listening in to our third quarter 2025 earnings call. Before we start to share some slides and talk about some numbers as we do usually, I want to come back to something I said earlier this year during our Investor Day in Sao Paulo when I referred to a quote from Ayrton Senna, I think all of us know him, who said -- you may remember, I said this. Who said when it's sunny weather, you cannot overtake 15 cars. But when it rains, you can. And so why am I referring to that quote again is because I think when you look at our third quarter results, it is reflecting some rainy weather in some regions, particularly in North America. And so we cannot change the weather, of course, but we can try to adapt as fast as possible, maybe faster than others. And we can try to mitigate that rainy weather in one particular area with some more sunny weather, and some more performance in other regions. And I think that's what you will see back when you look at our numbers and when we talk through the slides. So let's keep that in mind. That we can go have a look at some of those numbers. If you look at the next slide, you see we used to look at global production ex China. And so you see a little bit of contraction in LV, light vehicle, 0.3% this year and next year, some more light contraction, maybe stability, but it's not great. There's not great growth at this moment. If we look on the truck side, on the right side, I think here, it doesn't look too bad. it's plus 2%, including China, minus 5%, excluding China. But if you look -- and we will talk about it more during this call, if we look particularly at North America, which is a very important market for us, especially when we talk about components, not so much when we talk about wheels. But for components, it's very important that segment and especially the heavy truck segment is very important. You got Class 4, 5, 6, 7, 8, and most of our business when we talk components in North America is actually in Class 7 and by far, the most is in Class 8. And so the higher up the classes, the more contraction we've been seeing already in quarter 2, but quarter 3 was particularly down in that area -- in that segment. And we will talk about it a little bit more during the call. If we look on what that does to our net revenue, this market situation, you can see our revenue in the third quarter amounted up to BRL 3.8 billion, which is slightly down, 4.5% down to the same period in last year 2024. And so there is another slide where I will talk a little bit more in detail about it. But I can guarantee you that if we would have had only half the drop of what we have seen in North America truck, that number would have been up instead of down. And so this has been impacting our overall net revenue meaningfully. Our gross profit, I would say, given that situation in North America truck, very healthy, remained at about 12% -- 12.1% in the third quarter of '25, and we're actually pretty happy with that number. Our EBITDA amounted to BRL 390 million in the third quarter, and that represents a margin of 10.3%, excluding restructuring costs, which amount to approximately BRL 32 million. Our net income was BRL 35 million. And with all of that, our leverage ended up at 2.55x, a little bit higher than we wanted, but still a little bit lower than in the same period 1 year ago. We will also talk a little bit more about growth, particularly in South America. There is a dedicated slide about that in the remainder of the presentation. If we look in more detail on our revenue, you can see that in the third quarter 2025, we were pretty much equal to the last year same period. And if you look at the 9 months 2025, we actually show some growth. But if you exclude FX, these numbers are a little bit down compared to last year same period. And so as I said before, this North American truck market situation has impacted both the 9 months, but more so the third quarter of 2025. I can also tell you that our -- when our impact was the highest in the third quarter of 2025, also our mitigation was the highest in the third quarter '25. That's one of the reasons why the numbers are pretty equal between the 2 quarters last year and this year. And so that means the more impact we have been having, the more we have been able to offset that in other segments, other products, other regions in the world, which is, I think, a good thing to have happening in the company. If we look on our revenue by product, as we already saw happening in the second quarter, you can see, of course, with that North America truck situation impacting components -- our components business very meaningfully. You can see that the percentage of wheels in the company has been growing. And so again, that's because of components going down, but it's also because wheels going up overall in the world. And so right now, it's about an 80%-20% split between wheels and components. If you go to the next slide, you see that also in our revenue by customer. Clearly, see TRATON. TRATON is a global customer for us for wheels and for components, but we have a big business in components with TRATON. That's their international brand in the U.S. And you see that revenue going down year-over-year same quarter. Same for Daimler. Of course, again, this is a global business, and we do a lot of wheels with them around the world. We do business with them for components in South America, but just the impact of North America truck makes that bar go down in 2025 meaningfully versus 2024. The good thing is, again, that some of the other bars are going up. And so if you look at customers like Ford or you look at Toyota, you look at Volkswagen, we are actually gaining quarter-over-quarter. And so that means in total, the impact of the North American truck market is there, but it's not as big as we -- it would be if we would not have been winning in other segments with other customers in other regions. If we look more in detail in other regions, I think South America, clearly, I would say we are continuing. You've been seeing that already in the first and the second quarter, and we're doing it again in the third quarter. We are outperforming the market. And the market quarter-over-quarter was pretty flat from a light vehicle point of view, and it was pretty down, even though it's only 4,000 trucks, but pretty much down on the commercial vehicle side quarter-over-quarter, year-over-year. And contrary to that, I think Maxion clearly up in light vehicles in a flat market and not as much down at all in the commercial vehicle sector. So overall, our revenue is up in the first 9 months of the year, meaningfully 6%, 7%. And even in that third quarter, it's still up by 2.6% versus the same quarter last year. On the other hand, if we look at North America, we see this is where the big drop is and not so much in light vehicles, but specifically in commercial vehicles. And you look at some of the market numbers and they say it's minus 5% or maybe when you look at North America, it's minus 25%. But in the segment where we operate, Class 7, mostly Class 8, we've recently seen some public announcements from big customers. I talked about TRATON. They were announcing the sales were down in the third quarter at about 64%. Daimler Truck said their sales were down close to 40%. We think the production may be a little bit more down than what the sales were down because already in the second quarter, they were down, so they've been slowing down production even more than their sales has been slowing down in order to build down some inventory. So overall, our numbers reflect very much what is happening in the market of heavy trucks in North America. And so here is where we see the big drop in our revenue quarter-over-quarter and with that third quarter also for the 9 months in 2025. If we look -- if we go to EMEA, this used to be Europe, now we call it EMEA. The only difference is the South African plant, which is, I believe, our smallest light vehicle aluminum plant, but of course, the comparison between the 2 quarters and the 9 months compared to last year, that's apples-to-apples. It's the same perimeter. But I would say I'm happy to say that we have a strong performance, stronger than the market performance, and that's true for both light vehicles and in commercial vehicles. And it's true not only for revenue, but I can tell you it's also true when you look at units. And so that does support our overall global results. Now the units is clear. We're gaining share because the market in light vehicles is pretty flat. Our numbers are up. Our units are up in light vehicles. And in commercial vehicles, okay, again, it's only 10,000 trucks more, but the market has been coming back a little bit in the third quarter of '25. Let's hope that continues into the fourth quarter and into next year. But at the same time that the market came back, also our market share keeps on growing. And so besides the units being up, we can also say that the recovery of higher raw material costs and other inflationary costs and a positive mix. And with that, I mean, we're supplying, for instance, on the light vehicle aluminum segment, we are supplying more and more the premium segment. That all contributes to a positive story, I would say, in Europe, EMEA. We go to the next slide. Asia, our revenue a little bit down in the third quarter 2025, but I can assure you that we will be growing in the Asian market, which, as you know, for us is mainly not only, but it's mainly the Indian market. We're very focused on India with our operations and with our sales. And so I wholeheartedly believe that we will be growing in this growing market, and you'll see that back in 2026. With that, what does that all do to our profit and our profit margin? As I said before, a 12.1% gross profit, actually, we think that's a very appropriate number given the circumstances that we talked about -- when we talked about the market. And so BRL 460 million in the third quarter or BRL 1.44 billion in the 9 months from a gross profit point of view, we think those are very -- those are actually very strong numbers. We go to the next slide. We see our EBITDA and our EBITDA margin. And here is where we see a little bit of the contraction where we cannot fully mitigate all of that heavy rain when we talk about Ayrton Senna and his rain, the heavy rain in North America from a truck market point of view. And so our margin, excluding nonrecurring effects, primarily restructuring costs in North America ended up at 10.3% in the third quarter and now amounts to 10.2% year-to-date. We go to the next, the net income, BRL 35 million in the third quarter. I would say this, again, North America truck production situation impacted our results meaningfully also from a net income point of view. On top of that, we had the restructuring costs. And on top of that, of course, as we all know, financial expenses are higher simply because of the CDI, the SELIC costs. So that's what we see back here on this slide as well. When we look at investments, we talk -- we always talk about disciplined CapEx management. And I think you see that back in -- on this slide. Our investments are actually down year-over-year. And of course, we do that because of some of the market slump that we see primarily in North America. So we try to manage our investments down there where appropriate, there were possible. And we think at the end of the year, we will come in with the number that we have been talking about in the prior calls, maybe a little bit lower because of the adaptations that we're doing because of the market situation. We go to the next one. Our leverage, our leverage is a little bit higher than we were targeting. But given the market situation, we're still happy to say even with that, we are slightly below where we were 1 year ago, even though we are slightly up from the prior quarter's presentation. So 2.55x was the number for our leverage at the end of quarter 3. Go to the next. Our gross debt, not so much change on this slide. We think it's a healthy composition of currencies when it comes to our debt. When you look at the term, 93% is long-term debt. So that's very healthy. And if you look on the top right, also our liquidity, our cash situation seems to be very healthy with BRL 1.6 billion cash in hand. And on top of that, BRL 760 million of undrawn credit lines. If you look at the cost on the bottom, I don't think these costs are uncompetitive. It's actually -- these are pretty good numbers. I think the plus 1.2% is competitive, the 3.5% in euro is competitive and the 5.4% in dollars is competitive. It's the CDI that is not competitive, but we all know about that situation. We go to the next one. Going away a little bit from the financials, talking about the business. We present here our third quarter 2025 SOPs. But I think it's more important to mention to you guys that when we talk about market share gains and outperforming in some important regions for us in the world, when we look at wheels, I can tell you that our new business wins, so the amount of new orders, of new -- of wins we have is significantly higher year-to-date 2025. And then I don't talk 5%, 7%, I talk tens of percentages, significantly higher than the same period last year. And already last year was better than the prior year. And so it's another proof for me when I look at the numbers that we are having some very good traction with the company globally on winning new business at appropriate margins. We go to the next slide. If you win share, especially when you win share in a growing market, and a good example of that is the South American light vehicle aluminum wheel market, our wheels are wanted and cars are wanted as well. And so you want to service your customers correctly, you need to do something. And I think you could have seen in the press release that we have been working hard on being able to service our customers like we want and to profit, of course, from this market growth. And so besides supporting our customers temporarily from global operations, which is very important to be doing, and we can do that as a global company. Also, we are redeploying assets from entities around the world, Europe, Asia back to Brazil to our plants in Limeira and in Santo Andre. And on top of that, I believe you may have all read about our recent acquisition of a majority share in Polimetal, which is an aluminum wheel factory in Argentina. And of course, the Argentinian market is doing well, and we believe we will be doing well going forward also. But the main strategic target here is to expand this factory, and it will be much more efficient for us to expand the factory here. In fact, we have equipment standing ready to be installed on adjacent land in San Luis. And so doing that in Argentina creates for us a situation where we will be able to produce wheels that we produce today in Brazil for Argentina to produce those wheels in Argentina, which again frees up capacity in Brazil for Brazil. And so this is just an example of how we try to service a growing market where we gain share in a very efficient way, meaning without spending a huge amount of money by building a new plant, we try to figure out a way to serve the market correctly and profit from that market growth that we are having in that market. With that, let's go to the next slide. We talk a lot about steel components and steel wheels and aluminum wheels, but we don't talk so much about the 2 materials being merged. And I cannot tell you yet that it is happening. But I can tell you that we have been trying for some time. And I can tell you that we're making a lot of progress. And we're now at a stage where we are involved with 2 OEMs, one in Asia and India, one in Europe for making a wheel that is made out of steel and out of aluminum. And as you guys know, wheel is a very important styling element, but the styling you only need there where you look at it, not there where you put a tire on it. And so we would make the rim out of steel and we will make the disc out of aluminum. And with that, we save costs on the steel part, and we guarantee the styling on the aluminum part, not easy. But I think if anybody will be able in the world to make it happen to pull it off, it will be Maxion because we are kind of the only one that is producing both steel wheels and aluminum wheels. And in many instances, by the way, we produce it at the same location or in the same region. And so this would be a true strategic advantage for our company if we will be able to make that happen. Again, I can't guarantee it yet. We're working at it with our customers, but I hope we will be able to talk about it a little bit more in one of the following earnings calls. With that, I think let's go to the last slide, wrap it up. I think it's not what we wanted, the market that we see in North America, and it's impacting us. But we believe that is a temporary situation, and we believe we will be very strong when that market comes back. I'm not saying if that market comes back, I say when it comes back. And I think in the meantime, we're doing a good job on managing through that situation locally and mitigating that situation with our results in the rest of the world. And so that makes us, I believe, a resilient company. We continue to deliver appropriate productivity. We continue to be disciplined in our costs, and we continue to be disciplined in our pricing management. I can guarantee you that. From a growth point of view, I have given some examples on how we try to grow and what we're doing with new business wins. It's really a good story. And I think overall, very important as well, our customers remain to see us as a very reliable, stable and high-performing partner. And I come back to Ayrton Senna, maybe we go a little bit slower because of some heavy rain locally, but I believe we will be able to overtake. And with that, I pass it on for Q&A. Rodrigo Caraca: [Interpreted] [Operator Instructions] And our first question is from Gabriel Tinem from Santander. Gabriel Tinem: [Interpreted] I'd like to know if the capacity has been adjusted already, if there's anything else to help. And in terms of capital allocation, if you could explain the rationale for the [ participation ] of Polimetal and the opportunities you see in these markets? And also still in that topic, if you could talk about the North American market and talk a little bit about how you saw cash management and how you see the leverage for 2025 and 2026 [ a little ]. Pieter Klinkers: Okay. Thank you very much. I believe that were 3 questions. So, I will try to give 3 answers. I believe the first question was around our management of capacity in North America. And of course, we have been adapting our capacity in the sense that we adapt headcount. And so a very significant number of people have been leaving the facility. We hope to see them back in the future. I'm sure we will see a good part of those people back in our plant. But in that way, the capacity has been adapted. We are also convinced that when this market comes back and the longer the downturn would last, the steeper that comeback would be, we believe. When it comes back, we are very well prepared with our existing operations in Mexico from a components point of view as well as with the new plant that somewhere in 2026 will be ready to operate. And it might just be that is exactly the same time when this market comes back. So I hope that answers the question from a capacity point of view. The other question -- the second question was, I think, around the rationale on Polimetal in Argentina. And as I said, the light vehicle market in Mercosur, particularly in Brazil, is doing well, and we are doing well in that market. And so, if you're gaining market share in a growing market, you also need to make sure that you have the capacity. And so, instead of building yet another new plant, we've come up with some other solutions that require some investment, but a lot less investment than just building a new plant. And so, the redeployment of assets, getting equipment from around the world there where we need less than in Brazil is 1 pillar. And the other pillar is expanding capacity in Argentina at a much lower CapEx number than when we would build a new plant, for instance, in Brazil. And so, those actions together, we believe, will make sure that we can supply our customers, which is really what we want to do because this is a very good market for us and for our customers. The third question, I think, was around the market in North America. And so I think it's impossible to say what will happen to this market on the short term. I think most industry analysts would agree with me when we say this market will come back. But if you ask me what day, what months? Exactly that's going to be very hard to predict. But we believe that somewhere, and this would be our assumption that somewhere during the course of 2026, which is not too far away anymore, by the way, we're having the November earnings call, somewhere during the course of 2026, this market will turn and then we should be ready to supply this market with a steep increase, which is our assumption. I hope this answers the questions you asked. Gabriel Tinem: [Interpreted] Yes, it did. Unknown Executive: [Interpreted] Next question comes from Gabriel Rezende from Itau BBA. Gabriel Rezende: [Interpreted] I would just like to follow up regarding North America. I understand Pieter's comment that you should expect some return in summer 2026. But I'd like to confirm how you have been feeling the body language of the OEMs in terms of orders for the next 2 or 3 months. I understand that short time before we had a deterioration of the market. I would like to understand that if this is continuing to happen or they have stabilized now in the third quarter, mainly if the volumes have started to stabilize. And also, would like to confirm the matter of the restructuring now for the third quarter. Should we expect anything in other markets considering 2026 where volumes-- were the performance not as good as 2025, especially for commercial vehicles? Is that the expectations of the company? Do you expect any impact on other geographies also? Pieter Klinkers: Gabriel, thank you for the good questions. And so, North American market, I think the visibility from our customers is very low. That's unfortunately something that we need. But that being said, volumes are not only stabilizing, we see an increase of volumes, but we only see it for November and December. So, we like it, and we will make it happen. And it's a good thing to happen. But we're not sure if this is the start of a structural recovery or it's just a temporary impact in the end of 2025. And so, I hope it's more structural and it's the beginning of a strong recovery. But right now, we see that happening in the last 2 months of the year, but we don't have that visibility yet for the first quarter of 2026. So, some good news, but let's see if that's structural or just temporary, but we'll take it. When you talk about us seeing any potential other restructuring, particularly in CV in 2026, I would say Europe not, we -- the market should come back to some extent. And we are gaining market share. So, I think 2026 will be a good year for us when it comes to Europe. The same in Asia. I think we'll have a good year in Asia next year with growing volumes in both India and China for us from a commercial vehicle point of view. And North America, my take would be that what we lost in 2025, particularly in the second half, hopefully, we will gain it back over the year 2026, maybe a little bit more towards the second half of the year than the first half of the year. But let's see how this situation in November, December that we see right now develops into 2026. When you talk about South America, interest rates are too high. And so, I would say, we don't expect a major downturn, but we also don't expect a major upside in South America. So, I would say we're not particularly worried about that market. We're also not particularly excited about that market. But it's an adequate level for us. We don't believe we need to do a lot of restructuring, if any, as we see it right now. Does that answer your question? Gabriel Rezende: [Interpreted] Yes, Pieter. Unknown Executive: [Interpreted] Our next questions comes from Fernanda Urbano from XP. Fernanda Urbano: [Interpreted] We have 2 questions. The first regards Europe. What got our attention was the good performance, especially for light vehicles in the region. And you have commented -- mentioned the possibility of gaining share in that area. If you could give us a current view of the competitive scenario in that area? And if you expect any growth in the region higher than the consolidated one for the company? And the other regards supply chain. We have heard many news in the media regarding semiconductors. Some OEMs have mentioned possible stopping production, but it seems that in Brazil, it is under control with the guarantees from Chinese suppliers. And I'd like to know if that has impacted you and if you see any risks in the supply chain talking about automotive production globally for 2026? Pieter Klinkers: Thank you, Fernanda. So, let's start with the European market. I think from a market point of view, I believe next year, there will not be a lot of growth. I don't know if it's going to be 1% or 2% contraction or 1% or 2% growth, but I think it's pretty flat, which is not a disaster, but I think we need to do something more if we want to grow. And our plan is to continue to grow in Europe, both from an LV point of view as well as from a CV point of view. I think the CV, actually, the market is designed to grow back a little bit next year. So that will be a combination of market growth and market share growth, which is -- we would be looking forward to that. And it's our target. It's our assumption that this is going to happen next year. When we talk about market share growth, in our business, if you win something or also if you lose something, you don't lose it. If you won it, you don't lose it the next year or if you lost it, it will take you a little time to regain it. So, once you're on this trend of gaining market share, I'm not saying it's there forever, but it's there for longer than just the current year. And so what we see happening this year in Europe, to some extent, maybe even a little bit more, maybe a little bit less, but I think the trend should be continuing into 2026. And so, even though the market is kind of flattish on LV, I think we will be able to grow. And in CV, I am very, very convinced that we will grow and actually grow more than the market next year. Talking about supply chain and Nexperia coming from Holland, it's all over the news, as you can imagine. I think people were very worried and rightfully so until recently when there was some relaxation, as you mentioned already. So, we are not out of the woods, I would say, but it seems that it's going in the right direction. I can tell you that to-date, we've had no or negligible effect in our customer releases because of this situation. So, let's hope it stays like that. And as you say, it looks like there is some relaxation compared to just 1 or 2 weeks ago. Unknown Executive: [Interpreted] Our next question comes from Andressa Varotto from UBS. Andressa Varotto: [Interpreted] There are some items I'd like to mention. First, regarding margins, thinking about the trajectory of margin and thinking of the recovery of the North American market. The third trimester's recovery, could you consider a normalized level until the volume recovers? Or can the company expand the margin considering the explanation you have given, although there is a consensus that the market will take a while to recover? Another item also regarding North America, regarding Structural Components that if [ this is ] [0:37:32] even more for commercial vehicle. And I'd like to understand what is the exposition of these 2 segments in commercial vehicles and understand the difference. Pieter Klinkers: Thank you. I've noted 3 questions for myself here. So, first of all, talking about margin and maybe normalized margin. So, let me put it like this. If the North American truck markets would have been similar this third quarter than what it was in the third quarter of 2024, I think our margin would have been a solid 11%, okay? So, when that market comes back, that would be my minimum expectation to be reached. And as you know, every year, all other things equal, we will be targeting some volume increase, so some top line increase and also some bottom-line increase. And so that was our target, and that will remain our target. And I feel confident we can make that happen next year based on how I see things today. I hope that answers the question on margin. On the truck market, there is -- within the truck market in North America, there is large differences. The smaller trucks that we, for instance, supply with wheels, there is not such impact as what we see on the heavy trucks. And the heavier the truck gets, the more impact we see. And so, as said TRATON and Daimler on their heavy trucks, the Class 8 trucks, the biggest trucks, they really see big drops, 40%, 60%. And that is what we are seeing as well for the products that we supply to that segment. But not for the smaller trucks, the Class 4, 5, 6, actually is pretty stable. And you see that back in the Wheels numbers in our company because that's the segment that we supply from a Wheels point of view. And those numbers are actually slightly up in our company. So it's a big difference within the North American truck segment between smaller trucks, medium trucks on the one hand and heavy trucks on the other hand. Does that answer your question? Andressa Varotto: [Interpreted] Yes, yes. Unknown Executive: [Interpreted] Our next questions comes from Luiza Mussi from Safra. Luiza Mussi Tanus e Bastos: [Interpreted] Could you give us a little bit more details about the difference we saw from light vehicles in North America with steel wheels growing up and the aluminum wheels going down. And we would like to understand what led to the difference in performance in that sector. Pieter Klinkers: Thank you for the question. I'm going to answer this one as well. So, North American steel wheels is a -- it is a good start for us, and I think you will see that actually expanding that situation into 2026. We've won very significant business that has just started up in the second half of this year with a big North American EV manufacturer. And believe it or not, those are steel wheels and not aluminum wheels. And so that is a big win. That was a big win for several of our factories around the world. But the first one to start up is our plant in Mexico, and that's what you see happening on steel wheels in this case, in San Luis Potosi in Mexico. So that's explaining the steel wheels story. On the aluminum side, we are changing programs between customers. And I'm very convinced next year, we will see a very meaningful growth beyond the market. in our plant in Mexico from a wheel's point of view in Chihuahua. And so even though we have a little bit of a decline right now, we're gearing up the plant for SOPs starting now in the fourth quarter of 2025 as soon as we can. And as soon as we're ready with the tools and we can supply and that will continue throughout 2026 and going into '27, '28. So, it will be a good story also from an aluminum point of view in North America. I hope that answers. Unknown Executive: [Interpreted] Our next question is from Andre Mazini from Citi. André Mazini: I wanted to ask about the Ford aluminum factory fire in New York State that happened in September 16, so kind of recent. It seems to have impacted the F-150 production. So of course, Ford is the second biggest client of Iochpe, if we should expect any impact from that on the fourth quarter? This is question number one. Question number two would be, any comments you could have on the Section 232 tariffs, which are, of course, on steel and aluminum. You guys have production of wheels both in the U.S. and Mexico. So maybe those 2 production hubs could be affected by the tariffs. So any comments on that? Pieter Klinkers: Thank you, Andre. So the Novelis fire, of course, we've all notified that. And even though we see a little bit of impact, so it's not that we don't have impact. We see some impact, but it's more than compensated by the good news that I just talked about in the prior question from Luiza. So, I think we see some impact, but we have more good news than bad news. And so bottom line, it's still a growth story for us. When you talk about tariffs, it's still the same mantra as what we have been saying in the last couple of calls. And so yes, there is indirect impacts that we see. For instance, North America truck is related to tariffs, we believe. But we don't foresee major direct impacts for our production in in Mexico for our wheel or components production and sales in Mexico or from Mexico to the U.S. Still the same -- sorry, very little direct impact, but of course, we see some indirect impacts. Hopefully, that answers your question. André Mazini: It does. Unknown Executive: [Interpreted] With that, we are closing the question-and-answer session, and I would like to give the floor to Mr. Pieter Klinkers for his final considerations. Pieter Klinkers: Thank you, Rodrigo. So, all in all, I would say a third quarter that is a little bit weaker than what we would have wanted and then what we would have expected. But if we look at the macroeconomic environment, if you look at the North American truck market, I can say, bottom line, the teams have been doing a good job on both mitigating regionally there where the issue is -- was and is as well as mitigating the impact from a global point of view. And I believe going forward, I've mentioned it a few times, we cannot change the market, but we will try to continue to do better than the market there where possible, there where appropriate. And you can count on us to give it our all to make that happen. And so I believe on the midterm -- short term, midterm, the market in North America will come back. We will be very well positioned to serve that market then appropriately. And then the rest of the market, we're doing good anyway, and our plan is to continue to do that also in the fourth quarter and in 2026. Thank you very much. Bye-bye. Unknown Executive: [Interpreted] The earnings meeting video conference is closed. Iochpe-Maxion's Investor Relations department is available to answer any other questions. Thank you very much, and have a good day. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
Operator: Good afternoon, and welcome to Funko's 2025 Third Quarter Financial Results Conference Call. [Operator Instructions] Please be advised that reproduction of this call in whole or in part is not permitted without written authorization from the company. As a reminder, this call is being recorded. I will now hand the conference over to Funko's Director of Investor Relations, Rob Jaffe. Please proceed. Robert Jaffe: Hello, everyone, and thank you for joining us today to discuss Funko's 2025 Third Quarter Financial Results. On the call are Josh Simon, our recently appointed Chief Executive Officer; and Yves Le Pendeven, the company's Chief Financial Officer. This call is being broadcast live at investor.funko.com. A playback will be available for at least 1 year on the company's website. I want to remind everyone that during the course of this call, management's discussion will include forward-looking information. These statements represent our best judgment as of today about the company's future results and performance. Our actual results are subject to many risks and uncertainties that may differ materially from those stated or implied including those discussed in our earnings release. Additional information concerning factors that could cause actual results to differ materially is contained in our most recently filed SEC reports. In addition, during this call, we refer to non-GAAP financial measures that are not prepared in accordance with the U.S. generally accepted accounting principles and may be different from non-GAAP financial measures used by other companies. Investors are encouraged to review Funko's press release announcing its 2025 third quarter financial results for the company's reasons for presenting non-GAAP financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is also attached to the company's earnings press release issued earlier today. Also, we have posted supplemental financial information on the Investor Relations section of the company's website, which includes, among other things, a net sales bridge, a gross margin bridge and key IP and product drivers. I will now turn the call over to Josh Simon. Josh? Josh Simon: Thanks, Rob. Good afternoon, everyone, and thank you for joining us. This is my first earnings conference call at Funko, and I want to start by saying I couldn't be more thrilled to be joining the team at this exciting time. Over the course of my career, I've seen this industry from a variety of perspectives, making movies at Disney, creating products at Nike and most recently leading the global consumer products and live experiences division at Netflix. Now across all those worlds, I gained a strong understanding for fandom, the culture of entertainment and how it translates into physical products. And I can unequivocally say there is no one better at it than Funko. There's one clear trend I saw across my years in entertainment and consumer products. Almost every filmmaker, creator or celebrity with whom I've worked inevitably asked that they would get their own Funko Pop! It seems as a sign of having made it in the entertainment world among the biggest Hollywood talent from the outside that love for Funko and its brand and products was energizing. Now I want to begin with some takeaways for my first 60 days after diving deep into the business and speaking with our customers, licensors and employees. Then I'll outline some of what I think it will take to get back to growth. I have the opportunity to meet with some of our most passionate fans at our retail stores and at New York Comic-Con. I've been able to spend time with our employees in the U.S. and Europe and we've engaged in senior leadership strategy sessions with key retailers like Hot Topic, Walmart and Target, licensed stores like Disney, Warner Bros., Universal and Netflix. And I have a deep, long-standing set of relationships with most of these partners and welcomed an honest dialogue. In talking with our partners, I heard 2 consistent themes. First and most importantly, they see the growth opportunity together and are energized by the far-reaching scope of our brand and products; and second, they suggested some very clear areas where we can improve. We definitely appreciate and value their feedback, and we'll use it to further strengthen our competitive advantages, namely first, we have a passionate and broad fan base. In September at a fan event at our Hollywood store, I was able to celebrate an important milestone for the company, 1 billion units sold. This amazing achievement puts us in very rare company among the most successful toy brands in the world. Membership in our fan loyalty program has grown 27% since the start of the year. We have a strong footprint of 9 million followers across our social media channels. And our customer base is highly diversified and evenly split between male and female with purchasers across an 18- to 55-year-old demographic, many of whom are buying for kids. Second, we work with the world's biggest IP and serve fans across every corner of the pop culture universe. Our robust relationships across multiple genres, more than 900 active licensed properties and 250-plus content providers create a strong moat around this industry-leading portfolio of licenses. Our product offering is highly diversified. We're not reliant on one character or single franchise. Now I'm pleased to announce that we've recently signed several multiyear renewal agreements with major licensing partners, Warner Bros, NBC Universal, 20th Century, Paramount and our biggest partner, the Walt Disney Company, which includes Pixar, Marvel and Lucasfilm. Third, our products are sold everywhere fan shop through a large and diversified global network of retailers, including more than 1,400 mass market specialty, e-commerce and mom-and-pop partners around the world as well as our own websites and flagship stores. There are very few brands that are equally relevant across a mass retailer like Walmart and that can spark a robust resale market on eBay at the same time. I'm still early into my tenure here, but my leadership team and I have identified our areas of focus and are ready to act immediately. Our growth will be driven by what we're calling our Make Culture POP! strategy, built at the intersection of 3 pillars: culture, creativity and commerce. This is where Funko has excelled and will align our priorities and organization to maximize the opportunity in these 3 focus areas. Let's start with culture. We aim to be the definitive brand for transforming pop culture into products. That includes fandoms that are existing strengths like film and TV, along with exploring new corners of pop culture through categories like footwear, cosmetics and food. We can do more in the areas of K-pop, sports, music tours and fashion and working with relevant content creators to expand into newer areas of fandoms like Twitch streamers, YouTubers and influencers. We want our products to be at the center of the moment everyone is talking about, created by us or with us. Now some examples of what that means. We will look to identify trends even faster and supercharge our speed to market. Let me give you a quick example of what I mean through the lens of KPop Demon Hunters, Netflix's most popular movie ever. Our team was among the first to recognize the appeal of this property for both mass audiences and collectors. We moved quickly to create an exciting line of the products that's become one of our biggest presale items ever when it launched on funko.com a month ago. And the Funko team was able to bring this product offering to market within just a couple of months across pop figures, backpacks and accessories compared with much longer lead times by other major toy companies. This speed to market is one of our unique advantages and will be one of the only toy companies that have KPop Demon Hunters' products on retail shelves this holiday season. We're operationalizing our quick strike and hyper strike offense across our entire value chain to make this more repeatable. By operating at a faster pace and being more on trend, we also aim to position our products at the center of what everyone is talking about across all corners of pop culture. For example, we partnered with The Late Show with Stephen Colbert for a surprise on air product reveal time to the show's 10th anniversary in September. The episode featured Stephen Colbert unveiling a brand-new Funko Pop! and marked a major crossover moment between late-night television and fandom culture. The launch included a live studio audience giveaway creating a shared moment of celebration between Colbert, his millions of at-home viewers and Funko collectors around the world. In music, we added to our Funko Pops music artist collection [La Fede], the Latin American sensation with nearly 30 million fans across Instagram and TikTok. In just a few weeks, our partnership has driven more than 5.7 million views on social media and is representative of our efforts to work with more artists who are in the global zeitgeist and create touch points for our growing customer base outside of the U.S. In addition to [Fede], we recently added a number of other artists to our Funko Pop music artist collection, including the K-pop and BTS, the Swedish rock band Ghost, Sabrina Carpenter, and classic artists like Tom Petty, Metallica and Ozzy Osbourne. Now an important part of cultural relevance also comes from embracing our community of passionate collectors around the world. Just as I saw at NIKE, supporting the collectors market through exclusive drops, and giving them something special is critical to building fan communities and driving brand awareness and excitement. It's a major priority for us to rebuild credibility and enthusiasm with core collectors and mega fans who have been loyal to us for years by improving execution around limited editions, storytelling and drop cadence. In the third quarter, we dropped a number of limited edition collectible pop figures with various tiers of rarity, Don Hero from the Lord of the Rings, Star killer from Star Wars, Sonic, Spider Cat, Bob's Big Boy and Fantasm. Each of these one-of-a-kind pops sold out within 1 hour. For the community of sports stands, we expanded our relationship with Inter Miami of major league soccer. At the start of this MLS season, we have dedicated retail space at the team's new state-of-the-art home stadium where fans will be able to purchase on-site a pop yourself with Inter Miami's official logo, standard Funko Pop figures of the team's most famous players and exclusive products only available at the store or take the growing global fandom of anime. We have even more opportunity to grow this business, which represented 30% of our sales in Q3 and is now our second largest and vertical. The U.S. market for anime remains very strong, and we've only scratched the surface with expansions in Europe, Asia and Latin America. Now let's talk about creativity. The goal is to continue innovating new form factors, expanding our product offering and obsessing over the details across design, development and storytelling, so our products feel meaningful for fans. We've built a beloved and truly unique franchise with Pop! and we're working on adding additional dimensions for fans, more excitement and bringing compelling new products to market. One example already showing traction is Bitty Pop!, our mini vinyl figures. Bitty Pop! is integral to our evolving strategic partnership with Walmart. Last month, Bitty Pop! was officially introduced in their toy aisle and made Walmart's 2025 top toy list and was featured in Walmart's toy boat catalog, which went out to over 40 million homes in the U.S. just in time for the upcoming holiday season. On top of that, an out-of-aisle placement of Bitty Pop! is expected to land in 1,800 Walmart stores later this month. We have built out the Bitty Pop! line to include the ability to world build. We intend to further expand the line to include more license than original characters and environments that allow fans to create realistic worlds or use their imagination to create new ones. As the Blind Box format continues to grow in popularity around the world, we're planning to expand our existing blind box offering, Mystery Minis. These collectible figures, which have been on the market for the last 12 years are smaller than our pop vinyl and larger than our Bitty Pop! figures. We see additional growth potential in the Blind Box space across new IPs, genres and fandoms spanning films, series and social media, and our own original characters. Earlier this week, we initiated a limited launch with several of our specialty retail partners for our new premium wine box collection, an artist-driven product line that gives fans the opportunity to discover gold and imaginative new designs. Beginning with 2 entries in this category, we intend to expand into new IP over the course of 2026. Our premium Blind Box line includes a chase variant, and we're looking to add more offerings for both internal and external artists. Now it's also important to note we have a diverse product archive of formats going back 25 years, many of which I think can be leveraged in more relevant ways to capture the hearts of today's fans and collectors. Now let's talk about commerce. We see a significant opportunity to expanding internationally, particularly in Asia and Latin America, enhance our presence with existing retail partners and deepen our digital and direct-to-consumer capabilities. To start, there's a significant opportunity to grow our international business with a more dedicated focus in Asia and Latin America. This was an area of particular focus for me at Netflix, and there is a clear lane for Funko to excel in these important geographies. With our D2C business, we intend to simplify the experience on our e-commerce site and app. This includes a more intuitive design, improved functionality around limited edition drops, wishlists and loyalty programs. Pop! Yourself, which just launched in Europe is a great example of the unique experience only we can offer. And we're planning to add a new AI-powered builder later this year, which allows the user to upload a picture and recommends options to more quickly build a customized pop, which we think will be transformative. We're also planning new innovative retail experiences such as selling Bitty Pop! products through vending machines with a surprise for mystery element to the purchase experience. In addition to the Pop! Yourself kiosks at Inter Miami's new stadium, beginning early next year, we plan to add more Pop! Yourself kiosks to support other year-round retail experiences and pop-up activations both in the U.S. and in Europe. We also plan to refresh existing kiosks in our flagship stores with enhanced capabilities, including the AI-powered builder. Now to summarize, our Make Culture POP! strategy is focused on maximizing opportunities at the intersection of culture, being at the center of the moment everyone is talking about across more fandom, creativity through new products and form factors, and commerce by being more strategic with partners in the U.S. and Europe, Latin America and Asia and direct-to-consumer. Now to be clear, we already have many ongoing initiatives against this plan underway. We're building the right team and capabilities to attack these opportunities in a focused manner and drive growth. Now that said, I'm only 60 days in, and we have a lot more to come. I'm excited and confident about our team and the opportunity working with our partners to ignite growth and to sell the next 1 billion Pop! products. And with that, I'll turn it over to Yves to review our Q3 results. Yves Le Pendeven: Thanks, Josh. Hey, everyone. Thanks for joining us today. For the third quarter, total net sales were $250.9 million, in line with our expectations. Compared with Q3 of last year, approximately $11 million of the decrease in net sales can be attributed to SKU rationalizations as well as a reduction of clearance sales. As a reminder, we posted supplemental financial information on our website, which includes a net sales as well as a gross margin bridge. Direct-to-consumer sales mix in the quarter was 18% of our gross sales down from 20% in last year's Q3 due in part to a pullback in marketing spend. Gross profit was $100.8 million equal to gross margin of 40.2%, which was better than expected. Price increases helped fully offset the impact of increased tariffs. It's worth noting that with the exception of our 2025 second quarter, which was significantly impacted by tariffs, we have maintained a gross margin in the 40% plus range since the first quarter of 2024 were in 6 of the last 7 quarters. SG&A expenses were $79.8 million compared to $92.7 million last year. Approximately half of the reduction came from a full quarter benefit of cost reduction actions taken in Q2 and the other half came from a reduction in marketing spend. Adjusted net income was $3.2 million or $0.06 per diluted share. And finally, adjusted EBITDA was $24.4 million, which was higher than our expectations. Turning to our balance sheet. At September 30, we had cash and cash equivalents of $39.2 million. Net inventory was $99.8 million and our total debt was approximately $241 million. Turning now to our outlook. We're pleased with our Q3 results and the progress made against the second half outlook, which we shared last quarter. We now expect for the 2025 fourth quarter net sales to increase modestly from Q3 2025, driven in part by the launch of Pop! Yourself in Europe and sales of our KPop Demon Hunters product lines, gross margin of approximately 40% and adjusted EBITDA margin to be in the mid- to high single digits range. A few comments on our refinancing process. Our 10-Q filing for the 2025 third quarter includes disclosures about the company's ability to continue as a going concern. As previously announced, we executed an amendment to our existing credit facilities, which mature in September of 2026. The amendment waived financial covenants for Q2 and Q3 and introduced a minimum cash requirement and a series of milestones to demonstrate progress against a refinancing transaction. We've engaged Moelis & Company LLC to advise the company on our refinancing process, and that process is ongoing. With that, I'll turn it back over to Josh. Josh Simon: Thanks, Steve. Compared with where we were 2 years ago, we've made progress on improving the quality of our business. Our gross margin trend has largely improved. We have a stronger retail footprint. We've fully implemented a price increase and inventory owned and in the channel is lower and at healthier levels. Now I want to reiterate the sense of urgency and opportunity around our Make Culture POP! strategy, executing across the intersection of culture, creativity and commerce. In the short term, I'm looking to maintain the momentum Yves discussed. Over the long term, what's most exciting to me, and I hope is equally exciting to our investors are the multiple opportunities to transform the company for substantial growth. We have a strategic advantage from building this company over the last 27 years, and we intend to leverage that legacy and relationship with our community of fans to take advantage of the huge opportunity in the increasingly global world of entertainment and pop culture fandom. I'm incredibly excited about joining Funko. From my perspective, the company has lots of potential on which we've already begun acting. And with that, we'll open the call for questions. Operator? Operator: [Operator Instructions] Your first question comes from the line of Stephen Laszczyk with Goldman Sachs. Stephen Laszczyk: Josh, welcome. Thank you for all those thoughtful highlights on the strategy. I'm curious as you look out ahead against some of those opportunities that you outlined, how you're thinking about what opportunities exist over the next 12 months to execute against how investors should be thinking about what you're prioritizing the sizing of some of those opportunities. Perhaps what point of the strategy do you feel like you need to get correct here over the next year or so before it unlocks the option value over the longer term to take Funko to the next level, so to speak. Anything -- any top priorities that come to mind, I think, would be helpful for us to understand. And then I have a follow-up. Josh Simon: Great. I appreciate the question. I mean, look, I'd say in the short term, our focus is on continuing the performance momentum that we've been talking about and then over the long term, obviously, transforming for more growth. I do really think it comes down to -- and I'll give you some specifics around the Make Culture POP! strategy. In the short term of the area of culture, I think there's really some areas of fandom where we can continue to expand. Obviously, as you know, we've been doing a lot in the areas of sports and music. But we just -- there's opportunities to move quicker in those areas. And so as an example, we just recently were able to launch the Dodgers Championship 5 pack. There's some really great details to it. It even includes them sort of wearing their alternate road uniforms. So really like how we think about operationalizing quick strike end-to-end capabilities, sensing trends, designing and manufacturing more quickly and getting it to consumers in new ways is really an important part of the cultural impact that we're looking to drive. And obviously, we share more details about that in the future. On the creativity side, I mean, we're really focusing on how we bring more dimensions to our core franchise, which is Pop! Bitty is a really great example of that. Obviously, we mentioned how it's rolling out into Walmart now. I'm spending a lot of time engaging more broadly with the creative community bringing people internally to help think about new sort of evolutions of products that we can launch, leveraging my relationships across the entertainment industry and the product space, thinking about how we can more closely collaborate with talent. Those are all sort of immediate things that we can do to continue to evolve our form factors and creative product strategy. And then on the commerce side, I mean, I've been able to engage with some really great strategic meetings with some of our biggest retailers over the last couple of months. International is a huge component of that. And so I think particularly based on pre-existing relationships I have there, we'll look to come back next quarter and talk in a little bit more specifics about some goals that we're immediately looking to get after with retail partners in Asia and Latin America. And look, I should also note on the -- because I think this is an important point to highlight on the commerce side as well. We were able to execute some really great extensions of our licensing deals with all the biggest studios in the last few months. And so I think that puts us on really firm footing to kind of take everything that we talked about as part of our Make Culture POP! strategy and drive growth through those relationships as well. Stephen Laszczyk: That's great. That's really helpful. And then if I could just ask a question, maybe more in the near term in the quarter and the broader retail environment, maybe for both Josh and Yves on 4Q. Just as you have conversations with retailers heading into this holiday season, anything you'd point out in terms of the cadence of stocking, how they're approaching restocking this year, how they're particularly engaging with Funko as a brand, as a partner this holiday season that differs from perhaps what you've seen in historic years or perhaps where the levers are as we get deeper into holiday on where restocking could come from upside, downside in the model, et cetera? Yves Le Pendeven: Stephen, this is Yves. I'll start by saying I think we're kind of encouraged by our POS trend, which has remained relatively strong and stable. In Q3, our global kind of POS in units was down only 3% year-over-year. Now we are continuing to see a pretty big difference in our various territories that we operate in. U.S. was more like down mid- to high single digits in units and then EMEA was up in low double digits. So we continue to see the consumer demand for our products. That being said, obviously, the tariff announcements earlier this year pretty significantly disrupted in Q2, kind of shipping of our orders out of Asia. And in Q3, I'd say we kind of continue to have a bit of a hangover effect from that. What you have to keep in mind is that retailers were placing their buys for Q3 and early Q4 shipments during, what I call, kind of peak uncertainty about what the tariff rates are going to be, how the consumer is going to hold up through the holiday period. And that was in part why our sell-in was down over last year in Q3. I would say as we head into the holiday period, it's a bit of a mix depending on the channel and the retailer, but I would say that we continue to have good momentum in Europe. In the U.S., a little bit more cautiousness, I think, from buyers. We do see a little bit more strength and momentum in the mass channel, and Josh mentioned the growth in Bitty Pop! sales there. So we're encouraged by that. It feels like for the smaller kind of specialty mom-and-pops distributors. And maybe a little bit of speculation here, but it feels like might be more kind of financially impacted by the tariffs or just generally more cautious about overcommitting to inventory. Josh Simon: Yes. And what I would continue with is the content slate is pretty big for us in Q4. The final season of Stranger Things will launch, and that's a big priority for some of our biggest retail partners as well as us. Obviously, the sequel or the Part 2 of Wicked will also be in the market, and we have products there. And then I think most importantly, just as a reminder, we really will have a lot of unique shelf space through our KPop Demon Hunters assortment across both Funko and Loungefly. So I think some good sort of content slate strength and shared priorities with our retail partners on that front. Operator: Your next question comes from the line of Keegan Cox with D.A. Davidson. Keegan Tierney Cox: Tom, I just wanted to ask a little bit as you open up this creativity in commerce. I know you talked a little bit about the vending machines and kiosks. I was just wondering how do you look at that market? It seems pretty competitive. I've seen a few of your competitors moving in there, just like my mall visits and retail visits. Just curious to how you see that market and how you plan to attack it? Josh Simon: Yes. Well, look, I think for us, the primary driver and excitement is around the Pop! Yourself experience, which is pretty unique to us. The ability for a fan to go and create customized Funko Pop! of themselves or a friend as a gift is something that I think we are uniquely able to offer. And so when we talk about the kiosk strategy, we have examples of those kiosks that currently exist in a couple of locations, primarily in our flagship stores. But we've already been deep into conversations with some of our bigger retail partners about how we can start to create experiences within their real estate footprint and bring that experience to more of our fans around the country and around the world. So it's -- I think we offer a pretty unique angle there. Keegan Tierney Cox: Got it. And then as I was just looking at the results, Europe sales down slightly versus an easier comparison last year. I know you're launching Pop! Yourself in the fourth quarter, but what are you seeing outside of that in Europe? Josh Simon: Well, like I mentioned previously, our POS trend is pretty strong in Europe. I would say one of the factors that's not super material, but we did have a little bit of production delays that impacted our European sales in the quarter, just some orders that just couldn't make it out of the factory in time. As a reminder, we moved pretty aggressively to move production from China to Vietnam. And so that was a bit of a result of that, but we expect those orders to ship in Q4. And then along with the launch of Pop! Yourself in Europe, which happened a few weeks ago, we expect Europe to be back to growth in the fourth quarter. Keegan Tierney Cox: Got it. And one more, if I can, just on pricing. I know you were able to essentially offset all of the tariff costs. But are you seeing that impact demand? I mean the POS for the U.S. essentially with weeks. I'm wondering how pricing played into that? Josh Simon: We've actually been pleasantly surprised by that. We rolled out the price increases. They were in effect on the shelf in early July. I mean we did anticipate that there would be slightly lower unit volumes. It's hard to attribute that directly to the price increase and not to the other kind of factors going on in the U.S. market. But generally, it's been in line with our expectations. I mentioned the POS trend so that the unit sales have held up pretty well. And then the price increases are fully in effect. So it's gone pretty well for us. Operator: There are no further questions at this time. I will now turn the call back to management for closing remarks. Josh Simon: Thanks, everyone, for joining us on the call today. We look forward to sharing our progress on our next call. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Q3 2025 Black Hills Corp. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Sal Diaz, Director of Investor Relations. Salvador Diaz: Thank you, operator. Good morning, and welcome to Black Hills Corp.'s Third Quarter 2025 Earnings Conference Call. You can find our earnings release and materials for our call this morning on our website at blackhillscorp.com. Leading our quarterly earnings call are Linn Evans, President and Chief Executive Officer; Kimberly Nooney, Senior Vice President and Chief Financial Officer; and Marne Jones, Senior Vice President and Chief Utility Officer. During our earnings discussion today, comments we make may contain forward-looking statements as defined by the Securities and Exchange Commission, and there are a number of uncertainties inherent in such comments. Although we believe that our expectations are based on reasonable assumptions, actual results may differ materially. We direct you to our earnings release, Slide 2 of the investor presentation on our website and our most recent Form 10-K and Form 10-Q filed with the Securities and Exchange Commission for a list of some of the factors that could cause future results to differ materially from our expectations. With that, I will now turn the call over to Linn Evans. Linn? Linden Evans: Thank you, Sal. Good morning, and thank you all for joining us today. I'll start my comments on Slide 3 with a summary of our quarter and our strategic outlook, including an update on our merger with our friends at NorthWestern Energy. Kimberly will provide our financial update, and Marne will discuss our operational performance and progress on key initiatives. We're fulfilling our commitment to deliver results for our stakeholders in 3 key areas that we identified at the beginning of the year. First, we're delivering on our financial commitments, having reaffirmed our earnings guidance and completed our planned financing activities. Second, we're executing on our regulatory and growth initiatives, including our $1 billion capital plan to support key projects to serve our customers' growing needs. And third, we're providing excellent operational performance, including top quartile reliability and a positive customer experience. I'm proud of our team's remarkable work in delivering strong financial results and making significant progress on our key initiatives. We're on track to achieve our earnings guidance for the full year with 3 primary drivers: new base rates, rider recovery and customer growth. We're also continuing to maintain a healthy balance sheet. We have made significant progress with our regulatory strategy, including securing a recent settlement for our rate review in Nebraska. Including this settlement, our team has successfully completed 7 rate reviews since the beginning of last year, highlighting our expertise in managing multiple regulatory requests. We also successfully advanced several key near-term projects that will drive growth. We're on schedule to complete our 260-mile Ready Wyoming transmission expansion project by year-end, and we broke ground on our Lange II generation project in Rapid City during the quarter. Additionally, customer growth, including growing demand from our large load customers such as data centers and economic development in our service territories are providing solid contributions to earnings. In addition to our current plan, we continue to be very actively engaged with high-quality data center partners. We have now signed nondisclosure agreements for more than 3 gigawatts of demand. If and when these negotiations lead to signed agreements, only then will we incorporate them into our plan. Our financial outlook is provided on Slide 4. We're reaffirming our prior 2025 earnings guidance with an adjusted EPS range of $4 to $4.20, excluding merger-related costs. This represents a 5% growth rate at the midpoint over our 2024 EPS. Looking ahead, with solid progress in our regulatory and growth initiatives, we plan to deliver in the upper half of our 4% to 6% long-term EPS growth target starting in 2026. Our confidence in achieving our long-term growth target is further strengthened by our $4.7 billion capital plan and strong customer demand, including the data center opportunities I previously mentioned. We anticipate presenting an updated financial outlook during our fourth quarter and full year earnings call in February, including earnings guidance for 2026 and capital investment plans for the years 2026 to 2030. Slide 5 represents our current $4.7 billion capital plan. Our base annual investment is approximately $700 million, prioritizing our customers' core needs for safety, reliability and growth. Additionally, our transformative infrastructure expansion investments will cost effectively enhance our systems' resiliency and support growing demand and evolving requirements for both our electric and natural gas systems. Some of the major capital projects in our current plan include our Ready Wyoming transmission expansion that is on schedule to be completed by year-end, our 99-megawatt Lange II generation project in South Dakota that is under construction, and we expect to place in service in the second half of 2026 and our battery storage project in 2027 to comply with the Colorado Clean Energy Plan. Our 2025 through 2029 capital plan does not currently include significant investments related to data center demand. We anticipate continuing to profitably serve large load demand through our market energy model with minimal capital investment at a level of approximately 500 megawatts of demand through 2029. However, demand exceeding that level will likely necessitate incremental investments in generation and transmission. Marne will provide more detailed information about data center demand in her business update. Moving to Slide 6. On August 19, we announced our merger with NorthWestern Energy. Although we are well positioned as stand-alone companies, this merger will create a stronger, more competitive entity with greater scale and enhanced financial profile and complementary strengths, enabling us to unlock additional value creation opportunities for our customers and our shareholders. In October, we submitted joint applications to our regulators in Montana, Nebraska and South Dakota, requesting their approvals of our merger. We anticipate receiving procedural schedules and commencing the discovery process this quarter. We're also diligently working through the S-4 process and intend to secure all necessary approvals to finalize the merger within the second half of next year. With that, I'll turn the call over to Kimberly for our financial update. Kimberly? Kimberly Nooney: Thank you, Linn, and good morning, everyone. Our team is executing our strategy exceptionally well. From a financial standpoint, we have successfully accomplished several of our objectives in the current quarter and throughout the year. Our financial results met expectations, and we have maintained our strong investment-grade credit rating while funding our $1 billion capital plan for 2025. On Slide 8, we provide a bridge comparing Q3 2025 to Q3 2024. For the current quarter, we delivered $0.34 per share of GAAP EPS, which included $0.10 of merger-related transaction costs. After adjusting for these costs, we reported $0.45 of adjusted EPS for Q3 2025 compared to $0.35 per share for Q3 2024. For the quarter, our regulatory efforts provided $0.21 per share of new rates and rider recovery margin, which offset unfavorable weather, O&M costs and a moderate increase in financing and depreciation expenses. Weather was a $0.07 headwind compared to the same quarter last year. We experienced $0.04 of unfavorable weather this quarter compared to normal, primarily driven by lower agricultural irrigation demand in Nebraska. O&M was higher by $0.08 per share, which included $0.10 of merger-related transaction costs. Excluding merger costs, we reduced our O&M expenses compared to the same period last year by $0.02. Financing costs increased $0.03 per share, which included $0.06 of higher interest expense, $0.01 of share dilution and a benefit of $0.04 per share from AFUDC, driven by ongoing large construction projects. We also incurred higher depreciation of $0.02 per share, reflecting new assets placed in service. Year-to-date EPS drivers are shown on Slide 9. We reported GAAP EPS of $2.58, which included $0.11 of merger-related costs. Removing these costs from the year-to-date results, we delivered $2.68 of adjusted EPS, an increase of 6.3% compared to $2.52 for the same period last year. Our year-to-date results tell a similar success story to the third quarter. Excluding merger-related costs, our regulatory efforts delivered $0.68 of new rates and rider recovery, which more than offset higher operating expenses, financing and depreciation. We benefited from $0.07 of weather favorability with $0.04 of milder-than-normal weather this year compared to $0.11 of milder-than-normal weather for the same period last year. Our earnings guidance is based upon normal weather within our jurisdictions. O&M increased by $0.37, primarily due to merger-related expenses, employee costs and outside services, insurance premiums and unplanned outages. Excluding merger-related costs, we expect to manage our 2025 O&M expenses to a compounded annual growth rate of approximately 3.5% off of 2023 O&M expense. We incurred $0.34 of financing and depreciation expenses supporting our capital investments. Financing and costs increased by $0.25, which included $0.23 of higher interest expense due to higher interest rates, $0.11 of dilution from new shares issued and a benefit of $0.09 from AFUDC. Depreciation expense increased by $0.09, driven by new assets placed in service. As we approach the end of the year, we remain confident in our ability to meet our adjusted EPS guidance range and remain committed to achieving the financial commitments we made at the beginning of the year. Further details on year-over-year changes can be found in our earnings release and our 10-Q to be filed with the SEC later today. Slide 10 presents our solid financial position through the lens of credit quality, capital structure and liquidity. We continue to sustain a healthy balance sheet by delivering credit metrics within our targets of 55% net debt to total capitalization and 14% to 15% FFO to debt, 100 basis points above our downgrade threshold of 13%. We completed our planned equity issuance for the year, issuing a total of $220 million of net proceeds in 2025, achieving our stated equity guidance range of $215 million to $235 million. Looking forward, we expect our 2026 equity issuance to be significantly lower, driven by stronger cash flows from the successful execution of our strategic capital investments, regulatory plans and increasing data center load growth. In October, we completed our planned debt offering, issuing $450 million of 4.55% notes, a portion to be used to pay off our January 2026 long-term debt maturity of $300 million. As a result of our team's successful execution of our 2025 financing activities, we have funded our capital plan and maintained strong liquidity with more than $600 million of availability under our revolving credit facility at quarter end. Slide 11 shows our earnings growth trajectory beginning in 2023, along with our 2025 earnings guidance assumptions. For 2025, we expect adjusted EPS to be between $4 and $4.20 per share, which at the midpoint represents a 5% increase over 2024 earnings. Our long-term earnings growth will be driven by ongoing customer growth within our jurisdictions, increasing data center demand and new rates and rider recovery on strategic investments like Ready Wyoming and Lange II that will provide long-term benefits to customers. We believe we are well positioned to achieve the upper half of our long-term EPS growth target of 4% to 6% beginning in 2026. Slide 12 illustrates our industry-leading dividend track record of 55 consecutive years. We continue to target a 55% to 65% payout ratio. A dependable and increasing dividend is an important component of our strategy to deliver long-term value for our shareholders. I will now turn the call over to Marne for our business update. Marne Jones: Thank you, Kimberly, and good morning, everyone. I'm excited about our current position, the progress we have made on key initiatives and the promising growth opportunities that lie ahead, all while continuing to provide our customers with safe, reliable and cost-effective energy they rely on every day. Slide 14 illustrates our industry-leading reliability for our Electric Utilities. 2 of our 3 ranked in the top 10 companies in EEI's most recent report based upon 2024 SAIDI metrics. This reflects the benefits of our long-standing commitment to our customer-focused strategy and investments. Moving to Slide 15. We continue to see significant data center interest. And in Wyoming, we are fulfilling this demand through our flexible service model of market energy, contracted generation and utility investment. Through our innovative tariff, we have served growing demand from Microsoft hyperscale data centers for more than a decade. We are now serving Meta's new AI data center under construction in Cheyenne, which we expect to transition from construction power to permanent service later this year. As Meta ramps up its data center and Microsoft demand continues to grow, our current plan includes 500 megawatts of data center demand by 2029, growing data center earnings contribution to more than 10% of total EPS in 2028. Other leading data center partners are also recognizing the value of our customer-focused offerings and the ideal attributes of our service territory as a choice location. As a result, our growing pipeline of load requests offers compelling upside to our current plan. We are actively engaged in negotiating with high-quality partners, representing more than 3 gigawatts of data center load, a significant increase from our previously disclosed pipeline of 1-plus gigawatts. Supporting this expanded pipeline, 2 additional data center sites were announced in recent months to be constructed in Cheyenne and to take energy as early as 2026. To capture this growth, we have executed nondisclosure agreements and are negotiating service agreements for these and other projects. While doing so, we continue to prioritize meeting our customers' unique needs, maintaining overall system reliability and appropriately addressing risks while ensuring we earn a fair return for our shareholders. Keeping with our normal practice, we will announce details when agreements are signed. Moving to Slide 16. We are very excited to be in the final stage of construction on our 260-mile $350 million Ready Wyoming transmission expansion and are just weeks away from the project being placed in service. By year-end, we will be serving customers with a stronger system that reduces reliance on third-party transmission, enhances resiliency and increases access to market energy, including renewables. Our interconnected transmission network will support long-term price stability for our customers and enable continued growth across our service territory. And as a reminder, this investment is recovered through our Wyoming transmission rider with new rates effective in January 2026. Slide 17 outlines our progress on South Dakota Electric Resource Plan. During the third quarter, we broke ground on our Lange II project, a 99-megawatt utility-owned natural gas-fired generation resource located in Rapid City, South Dakota. This new resource will replace aging generation facilities and address updated reserve margin requirements. We are on pace for the facility to be placed in service in the second half of 2026. Moving to Slide 18. In Colorado, our Clean Energy Plan is ever evolving, moving from a 350-megawatt plan to a 250-megawatt plan. This week, we received approval of our CPCN settlement for a 50-megawatt utility-owned battery storage project. And recently, the commission provided additional guidance on the solar projects. They have requested us to continue negotiating on the 200-megawatt PPA and abandoned negotiations on the 100-megawatt solar project due to increased pricing. Slide 19 summarizes our regulatory progress. We are pleased with our settlement, which was reached during the third quarter for our Nebraska rate review. The settlement provides $23.9 million in new annual revenue based on an ROE of 9.85% and a capital structure of 50.5% equity. We anticipate approval of this settlement in December with new rates effective January 1, 2026, to replace interim rates in effect since August. The settlement also includes the renewal of our 5-year system safety and integrity rider, an insurance cost tracker and a weather normalization pilot program. In Arkansas, we're preparing to file a gas rate review to recover investments that support safe, reliable service and strong growth in the region. We are also preparing for an electric rate review in South Dakota after holding base rates unchanged for more than a decade. The request will recover our customer-focused investments, including the Lange II generation project and increased cost to serve customers since our last rate review in 2014. And finally, in Wyoming, we are preparing to file our Wildfire Mitigation Plan this month for commission approval in accordance with wildfire liability legislation. Following our approval process, we expect to obtain significant liability protections as we remain in compliance with our approved plan. With that, I will now turn the call back to Linn. Linden Evans: Thank you, Marne. As I hope you've heard, we delivered another strong quarter, achieving significant progress within our financial, strategic and regulatory strategies. This gives us confidence in achieving our 2025 earnings guidance and our ability to deliver in the upper half of our long-term EPS CAGR starting next year. We're at a pivotal juncture in our company's history. We have large transformative projects coming online in the near term, coupled with a robust pipeline of growth opportunities, including expanding data center demand. Additionally, our planned merger with NorthWestern Energy will provide us with the advantages of increased scale and new opportunities. Thank you for your interest and your trust in Black Hills as we partner to grow long-term value for our customers and our stakeholders. This concludes our prepared remarks, and we're happy to take your questions. Operator: [Operator Instructions] Our first question comes from Chris Ellinghaus with Siebert Williams Shank. Christopher Ellinghaus: Marne, given your pipeline for data center potential resource requirements, have you guys done anything to put in options or reservations on any important critical equipment at this point? Marne Jones: Chris, thanks for the question. We're obviously very excited about the pipeline that we're building. And much to your point, it is going to require some generation. But we have -- we do have some reservations, and we also continue to use our LPCS tariff, which allows us to serve it through that mix of utility-owned, contracted as well as market purchases. And so really providing us a lot of flexibility in how we serve this growing pipeline. Christopher Ellinghaus: Yes. I wanted to ask you about this. I assume you have a preference for utility-owned, but do you have any considerations or thought process on having it be nonregulated generation transmission? Marne Jones: Yes. With the tariff, certainly, there's good opportunity for utility ownership. But I think the flexibility is what's most important because our tariff does allow us to earn a utility-like return even without the rate base investment. And so that flexibility is really important as we talk about this expanded pipeline because we can be almost agnostic in some perspectives of how we serve it. It's really important, as I mentioned earlier today that making sure we have the reliability. So that obviously is going to come through some control of capacity, but we want to make sure that we're managing it from a risk perspective with tail risk and protection of customers. We want to make sure we're getting the returns. And so that model that we've been talking about here for -- gosh, we've had in place for a little over 10 years will continue to be the model that we use as we talk about this growing load. Christopher Ellinghaus: Okay. Great. Given -- I don't know how to phrase this, but given the activity in the Montana commissions in the last couple of months, have you got any concerns or thoughts about the approval process in Montana? And are you thinking that, that could be extended given what's been happening there? Linden Evans: Chris, this is Linn. We're watching that closely with our friends at NorthWestern. NorthWestern, of course, does a lot of business for a long time in Montana. We're taking a lot of guidance from them in terms of the politics, et cetera. To be blunt, we're not worried. In fact, some of the things that have happened recently arguably can be helpful to the process. We're watching it closely, staying highly engaged with that commissions through our application. We'll be starting discovery here quite soon. We'll look forward to the procedural schedule that will tell us a lot, too. So we're aware and we're managing our way through it. Christopher Ellinghaus: Okay. Given the good third quarter results and sort of where consensus expectations are for the fourth quarter, that sort of implies towards the upper end of your guidance range for the year, but you didn't really address where you think you're falling in the range so far. Are there any fourth quarter issues that you'd highlight that might be on the more negative side? Kimberly Nooney: Yes, Chris, it's Kimberly here. I don't think there's anything that we would highlight. Everything operationally, financially, we're really hitting on all cylinders. We're obviously always focused on the weather. And I'd just remind listeners that our earnings guidance is based on normal weather. So that's the thing that we watch and are probably most concerned about, but it's outside of our control. Operationally, we're in a really good place. So overall, there's just nothing else that I would highlight. And again, I'd just remind listeners that we did reaffirm our guidance for the year. So we're really feeling good about where we're at. Linden Evans: Chris, this is Linn. I would only highlight beyond what Kimberly just said that the largest project -- capital project in our company's history, our Wyoming Ready project is on schedule. We'll have that finished before the end of the year. So that's a big deal for us, too. Christopher Ellinghaus: Sure. Lastly, there's been some data points on some economic issues, some weakness here and there and lots of layoffs of late. Have you seen any indicators of weakness in your service areas at this point? Linden Evans: We monitor that closely, Chris. And I'd say the short answer is no. We're watching that closely. But in our particular service territories, the economic conditions seem to continue to be strong, maybe not as strong as they've been in the past, but they're still -- they're certainly not weak, put it that way. Operator: [Operator Instructions] Our next question comes from Andrew Weisel with Scotiabank. Andrew Weisel: First question, I want to ask [indiscernible] try to quantify the EPS upside from the Crusoe-Tallgrass data center project. Bear with me here. I know that you're not going to answer the direct question here, but I want to go through this thesis going around, you may have heard. The basic concept is you've talked about 10% of 2028 EPS coming from data centers based on 500 megawatts. We can take 2025 EPS, grow it by 5% per year, take 10% of that, divide by 500. That gives a simplified math of EPS per megawatt. You multiply that by 1.8 gigawatts, you get a huge potential impact in the neighborhood of like $1.50 of EPS or more by the time this project is at full scale. It would be even higher if we did like 2.5 gigawatts or 3 gigawatts that you've talked about today. So admittedly, this is very simplified math. But does that approach make sense to quantifying the upside? Or I know you've talked a lot about the tariff structure. Are there diminishing returns or any other reason to think that, that approach and that level of upside is wrong? Kimberly Nooney: Andrew, it's Kimberly. What I generally say is your theory and your mathematical calculation is directionally correct. It's really important to understand that we negotiate with each of these data centers. And so the nuances of those contractual agreements will be different between each of the respective hyperscalers, whether it's our existing customer base with Microsoft and Meta, whether it's the forecasted opportunities with some of the hyperscalers that we're currently negotiating with. So in general, each megawatt is going to look a little different. But from a theoretical perspective, you're absolutely right. This is going to be a significant opportunity from Black Hills' long-term growth perspective. Linden Evans: And Andrew, Kimberly answered that question very, very well. I'd also add that some of these revenues also go back to customers. They go back through administrative fees and other kinds of fees. So it's very beneficial to customers the way these tariffs are set up as well. Andrew Weisel: Okay. Great. That's helpful and very encouraging. Along those lines, you talked earlier about incorporating the upside to the growth plan from data centers only after contracts are signed, which makes sense. Should that happen before the merger closes, would you address the growth outlook? Or is the 4% to 6% more or less frozen, so to speak, until the deal closes? I'm not looking for a number, I'm asking for a philosophy. Kimberly Nooney: Andrew, yes, this is Kimberly again. So obviously, we're very focused on achieving our current growth rate, and we're on target to do that. We've obviously guided to the upper end of that range as a result of a lot of the projects our teams are working on that will go into service, Ready Wyoming, our Lange II project, et cetera. So as we think about data center growth, obviously, it would be a significant upside to our plan. And we would obviously provide an update at the point that we're going to close or sign these contracts. And at that point, we'll assess whether it's the right time to change our earnings guidance range, our long-term earnings guidance range for any reason. So that's really how we're thinking about it at this point. Andrew Weisel: Okay. Very clear. One last one, if I may. You own a coal mine, which has not gotten a lot of investor attention recently. But in today's environment, it might be worth more than it has been in the past. How are you thinking about that asset? Is it something that you could potentially monetize? Coal, obviously, is not a rare earth mineral, but it seems to fall into that rare earth conversation. How do you think about that asset strategically? Linden Evans: We're keeping our options open, I suppose, Andrew. You might know my background is mining engineering. So I'm aware of what this could be and what it could not be. We are aware we have rare earth minerals in our coal, in our fly ash, et cetera. It'd be my personal opinion, probably not enough to monetize, but stranger things have happened. We'll watch what's happening at the Washington, D.C. region, especially if there was a price floor or something of that nature. We're all aware that the Chinese can flood the market very quickly if they choose to in that regard, et cetera. So we're keeping an eye on it, I suppose. Our coal has been tested, analyzed. So we're kind of aware of what's there, but we don't think there's anything that we need to be really happy or concerned about in the near term. How does that sound? Operator: Thank you. I would now like to turn the call back over to Linn Evans for any closing remarks. Linden Evans: Well, thank you, everyone, for your interest in Black Hills today. We appreciate your time. We appreciate your investment in us and your confidence in us. As you can see, I think we're hitting on all cylinders. So we're very excited about finishing our Ready Wyoming project. We're excited about our merger in the second half of next year with our friends at NorthWestern Energy. We'll be seeing many of you in the next couple of days at the Edison Electric Institute Financial Conference. We wish you safe travels, and we look forward to connecting with you there. And then finally, I just want to say a huge thank you to our team, how engaged you are as you're improving our customers' lives with energy every day. Thank you for what you do. And with that, enjoy a Black Hills Energy Safe Day. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
Operator: Greetings. Welcome to Chimera Investment Corporation Third Quarter Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the conference over to Miyun Sung, Chief Legal Officer. Thank you. You may begin. Miyun Sung: Thank you, operator, and thank you, everyone, for participating in Chimera's Third Quarter 2025 Earnings Conference Call. Before we begin, I'd like to review the safe harbor statement. During this call, we will be making forward-looking statements, which are predictions, projections or other statements about future events. These events are based on current expectations and assumptions that are subject to risks and uncertainties, which are outlined in the Risk Factors section in our most recent annual and quarterly SEC filings. Actual events and results may differ materially from these forward-looking statements. We encourage you to read the forward-looking statement disclaimers in our earnings release and our quarterly and annual filings. During the call today, we may also discuss non-GAAP financial measures. Please refer to our SEC filings and earnings supplement for reconciliations to the most comparable GAAP measures. Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date of this earnings call. We do not undertake and specifically disclaim any obligation to update or revise this information. I will now turn the conference over to our President and Chief Executive Officer, Phil Kardis. Phillip Kardis: Thanks, Miyun. Good morning, and welcome to Chimera Investment Corporation's Third Quarter 2025 Earnings Call. It's great to have you with us today. Joining me are Jack MacDowell, our Chief Investment Officer; and Subra Viswanathan, our Chief Financial Officer. After my remarks, Subra will review our results, and then Jack will discuss the portfolio before we open it up for questions. This quarter's story doesn't start in ancient Greece. It doesn't involve hedgehogs or foxes, so we remain proud to be a hedgehog. It began this past spring when we learned that HomeXpress mortgage was for sale. At that point, we weren't looking for an originator. We had just completed our strategic analysis, sharpened our focus and executed on that clarity with the acquisition of Palisades. That integration went smoothly, proved that discipline and culture matter. Because Palisades manages assets for third parties who own HomeXpress loans, we knew the high quality of their production. So when HomeXpress came to market, we reached out. We had an introductory call with Kyle Walker, as CEO and members of the senior team. That conversation was the first of many over the ensuing months. They confirmed we weren't just buying a platform, we were partnering with a team that shares our values and vision. We saw 7 key reasons why this acquisition made sense. First, it met our high standard. When we look at a potential acquisition, we asked 3 questions. Does the management team share our values and vision? Is it profitable and well run? Can it make the whole greater than the sum of the parts? HomeXpress passed each test. I'll discuss profitability, operations and synergies shortly, but what are our values and visions. Our values are simple, long-term orientation, high ethical standards and an insistence on operational excellence. Our vision is to build a company that endures, one where our team members are proud to work, clients receive tangible value and shareholders are rewarded for their partnership. That's the standard and HomeXpress met it. Second, the size and growth of the non-QM market. While there's not a lot of data on non-QM originations, we believe such originations have grown every year since 2021 from about 1.1% of total residential mortgage originations in 2021 to an expected 5.1% or more than $100 billion in 2025. That's a roughly fivefold increase in the sector's market share in the last 4 years. Forecast for the size of the 2026 non-QM market range between $110 billion and $150 billion. We like markets with durable tailwinds. Third, the management team. HomeXpress has an experienced management team that knows how to grow in a disciplined manner, placing quality of production over volume. Fourth, the synergies. The synergies with Palisades and Chimera, we believe, are obvious. Palisades already manages assets for some of the buyers of HomeXpress' loans. By connecting origination and asset management, we can widen that reach to others and support the performance of HomeXpress' loans. While HomeXpress has not had its own securitization program, Chimera is a leader in securitizing residential mortgage loans. We believe that the ability to securitize some of their production at the cost to originate while still satisfying their customer base will provide an additional longer-term source of income. Fifth, expansion runway. Today, HomeXpress originates business purpose loans in 46 states and consumer loans in 42 states. We plan on adding additional states, including New York and accelerate the correspondent channel growth alongside the already successful wholesale channel. Sixth, the MSR opportunity. HomeXpress currently sells all loans servicing-released. They plan to obtain the servicing license they don't have, which will enable us to grow our own MSR book, both from our production and from purchases from third parties, which will create a hedge for our loan portfolio and reoccurring income engine. Seventh, agency originations, a small but promising business that adds optionality and balance. Turning to the transaction. We closed the acquisition on October 1 for $267 million. That's the sum of the 6/30 (sic) [ 8/30 ] book value of nearly $120 million, $120 million premium and about $28 million in stock. The price will be adjusted based on the 9/30 book value and some other true-ups, which we expect will result in an increase in the purchase price of around $5 million. Importantly, the HomeXpress leadership team remains in place, and we granted retention stock to HomeXpress' employees that vest in 3 years because ownership builds alignment and alignment builds results. Let's talk about the numbers. Through September 30, HomeXpress originated $2.4 billion by UPB, up 36% year-over-year, about 40% consumer, just under 60% business purpose and the rest agency. For Q4, we expect around $1 billion in originations, yielding expected pretax earnings of $15 million to $18 million and after-tax earnings of $13 million to $15 million. That's after the application of our net operating losses, and annualized return on equity of 19% to 23%. For 2026, we project $4 billion to $4.4 billion in originations, pretax earnings of $62 million to $80 million and after-tax earnings of $53 million to $68 million, again, after the application of our NOLs. That's a 20% to 25% return on equity. So looking ahead, what does it all mean? It means we believe HomeXpress is accretive to our earnings. It gives us a new revenue stream, greater diversification and more recurring income. It accelerates our strategy, growing our assets and fee generation, which we believe will lead to an increase in our dividend paying ability and total economic return over the long term. We're not just building a bigger company, we're building a better one, one designed for the long term. Now I'll turn it over to Subra to walk you through the financials. Subramaniam Viswanathan: Thank you, Phil. I will review Chimera's financial highlights for the third quarter of 2025. GAAP net loss for the third quarter was $22 million or $0.27 per share. GAAP book value at the end of third quarter was $20.24 per share. For the third quarter, our economic return on GAAP book value was negative 1.4% based on the quarterly change in book value and the $0.37 third quarter dividend per common share. And year-to-date 2025, our economic return on GAAP book value was 8.3%. On an earnings available for distribution basis, net income for the third quarter was $30 million or $0.37 per share. Our economic net interest income for the third quarter was $69 million. For the third quarter, the yield on average interest-earning assets was 5.9%. Our average cost of funds was 4.5%, and our net interest spread was 1.4%. Total leverage for the third quarter was 4.8:1, while recourse leverage ended the quarter at 2:1. Recourse leverage increased this quarter as we continue to increase our capital allocation to Agency RMBS securities. For liquidity and strategic developments, the company ended the quarter -- ended the third quarter with $752 million in total cash and unencumbered assets compared to $561 million at the end of second quarter. During the quarter, we strategically raised liquidity through staggered sales of select assets. We sold $617 million of retained bonds, non-Agency RMBS and Agency CMBS IO positions, releasing $116 million of capital. In addition, we issued $120 million of 8.875% senior unsecured notes due 2030. Net of the underwriting discount and other debt issuance costs, we raised $116 million in capital. The increase in cash balance prepared us with anticipated funds required to close the HomeXpress acquisition, which was finalized on October 1. We closed on our acquisition of HomeXpress for $240 million in cash comprised of an estimated adjusted book value of $120 million. This is subject to certain post-closing adjustments and a cash premium of $120 million plus the issuance of 2,077,151 shares of common stock. Okay. So I just wanted to update one remark from Phil's earlier prepared remarks. The -- Phil mentioned that the adjusted book value was as of 6/30, but it is actually the adjusted book value as of 8/30, make a correction. The purchase price that we paid. And for liquidity, continuing on, separately during the quarter, we added $275 million of Agency RMBS securities and closed on our initial $38 million MSR investment. For repo and hedging, we had $2.1 billion outstanding repo liabilities secured by the residential credit portfolio. 53% of the outstanding residential credit repo or $1.1 billion had a floating rate sensitivity, and we maintained $2.2 billion in notional value of various interest rate hedges protecting the repo liabilities. We had $1.3 billion of either non or limited mark-to-market features on our outstanding repo agreements, representing 64% of our secured recourse funding for the residential credit portfolio. On the Agency RMBS side, we had $2.4 billion notional value of interest rate swap, swap futures and cancelable swaps with varying tenors protecting against $2.4 billion of outstanding repo liabilities. For the third quarter of 2025, our economic net interest income return on average equity was 10.6%. Our GAAP return on average equity was negative 0.1%, and our EAD return on average equity was 7.3%. And lastly, compensation, general, administrative and servicing expenses were higher by $2 million, primarily driven by onetime severance payments. Our transaction expenses were higher by $10 million this quarter, reflecting the costs associated with HomeXpress acquisitions. I will now turn the call over to Jack to review our portfolio and investment activity. Jack Macdowell: Thanks, Subra, and good morning, everyone. We had a busy third quarter as the team remained focused on repositioning the portfolio while maintaining elevated levels of cash in preparation for the HomeXpress acquisition. Against this backdrop, the U.S. economy remained mixed but generally resilient. Growth was supported by continued strength in nonresidential investment, particularly in artificial intelligence-related infrastructure, equipment and software, while labor conditions show gradual signs of cooling. Policy and regulatory developments once again shaped the tone of financial markets. The Federal Reserve shifted from holding the line on restrictive policy to actively easing, cutting the target Fed funds rate by 25 basis points in September. Importantly, the Fed acknowledged that risks have begun to tilt toward labor market conditions rather than inflation alone, reinforcing a market narrative that policy is now oriented towards sustaining growth and employment rather than focusing solely on price stability. In rates, the curve steepened as front-end yields led the rally. The 2-year treasury declined 11 basis points during the quarter, while the 10-year fell 8, widening the 2s 10 spread to 54 basis points. Agency MBS continued to offer attractive carry even as OAS tightened amid lower volatility and strong demand. Current coupon nominal spreads tightened by 24 basis points versus swaps and 21 basis points versus treasuries. Primary mortgage rates declined roughly 35 basis points to 6.32%, spurring a rise in refinance activity as the refinance share of applications climbed from 40% in early July to more than 60% in late September. Housing activity improved modestly, though existing home sales at a $4.1 million annual pace remains well below the 27-year average of $5.2 million. Credit markets remained firm. Investment-grade and high-yield corporate spreads tightened 9 and 23 basis points, respectively. Non-Agency RMBS saw strong demand and healthy absorption of supply with the non-QM credit curve flattening as AAA spreads tightened in the context of 15 basis points and BBB spreads held steady. In the legacy reperforming loan sector, which represents the majority of our portfolio, AAA and senior unrated bonds tightened by approximately 10 and 25 basis points. Overall, mortgage credit fundamentals remain solid, supported by high homeowner equity, low incidence of default and near historic low unemployment. Even so, rising defaults and isolated idiosyncratic events in non-mortgage sectors have prompted heightened investor awareness. Turning to our portfolio. Book value declined approximately 3.2% during the quarter, largely driven by the combined effects of tighter non-Agency RMBS spreads and the rally in short-term rates, each of which lifted the valuation of our securitized debt more significantly than the corresponding gains in our loan portfolio. We made substantial progress in repositioning the portfolio during the quarter. while also preparing for the HomeXpress acquisition. To put that in context, excluding the Palisades acquisition, we began the year with more than 90% of our economic capital allocated to residential credit, just 4% in Agency MBS and the remainder in cash. As of October 1, we are beginning to see a more balanced and diversified portfolio with robust sources of income. The residential credit allocation is now below 70%. Agency MBS has increased to about 17%. MSRs are small but growing at just over 1%. And importantly, we deployed roughly $267 million or about 13% of our economic portfolio into the HomeXpress investment. The issuance of $120 million in senior unsecured debt during the quarter allowed us to retain a larger portion of the Agency MBS portfolio in advance of that acquisition. Our investment strategy remains centered on rotating out of fully valued assets and redeploying capital across opportunities that align with our long-term portfolio construction goals and enhance earnings power. During the quarter, we exited $453 million of retained and non-agency bonds, including senior and subordinate positions, along with the $164 million notional Agency CMBS IO position. These sales released approximately $116 million of net liquidity at a breakeven GAAP ROE of just over 7%. We purchased a net $275 million of Agency MBS, settled our previously announced MSR transaction and increased our cash balance ahead of the HomeXpress closing. This elevated cash balance was a temporary drag on earnings, but we believe that drag will be more than offset by the near-term contributions from HomeXpress as illustrated on Slide 9 of the presentation. Our agency pass-through portfolio now stands at just over $2.5 billion across the coupon stack. Leverage on the agency pass-through book increased modestly to 7.3x from 6.6x during the quarter, with rate and spread sensitivities remaining within risk parameters. We continue to hedge with swaps to maintain tight duration alignment, match our SOFR-based funding and capture additional carry. These positions continue to deliver high-quality income with levered ROEs in the low to mid-teens. On the credit side, the majority of our portfolio is made up of reperforming loans that exhibit high levels of borrower home equity and over 17 years of seasoning. Loan performance remained stable with these loans reporting a modest increase in delinquencies of 20 basis points during the quarter. Recourse leverage on the residential credit portfolio declined by approximately $329 million to $2.1 billion, reflecting asset sales and normal course paydowns. 64% of this financing was structured as non-mark-to-market or limited mark-to-market, up from 58% in the second quarter, while the floating rate component declined from 58% to 53%. As discussed last quarter, our interest rate hedging strategy for the residential credit portfolio remains designed to protect earnings power in a rising rate environment while maintaining upside in the declining rate scenario. During the quarter, we added $600 million in 1.5x 2-year swaptions to further hedge our floating rate liability exposure further out the curve. We continue to evaluate opportunities to unlock value and reinvestment capital by exercising call rights on our legacy securitizations. The scope of our review currently includes 18 transactions collateralized by approximately $5.9 billion of loans. At times, we may call these deals and either sell or resecuritize the loans. These activities can allow us to unlock capital to reinvest in higher return opportunities that drive earnings growth and support our portfolio repositioning efforts. While redeeming debt at par can reduce book value when the debt is valued at a discount, we balance those near-term effects against the benefits of our long-term portfolio objectives. These activities are designed to enhance earnings durability and reinforce the portfolio's resilience across economic, interest rate and credit environments. Turning to HomeXpress. We're excited to welcome the team as this transaction further diversifies our earnings base, creates synergies with our third-party asset management activities and supports our long-term portfolio goals by enabling us to retain loans for our own investment and securitization programs. Overall, the third quarter was another transitional period for both the portfolio and the broader business. We continue to unlock value organically through strategic divestitures, redeployed capital into accretive investments, most notably HomeXpress, diversified our portfolio and sources of income and enhanced our platform capabilities. We remain focused on executing our strategy. And with the HomeXpress acquisition now closed, we are well positioned to capture earnings tailwinds heading into the fourth quarter and into 2026. That concludes our prepared remarks. We'll now turn the line back to the operator for questions. Operator: [Operator Instructions] Our first questions come from the line of Bose George with KBW. Francesco Labetti: This is Frankie Labetti on for Bose. Congrats on the deal closing as well. And first question is on book value. You noted that the change was due to like the steeper yield curve and the increase in value of the securitized debt more than the value of the loans. Can you just walk through that and why the loans don't get a similar mark? Is it due to like liquidity or -- yes. Jack Macdowell: Yes. No, it's a good question. And part of it is a lag in just the timing with respect to when we're seeing spreads change in the securitization markets versus when we actually see that propagate down into the loan market. So that has one effect. The other piece is the shape of the yield curve. So as we saw the 2-year rallied 11 basis points, the 5-year, only 6 basis points, so that steepening caused the yields in our securitized debt to increase -- to decrease more than on the loan side. So that has the effect while our loans actually increased in value, the increase in the value of our liabilities increased more. The other piece I would highlight there, we saw spreads tighten across non-Agency RMBS during the quarter. But when you think about what our portfolio is comprised of, it's really reperforming loans. So there's a rated and a non-rated component there. And the unrated portion of the RPL market is where we saw the tightest spreads that came in somewhere between 20 and 25 basis points. So that represents somewhere between 55%, 60% of our securitized debt. And again, that's what caused the increase in value of our debt more so than what we saw on the loan side. Francesco Labetti: Great. That's very helpful. And do we have an update of book for the quarter? Jack Macdowell: Yes, yes. And actually, we've seen some of that reverse. Some of that has to do with the timing and seeing some loan activity during the course of October, but we're up about 2.4% through October 31. Francesco Labetti: Awesome. And just one last one on the deal, is goodwill $120 million? You noted that the deal was -- that was a premium to book. Is that -- I just want to confirm that. Subramaniam Viswanathan: Yes. This is Subra. Thanks for the question. Well, the total premium was -- well, all the payments above the $120 million book value. Obviously, we haven't closed, and there will be an adjustment, meaning there is some final adjustments to the book value that will come through as we true up September. Now as far as everything is going to be goodwill, that all depends on the purchase accounting. We're going through these numbers right now. And a portion of the purchase accounting, that will -- we are still evaluating how much of that premium is related to intangibles versus goodwill. Operator: [Operator Instructions] Our next questions come from the line of Trevor Cranston with Citizens JMP. Trevor Cranston: A couple of questions on HomeXpress. First of all, thank you for the projections for Q4 and 2026. That's very helpful. I guess when you guys think about the earnings contribution that you're going to get from HomeXpress, can you talk about how you guys are going to approach that with the dividend? Would you expect to pay out the majority of HomeXpress' earnings as part of the dividend? Or do you think a lot of that will be retained to sort of finance future growth in that business? Phillip Kardis: Yes, sir, this is Phil. So that's a question and we started to address last time. It's -- first, as you know, it's a final determination by the Board. But we'll look at a variety of factors, which are related to how much HomeXpress would need to retain to continue to grow and as we want to be able to grow our own asset base even through securitizations, for example, versus current dividend needs. I mean we recognize the benefits for both, and we're just going to have to look at the timing and make assessments at that time where we think the split is appropriate between current dividend needs and future growth. it's a little bit wishy, but it's hard to predict right now for that. Trevor Cranston: Sure. Okay. And then as you look at the origination volume that they're producing, can you talk about kind of your near-term expectations as to how much of that you might retain and securitize for an ongoing investment on the balance sheet and how you sort of view returns on retaining that production as investment relative to some of the other areas you've been deploying capital? Jack Macdowell: Yes, sure. This is Jack. I guess what we would say, first and foremost, is our intent is not to disrupt any of the partnerships that they have with their existing investor base. That's a very important component of their business. We continue to believe that our job is in part to support that effort. With that being said, given just the predictions for the growth in overall mortgage originations in 2026, and the fact that the non-QM share of total mortgage originations has increased every single year since 2020. We believe that their volume is going to be such that our retention of loans will not disrupt any of those partnerships. So I think a fair assessment of that is we'll look to do something in the context of 4 to 5 securitizations a year, maybe 1 per quarter. When that starts will be a function of market conditions. And it's also a balance between they are generating some healthy gain on sale income. And when we retain those loans for our portfolio, that's a long-term investment decision, but we're also giving up some of those near-term gains. So there's an economic assessment that we go through as well. But I think it's a fair assessment to assume something along the lines of 1 deal per quarter. And the other piece of your question, I think, is with respect to economics. I mean it depends on the structure of the deal, how far we sell down in the capital structure and what we ultimately retain. But we're looking at returns on our retained pieces of those deals somewhere in the context of mid- to high teens. Operator: We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Phil Kardis for closing comments. Phillip Kardis: Thanks for participating in our third quarter earnings call. We look forward to speaking to you in February about the fourth quarter and 2025 end of the year. So look forward to seeing you. Thanks for joining. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines at this time, and have a wonderful day.
Operator: Good morning, ladies and gentlemen. Welcome to the BK Technologies Corporation Conference Call for the Third Quarter of 2025. This call is being recorded. [Operator Instructions] There is a slide presentation that accompanies today's remarks, which can be accessed via the webcast. At this time, it is now my pleasure to turn the floor over to your host for today, Jen Belodeau of IMS Investor Relations. Please go ahead. Jennifer Belodeau: Thank you. Good morning, and welcome to our conference call to discuss BK Technologies' results for third quarter 2025. On the call today are John Suzuki, Chief Executive Officer; and Scott Malmanger, Chief Financial Officer. I will take a moment to read the safe harbor statement. Statements made during this conference call and presented in the presentation that are not based on historical facts are forward-looking statements. Such statements include, but are not limited to, projections or statements of future goals and targets regarding the company's revenue and profits. These statements are subject to known and unknown factors and risks. The company's actual results, performance or achievements may differ materially from those expressed or implied by those forward-looking statements, and some of the factors and risks that could cause or contribute to such material differences have been described in this morning's press release and in BK's filings with the U.S. Securities and Exchange Commission. These statements are based on information and understandings that are believed to be accurate as of today, and we do not undertake any duty to update such forward-looking statements. All right. With that out of the way, I'll turn the call over to John Suzuki, CEO of BK Technologies. Go ahead, John. John Suzuki: Thank you, Jen. Good morning. Thank you, everyone, for joining today. I'll start by reviewing some of the highlights of our operations and financial results during the quarter -- during the third quarter, and then I'll turn it over to our Chief Financial Officer, Scott Malmanger, for a deeper dive into our financial results. We'll conclude by opening up the call for a brief Q&A. This was an excellent quarter for our business, highlighted by significant revenue growth of 21% to $24.4 million, driven primarily by robust order activity from federal customers, including multiple purchase orders totaling $12.9 million from the USDA Forest Service. Gross margin improvement to 49.9% compared to 38.8% in the third quarter of 2024, primarily reflecting the ongoing shift in the product mix to our higher-margin BKR 9000 multiband radio. This revenue growth and gross margin improvement, coupled with ongoing cost management, drove a 46% increase in net income to $3.4 million or $0.87 per diluted share. On a non-GAAP basis, fully diluted adjusted EPS was $1.27 in the third quarter of 2025 compared with fully diluted adjusted EPS of $0.71 in the third quarter '24. We also significantly strengthened our cash position in the quarter with cash and cash equivalents totaling $21.5 million compared with $7.1 million at year-end 2024 and have no debt. This gives us the flexibility to deploy capital thoughtfully. Through pursuing that, offer the highest return on invested capital, whether through new product innovation, strategic partnerships or technology investments that strengthen our long-term competitive position in our core public safety communication markets. Over the past four years, we have seen consistent improvement in the gross margins of our business as we have reduced costs, outsourced manufacturing to our partner, East West and launched our higher-margin BKR 9000 multiband radio. We continue that trend in the third quarter, delivering a sequential increase in our gross margin of 250 basis points as compared to the second quarter of 2025. As the BKR 9000 multiband radio continues to gain traction among our customers, the radio's higher price point and margin profile are favorably impacting our gross margin performance. Price increases implemented in the first half of '25 benefited our third quarter margin as well, though some tariff exposure in Asia slightly offset these improvements. With the progress we've made to date, we're confident in our ability to exceed our stated gross margin target of 47% for the full year. Growing demand for our BKR Series radio has driven both sequential and year-over-year revenue growth. We achieved revenue growth of 21% in the third quarter compared to the prior year period, primarily driven by strong federal order activity that included multiple purchase orders from the USDA Forest Service for a total of $12.9 million. Additionally, our BKR 9000 is performing well in the market. We are on pace to deliver between 2x and 3x the amount of BKR 9000 multiband radios in 2025 as we did in 2024. Our particularly strong third quarter revenue growth also benefited from the increased amount of finished goods that we imported in the first half of the year to mitigate the impact of tariffs on our shipments, which allowed us to ship more radios in the quarter. So all in all, a great quarter for the company with continued strong execution by the team. With that, I'll turn it over to Scott Malmanger, CFO, to give a more detailed overview of our third quarter financial performance. Go ahead, Scott. Scott Malmanger: Thanks, John. My prepared remarks will focus on the third quarter results. For a full review of year-to-date results, please consult the press release issued earlier today or the earnings presentation posted on our website. Sales for the third quarter totaled $24.4 million, an increase of 21% compared to the $20.2 million in the third quarter of 2024. As John mentioned, gross profit margin in the third quarter was 49.9% compared with 38.8% in the third quarter of 2024, reflecting tariff-related price increases and improved sales mix as the BKR 9000 continues to gain traction in the market. Selling, general and administrative expenses, or SG&A, for the third quarter increased to $7.3 million compared to $5.2 million for the same quarter last year. SG&A expense for the quarter includes noncash stock compensation expense of approximately $600,000. On August 6, 2025, the company issued 39,250 shares of common stock at a closing price of $38.27 related to restricted stock unit grants, RSUs, issued in 2023 for performance-based compensation around the BKR 9000 radio. Expenses in the quarter also included our continued investment in sales, marketing and engineering. Operating income was $4.8 million in the third quarter of 2025, representing an operating margin of 19.8%. This compares to an operating income of $2.6 million in the third quarter of 2024 or an operating margin of 12.9%. The company achieved GAAP net income of $3.4 million or GAAP EPS of $0.93 per basic and $0.87 per diluted share in the third quarter of 2025 compared with net income of $2.4 million or $0.67 per basic and $0.63 per diluted share in the prior year period. Non-GAAP adjusted earnings, which adds back net realized and unrealized loss on investments, noncash stock-based compensation expenses, noncash income tax provision expense and severance expenses, was $5 million or $1.35 per basic and $1.27 per diluted share in the third quarter of 2025. This is compared with an adjusted earnings of $2.7 million or $0.75 per basic and $0.71 per diluted share in the third quarter of 2024. We reported non-GAAP adjusted EBITDA of $5.3 million in the third quarter of 2025, a substantial increase over the non-GAAP adjusted EBITDA of $3.1 million in the third quarter of 2024. Third quarter 2025 adjusted EBITDA margin was 21.5% and represents our second consecutive quarter of adjusted EBITDA margin greater than 20%. On Slide 7, you can see our enhanced profitability metrics dating back to the first quarter of 2024. While profitability has consistently improved overall, we did recognize a slight decrease in adjusted earnings on a sequential basis related to a provision for income taxes of approximately $1.5 million in the quarter, which is related to the year-to-date R&D tax credit adjustment related to The Big Beautiful Bill signed in July. Overall, our profitability trend has been strong, and we anticipate continued profitability growth as product mix shifts and we increase BKR 9000 sales. Our balance sheet continues to improve as well. At September 30, we had $21.5 million of cash, which, as John mentioned, is a significant improvement over our year-end 2024 cash position of $7.1 million, as well as no debt. Working capital improved to $33.8 million at September 30, 2025, compared with $23 million at December 31, 2024. Shareholders' equity increased to $41 million compared to $29.8 million at December 31, 2024. The strong and improving balance sheet gives us the flexibility to deploy capital thoughtfully to continue to strengthen our long-term competitive position in our core public safety communications markets. To conclude, we're very pleased with our third quarter results, and we believe that we're favorably positioned to execute on a long-term strategy of delivering enhanced value to our shareholders. I will now turn the call back over to John for closing remarks. John Suzuki: Thanks, Scott. With the federal government still shut down, I thought I would take a moment to address the business impact. We have received letters from some of our federal customers asking us to hold shipments while the shutdown is ongoing. And of course, we are complying with these instructions. With that being said, we will continue to execute with the intent to make the planned deliveries by year-end since, in our opinion, it is unlikely the shutdown will extend to the close of the year. In the extreme case, where the federal government shutdown does persist, the business is prepared to pivot product deliveries to fulfill other state and local customer orders. At this point, we believe we have mitigated the federal government shutdown risk as we remain focused on closing out a very strong year of operation execution for the business. We continue to be highly confident in our stated targets for the full year, which are high single-digit revenue growth, full year gross margin of 47% or greater, full year GAAP EPS of $3.15 and full year non-GAAP adjusted EPS of $3.80. Lastly, we continue to make meaningful progress on the development of the BKR 9500 multiband mobile radio, a companion radio to the BKR 9000, with revenue expected in 2027. We look forward to carrying the momentum that we've built year-to-date through Q4 as we close out what should be an exceptional year for the company. With that, I will now open the call for questions. Kelly? Operator: [Operator Instructions] Your first question is coming from Jaeson Schmidt with Lake Street Capital Markets. Jaeson Schmidt: Congrats on the really strong results. John, I want to start with your comments on the government shutdown. Curious if you think any orders got pulled into Q3 in anticipation of this? And I guess, relatedly, I just want to clarify that the outlook for the full year takes into account any continued friction here. John Suzuki: Yes. So September 30 was the year-end for the fiscal year for the federal government. So they don't have money that's associated with the new year, and that's why there's the shutdown. So any of the orders that were planned for the last year's fiscal year had to be spent or issued in terms of purchase orders by September 30, midnight time frame. So in terms of our case, all the orders that we were expected did get processed. Some of them got processed late on the 30, but they all did come in. So it would be very unusual to get an order, like to pull in an order in our business because, again, those funds haven't been approved, and so they couldn't generate an order for the new fiscal year. Sorry, I forgot the second part of your question, Jared. Sorry, Jaeson. Jaeson Schmidt: Just the full year guidance accounts for sort of the continued shutdown. John Suzuki: Yes. So the first thing I would say is, is we don't believe that the shutdown is going to extend through the end of the year. So our planning is, is that we continue to drive the material and stage the orders for shipment because our customers still need that material. They just -- there's just nobody there to receive them, right? So hence, the letters to hold the shipments. We believe that the shutdown will -- the business -- the government will open before the end of the year. Once they open, then we'll be getting approval to ship. So that's what our belief is. And so that's what we're working towards. Now that doesn't mean that's going to happen. There is the upside chance that the shutdown does extend through the end of the year. And so we put a mitigating plan in place that we could redirect that material to fulfill on other state and local orders. So all in all, we believe we're very confident regardless of what happens with the shutdown in terms of our overall revenue guidance. Jaeson Schmidt: Okay. That's helpful. And then just looking at gross margin, understanding some of the step back here in Q4 is related to lower revenue, but anything else that we should be aware of that would sort of drive that sequential decline in gross margin? John Suzuki: So we didn't comment on a sequential decline in gross margin in the fourth quarter, Jaeson. So I'm not understanding your question. Jaeson Schmidt: Okay. So gross margin should be able to remain stable from Q3? John Suzuki: That's our belief. Scott Malmanger: Yes. I think what you were referring to was the decline in our operating income or our net income, and that's due to the tax event related to The Big Beautiful Bill. It's basically an adjustment -- a year-to-date adjustment for the R&D tax credits as part of The Big beautiful Bill that was passed in July. Jaeson Schmidt: Okay. No, understood. Just with the sort of that gross margin outlook for the full year being 47%, I mean, obviously, that was maintained. But just given the Q3 performance, the outlook for the full year probably is -- you're feeling a little bit better on that gross margin line. That's a fair assessment? John Suzuki: Yes. Yes, that's right. We just didn't update it. I think our year-to-date is 48 something, 48.2% is the first nine months. So -- and typically, your margins are higher in the first and fourth quarter because typically, the margins are affected by federal orders, more aggressive pricing, which is usually in quarters two and three. Now a lot of that's just been skewed over the years just because we've been making other improvements. So you really haven't seen that dynamic. At some point, the margins will start to level off, and you'll see that dynamic a little bit more with more aggressively priced products being shipped to the federal government in more of that Q2, Q3 time frame. Operator: Your next question is coming from Samir Patel with Askeladden Capital. Samir Patel: Congrats on a really nice quarter. Scott, I wanted to ask about cash flow, which has been really strong this year and particularly in this quarter. And I noticed that you've actually kind of had some working capital favorability and your cash from ops has exceeded adjusted EBITDA, if I'm looking at that right. So maybe you can just help me think through over the next few years as you continue to grow, just how much -- how you think about working capital and cash from operations as compared to your income statement metrics, basically the cash conversion. Scott Malmanger: Yes. Thanks for the question. Basically, I think we have significant operating leverage. I think that's the best way to explain it. We have seen incremental expenses in our SG&A for investments in sales marketing and engineering on the new products that are under development. So there's going to be some incremental improvement as our revenues grow with the mix of the 9000. So I would say a significant amount of the gross margin improvement will fall through to the bottom line. Samir Patel: Yes. Sorry. I apologize. Maybe I wasn't clear. I was asking more about the cash flow and just receivables, payables, inventories and just as you grow the business, how much you expect to need in working capital? Because this year, you haven't -- it doesn't seem like you've really -- in fact, it's been a contributor as opposed to a detractor, even though you've grown revenues a little bit. Scott Malmanger: Okay. Thanks for the clarification. Yes, I think you are correct that basically, we have favorable terms for our AP and the cash collection cycle still remains very strong. So we will see improvement in the cash cycle itself just due to the timing of the payables and the receivables. We will also expect to continue to reduce our inventory, but that's -- it's not a straight path. It's going to depend on what we have for finished goods for the sales increases. Samir Patel: Okay. So basically, as you look out over the next few years, you don't think you need to invest in working capital. You think it should be pretty clean from income statement to the cash flow statement? Scott Malmanger: Yes. Samir Patel: Perfect. Okay. And then the second question, I just wanted to make sure I understood the comments you made, John, about your mitigation plan for the shutdown. So I guess if I'm understanding this correctly, and just tell me if I'm not, you have a backlog of state and local orders for, I guess, the same radios that you'd be shipping to the federal government. And so if you don't have the ability to ship those federal orders this quarter, you're basically going to pivot, ship those same products to state and local customers this quarter instead of next quarter. And then I guess, whenever the government reopens, you would kind of go back and ship those orders to the federal government. So you're saying that essentially it wouldn't be a material impact to revenue because you're kind of just changing out delivery slots. Is that the right way to understand what you said? John Suzuki: That's correct, Samir. Operator: Your next question is coming from Robert Van Voorhis with Vanatoc Capital Management. Robert Van Voorhis: So I actually just had a few questions. One is a follow-up on the one that Samir just asked actually. And John, is the right interpretation of that dynamic that we are actually currently undershipping demand? Because if all of our -- if the mitigation is just to ship the state and local orders if the shutdown continues as opposed to the federal ones, does that mean actually, if we could ship everything in this Q4, then we would have meaningfully higher demand than what would be maybe implied, if you understand what I'm asking? John Suzuki: Yes. Yes, sure, I do. So there are two aspects. One is we plan our material with our production facilities. We did drive our finished goods a little stronger this year because of the potential tariff increase. So we've been carrying that a little bit higher than normal, I would say, but that will deplete out to the fourth quarter. So we do plan our material for the quarter, right? So it's not like you can just pivot on a dime and drive more material in. It's very difficult to do that. The other part of it is, is the customers. So although the material may match your other customers, those customers have been promised material in certain time frames. And so some of it is going back to those customers and saying, "Yes, I know I promised you in January, but would you accept it in December?" And so there is a little bit of work. It's not as simple as saying, "Oh, I've got all this extra demand, let's just go ahead and ship." You have to have the material to fulfill that larger demand. And then, of course, the customers have to be willing to accept those deliveries. Robert Van Voorhis: Okay. Got it. That makes sense. And so I just have maybe two more questions. And the first one is just on gross margins. So I know our goal for a few years now has been getting to 50%. Clearly, we're already there, and we still have more room to go on the 9000 in terms of fulfilling demand in the out years. So longer term, John, it sort of seems like, at least to my eye, that 50% is not really the ultimate goal. I mean, do you have any comments on where you really want to see it long term? John Suzuki: Yes. So that was certainly our goal to hit 50% by 2025, and we were hoping that we would get that for the full year. It'll end up very close. In terms of where we see the margin profile going forward, we will be talking about our Vision 2030. And one element of that is further margin expansion. So I'll just leave it at that because I don't want to get ahead of myself. We'll be talking about that in the March time frame when we do our Q4 investor call. Robert Van Voorhis: Okay. Got it. And then my last question is just on sort of capital allocation and our plans for the cash. And I know previously, we had alluded to the fact that we might do some M&A. And I just want to ask a bit more directly like how are we thinking about the risk profile with that M&A? I mean, in terms of maybe size and what sort of return metrics we'd be looking at? I mean, is it -- are we going to be acquiring technology that maybe is loss-making now and then in the future is not going to be as you roll it in? Like how do we think about it? John Suzuki: I think I'm going to defer that question, if you don't mind, until the March time frame because part of our Vision 2030 is really -- I mean, we're projecting over the next five years to generate a fair amount of cash. And so I think it's more appropriate to kind of defer it to that time because then the question becomes more material, right? You're going to generate this cash, what do you plan to do with it? And then what kind of companies are you looking at? I think it's better if we have that discussion then, that way I can provide a more thoughtful answer. Operator: [Operator Instructions] Your next question is coming from Aaron Martin with AIGH Investment Partners. Aaron Martin: Congratulations on a great quarter. Scott, I'll start first with you on the tax. I understand it's almost $1.5 million, call it as a catch-up. How should we think about the non-GAAP tax rate going forward? Scott Malmanger: That, I think, is going to be pretty much at the rate -- it depends a lot on The Big Beautiful Bill and the treatment for the R&D tax credits because there's going to be an acceleration function. So depending on our tax experts to give us some good guidance there, but what we've guided to in the past is a rate in the range of 24% to 26% for income taxes. Aaron Martin: Got it. So which means there wasn't that much of a catch-up in this quarter that was close to a full tax rate. Scott Malmanger: There was quite a bit -- if you look at what we had for year-to-date in June, I think it was something like a 14% rate. The third quarter was definitely a catch-up. I think year-to-date now the rate that we had was about 20%. So it's trending towards the 26%. That's correct. Aaron Martin: Got it. Okay. And John, going back again to hash out this shutdown and your handling of it, what -- how much -- I guess, roughly what percentage of your backlog is federal versus state versus other agencies? John Suzuki: I don't have that number off the top of my head, Aaron. We did make quite a bit of deliveries to the federal government in the third quarter, which helped us achieve that $24 million. I don't have it -- we'd have to get back to you. I don't want to guess. It's easy the majority is state and local, right? The majority... Aaron Martin: I would say, it's not 70% federal, 30% state. It's something... John Suzuki: Yes. I think it's -- yes, it's like 25%, 35%. We thought we would do about 35% federal business this year, which we're -- we'd probably be less than that maybe, depending on the shutdown and how that goes. Aaron Martin: Got it. John Suzuki: But yes, the majority of the backlog is state and federal. Aaron Martin: And then I want to nitpick you a little bit on the 9000. You talked about the confidence in the 9000 being -- shipping 2x to 3x the number of radios in 2025 than from 2024. In the past, the language you've used was 3x revenue. So I don't know if this is -- should we be taking this as a different language there? Or what should I take from that? John Suzuki: Yes. Actually, I'm not -- I don't remember using 3x revenue. I think the last few calls, we've been saying 2x to 3x as many units. But the units average pricing, I think we talked about was about $2,500. That's consistent. So... Aaron Martin: Okay. So no change there on your expectations for the 9000 growth? John Suzuki: No. Aaron Martin: Congratulations on the progress. Operator: [Operator Instructions] Samir Patel has a follow-up question. Samir Patel: Apologies. I was on mute. I just wanted to go back to gross margins and a comment you made in response to the last question. So first of all, you had elevated federal orders in Q3 relative to Q1 and Q2, correct? John Suzuki: Yes. Samir Patel: Okay. But you also saw -- I mean, you saw a pretty significant step-up in margin from 47.4% in Q2 to 50%-ish around in Q3 as you had the price increases, the mix, et cetera, but that was with, I guess, the headwind of having more of those federal orders, which are your lower-margin product and your best pricing, correct? John Suzuki: Right. Samir Patel: So on a like-for-like basis, I mean, if you're looking at on a -- if you're trying to just separate out kind of the structural margin of the business, I mean, your mix -- it seems like the margin in the quarter was, I guess, even stronger. And to -- I think Robbie asked the question earlier about gross margins. I mean that should give you confidence that even with a heavy federal quarter, if you're hitting 50%, then if you kind of average it over the year and look at more of your growth obviously coming from the state and local, I mean, surely, you should be pushing well into the 50s. Is that a reasonable interpretation? John Suzuki: Yes. Operator: There are no additional questions in queue at this time. I would now like to turn the floor back to John Suzuki for closing remarks. John Suzuki: Thank you, Kelly. Before I close the call, I would like to also mention that Scott and I will be attending the 14th Annual ROTH Technology Conference this month on November 19 at the Hard Rock Cafe or Hard Rock Hotel in New York City. With that, I wish you all the best, and have a great day. Operator: Thank you, everyone. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.
Operator: Good day and thank you for standing by. Welcome to the Borr Drilling Limited Q3 2025 Results Presentation Webcast and 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, Mr. Bruno Morand, CEO. Please go ahead. Bruno Morand: Good morning, and thank you for participating in Borr Drilling third quarter earnings call. I'm Bruno Morand, and with me here today in Bermuda is Magnus Vaaler, our Chief Financial Officer. First, covering the required disclaimers, I would like to remind all participants that some of the statements will be forward-looking. These matters involve risks and uncertainties that could cause actual results to differ materially from those projected in these statements. I, therefore, refer you to our latest public filings. For today's call, I'll start with a review of Q3 and highlight key developments since quarter end. Magnus will then review our quarterly financial results. I'll follow with a deeper look in the market and our commercial execution, and we'll conclude with your questions. Let's get started. Our third quarter results were strong, extending the rebound delivery in the second quarter. With 23 of our 24 rigs active, our commercial team continues to execute at the highest levels, delivering strategically and timely contract despite a volatile and dynamic market. Revenue increased by $9.4 million quarter-over-quarter and adjusted EBITDA rose 2% to $135.6 million with a margin of 48.9%, confirming the quality of our earnings. Operational execution continues to be industry-leading with technical utilization of 97.9%, and economic utilization of 97.4% across the fleet. Subsequent to quarter end, in October, we are pleased to announce 3 contract extensions in Mexico. Mexico remains an important market for Borr Drilling. Notably, collections restarted in September with approximately $19 million received in September and October. These inflows, together with the recent government actions to strengthen Pemex finances are the basis for our confidence in continued normalization of payments. Additionally, in October, newly imposed international sanctions affecting one of our counterparties in Mexico required us to issue termination notices for the old and the new contracts. Today, we announced new commitments expanding Borr Drilling footprint into the Gulf of America and Angola. These awards strengthen and diversify our customer base and portfolio, underscoring our ability to navigate evolving markets and minimizing idle time across the fleet. We expect fourth quarter 2025 results to reflect fewer operating days due to several rigs transitioning between contracts and the recent impact of sanction-induced contract terminations in Mexico. Despite this, we anticipate full year 2025 adjusted EBITDA in the range of $455 million to $470 million. In recent quarters, we've experienced a step-up in jack-up demand across several international markets, absorbing available capacity and providing gradual relief to the headwinds from 2024. While near-term volatility may persist, clear signs of demand inflection in Saudi Arabia and Mexico, 2 of the world's largest jack-up markets, together with incremental activity in other areas provide us with confidence that the market is now past the trough. We foresee a tightened market in the near to medium term that should support higher utilization and day rate levels. I'll walk you through that in more color later in the call. But now I'll hand the call to Magnus to discuss third quarter financial results. Magnus Vaaler: Thank you, Bruno. I will now go into some details of the financials of the third quarter. As Bruno mentioned, we continued the good trend seen in the previous quarter and the results quarter-on-quarter improved. Total operating revenues increased by $9.4 million due to $2.5 million increase in day rate revenue and $6.4 million increase in bareboat charter revenue. The $2.5 million increase in day rate revenue was primarily due to an increase of the number of operating days and day rates for the Ran and Thor, recognition of day rate revenue for the Odin versus previously being recognized as bareboat charter revenue and an increase in reimbursable revenue for the Balder. These increases were offset by a decrease in the number of operating days for the prospective one. The $6.4 million increase in bareboat charter revenue is primarily due to the rigs Galar, Grid, and Gersemi being fully operational in the quarter compared to being on suspension for part of the prior quarter. This increase was offset by the decrease in bareboat charter revenue for the Odin, and the bareboat charter contract was terminated effective June 30 and begun earning day rate revenue in August 2025. Total rig operating and maintenance expenses increased by $6.3 million, which is primarily as a result of the increase in reimbursable expenses for the Grid. This in total gives us an operating income of $98 million, a $1.5 million increase from the prior quarter. Further, below the operating income line, total financial expenses net increased by $2.2 million, primarily due to foreign exchange loss offset by some higher interest income and lower interest expenses. Income tax expenses increased by $6.5 million, primarily due to a one-off deferred tax benefit recognized during the prior quarter, with no comparable in the current quarter. As a result of the before mentioned, net income for the quarter was $27.8 million and adjusted EBITDA was $135.6 million, an increase of $2.4 million. Moving on to cash. Our free cash position at the end of Q3 was $227.8 million. In addition, we have $234 million undrawn under our revolving credit facilities, resulting in total available liquidity of $461.8 million. Cash increased by $135.4 million in comparison to the prior quarter, explained by the following: Net cash provided by operating activities of $72.1 million, which includes $6 million of cash interest payments on our convertible bonds and $13.2 million of income taxes paid. Operating cash flow for the quarter was further impacted by a buildup of working capital, primarily driven by approximately $42 million increase in trade receivables in Mexico and a $13 million increase in trade receivables relating to the rig Vali. However, subsequent to quarter end in October, we received approximately $17 million related to the trade receivables in Mexico and $10 million related to the Vali. We expect to receive further settlements for our Mexico receivables, both in November and December. Net cash used in investing activities was $33.9 million and is comprised of jack-up additions, primarily as a result of activation costs and contract commencement for the Vali, capital additions for drilling equipment and maintenance costs. Lastly, net cash provided by financing activities was $97.2 million, primarily due to $96.9 million net proceeds for the company's July 2025 equity offering. With this, I will pass the word back to Bruno. Bruno Morand: Thank you, Magnus. Year-to-date, we have secured 22 new commitments, adding $625 million to our backlog. Since our last report, we've continued to secure meaningful awards. First, in Mexico, we secured 3 contract extensions. Galar and Gersemi received 2-year extensions on improved commercials and payment terms. These commitments not only strengthen our 2026 utilization, but they also provide visibility well in 2028. Under the revised structures, operating costs will be reimbursed by the customer on a fixed 45-day payment term, materially reducing our working capital needs. Bareboat charter payment terms will be kept at 180 days. And for the Galar, this cap will progressively improve over time. Additionally, we received a short-term extension for the North and continue in active discussions with our customer in Mexico about a long-term deployment for the rig. In Mexico, going forward, we will have a total of 5 rigs working from a previous count of 7, with 2 rigs being reassigned to new work elsewhere, as I'll cover shortly. Regarding the 5 remaining rigs in country, 2 are long-term contracted with payment protection provisions, 2 are contracted with IOCs, and only 1 has direct Pemex payment exposure. This is a significant change in our fleet mix in country. I'm also pleased to report on recent awards in Americas and West Africa, along with several other contracting updates. In the Gulf of America, the Odin received a letter of award for a 6-month campaign with an undisclosed operator. The campaign is expected to commence in January 2026. This will mark our entry into the U.S., and again highlights our team's ability to timely secure work for the rig, following sanction-induced contract termination. In West Africa, the Grid has received a letter of award for a 6-month commitment plus unpriced options with an undisclosed operator in Angola. The campaign is expected to commence in the first quarter. Leaning on our strong relationships, we have collaborated with our partner in Mexico to reassign wells previously allocated to the Grid to our other rigs in country. This will enable us to conclude operations with the Grid in Mexico in November, and the rig will begin its mobilization to West Africa in December. Also related to the Grid, we have agreed with New Age to reassign the contract we previously allocated to the NAT to the grid, and expect to commence a 1-well campaign with New Age in Congo in January, prior to commencing the work in Angola. Additionally, in West Africa, we are in discussions with ENI regarding their current well sequence for the NAT in Congo. While there are various scenarios in consideration, we now expect the NA to stay busy with ENI in Q4, and potentially into early part of 2026. I'm also pleased to share that we have agreed with Shell in Nigeria to accelerate the NAS campaign originally scheduled to commence in November 2026, now to April 2026. This significantly reduces potential idle time for the rig and provides Shell the ability to accelerate their well delivery schedule. It is clear to me that Borr Drilling is the preferred partner for shallow water drilling operations. In recent months, we have been trusted with commitments from our customer to deliver critical wells globally. For example, Shell with their highly anticipated HI project offshore Nigeria, ONE-Dyas for the first fully electrified offshore drilling campaign in the Netherlands and CME in Mexico for their Bacab-Lum project, just to name a few. It is particularly notable that despite the various market headwinds presented in 2024, and early this year, our 2025 fleet coverage has reached 85% at an average day rate of $145,000. This is in line with our earlier targets of achieving 80% to 85% coverage in the year. Our full year 2026 coverage, including price options, now stands at 62%, a 15-point improvement since our last report. Taking a closer look into 2026, we have 79% coverage in the first half, a solid position to build from as we enter into the year. Based on our current pipeline of opportunities and ongoing negotiations, we expect that utilization levels for the first half of 2026 will continue to increase in the coming months. At the same time, recent developments in Mexico and Saudi give us increased confidence in a tightening jack-up market and a constructive outlook for the second half of the year. This should position us well to gradually fill up the coverage for 2026, while maintaining a disciplined commercial strategy. On the commodity front, Brent crude has remained volatile, but range bound in the mid-60s. Current price levels have still allowed for meaningful contracting activity this quarter as lower breakeven shallow water projects offer a relatively rapid B2 barrel cycle for our customers. Despite several macro uncertainties, global utilization has remained resilient, in fact, increased quarter-over-quarter with modern rig market utilization at approximately 93%. In Saudi Arabia, we're encouraged by the market reports confirming that Aramco has issued notices calling back several rigs previously suspended in line with our earlier expectations. As of today, our count is that 7 to 8 rigs have been called back by Aramco, effectively taking the majority of the readily available modern rigs still available from suspensions. The remaining idle rigs are either rumoured to be committed elsewhere or have moved to cold stacked after the suspension last year. The increase of activity levels in Saudi will significantly tighten the supply and demand balance in the region. Equally positive, as we highlighted in our last call, we continue to see visible incremental demand in the Middle East, particularly Kuwait and the neutral zone with multi-rig, multiyear tenders progressing towards awards. Now coupled with the callbacks from Saudi Aramco, there is a real scenario for rigs from outside of the Middle East to be required to mobilize into the region to meet the forecasted increased demand in late '26 and into 2027. In Southeast Asia, demand has remained resilient despite various market obstacles. As mentioned on past calls, weakness in the region has been driven by excess supply targeting opportunities following Aramco suspensions. We expect this dynamic to improve in 2026. In West Africa, incremental demand has continued to materialize as expected, and as evidenced by our mobilization of an additional unit to the region. Contract activity has continued to accelerate in the past 12 months, and we see opportunities developing in areas that historically held a much higher jack-up count, particularly in Nigeria and Angola. Mexico is one of the world's most consequential shallow water markets and remains strategically important for Borr Drilling. Over the past year, industry-wide payment timing challenges and temporary contract suspension at Pemex have affected activity cadence. We responded constructively. We evolved our Mexico contract portfolio, thoughtfully diversifying beyond concentrated Pemex positions into IOCs and independents while continuing to partner with Pemex for terms to support sustainable operations. Looking into 2026, we see a market where turbulence begin to ease as the year progresses. White space for the global modern jack-up fleet is heavily weighted towards Asia and the Middle East in near term, a phenomenon we see reconciled by demand increases in those regions over the next few quarters. In closing, I'm pleased to see how Borr Drilling continues to successfully navigate the dynamic market experienced over the last couple of quarters. We secured important contracts for our premium rigs, strengthen our fleet coverage in 2025 and into 2026. We have continued to partner with our customers to optimize our fleet availability or offer them unique operational schedule flexibility. Based on that, we now anticipate 2025 full year adjusted EBITDA to be $450 million to $470 million, aligned with our early expectations and adjusted for the impact of the recent sanction-induced terminations. Demand for modern jack-up rigs remain resilient. The jack-up market has bottomed, and we're seeing clear inflection in rig demand across key regions, including Saudi and Mexico. Lastly, I want to emphasize the strength of our drilling operating platform. It is built on operational excellence, anchored by a strong focus on safety culture and streamlined operating model that keeps us efficient and predictable. It's relentlessly customer-centric, informed by intimate knowledge of the shallow water market and strengthened by deep-rooted relationships. It is powered by our premium jack-up fleet and our global footprint. This platform is our defining competitive advantage and position us uniquely to benefit from ongoing market inflections. With that, I'll now turn the call over to Q&A. Operator: [Operator Instructions] We will now take the first question from the line of Scott Gruber from Citigroup. Scott Gruber: It's good to hear, obviously, the new contracts in Mexico for you and good to hear Saudi is calling some rigs back. It seems like the market is improving here. But just curious how you view the next 12 to 24 months in the global jack-up market. Is this momentum going to continue? Are we going to see a genuine inflection in demand in the next year or so, even if crude is range bound? Or do we need some improvement in crude to really drive that inflection? Bruno Morand: No. Thanks, Scott. As I mentioned earlier, a lot of the inflection now is basically resulting from the fact that the headwinds experienced earlier, namely Saudi and Pemex are now starting to revert. If you look at activity levels or if you look at utilization levels, at 93%, that number is very healthy. And with the suspension now rolling back, the 93% is a real number. It's not a number that requires adjustment. So we are in a territory that is quite interesting. Obviously, it takes a little bit of time for some of these dynamics to take place. We expect that as particularly the tenders in the Middle East start to conclude, the push for rigs to come back will start to kind of come through and that rebalancing is what eventually helps us in achieving higher utilization and better day rates in general markets. Now I say beyond the Middle East, we've seen that most markets have been operating at or very close to balance, and that includes, for example, West Africa. And we think that obviously, the ongoing inflection will support faster recovery in markets like that. On the opposite end, as I mentioned in my remarks, markets such as Southeast Asia, for example, where the demand takes a bit longer to materialize, may take a quarter or 2 before we see the real impact of that. But I think the way to think about it is we're going to continue to navigate some volatility in the first half of the year, improving. The potential here for a much stronger second half of the year seems to be solid defined based on this development that we see. Now we said before, in terms of commodity price, pricing where it is, I believe, is quite healthy for the jack-ups. It is -- jack-ups are very economical barrels for the customers. They are fast barrels to the market. And we think it's actually quite interesting for us to have pricing at that level. So I don't think that pricing movements here are needed to spark additional activity. It's really just the timing that takes for the development in Saudi, the developments in Mexico and some of the ongoing tenders to really come through. Scott Gruber: I appreciate that color. And then one of the macro themes we're seeing here is rising demand for natural gas around the globe to help power data centers and just generally rising power demand. How do you think that impacts the jack-up market in the years ahead? And I'm particularly thinking about Southeast Asia. Is there a pull from the gas side that's going to help that market? Bruno Morand: No, indeed, Scott. And we've been participating in several very interesting gas projects around the world. And I think in the previous quarters, we named, for instance, the ENI project in Congo, which is a very interesting and large-sized gas development. In Asia, we've been participating in gas projects before. There are a few very interesting projects, particularly in the area of Sarawak, that have been put on hold for now until the situation in Malaysia gets resolved, the political situation in Malaysia gets resolved. Aramco has, over time, obviously expanded their presence in gas, and I think it's been largely onshore focused. But there have been discussions over the last few quarters about Aramco potentially returning to gas in the offshore space in a more meaningful way. So clearly, what you see is true. We do expect that there will be high interest from our customers to start developing some of these gas projects that are available around the globe. Operator: We will now take the next question from the line of Eddie Kim from Barclays. Eddie Kim: Congratulations on the 2 separate 2-year extensions on the Galar and Gersemi in Mexico. Just curious on pricing for those 2 rigs. I don't know if you can share if the day rates on those 2 extensions are similar to what they're earning today, or higher or at a discount? Just any kind of directional commentary there would be great. Bruno Morand: Very good. And we haven't disclosed specific numbers for that. But what we shared, they are a notch above from where the rigs are operating at the moment, which that on itself is very interesting. But equally relevant, as I mentioned in the prepared remarks, is the fact that we were able to negotiate improved contract terms and payment terms for those rigs in particular. What we've seen over in Mexico over the last several quarters has been that collections has been a very relevant topic. So we took marked efforts to ensure that we were adjusting these things in this contract, not only to improve the day rates because that's an important part, but equally important to make sure that those day rates are received in the bank account, and we don't have a growing working capital requirement in the country. Eddie Kim: Separately, it's great to hear about the expected activity inflection in Saudi Arabia. Just curious, I mean, 2 years ago, the Saudi Aramco jack-up rig count was as high as almost 90 jack-ups. Today, it's around 55. Just curious, where do you think we get to sometime in 2027? Probably not back up to that 90 level -- but does 70, is that reasonable? Or even that too high? Just curious your estimate of where the jack-up rig count could get to by 2027. Bruno Morand: Yes. And Eddie, this is a great question, probably not a very easy one to be precise. I -- from our deck, we think that a number in the high 60s and 70s is very likely. I think a number in the high 70s is possible. The reality is that the big scheme of things, as I mentioned in the prepared remarks, even with this callback that just took place over the last couple of weeks, capacity in the region is actually already very tight, right? So whether that number is low 70s, whether that number is high 70s, I think actually has very little bearing on how the sector is going to respond. Because in any case, any lag up from where we are at the moment is very likely to cause an acceleration in utilization and consequently in economics in the space. I think a number in the 70s is very reasonable, but I would probably fall shy of trying to predict around for behaviors. We all try and the best. It's definitely not an easy thing. They have a lot of things going on. So that's the way to think it. I think anything they do on top of the callbacks that already took place is more than welcome in the sector and kind of strengthen the space tremendously. Operator: We will now take the next question from the line of Fredrik Stene from Clarksons Securities. Fredrik Stene: I have 2 questions for you today. And the first one relates to Mexico and the payments there. Clearly, liquidity in general has been a recurring theme given your historical or Mexico exposure, mostly Pemex. Now that you've received some money in October and small sum in September as well, how do you think about potentially -- I think historically, Pemex has paid suppliers mostly. Should we expect any similar payments as you got in October in November and December as well? Do you have any clarity on that kind of taking your receivables down? Magnus Vaaler: Thank you, Fredrik. Obviously, very positive to see that what we have predicted payments starting to flow in the second half of the year actually has happened, and we received $17 million in October. We have -- from what we see in the plans, there are payments to come in, in both November and December as well. And following that, we would also expect things to return more to normal with monthly settlements. Also, that being said -- and Bruno, Bruno also mentioned the improved payment terms that we have in our new contracts, which has actually a cap on the number of days we can have outstanding for operating costs that we pay on our O&M of 45 days. So we expect to get that paid within 45 days, and also a maximum of 180 days outstanding for the bareboat. So that's also going to improve on our collections as we see it since we're not contracting directly with Pemex for these 2 rigs, but between the intermediaries, we have obtained payment terms from them. Fredrik Stene: For my second question, switching gears a bit. There has been some industry consolidation in the space this year with ADES likely acquiring Shelf if all -- everything is checked. And clearly, there's -- in almost any type of consolidation, there are room for fleet improvements, scrapping and whatnot. But you guys, you have a premium -- a full premium fleet already. And I'm sure there are some other assets out there that could be an interesting fit for you guys. Have you thought any more actively on how Borr could potentially be in any M&A or asset transaction scenario, since you're kind of both in the third quarter and in relation to the equity raise in July seemed a bit more open to that particular theme compared to what you have been earlier? Bruno Morand: Thanks, Fredrik. And see, I hope my answer is probably not too much of a repetition from what I've tried to put across in earlier calls. Consolidation is definitely important for the space. It has been welcomed in general. And you're right, whether result of that consolidation or just the state of the market, we have seen together with it some additional retirements, some additional scrapping, some additional repurposing, which is obviously another very important dynamic for the sector. So those things are indeed interesting. We continue to look -- you're right, as I highlighted in the remarks, we do believe we have a very strong operational platform that can deliver better value for jack-ups than perhaps quite a few of our peers. And that's really what puts us in a position to meaningfully look into how we participate in consolidation if opportunities were to come. But as you said before, and you mentioned that in your question, there are some metrics that are very important for us to consider. And one of those metrics is really the quality of the fleet. We are very proud to have the youngest and the most premium fleet in the water. And obviously, it's important for us to make sure that anything that we're looking to does not come at the expense of diluting the quality of the fleet that we have. Similarly, as we said before, I think a very strong driver for the company at the moment is to make sure that we continuously delever our balance sheet over time. So when we look at any M&A transactions, it has to be something that makes sense from a deleveraging perspective. So when you put these things together, we continue to see what is out there. I do think that we have a great platform to grow -- we don't have to, and we're going to continue to look at that opportunistically. I do think that the sector can do more consolidation. And if it can be part of it, if it is rational, if it fits our strategy, we're definitely open to see what's out there. Operator: We will now take the next question from the line of Doug Becker from Capital One. Doug Becker: Bruno, you've emphasized the expanding Borr footprint. Curious how you're thinking about balancing portfolio diversification versus having scale in particular markets to manage costs? And maybe putting it differently, do you view growing the fleet in the U.S. Gulf, Angola, Saudi Arabia as strategic priorities? Bruno Morand: Thanks, Doug. And see, I think you're right. There's a very interesting balance between not stretching ourselves too wide. But the way I see at the moment, our operation, if you look in the markets where we are present, we are in very large scale in these markets. And generally, our expansion has been in adjacent markets. So obviously, Angola is a new place for us, but we have a very strong operation in West Africa and a very strong knowledge of operation in West Africa that will help us to build that up. The U.S. is definitely a new frontier. But on the Mexico side, we're present. We understand the operational challenges. We understand how to be successful in that environment. Certainly, there will be some learnings from the U.S., which is new to our portfolio. But certainly, we feel that we are in a good position to manage that. Frankly, I don't -- I wouldn't say at this time that the U.S. is expected to be a large expanding market for us. Getting rig there, I think, is a good achievement for us. It's a new place that we're going. I do see some of the policies in the U.S. potentially supporting more activity. For now, we see a pipeline that is enough to keep Odin busy for quite a while, and that's what we're targeting. If more opportunities come in the back of changing policies, changing incentives for operators in the U.S. to go forward their projects, we'll be ready to look at that. For now, I think it's probably a rig play. Doug Becker: Then just given the increased confidence that the jack-up market is past the trough, any changes to the capital priorities? I know you mentioned deleveraging over time, still a priority. But just given a better market outlook, is there any shifting in how capital might be allocated? Bruno Morand: No, not at this time, Doug. I think we maintain the view that deleveraging is a priority for us, and it will be for a while. So we want to make sure that by the amortization that we have in our bonds, by the potential cash sweeps that we have in the bonds, we're positioning ourselves to be in a very favorable position to refinance our debt in 2028. That is on the back of obviously, deleveraging consistently over time. Other priorities, I think we'll leave it for another day. I think it's a bit too early for us to consider. The momentum is positive. That doesn't drive a change in strategy for now. Operator: We will now take the next question from the line of Ben Sommers from BTIG. Benjamin Sommers: I know you touched on it a little bit in the press release, but kind of curious how you're looking at the new build market. I know you guys mentioned that there's some supply chain challenges that you think will kind of push out these new build rigs entering the market. So just kind of curious any color there on what you're seeing. Bruno Morand: Yes. No, nothing's changed, Ben. We -- I think quite a few quarters ago, we shared a view that we believe that the order book that is namely there, there may be 1 rig, 2 rigs maximum that would come to the market. That was several quarters ago. None of these rigs have come out. And obviously, the longer they stay in the shipyard, the more complicated it is. A lot of these rigs are very -- were in very early stages of conclusion when they were stopped or abandoned, is not easy. We haven't seen any one of them coming out. I honestly do not expect that to change as things improve. Unknown Analyst: Awesome. Then I know you touched a little bit on the U.S. Gulf entry, but just curious kind of on Angola, now bringing a rig there, just kind of any outlook or color on that market. Bruno Morand: Yes, sure. I mean, it is a new area for us. We have been looking at Angola before and waiting for the right moment and the right opportunity to be in country. As I said earlier, we have a very well-established infrastructure in West Africa. So Angola was a bit of a natural growth opportunity for us. Historically, as I mentioned in the remarks, it is a market that had a quite substantial activity level for jack-ups that has been subdued for quite a few years. It seems that the potential is very large. And that's not limited to Angola. We see quite a few markets in West Africa that haven't had enough activity for quite a few years now coming back and being able to penetrate Angola now. Having that as an opportunity for our portfolio, I think strengthens our flexibility going forward. Operator: We will now take the next question from the line of Greg Brody from Bank of America. Greg Brody: Just you talked about better collection terms on your new contracts and obviously, collected $19 million in October from Pemex. How should we think about what the opportunity to recapture sort of that -- the receivables is over the next year? Bruno Morand: Sorry, your question was on how to capture the receivables from Pemex? Greg Brody: Pemex, that's the main one, yes. Yes. Bruno Morand: No. I think what we've seen now is that Pemex has -- and the government of Mexico has put in place several schemes this year, want to refinance their financial liabilities and also their vendor or supplier liabilities with a $12 billion setup. And that's something we've seen they've gone through now in the second half started to repay, and we received $17 million so far in October. We see times of having more payments come in, in November and December and expect a return to normality when it comes to payments in Mexico. So I think it's looking like they are taking the right steps in Pemex and the government in Mexico to become more current on their payables definitely. Greg, just to highlight what we've kind of mentioned earlier, obviously, we have current receivables that we are -- and we will continue to work hard to collect them. With the new contract terms that we have and the new allocation of the portfolio in Mexico, effectively, then York will continue to have Pemex payment exposure, while the remainder of the fleet in country will now either be working on IOCs or include fixed payment terms that diminishes tremendously our exposure to the Pemex payment friction. So that doesn't resolve the current outstanding receivables, and we continue to work very hard, as Magnus said, to lean on the existing facilities in place, the mechanism the government put in place to accelerate that. But going forward, we expect that very soon the new terms will slow down considerably the accumulation of receivables in Mexico and keeps us far more current. Greg Brody: Then just with the sanctions, you -- obviously, you moved one of the rigs, so that leaves the hill. What are your expectations for how this plays out, in particular with what I think is the sale to Gunnlod of those assets. But what's your expectation for that? And how are you thinking about what you do with the Hill from here as a result? Bruno Morand: Yes. It's probably early to say, Greg. What we know is we've worked very diligently. As soon as we became of the sanctions, we did what we were required to do to make sure that we stick to our governance and comply with international requirements. We are currently winding down operations on those rigs. We're expecting both of them to finish around mid-November, the ongoing activities as allowed by the sanctions. And we continue to monitor the situation. It could change if there's a sale potentially. We don't want to speculate. For now, we're doing what we have to do. It's a customer that, over time, I think we deliver great service for them. They seem to be extremely happy with what we've done over time; and provided no sanctions affect our ability to continue working in that field or delivering that program, we definitely will be more than happy to continue to do that. But I don't want to speculate for now. We're sticking to the rules as they apply, and then we'll see if things change as we go along. Greg Brody: Have you seen this uncertainty with sanctions impact the rig market at all? You're probably a little closer to this than me, but how many others have been affected by the suspensions? Bruno Morand: Well, I won't comment much about others. I mean, the only thing I think has been in the news recently was a similar impact of advantage on the deepwater market. In the shallow water market, I haven't seen any other announcements. As far as we are concerned, the impact of that has been limited to Mexico. We'll continue to monitor the whole topic of sanction is a very dynamic topic at the moment. For now, that's been the only impact to our business, which we disclosed, which is the loss of revenue. For the Odin, we're very happy to see that the rig has been re-contracted now. For the Hild, we'll continue to see what are the opportunities for the rig, whether it involves returning to the same project once the field is sold or if the field is sold or alternative deployments for the rig within with the region. Greg Brody: Great. And one last one. Just what's your expectation for cost trends on the operating side here relative to this quarter going forward? How should we think about that? Bruno Morand: Sorry, Greg, I'm not sure if I got your question. Cost trends on the operating side. Greg Brody: What's your expectations for the direction of your cost up -- or is there opportunities to cut costs? Just wondering how you're thinking about that going forward. Bruno Morand: Yes. No. And as we said before, we've been seeing operating costs very steady over time. There are differences in operating costs from region to region, from country to country. But all in all, we have not seen a significant change in operating costs over the last few quarters and neither we have any reason to believe that that's going to be changing going forward. The team continues to be working focusedly on finding savings in our operations, streamlining operations, and that clearly has been more than enough to offset any inflation experienced in the sector. But so far, it has been flat. I have no reason to think that will change going forward. Operator: We will now take the next question from the line of Joshua Jain from Daniel Energy Partners. Joshua Jain: Just I really only have one, which is on rig attrition. Maybe do you have a number in mind with respect to how many incremental rigs could leave the market next year or any insights there? Or maybe to put the question differently, could you speak to broadly the capital investment that may be required for a number of operating rigs that are out there today that are older to sort of keep pace with a lot of the newer spec rigs and how that frames market dynamics? Bruno Morand: Thanks, Josh. We see that standard rig market or the older vintage rig market has been shrinking over time, and they've been limited to a few markets. The rig count in that side, the active rig count in that side is about 100 rigs at the moment in the water and the average age is above 40 years old. So there's obviously, a lot of potential for attrition. Some of the attrition should happen as a result of lack of contracting opportunities for these rigs. Some of the attrition will happen as a result of just the high CapEx required to maintain these rigs active going forward. Rigs are mechanical equipment and as such, they require capital to stay in good working class. And by the time they are 40 years old and beyond the retirement age, that only gets better -- only gets worse exponentially. So I don't know how many rigs I'll say can get out of the market. Clearly, there's a potential for a lot of the rigs to go out of the market. We're seeing that trend accelerating, we're seeing rigs now converted to -- or sold for conversion to MOPU, including quite a few of the rigs that came out of Saudi. We'll continue to look obviously for us. We expect owners to act diligently in that and discipline on that. For us, it's a bit of a muted point. Our rigs are all very new with the youngest fleet in the industry. So let's see what happens. Operator: Thank you. That's all the time we have for questions today. I would now like to turn the conference back to Bruno Morand for closing remarks. Bruno Morand: Very good. Thanks for participating in today's call, and I look forward to speaking to you guys soon. This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good evening. This is the Chorus Call conference operator. Welcome, and thank you for joining the Banco BPM Group 9 Months 2025 Results Presentation. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Arne Riscassi, IR Manager of Banco BPM. Please go ahead, sir. Arne Riscassi: Good afternoon, and welcome to Banco BPM 9-month Results Conference Call. We have here Giuseppe Castagna, our CEO; and Edoardo Ginevra, Joint General Manager and CFO, which will take you through the presentation. This will be, as you know, followed by a Q&A session, and I kindly ask you to limit yourself to 2 questions. Now I hand over to Giuseppe. Giuseppe Castagna: Thank you, Arne. Thank you, everybody, for being with us for this Q3 presentation. Let's start immediately on Page 6 of our presentation. We wanted to show you just a full picture of what we are doing and how we are delivering our vision that we announced with our business plan in February this year. We think we have completed almost the product factory activity that we started 2.5 years ago with the bancassurance, payment system, life insurance and recently asset under management. This brought us already quite a relevant set of results, let's say, almost EUR 400 billion of total customer financial assets, 49% of fee-based generated models or non-NII revenues on total revenues, a strong reduction on NPE ratio, 2.48% gross and 1.4% net and maintaining and building up, again, a strong capital position up to 135%. Profitability is growing as we expected. We have now reached ROTE of 22% vis-a-vis 16% of 2024 and 14% in 2023 with an ROE which stands at 6.5%. In terms of shareholder remuneration, we can confirm that the Board has approved a distribution of EUR 0.46 per action per shares to be paid in -- later in November on 26th of November this month, representing interim dividend for 2025. If you can make a comparison with the previous dividends starting from '22, you can see the growth that we are having, considering like-for-like results, EUR 350 million '22, EUR 850 million '23, EUR 1,100 million, excluding extraordinary distribution for the Numia one-off in 2024 and already EUR 700 million in 2025. Total shareholder remuneration during this year is 565%. We will -- the dividend yield that we will pay will be 7.3% on a yearly basis. Net income stands at EUR 1.660 billion, well on track towards our guidance. Common equity ratio at 13.52% Again, as you can see, excluding one-off, we are 17% higher than last year results, and we have already reached 85% of the total guidance we gave for this year. Then we will come back to that. Net income was very strong, EUR 450 million, considering the seasonality of August and one of the best quarter -- third quarter in our story. This pace we deem is fully consistent with our long-term targets. In terms of the commercial performance, new lending was 39% higher year-on-year. Asset under management net flows was EUR 1.7 billion in 9 months compared to EUR 700 million of 2024 and the cost income stood at 45%, down from 47% 9 months '24. Again, cost of risk reduction to 34 basis points compared with 40 basis points last year. The interim dividend has a yield on 6-month yield of 3.6% and again, has been approved today will be paid on 26th of November. We have already accrued EUR 170 million in the first 9 months of the year to be distributed between the interim and the final distribution. Economics are very solid, both in terms of growth in revenues, 5% stated vis-a-vis last year. If we consider pro forma the contribution of Anima, we increased these results EUR 120 million. We already say that non-NII revenues stood pro forma at 49%, very close to 50% of the target in '27 as well as net fee and commission rose 18%, including the contribution of Anima, but pro forma also the first quarter of Anima, this will grow of another EUR 140 million. Also the contribution from income from associates, insurance NFR increased from EUR 140 million to EUR 290 million in line with our expectation for '27. In terms of cost control, we were able to reduce again the cost-income to 45% with a reduction of 2% like-for-like vis-a-vis '24 and just a slight increase if we consider the Anima inclusion of cost. Significant decline in provision from 30% year-on-year from EUR 350 million to EUR 24 million with a cost of risk going down from 40 to 34 basis points. Capital, if we consider the acquisition of Anima and the regulatory headwinds, we were able to build up 152 basis points in terms of organic generation through managerial action after paying 240 basis points out of the Anima transaction and 60 basis points for regulatory headwinds and including, of course, also 200 basis points that we will pay as dividend, 80% dividend payout. On Page 10, let's have a look to the trajectory towards our target in 2027. As we already said, net income grew in terms of quality of the contribution. You remember that we switched our bank from a pure commercial banking activity to a more equilibrated and more capital-light activity, diversified activity. We had the target to grow from 24% to 35% is a contribution in terms of wealth asset management and protection. We are already at 33% after 9 months from the target decision. The same is for specialty banking contribution that is almost in line with the minimum target of 27% and reduction of commercial banking activity, which went down from 65% to 57% with a target of 50% to 55%. The quality -- these results were driven by non-NII revenues, again, growing from 40% to 49%, cost income ratio reducing from 47% to 45% cost of risk down to 34 basis points. In terms of figure numbers and the different contribution of the main area vis-a-vis the current results and the target -- we have still -- we are fully in line with our expectations. We still have a delay of EUR 30 million per quarter in terms of NII, which will easily reach through the refresh of replicating portfolio in the next couple of years. The decrease in cost of wholesale funding, which is already contributing more than EUR 40 million per year and the growing commercial volumes, which we expect in terms to up to EUR 3 billion by the end of the business plan. Net fees and commission, still we have some growth to expect from the full speed of the different product factory, including, of course, Anima contribution and improvement in the running fees, but also we expect some improvement from insurance business. You may remember that this year, we had 2 IT migration for both life and non-life business, which impacted on our results and also on the payment system activity with Numia. Meanwhile, we are still -- we are experiencing a very strong growth in terms of fees coming from corporate investment banking, Banco agro's trade finance, and we expect this to continue to grow for the coming 2 years. In terms of cost, both operating cost and cost of risk as we anticipated are well on track. Cost of risk is below the target we expected. So we have an advantage that would help the final target that we have in terms of net profit. So very confident to reach our target. Let's have a look to Q3. We wanted to dedicate a slide to the Q3 contribution. We are very satisfied of our EUR 450 million of results. On the right side of the slide, you can see the profit before tax, which stood at EUR 685 million in Q3, which has normally deflated by seasonality, but the difference of EUR 70 million coming from the Q2 results is due essentially only to the Monte Paschi dividend that we included in Q2. Meanwhile, the seasonality has been partially recovered through organic improvement expected in fees and lower cost. So a very solid result for Q3. Let's have a look to the 9 months, net interest income down 8%. But if you consider net interest income at full funding cost, which means including the cost of certificates, which are, of course, a source of funding for our bank, we go down to 5.7%. And core revenues, although experiencing a reduction of EUR 225 million in NII vis-a-vis the 9 months '24 have an increase of 1.6% as total core revenues year-on-year. If you include the net financial result and other operating income, this advantage vis-a-vis last year grew to 5% and operating cost meanwhile registered a 2.2% increase due to the Anima impact if we consider year-on-year without Anima on a like-for-like is a reduction of 2% in general cost. Provision down 30%, leading to a net profit from continuing operation and net income one-off down better with 17% vis-a-vis last year. On the right side, you can see the trend of the last 2 years with the continuous improvement, which are very encouraging for the remaining growth that we have to experience by 2027. As you can see, revenues grew 13%, almost EUR 550 million in 2 years. NII at full funding cost registered this year is at the same level of 2023, notwithstanding a Euribor, which is 106 points below the average of 2023. Cost income down, cost of risk down. Let's pay some attention to net profit from continuing operation, which is EUR 1.5 billion compared to EUR 1.1 billion of '23 is EUR 440 million more also after considering almost EUR 200 million reduction of NII. So that means that we had a profit generated by a strong increase in fees and a very strong reduction in general cost and cost of risk. We already mentioned NII. Let me just say that the reduction we had has been offset for EUR 84 million by managerial action out of EUR 100 million that we expected by 2027. So we are also, in this case, at a good point. Now we have almost the same spread asset liability in the region of EUR basis points. And we are consistently taking advantage from the bonds issue spread, which has been reducing 40 basis points, generating a lower cost in terms of NII for EUR 41 million per year. You have some example of in the different kind of bond issued by the bank of the strong reduction we are experiencing since the previous issuance, that were strongly higher in terms of spread vis-a-vis the current situation. We also gave you some figure about the replicating portfolio, which now stood at almost EUR 28 billion. We have to refresh by the end of the year and next year for a total consideration of something like EUR 9 billion to EUR 10 billion that will improve also the general yield and the contribution to NII. Notwithstanding, we have -- we were able to have an increase in new lending of 39%, exactly 57% in mortgages and 44% to nonfinancial corporates the level of our stock remaining basically the same. As you know, we are not registering an increase in loan demand, although we are confident that by 2026, having kept the level of loan at the same level of beginning of the year, we can register a strong increase that is testified by the good activity we are having in granting new loan. We are taking, of course, a lot of attention to the quality of our portfolio. Stage 2 loans reduced EUR 1.6 billion to below EUR 9 billion. And now our corporate nonfinancial corporate portfolio is 53% secured, 64% if you consider only small businesses. 92% of our stock is concentrated in the best risk classes and the same level is up to 98% if we consider the new lending of the first 9 months of this year. Let's go to Page 16. Total net fees and commission, up 3%, which would be pro forma 5% if you exclude the contribution of ecobonus and instant payments last year. Of course, the stated figure is much higher because it includes the contribution given by Anima, which is up to EUR 1.8 billion. And if we include the full consolidation of Anima starting from January, this figure is almost EUR 2 billion. The investment product fees grew 10%, mostly in upfront fees, but with a good contribution also running fees in line with the growth of investment product placement, which after 9 months stood at EUR 17 billion vis-a-vis EUR 15 billion of last year and EUR 7 billion was realized notwithstanding EUR 2.3 billion of issuing of BTP by our bank. Let's say that also in October, we are continuing this strong production. And also in October, we have increase of another EUR 2 billion the investment product sales. For other fees, we have a reduction, which is driven by the commercial banking activity, the 2 business line I mentioned before, especially ecobonus and instant payment, which went down EUR 35 million year-on-year. Meanwhile, we are growing almost EUR 40 million in terms of fees generated by corporate investment banking, structured finance and trade finance. So very strong results. Let's have a look to the contribution of Anima. On the left, we have the growth in terms of total asset generated by the bank stand-alone. Also in this case, we wanted to give you the progression of the last 2 years, we grew basically EUR 20 billion in less than 2 years from EUR 210 billion to EUR 230 billion with the growth year-to-date of EUR 3.4 billion in terms of assets under custody, EUR 2.4 billion in assets under management, EUR 2.3 billion in terms of deposit. These, of course, are excluding consolidation of Anima. In terms of net inflows, we grew EUR 1.7 billion versus EUR 700 million last year. On the right side, you have the consolidation of Anima. We increased EUR 230 billion to almost EUR 390 billion vis-a-vis EUR 377 billion of end of '24. So a strong increase also in terms of Anima asset contributed to the bank. On Page 18, on the left side, you see the main feature of Anima, which we consider a first-class network, which is still performing consistently well. And we have on the right, the outstanding commercial and financial results, a growth in assets under management of 2.4%, namely EUR 2.5 billion in 9 months of asset under management net flows, excluding the insurance mandates. In terms of revenues and net income in the 9 months compared to 9 months '24, we have an increase of 11% in terms of revenues [ up 50% ] in terms of net income generated by Anima. Cost-income ratio down to 45% as you can see, like-for-like, we have a reduction of 2%. Meanwhile, we have a stated with a small increase of 1%, driven by the Anima inclusion. The staff cost was down, again, like-for-like 1%. Still, we have some further advantages that will be generated in Q4, even though mostly offset compensated by the new labor contract and hirings that we are still having in order to offset the exit of the early retirement scheme. We will have another EUR 40 million of reduction next year generated by the early retirement scheme ended December '25, but part of that, of course, will be offset by the. Also other administrative expenses and D&A are down 4% like-for-like and other admin expenses stand-alone are down 7%. Cost of risk at a very good level of 34 basis points, driven in effective credit management over the life cycle. The gross total NPEs went down from EUR 3.2 billion to EUR 2.5 billion, the net from EUR 1.7 billion to EUR 1.35 billion. The net bad loan ratio is low as 0.4% of total loans as much as we -- if we include also the state guarantee, this figure go down to 0.1%. And the share of the cake between UTP and bad loans is 80% UTP and 20% bad loans. We already mentioned the reduction in Stage 2. Let's see some figure that generated this 34 basis points of cost of risk. First of all, default rate down to 0.8%, rate up from 4% to 6.5% with the net default rate which was as much low as 0.7% from 1% -- the coverage is increasing both in terms of total coverage to 45.7% as total NPEs with vintage in terms of years, which has been reduced from 2.5 to basically 2.1 years. If we include the state guarantee -- if we exclude the state guarantee NPEs, we have an increase in bad loans to 77% in UTP to 43% and in total NPEs, 55.3%. Let me pass the -- give the floor to Edoardo for some figure in terms of net financial results. Edoardo Ginevra: Thank you, Giuseppe. So very quickly on the financial contribution to capital and the financial part of the balance sheet contribution to capital and to P&L. Capital-wise, we are at a contribution which from reserves at comprehensive income that remains at EUR 330 million, similar to last quarter, a significant improvement versus the value at the beginning of the year, which was negative for EUR 500 million, allowed this improvement by the active management of the bond portfolio. In terms of stocks, situation is that we have EUR 47 billion, similar to what we had -- slightly above EUR 47 billion, similar to what we had 3 months ago and also the split between fair value comprehensive income and amortized cost didn't change, EUR 32 million as opposed to EUR 68 million with a slight increase of the fair value comprehensive income versus the beginning of the year. Share of Italian govies on total govies is below 40%, which is our risk appetite threshold, also very well under control. Contribution to P&L, as I was saying, it's positive for EUR 97 million. Bearing in mind that in this P&L line, we have to offset the negative contribution from certificates, which is as high as EUR 129 million this year, down from EUR 29 million -- EUR 20 million in the 9 months of 2024. So with a positive impact from the reduction in rates, as also shown in the first part of the P&L of this presentation, concerning the overall contribution of NII at full funding cost. Rest of NFR of trading is EUR 226 million positive through the year, benefiting not only from MPS dividends, but in general, from the active management of the bond portfolio. Page 22. Liquidity is at EUR 54.7 billion, so almost EUR 55 billion, increasing again this quarter and from the beginning of the year, which was EUR 48.4 billion. Total direct funding increased, especially for the contribution of retail deposits, which, of course, leads gives interesting perspective in terms of -- interesting outlook in terms of positive potential P&L contribution, NII contribution. We have continued actively our activity in the market for issuance being the first Italian bank and the second in Europe issuing in October a green bond under the EU green bond fact sheet. Issuance activity has been also encouraged by the positive evolution of our rating position with a positive outlook assigned by Standard & Poor's, Moody's and Fitch and an upgrade by DBRS to BBB (high). DBRS also is -- has assigned a first A level rating to the bank recently in October. Very positive, reassuring also the position for the liquidity indicators, LCR at 157%, NSFR stable at 126%, MREL buffer at 7.8 percentage points of the total. So a very significant level of the buffer. 23 for capital -- Page 23 for capital. As mentioned in the first part of this presentation, capital creation in -- from the beginning of the year has been 152 basis points after taking into account more than 200 basis points of dividends. In the last quarter, the progress has been 20 basis points, which is some 12 basis points from the difference between positive performance and accounting for additional dividends, 20 basis points from our source of capital that constantly gives a contribution which is DTAs and reserves fair value other comprehensive income in total, 13 basis points negative from the expansion of the books in terms of RWA increase. On the contribution from DTA and fair value comprehensive income, we confirm that this will be important also for the rest of our plan horizon with 145 basis points as shown in the bottom of this page, materializing in between now and end of 2027. MDA buffer quite comfortable now above 400 basis points in 50 basis points above the minimum threshold of our plan. Let me conclude. Let's recap this very strong first 9 months of the year. I don't have to remember that during the year, our bank was also some pressure, I would say. But notwithstanding that, we were able to almost complete the target for this year, the guidance for this year. Let's say that we are increasing profitability through the non-NII-related business, benefiting from our unique product factories model. We are continuing strong and efficient cost discipline. We have built up an excellent asset quality, which reflects the footprint and the geography of our branches. All in all, we were able in 1 year to increase the ROE adjusted and ROTE adjusted adjustment means without Anima contribution -- one-off Anima contribution for '25, one-off Numia contribution for '24 up to almost 200 basis points in terms of ROE and almost 550 basis points in terms of ROTE. And this notwithstanding the NII impact due to the reduction of Euribor from 3.6% to 2.2%. So we consider this a very strong results and already on top of our target in 27. Having already said of the capital position, the capability to build up further capital over the next quarter, we were able to approve the EUR 700 million distribution for our shareholders to be paid on 26th of November with an increase of 15% year-on-year on the interim dividend distributed in November '24, EUR 0.46 versus EUR 0.40 last year with an annualized expected dividend yield at 7.3%. In terms of cumulative remuneration after 18 months, we are already -- we have already delivered and will distribute EUR 2.2 billion in 18 months, fully in line with the over EUR 6 billion we expect for the full duration of our business plan. Some hint on the guidance. We already say that we prefer to leave the guidance at the level we announced EUR 1.95 billion. Whatever will be the accounting treatment of the fiscal impact that they will have, and we don't know yet which kind of impact, but we are pretty sure that having already reached 85% of the target we wanted to achieve in '25, we will be able to leave this guidance, whatever will happen in terms of fiscal impact this year. That's all. And now we will leave the floor to M&A session -- Q&A session, sorry. Operator: [Operator Instructions] The first question is from Giovanni Razzoli, Deutsche Bank. Giovanni Razzoli: I have 2 clarifications. The first one is on Slide 23. You mentioned the 145 basis points of organic capital generation that I interpret as deriving only from the release of DTA and the fair value reserve in the next 2 years. Is that -- is my understanding correct? And is my understanding correct that out of these 145 basis points, around 60 basis points are from the securities on fair value on other comprehensive income. That's my first question. And the second one, again, on capital, I was wondering whether you plan to complete some SRT transaction on risk-weighted asset optimization in Q4 or if there are any regulatory headwinds that you can expect? Edoardo Ginevra: So thanks, Giovanni. As far as the question on capital -- the 2 questions on capital, let me first confirm that we are finalizing an SRT transaction, which we plan to complete in the next few weeks, so before the end of the year. For the capital creation from DTAs and fair value comprehensive income, so this is EUR 145 million is what is expected to come as additional capital in the quarters in the next -- between the next quarter, '26 and '27 in total. You asked what is the split between DTAs and fair value comprehensive income. DTA is around EUR 120 million. The rest is fair value comprehensive income pull to par effect. Before continuing -- let me add also that we prefer here to stick to the plan horizon. Needless to say, there is additional capital to come also after end of '27. Operator: The next question is from Manuela Meroni, Intesa Sanpaolo. Manuela Meroni: The first one is on the guidance of 2025. You confirm your EUR 1.95 billion guidance, but considering what you have already achieved in the 9 months, this embeds a fourth quarter significantly weaker compared with the third quarter. On the other hand, you are guiding for a stabilization of NII and fees up on a quarterly basis. So I'm wondering what -- if there are some reason to be so prudent on the fourth quarter, so what you are expecting there? And the second question is on the dividend. You have already at 13.5% common equity Tier 1 so well above your 13% minimum threshold. You have these tailwinds from DTA and fair value through the OCI. So I'm wondering if you might consider to increase the payout above the current level. Giuseppe Castagna: Thank you, Manuela. Let me be more precise on that. Of course, we think that we will reach the guidance. As I said before, whatever will be the final accounting principle to regulate the fiscal impact that we are still waiting from the government to deliberate. So let me be a bit prudent, but also, let's say, on the other way, a bit aggressive in saying that even though we should be obliged to put the potential amount into profit and loss, we feel that we can be able to still respect a figure in the region of EUR 1.95 billion, which I think was not expected. And I didn't hear from anybody else such a possibility. On dividends, of course, as you may remember, we were very much questioned about the possibility to be above 13%. In the first 3 quarters, we have generated a lot of capital. We are respecting 80% of payout still increasing to 13.5% our common equity Tier 1, let's say that still we are below our peers. So let's wait for end of the year to understand which will be the capital generated by the bank in the next couple of quarters, and then we can discuss the increase in the remuneration of the payout. Operator: The next question is from Sofie Peterzens, Goldman Sachs. Sofie Caroline Peterzens: Here is Sofie from Goldman Sachs. My first question would be on net interest income. In terms of the trough, we saw weak volumes, but new production is very encouraging and also lending margins are stabilizing. So do you think we have reached the net interest income trough? Or do you think that's still ahead of us? And then my second question would be on M&A. If you could just talk about your kind of thoughts around M&A. The press has been talking about CRA, Italy. Any comments you can make here? Edoardo Ginevra: So let me talk about NII and then Giuseppe on the M&A session, which you wanted to start earlier. On NII, considered that in our plan, we have a guidance of -- we have a target of slightly above EUR 3 billion for 2026, which we believe that at this point is confirmed with a scenario of Euribor at 2%. We announced already that we would be able to absorb more shocks on the scenario. But basically, we don't see reasons why we should change this target and this assumption on given the evolution -- the market evolution that we are facing at this point. Then we expect, as described in Slide 10 that this is the basis to achieve higher level of NII and to hit our target in 2027 with a mixture of actions that will provide contribution from the financial part of the portfolio, and this is replicating portfolio and decreasing cost of wholesale funding. To give you an idea, we have EUR 25 billion EUR 27 billion replicating portfolio target is EUR which is where we expect to stay on average next year. This EUR 25 billion are paying currently a level that is some 20 basis points above Euribor for a pure mechanical effect of time lag on the repricing and the readjustment. If Euribor stabilizes, this mechanical effect will disappear and 20 basis points on EUR 25 billion is around EUR 50 million. Similarly, benefited from issuance of wholesale funding. We have EUR 5 billion of new issuance per year. And so in the next -- in a total of EUR 10 billion, which is the average over 2 years, including issuance of second part of this year and issuance and half of issuance of 2027, a benefit of 50 basis points leads to an improvement down the line of around EUR 50 million. Commercial volumes, just look at the spreads, which are quite similar on the asset and on the liability side means that every EUR 1 billion either of growth in loans or growth in deposits will provide us with an improvement of some EUR 15 million, 1.5% in terms of P&L. Deposits are growing at a very -- an excellent pace, have been growing at an excellent pace throughout the last few years. Loans is the next challenge, but we believe we are very well equipped to restart in growing the loan book once investor -- once our clients will restart -- will revamp this investment process, maybe on... Giuseppe Castagna: Thank you, Sofie. Let me just give some color to your question. I think we have shown this year to be able to respect our guidance also considering unexpected headwind as we are having. On top of that, we managed this year to cope with the Anima acquisition on one side and let's say, to be obliged to stay unde [indiscernible] for 9 months with our network. We had to cope with 2 IT migration in the 2 bancassurance deal and the integration of the product factory we have built up in the last year. So a lot of work to do, reaching always strong results. The same we have for 2026. Of course, we are not scared of taking one eye on reaching our target for '26 and also considering any opportunity coming from the market in terms of M&A. We are not -- in this moment, of course, we have nothing in mind. We are not dealing with any traction. But we know very well that there are some stakeholdings either in our bank or our stakeholding in other banks that could generate during 2026, some potential M&A. So I think we have to consider our stand-alone plan and the capability in any situation, in any market situation to respect our plan on one side, and the possibility to deal with opportunities that we show that we were able to do together with reaching our results. So attentive to have anything happen on the market. We have not many left in the market, but still with a lot of opportunities. Operator: The next question is from Luis Pratas, Autonomous. Luis Pratas: My first one is on NII. We saw a much lower quarterly reduction this quarter in the customer spreads compared to, let's say, Q1 and Q2. So do you think we are close to the bottom in the customer spread? And how do you see the spread going forward, split by the asset and liability spread? And then my second question is on the Anima minorities. I wanted to hear your latest thoughts on how you plan to deal with the minorities. Do you have the goal to own 100% of Anima and delist? Giuseppe Castagna: Thank you, Luis, for the 2 questions. Let's say, yes, we think we have reached the bottom, both in terms of asset spread. Of course, the same, I think, is also in terms of liabilities. We don't think we can -- with Euribor, which is now quite stable. Again, I want to stress especially the work we have done on the asset spread because on the liability, I think we dealt very well with the spread. On asset, as I mentioned before, we managed to maintain the same level of stock with a strong increase, almost 40% of increase in new loans generation, which, of course, are a good boost for our commission. In a situation in which loan growth was 0% or minus 0% because we don't have -- we are not having loan growth in our country. So thanks to our geographic footprint, we were able to stand at a very good level of new loans, maintaining the situation, but of course -- and sorry, bettering the quality of this credit book with a lot of guarantee taken also with the opportunity of the guarantee state scheme. This, of course, in a situation in which loans are not growing, and we are willing to better our quality, of course, you can lose some few basis points, which is what happened to our portfolio. We feel, as I also understood that my colleagues think that in 2026, there will be a recovery in terms of investment. If this happen, as historically happened, our bank is -- will be in the best situation to take advantage from that. And with a growing, even though not booming, but growing market in terms of loans, I think also the asset spread will increase. Second question about minorities. We are -- I always say that we're going to buy Anima in order to make Anima greater. We want to have our distributor of Anima. We think there is an opportunity to have some other banks joining the group of distributors. And we want to leave room for also giving a stake in Anima to this new distributor. So until this situation will be open, and we will have the opportunity to manage some contact with other banks, I think we will leave for the time being, the stock listed, but I hope that quite soon, we will understand what will be the opportunity for the next quarter. So give us some time to experience the opportunity of having somebody else on board, and then we will decide what to do with the stake. Operator: The next question is from Hugo Cruz, KBW. Hugo Moniz Marques Da Cruz: My main question is around dividend, the final dividend for 2025. If I understand your dividend policy is you net out the gain on the revaluation of Anima. You already raised the interim larger than last year. So even if you beat the guidance on earnings, it sounds like the final dividend will be lower year-on-year. Is that something you're comfortable with or not? And then a second question, why are you not seeing loan growth? You're in the most dynamic part of Italy. Some of your peers, at least in the past quarter have shown loan growth. So is that too much pricing competition and you don't want to compete there? Or because a system level, there is -- that you're starting to have loan growth for the whole of Italy. So why shouldn't you be doing better than the system when you are in the better part of the country? Giuseppe Castagna: Thank you, Hugo. For the first part, yes, of course, the one-off of Anima will not be considered. We announced that with our business plan. But of course, if we will beat the guidance, the dividend will increase and our effort will be to give a dividend, which would be as much as possible in line with last year, in which we include the Numia one-off contribution. So let's say that like-for-like will be much better this year. We will decide, depending also on this fiscal impact, how to increase further this contribution. Let's say that when we announced the EUR 6-plus billion in 4 years, we already say that, of course, there would have been an increasing dividend distribution in the last part of the 4 years, increasing, of course, also the profitability. We are perfectly in line and hopefully, depending on the unexpected situation, we can try to also increase the contribution. On the loans, we think we are doing better because we are basically maintaining our loans at the level they are. Meanwhile, I think there is some reduction in loan for other banks, notwithstanding is the best part. Unfortunately, investments are still lacking. So the geopolitical situation, the uncertainty on tariffs have been very persistent during the year, and we still now in the beginning of November are not having a signal -- strong signal of recovery. But being the third year in a row, we really are confident that some recovery there could be. And in this occasion, I'm sure we will be better than others in recovering and increasing our loans. Operator: The next question is from Ignacio Ulargui, BNP Paribas Exane. Ignacio Ulargui: I have 2 questions. One is on fees. I mean, do you think that whatever is not fees from specialized activities within the other fees bucket have probably bottomed at this level, and we should -- we could see some recovery into the fourth quarter, thanks to seasonality? And the second question is linked to Monte dei Paschi stake. So if you could just share with us a bit of your thoughts on the stake going forward? Edoardo Ginevra: Okay. Just a minute and get into the page -- yes. So you were mentioning about the product factories because we have 3 categories, commercial banking and other product factories, which means consumer credit payment system and P&C insurance. And the last one is from Corporate Investment Banking and Trade Finance, which one you are precisely? Ignacio Ulargui: I was just referring to the commercial banking and other fees and product factories, which -- I mean, if I just look into the year, they have been relatively flattish, whether that could be -- you see that could recover into the year-end? Edoardo Ginevra: Yes. We think that there will be basically everything which is not included in product factories and in corporate investment banking and trade finance activity is on the other, which mean current account, commission on loans, other commission on payment activity, money transfer and so on is included in that. Last year, we had also a strong contribution from the discount on fiscal credit. You know that in Italy, we had such a possibility to discount the fiscal credits, the famous super bonus or ecobonus. And together with the commission that we were able to get from the instant payment, which now are not anymore possible to apply, there is a reduction of almost EUR 40 million, EUR 35 million to EUR 40 million. The other are doing well, especially, of course, on loans because as you -- as I said before, we were increasing 40% the new loans activity. So all in all, we think that like-for-like, we are increasing the commission also on the commercial banking, and this will stand also for the next quarter. For the other, as I mentioned before, the one from specialized activities are doing very well. Meanwhile, we have registered some reduction in the bank insurance because of the migration I was mentioning before, both in the Life activity and the non-life activity, which will not have any more, of course, going forward in the next quarter. This is for the first question. The second question go back to the problem of we were talking about delisting Anima until we don't understand exactly what will be Monte Paschi, as you know, is a strong contributor in terms of distribution of Anima. We had in the past some talks about the possibility for them to continue this activity, also getting possibly some interest in being shareholders. So we will see after that what the final word about our stake in Monte Paschi. Operator: The next question is from Delphine Lee, JPMorgan. Delphine Lee: My first one is on the Italian bank taxes. I know it's still being discussed, but just wanted to kind of have your thoughts, your initial thoughts on how much that impact could be? And then my second question is on M&A. So CredAg has already commented that they wouldn't -- they're not considering selling their subsidiary in Italy. So just kind of wondering what other forms this M&A potential could take. Like, I mean, would you consider more partnerships with CredAg in Asset Management or in other areas? -- which I think is something that they would be keen on. If you could just share your thoughts here, that would be great. Edoardo Ginevra: Yes. So thanks for the question. On bank taxes, there are various, of course, items that are of interest by the law or the project of law, which has not been, as you know, approved yet. In the current scenario, we expect to have a one-off this year of payments of levy that is in the order of magnitude of around EUR 100 million, and this is a one-off. For the next years, the scenario is not clear, but we expect this to be affordable in the margins of flexibility and buffers that we will have in our plan once the real amounts and the technicalities of taxes will be clarified, then of course, we will have to take care of planning the impacts and potentially adopting measures to counterbalance these impacts. But we don't believe them to be a real changer versus our targets. Giuseppe Castagna: Okay. Let's go back to M&A. You were mentioning CASA doesn't want to sell, but we never talk about buying the network of CASA. We're never talking about having anything else with CASA other than being, I hope, an happy shareholder of our banks. We are not aware of anything happening in terms of a possible merger. And so we will see what happen. They also requested to increase their stake to ECB. They have not yet received the authorization. Once they will receive the authorization, they will decide the stake to take. Of course, we will understand better what could be the possibility to have some more collaboration with them. Up to now, there is nothing at all. I read the speculation about buying the activity in Italy, but there is nothing in course. Operator: The next question is from Adele Palama, UBS. Adele Palama: Two questions. One is a clarification on the capital impact. So 145 basis points does include also like the impact that you were expecting in the business plan from the securitization. So if I remember correctly, you were guiding for like 48 basis points from synthetic securitization. How much of that 48 basis points has been already taken? How much is left? And if it is included in that 145 basis points. And then if you can give us a guidance on the other provision and provision for risk and charges. Because this quarter, you reported like positive number there. I'm just trying to understand a little bit the gap versus the target, which seems a little bit conservative for full year '25. And then on cost of risk, so which is the guidance for this year? Because again, I mean, you have reported like around 35 basis points. But then if I try to bridge with your target, it looks like that you are expecting some additional extra provision in the fourth quarter. Is that right? Which is the guidance there? Edoardo Ginevra: So on capital, thanks for giving the opportunity to clarify. 145 basis points that we showed -- that we mentioned in Page 23 of today's presentation is only the impact during the plan horizon from DTAs and fair value comprehensive income. Securitization transactions are on top and will continue to provide the contribution that we have announced in the plan. By the way, we are overdelivering on that, taking into account the fact that in the plan, we said 48 basis points, including the effect of amortization of existing ones. But in general, in this quarter, we didn't have securitization since SRT transactions, we -- as I said earlier answering to the previous question, we will have impact in the fourth quarter. And in general, we will continue to generate capital through this lever also in the next few years. Normally, the high-level guidance, I would say, is that we do 2 to 3 transactions per year, and we have an impact of each transaction of around 10 to 15 basis points on average, but part of this impact is eroded by the amortization of existing ones. Giuseppe Castagna: For cost of risk guidance, we always said that this year, we would have been below 40 basis points. We can confirm we don't expect extra loan loss provision in Q4. As I mentioned before, we have a 0.1 net bad loans ratio. We have a very good default rate. We are almost at half of November, so halfway to the year-end. So I expect apart from some managerial action that we could take by the year-end, I expect something in line with the previous cost of risk. Operator: The next question is from Matteo Panchetti, Mediobanca. Matteo Panchetti: I have one clarification on RWAs and capital for the quarter. Can you please clarify because when I see on your booking loans, they are down 2% Q-on-Q, but your RWA were up quarter-on-quarter. So can you please clarify if there was any headwinds during this quarter or if the density has been increasing? And the second one is on the overlays. You still have EUR 150 million overlays, which point you will consider to release or eventually using that? Edoardo Ginevra: No. We have grouped the 13 basis points in Page 23. RWA and other, actually, this includes a number of of second effects that give a contribution, the specific part of RWA is only 6 basis points, and it's related in general to normal refresh of the portfolio, but nothing that creates any real drift towards a higher level of density or headwinds in this quarter. The rest is due to a number of minor impacts, for example, increase in the value of our participations that we deduct from capital and that if they mature, if we use equity method for our valuation, if they mature net profit over the quarter, then this net profit is accounted for in the value of the participation and this value is an increase in the capital deduction. So not material effect on credit in general. Yes, overlays, overlays, well, usual debate. Overlays, technically speaking, are not something like a treasure we have and at some point will be left for release. Overlays are a way to account for unexpected risk that are not modeled and that you capture in your framework of risk management framework and IFRS 9 accounting framework through adjustments on top of what the risk model suggests to have in terms of generic provisions on performing loans. The only thing that counts is the level of coverage on performing Stage 1 and Stage 2. And this coverage is driven by considerations on the status of the portfolio. We are sticking to a coverage, which is in the area of above 40 basis points. We have increased from 45 to 46 basis points in this quarter. We believe that this is our sweet spot in general in the long run. And so we believe that any comparison should take into account between banks on this KPI should take into account, of course, geographic footprint, average rating of portfolios and so on and so forth. Operator: Gentlemen, there are no more questions registered at this time. I turn the conference back to you for any closing remarks. Giuseppe Castagna: So if there are no other questions, thank you very much for being with us for Q3, and we will see in the next days or talk to you for further details. Thank you and have a good evening. Operator: Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.
Operator: Good day, and welcome to the Priority Technology Holdings Third Quarter 2025 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Meghna Mehra, Managing Director of Investor Relations. Please go ahead. Meghna Mehra: Good morning, and thank you for joining us. With me today are Tom Priore, Chairman and Chief Executive Officer of Priority Technology Holdings; and Tim O'Leary, Chief Financial Officer. Before giving our prepared remarks, I would like to remind all participants that our comments today will include forward-looking statements, which involve a number of risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. The company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. We provide a detailed discussion of the various risk factors in our SEC filings, and we encourage you to review these filings. Additionally, we may refer to non-GAAP measures, including, but not limited to, EBITDA and adjusted EBITDA during the call. Reconciliations of our non-GAAP performance and liquidity measures to the appropriate GAAP measures can be found in our press release and SEC filings available in the Investors section of our website. With that, I would like to turn the call over to our Chairman and CEO, Tom Priore. Thomas Priore: Thank you, Meghna, and thanks to everyone for joining us for our third quarter 2025 earnings call. I'll begin today's call by highlighting our aggregate performance, full year guidance on revenue, adjusted gross profit and adjusted EBITDA and key strategic updates. I'll then hand the call over to Tim, who'll provide segment level performance, key trends and developments across our business segments and Priority overall. As summarized on Slide 3, Priority grew net revenue by 6% generated adjusted gross profit and adjusted EBITDA growth of 10% and 6%, respectively, and increased adjusted EPS by $0.10 or 56% year-over-year to $0.28 in the third quarter. We ended the third quarter with over 1.7 million total customer accounts operating on our commerce platform, up from 1.4 million at the end of last quarter. Annual transaction volume in the LTM period increased by nearly $4 billion from quarter 2 to $144 billion and average account balances under administration improved by almost $200 million from the prior quarter, our largest quarterly increase to date to $1.6 billion. Certainly, a solid showing for the quarter, but candidly, with mixed performance at the segment level. We produced continued strong results by all key metrics within payables and treasury solutions on the strength of 14% and 18% revenue growth, respectively. However, growth moderated to 2% in our Merchant Solutions segment as same-store sales decelerated in multiple areas. But constructively, merchant attrition remained stable, leading us to conclude that macroeconomic factors influencing spending are affecting performance and will likely persist through the remainder of the year. The result is that revenue growth we had projected of 10% to 12.5% for the full year is expected to come in at the lower end of our range at 8% to 10%. The impact is a modest revision to our full year revenue guidance to $950 million to $965 million from $970 million to $990 million. Importantly, however, as a result of our expanding gross profit margins, which has continued to 38.9% year-to-date, we are raising the low end of our full year gross profit guidance from $365 million to $370 million with the upper end remaining at $380 million and modestly improving our full year adjusted EBITDA guidance to $223 million to $228 million. I'd like to cover one bit of housekeeping before we dive more fully into our results. In our press release this morning, you'll note that we are now categorizing our operating segments as Merchant Solutions, Payables and Treasury Solutions instead of SMB, B2B and enterprise. As Priority's business mix and solution set continues to evolve, we believe this will provide greater clarity to stakeholders about the revenue sources driving performance through our commerce platform. These categories also reflect the evolution of our client base with increasingly larger customers and a diverse set of reselling partners accessing Priority for multiple features across acquiring, payables and treasury solutions. Now turning our attention to our aggregate Q3 results on Slide 4. Revenue of $241.4 million increased 6% from the prior year. This led to a 10% increase in adjusted gross profit to $94.8 million and a 6% improvement in adjusted EBITDA to $57.8 million. Adjusted gross profit margin of 39.2% increased 140 basis points from the prior year's third quarter, reflecting the ongoing performance of our diverse, high-margin Payables and Treasury Solutions segment. Highlighted on Slide 5, our Q3 performance contributed to year-to-date revenue growth of 8% to $705.9 million fueling a 12% increase in adjusted gross profit to $274.4 million and an 8% improvement in adjusted EBITDA to $165.1 million, while expanding our adjusted gross profit margin by 150 basis points to 38.9%. For those of you who are new to Priority, Slides 6 and 7 highlight our vision for Connected Commerce. The Priority Commerce platform is purpose-built to streamline collecting, storing, lending and sending money. It delivers a flexible financial tool set for merchant acquiring, payables and treasury solutions designed to accelerate cash flow and optimize working capital for the businesses we serve. I would encourage you to play the short 1- to 2-minute videos embedded in the product links on this slide to gain a deeper appreciation of why customers are consistently partnering with Priority to reach their commerce goals and why we are emerging as a go-to solution provider for embedded commerce and finance solutions. Slide 7 highlights a typical partner experience with our commerce APIs, orchestration capabilities for payments management and treasury solutions. This enables partners to use a single API tailored to their specific objectives. Customers connecting via our API can access all routes for digital payments acceptance, create traditional and virtual bank accounts, issue physical and virtual debit cards, enable lockbox for checks, configure single vendor and advanced bulk vendor payment programs and many other commerce options at their own pace. In the third quarter alone, we contracted with new enterprise ISV partners in hospitality, marina infrastructure management, construction supply, class action administration and mortgage lending with over $10 billion in incremental annual transaction volume to harvest, while continuing to expand our success in sports entertainment, automotive, property management and payroll and benefits. Given our expanding customer base and segments, our commerce platform creates 2 important benefits for Priority's long-term. First, it enables our partners to develop their offering to seize new opportunities and respond to emerging trends as we add features and embedded solutions. Both parties maintain clear visibility into quantifiable revenue growth opportunities, building customer confidence and driving mutual success. And second, by standardizing operational workflows across diverse industry segments where money movement is critical to the value chain, we can identify and refine key operational metrics in compliance, payment operations, risk and application support. This enables us to scale efficiently, maintain cost discipline and ultimately improve profitability. This vision explains why we've been able to evolve Priority into a consistently high-performing payments and banking financial technology company with strong recurring revenue prospects. Our customers and current market conditions reinforce our belief that systems connecting payments and treasury solutions to accept and distribute funds in multiparty environments will be critical as businesses put greater demands on software and payment solution providers to deliver a full suite of core businesses services on a single relationship. We're committed to meeting our customers where they are by curating the experience for our partners to make working with Priority seamless and easy. Before we move on to a detailed segment level performance review, I want to highlight a few key investments during Q3 on Page 8, namely our acquisitions of Boom Commerce and Dealer Merchant Services and the launch of our residual financing facility to power growth in ISO and ISV partnerships. The Boom transaction adds veteran sales depth with exclusive distribution partnerships, expanding our West Coast capabilities, while the addition of the DMS team will underpin our strategy to lean into the future of automotive commerce with vertically focused distribution and integrated payments, treasury and payable solutions to this steadily growing and historically defensive area of consumer spending. Last, our launch of the residual financing facility helps us put fuel in the tank of our ISO and ISV partners to grow their customer base on our commerce platform. At this point, I'd like to hand it over to Tim, who'll provide further insights into the health of our business segments, along with current trends in each that factored into our third quarter results and confidence for sustained performance through the end of 2025. Tim O’Leary: Thank you, Tom, and good morning, everyone. I'll start on Slide 10. As Tom mentioned, we had solid overall financial performance in the third quarter that benefited from the diversification of our platform as strong growth in our higher-margin Payables and Treasury Solutions segments offset the impact of slower growth in our Merchant Solutions segment this quarter. The strong 14% and 18% growth, respectively, in Payables and Treasury Solutions allowed for overall margin expansion as adjusted gross profit margins improved by nearly 140 basis points from Q3 last year and over 70 basis points sequentially from Q2 this year. Consistent growth from our Payables and Treasury Solutions segments also resulted in the continued favorable shift in Priority's gross profit mix. For the quarter, Payables and Treasury Solutions comprised nearly 63% of adjusted gross profit. If you evaluate that same metric on a trailing 12-month basis, Payables and Treasury Solutions contributed over 62% of gross profit for the 12 months ended September 30, which represents a 23 percentage point increase from the beginning of 2023. This trend, which you can clearly see on the page here, is highly indicative of our commitment to investing in higher growth, higher-margin operating segments, which will expand Priority's total addressable market and in turn, enhance shareholder value. As noted on prior calls, the continued shift in our business mix also helps enhance the highly visible and recurring nature of our business model. During the quarter, over 64% of adjusted gross profit came from recurring revenues that are not dependent on transaction counts or card volumes, which compares to just under 60% in Q3 of last year. Moving now to the segment level results and starting with Merchant Solutions on Slide 11. Merchant Solutions generated Q3 revenue of $161.9 million, which is $3.1 million or 2% higher than last year's third quarter. Revenue growth was a combination of 4% growth in the core portfolio, combined with just over $1 million of revenue in the quarter from the Boom Commerce acquisition, partially offset by lower revenue from both specialized acquiring and historical residual purchases. As expected, those headwinds moderated in Q3 compared to the first half of the year, but will continue into Q4. Lower growth in the core portfolio compared to first half of the year was largely attributable to a pullback in consumer spend within a few industry verticals, including restaurants, construction and wholesale trade. Total card volume was $18.5 billion for the quarter, which is up 2.2% from the prior year. From a merchant standpoint, we averaged 179,000 accounts during the quarter, which is up from 178,000 last year, while new monthly boards averaged 3,400 during the quarter. Adjusted gross profit for the second quarter was $35.5 million, which is consistent with Q3 of last year. Gross margins of 21.9% are 50 basis points lower than the comparable quarter last year, largely attributable to lower revenue from both specialized acquiring and historical residual purchases. Lastly, adjusted EBITDA was $27.7 million, which is down $900,000 or 3.2% from last year due to increased salaries and benefits and elevated software expenses related to the previously discussed cloud migration. Moving to the Payables segment. Revenue of $25.2 million was 13.6% higher than Q3 of last year and sequentially increased from $25 million in Q2. Our buyer-funded revenues grew 11.8% year-over-year to $20 million, while supplier-funded revenues grew 21.3% year-over-year to $5.1 million. Adjusted gross profit was $7.2 million in the quarter, which is a 13.6% increase over the prior year. For the quarter, gross margins were 28.5%, which is consistent with last year's comparable quarter. The Payables segment contributed $3.5 million of adjusted EBITDA during the quarter, which was a $1.5 million or 79% year-over-year increase. The acceleration of adjusted EBITDA growth compared to revenue and adjusted gross profit was driven by strong operating leverage in the segment, including a 12.5% year-over-year reduction in operating expenses before D&A. Moving to the Treasury Solutions segment. Q3 revenue of $55.7 million was an increase of $8.6 million or 18.2% over the prior year. Revenue growth was driven by continued strong enrollment trends and an increase in the number of billed clients enrolled in CFTPay, combined with an increase in the number of integrated partners and organic same-store sales growth from existing Passport program managers. Higher account balances in both CFTPay and Passport were able to more than offset the impact of lower interest rates in the quarter compared to Q3 of last year. As a result of those factors, adjusted gross profit for the segment increased by 18.3% to $52.1 million, while adjusted gross profit margins remained strong at 93.6% for the quarter. Adjusted EBITDA for the quarter was $46.7 million, an increase of $5.7 million or 14% year-over-year. Overall profitability in Treasury Solutions was driven by consistent and strong high teens revenue growth in CFTPay, combined with 100% revenue growth in Passport, which offset investments we continue to make in newer vertical software assets within Priority Tech Ventures. While many of these investments are still scaling, we view them as highly compelling opportunities to enhance Priority's already comprehensive product suite and expand further into new and existing markets, including construction, payroll and benefits, asset management and sports and entertainment, including the NIL marketplace. Moving to consolidated operating expenses. Salaries and benefits of $26.1 million increased by $4.4 million or 20.2% compared to Q3 of last year, but declined by $1 million when compared sequentially to Q2. The year-over-year increase was primarily driven by higher non-cash stock compensation expense, along with increased headcount from organic growth combined with acquisition-related activity. SG&A of $15.7 million increased by $3.3 million or 26.7% compared to Q3 of last year as a result of increased accounting and SOX-related expenses, along with higher legal, marketing and software expenses. Now I'd like to take a moment to discuss our capital structure. Debt at the end of the quarter was $1 billion, and we ended the quarter with $157 million of available liquidity, including all $100 million of borrowing capacity available under our revolving credit facility and $57 million of unrestricted cash on the balance sheet. As Tom noted earlier, we closed a new $50 million residual financing facility during the quarter, and we also refinanced our broadly syndicated term loan on more favorable terms. The residual financing is a securitization style structure, and it is nonrecourse to priority, which is why the outstanding balance of $23 million at quarter end is not reported in the totals you see on this page. Subsequent to quarter end, we upsized the $1 billion term loan by $35 million to finance the cash portion of the DMS acquisition. But as highlighted in our press release this morning, I'm pleased to reiterate that we made a $15 million prepayment to the term loan at the end of October. While the total quantum of our debt has increased this year due to acquisitions and the acceleration of certain deferred consideration related to the Plastiq acquisition, we've applied $25 million of prepayments to the term loan this year between $10 million in Q1, combined with the $15 million payment last week. Given strong free cash flow generation, we expect to continue to apply excess cash to debt reduction throughout 2026. With respect to free cash flow, we generated $29 million of free cash flow in the quarter based on adjusted EBITDA of approximately $58 million, minus $6 million of capital expenditures, $21.5 million in cash interest expense and just under $1 million in cash taxes. On a year-to-date basis, that same metric totaled $71 million. If you were to annualize that figure to $95 million and look at it on a per share basis, we generate $1.17 of free cash flow per share, which I know is a metric that many investors have referenced in our prior discussions. For the LTM period ended September 30, adjusted EBITDA of $216.8 million represents $3.1 million of sequential quarterly growth from $213.7 million at the end of Q2. This growth in adjusted EBITDA, combined with net debt of $943 million resulted in net leverage of 4.35x at quarter end, which is up from 4.1x at the end of Q2 due to acquisition activity and a partial quarter of acquired EBITDA benefit. If you were to recalculate leverage on a pro forma basis for a full year effect of the Boom and DMS acquisitions and related balance sheet activity, net leverage would be 4.1x, which is neutral to where we finished Q2. We will continue to evaluate opportunities to acquire strategic assets that provide priority with higher-margin vertically focused sales channels, but debt reduction on both the dollar basis and the leverage ratio are focus areas for 2026. Moving to Slide 16 and our revised financial guidance. We have adjusted our full year revenue guidance to reflect the year-to-date results, combined with our most up-to-date outlook for Q4. The revised revenue range of $950 million to $965 million implies an 8% to 10% full year growth rate and is reflective of mid-single-digit organic revenue growth in our Merchant Solutions segment for Q4. Despite lower revenue growth expectations for the full year, we have raised the low end of the adjusted gross profit range by $5 million to $370 million, with the upper end remaining at $380 million. Adjusted EBITDA is expected to range from $223 million to $228 million, which is up slightly from prior guidance of $222.5 million to $227.5 million. The revised full year guidance is inclusive of approximately $6 million of adjusted EBITDA related to acquisitions. While there is certainly some impact to adjusted EBITDA from lower revenue growth in Merchant Solutions, the full year guide is also reflective of continued investment in Priority Tech Ventures. Lastly, we will provide more details related to our 2026 outlook during our fourth quarter earnings call, but preliminary expectations are for high single-digit revenue growth with adjusted gross margins expanding by 75 to 100 basis points or more. With that, I'll now turn the call back over to Tom for his closing comments. Thomas Priore: Thank you, Tim. Before concluding, I want to offer perspective on what it means to grow. In aggregate, Q3 was not among our best-performing quarters purely as a measure of economic growth despite the strong performance in our Payables and Treasury Solutions segments. But make no mistake, our third quarter was one of intense internal growth that has set critical foundations for developing and increasing enterprise value. During the quarter, we activated card acquiring in Canada, added real-time payment capabilities and implemented a unique financing source to fuel our partners' growth. Additionally, we reduced our borrowing cost by 100 basis points, executed 2 accretive acquisitions without impacting net leverage and generated free cash flow to pay down $15 million of debt, all while continuing to refine our operational muscle by integrating a host of ISV and enterprise customers on our commerce platform with addressable annual transaction volume of over $10 billion to capture in the coming months and adding more incremental deposits under administration, nearly $200 million than in any other quarter in our history. While the scoreboard may not reflect it yet, we were busy grinding out wins each day that underscore how we are built with intention for the long-term and built to last. It's why since becoming publicly listed in 2018 through challenging periods, we have produced compound annual adjusted EBITDA growth of 18%. We will continue to curate Priority's commerce offering by connecting payments and treasury solutions on a single platform that centralizes all money movement at scale for our partners, allowing us to expand our portfolio of core business applications and addressable market segments to continue to deliver stable free cash flow and long-term shareholder value. As always, I want to thank all my colleagues at Priority who continue to work incredibly hard to deliver results. Your commitment and dedication to improving everything we do is clear, providing our partners and customers with a constant reminder that they made the right choice to partner with Priority. Last, we continue to appreciate the ongoing support of our investors and analysts. And for those in attendance who are new to Priority, for taking the time to participate in today's call. Operator, we'd now like to open the call for questions. Operator: [Operator Instructions] And our first question will come from Harold Goetsch of B. Riley Securities. Harold Goetsch: It's a good idea to reclassify these segments into treasury, the different 3 segments you've renamed I think that reflects what they do, and I appreciate that. I just wanted to ask about -- given you reported Q2 in the August time period, and there's been some same-store sales weakness. When did you start seeing that? I mean another company called Shift4 Payments mentioned difficult same-store sales for restaurants as well. But what did you start seeing? And could you go over some of the segments you saw some weakness in? That's my first question. Tim O’Leary: Hal, thanks for the question and the feedback on the segment names. We started seeing some of that in August, and it certainly accelerated in September as we look across all the different verticals for the Merchant Solutions business. There were a handful that definitely saw a trend line that was against us. It was relatively broad-based, though, but the ones we called out, restaurants, construction, wholesale trade were the ones that were a little bit even more onerous at the tail end of the quarter. There were others that were down slightly, but not as much of an impact, things like education and some other verticals, but we really started seeing in August and then that accelerated into September. Harold Goetsch: Okay. And you mentioned like some of the residuals. Can you kind of -- what's the impact of the merchant attrition was decent. Monthly adds were still really good. What were some of those other components? If you could clarify what they mean and how long the impact will be from those? It was -- I think you mentioned some residuals and impacts. What were those again? Tim O’Leary: Yes. So I was referencing lower revenue in the quarter from specialized acquiring, which we've talked about the last couple of quarters, given some of the dynamics in that end market and then historical residual purchases and not to rehash a lot of the nuances there, but we had done some larger residual purchases back in 2021. But from a capital allocation strategy, the last few years, we've been focused on deleveraging and taking out the preferred equity. So we haven't done a lot of additional residual buybacks. So those older portfolios, as they start to run off over time, that presents a headwind and you're running off effectively what is 100% margin because you bought back those residuals from the resellers. So that headwind has continued. Combined, those 2 things had about a $2 million impact on the quarter on a year-over-year basis. That's down from what it was in the first 2 quarters of the year where we talked about a more onerous headwind where that was $4.5 million or so. So it's come down, which we expected it to moderate. We'll see another consistent type of headwind in Q4, but definitely less than we saw in the first half of the year. Thomas Priore: Hal, just one other point, which I think is important to reference on the residual base question you have, one of the major drivers of putting together the financing facility that we have, it's nonrecourse. Is that -- I mean, really, that positions us in our space. There's no one else who has something like this that will enable us to -- instead of having that financing be at the holdco level, we now have it at the facility level that's nonrecourse, but gives us -- that's a place where we'll buy those residuals. We will make other lending facilities to our ISV and ISO partners to put gas in their tank to supercharge their marketing, to do development that will help them accelerate adoption on their products. So it's a very, very valuable facility that you will see reflected in that way going forward. And it will help us really not have that drag that Tim just alluded to. Harold Goetsch: Excellent. Okay. And I have one follow-up on that on -- this has been a real building year and investment year. And I look at that based on maybe where -- maybe even the dollar increase in salaries and employee benefits, we had a couple of acquisitions -- it's is cost of living, but it looks to be like a pretty solid dollar increase year-over-year in salaries and benefits. Will we -- will there be a moderation of that maybe based on the investment you spent this year going into 2022? I know you gave some initial sales commentary and gross profit margin guidance commentary. But give us a thought about some of the expense items that trajectories exiting 2025 into 2026. Tim O’Leary: Yes. So a lot of the increase was driven by acquisitions, right? So you go back and think about the acquisitions late last year with our payroll platform, at the very beginning of this year with the lettuce business up in Canada, right? So we had a couple of acquisitions that we haven't anniversaried yet. So that's part of the increase. Benefit costs also is certainly higher, and we're going to see the same impact next year with health care premiums going up. And then there was also a meaningful component of that increase was non-cash related to stock comp and some mark-to-markets on long-term incentive plans. So a lot of it was non-cash but definitely acquisition related in addition to on the SG&A side, you had some of the increased software and public cloud expenses that we expected, and we'll continue to see some of that growth. But I think this is a good run rate to think about going into next year, and we actually -- we were down $1 million from Q2, right? So we've actually continued to be very disciplined about the actual salary and benefits we have in the organization, but some of the acquisitions certainly added to that. Operator: The next question comes from Jacob Stephan of Lake Street Capital Markets. Jacob Stephan: Just kind of first, asking on the guidance as well. Some of these -- the construction vertical, the restaurants and wholesale trade, maybe can you kind of help us think through what potentially that represents as a whole of Merchant Solutions? Tim O’Leary: Sure. Happy to Jacob. So the restaurant sector for us, we still feel like we're underweight in that vertical compared to the broader market, but it's mid-teens, high teens, 16%, 17% of our volume. Construction is in the mid-single-digits from a percentage basis points. Wholesale trade is comparable, maybe a little bit higher than that. But again, some of the slowdown we saw from a same-store sales standpoint was broad-based. So those verticals were probably impacted a little bit more, but it was across a lot of the different end markets that we service. Jacob Stephan: Okay. And I know we talked a little bit about maybe potentially opening up some -- a greater risk profile in the portfolio, but has this kind of shifted that thought process at all? Tim O’Leary: I don't know if we're looking to increase the risk profile. I think we managed that very effectively. I think we had pared back some of the risk earlier in the year given some of the changes in the end market and some of the network regulations and getting in front of that to create some headroom. But we're not looking to increase the risk across the portfolio. I think we're generally a low-risk portfolio and where we do play in the specialized acquiring segment, we're very disciplined about how we approach that from a risk standpoint. Thomas Priore: Maybe one other point on that. Look, and I'll point to the acquisition. We have a thesis around the future of automotive commerce. And the acquisition of DMS is a -- I wouldn't call it a first step. I'll just call it an evolution of sort of what we built in preparation of really leaning into that segment. So where that kind of reflects the risk side is, say, we're looking at industries I would consider more defensive. In the auto segment, sales are slowing. They're moderating for sure. And what that typically means, and you're seeing this in the stat is people own their cars longer, even if it's a pre-owned environment, it's just the cars are around longer, which means more service. So leaning into that narrative and when sales go down, service goes up. So we really like the defensive nature of that. We're going to lean into that. We have some really good partners in addition to what we acquired with DMS. So those are sort of the type of strategies we're going to lean into because we think they make tremendous sense just from an addressable market and the nature of the cash flow, they're very stable. And they actually, when the economy maybe isn't as great, they tend to go up. So we're looking for other segments. We're examining other strategies and segments like that. Tim alluded to this as well. Our benefit costs are going up. There's a lot of controversy around affordable care and how that's all changing. Well, we're leaning into payroll and benefits, right? That's just a place to be because the money -- we are fundamentally a commerce engine designed to move money through systems of commerce. Certainly, card acquiring is one of them, but I can't underscore this enough. 2/3 of our gross profit is coming from segments outside of requiring. That's not accidental. So as we lean into these segments that just are defensive in nature, getting into the benefits segment, getting into things like auto, like that's how you create stable cash flows to really reward our investors for thinking over the long term. So I just invite everyone to examine those conditions and where we're positioned because we have very good cost basis entering these markets and a lot of upside optionality to win. Jacob Stephan: Yes. Understood. And obviously, we see that reflected in the guidance with both profit metrics actually moving up. Let me ask this question. So there's a $15 million kind of delta on the revenue line with -- we're essentially almost halfway through Q4 here. What are really the puts and takes that kind of get you to the high end versus where we might be at $950 million for the full year? Thomas Priore: So I'll say -- I'm going to ask Tim to follow up on this. But look, I'm going to just talk about our pipeline and Tim will maybe talk to trend. The upside guidance is activation of the pipeline. If it activates faster than we've kind of modeled, that all falls right to the bottom line. And these customers, they're considerable. These are not -- these are coming from large enterprise segment. And it's why we have evolved our segment level reporting to reflect how customers are using commerce engine. The customers that come in, they're using everything. They're using Acquiring, they're using Payables. They're certainly using the Treasury Solutions that we provide. So this gives us better visibility into just what's generating the income if you will. And then as a result of that, just how sticky it is. So that will be one major influence in terms of where upside can come from. Let me let Tim comment on the trend line. And then I kind of have one other thought I want to share, but I want to let Tim weigh in here. Tim O’Leary: The other factor is certainly the volumes in Merchant Solutions, right? We took a pretty forensic analysis looking at quarter-to-date trends and looking at October trends compared to August and September and definitely have seen a little bit of an uptick in October, right? Not dramatic, but certainly improvement from what we saw in August and September, which gives us the comfort to think about the guide for the balance of the year where we're referencing mid-single-digits organic growth for Merchant Solutions. So you think about that core, it grew 4% in Q3. We think we'll do better than that in Q4, given some of the trends we've seen so far in October, plus to Tom's point, some of these larger customers and ISVs we've onboarded to the platform which goes back to why we changed the segment names. As we interact with the investor community, there was an increasing confusion on what is SMB and what is enterprise because people were associating it with just the size of customer. And as we think about continuing to add some of these large customers that everybody was expecting that to go into enterprise, they might be coming on and the entry point might be acquiring where we're doing ticket sales for the Minnesota Wild or others like that or they might come on for Payables. We're working with them on automated payables. So we're trying to reorient the segments to the solution sets provided because the customer sizes are certainly changing as we evolve the business and more of our clients are coming on to the full commerce platform. Thomas Priore: If I can add one last point. And look, this is just -- let's be candid about it. We've outperformed certainly our segment peers for a considerable number of quarters. And that's not -- I would say we're not rewarded for it. So having a measured expectation to ensure we just -- we stay on track and on target, we think probably is a more thoughtful approach. So as we start to see this enterprise pipeline convert, I'll call it enterprise customer pipeline convert, I think we'll feel a lot better about just how we model that throughput. Operator: The next question comes from Bryan Bergin of TD Cowen. Bryan Bergin: So in the Merchant segment, just trying to think about, as we step back and think on the remaining portfolio, how much of the book is still in specialized acquiring and potentially how much within the residual portfolio may still be a risk as we look to 4Q and beyond? Just trying to get a sense of the scale of these in totality, just to get a sense on further potential volatility in performance just on a quarter-to-quarter basis. Tim O’Leary: Sure. So specialized, it's actually -- it's grown quarter-over-quarter as we've moved through this year, you're just coming off a much larger year last year. This year has obviously been dampened a little bit by some of the network changes. But we actually -- but we saw some improvement in that business from Q1 to Q2 and from Q2 to Q3, and we expect that to continue into Q4. So it's still a year-over-year headwind, but that business is improving, and we'll obviously anniversary some of those headwinds as we move into next year. So I think that will dissipate itself. On the historical residual purchases, we still have a meaningful amount of residuals there that will run off over time. It's a slow burn, but you're seeing, call it, $0.5 million a quarter of an impact, maybe $1 million a quarter of a year-over-year impact as that runs down. Bryan Bergin: Okay. That's helpful. And then you have a large partner that's going through some challenges here in strategic changes driven by their new management. Just curious, are you seeing any impact in your business from that as you are a large distribution partner to their SMB offering. So just anything to call out on the underlying changes there and your outlook on that strategic relationship. Tim O’Leary: You might be referring to -- I'm not sure [ what you're ] referring to. I think we continue to see good trends across our portfolio with POS systems. Tom, you can probably offer a little more color specifically, but we've still been very active in that market. Thomas Priore: And Bryan, I apologize, I'm actually -- I'm remote, so I'm on my mobile and you broke up a little bit on your question. Would you mind repeating it? Bryan Bergin: Yes. Just with all the changes going on with Fiserv and Clover, repricing and things like that, is there any downstream impact to the activity that you may be seeing? Thomas Priore: We haven't seen changes in trend on POS, specific to Clover. We're one of their larger resellers, you certainly reflect that. There's -- we actually -- because of our positioning, we've been able to really have a constructive relationship on material costs. So making some bulk purchases has been helpful. So I don't know that, that will necessarily continue with Fiserv based on some of the conversations that we've had and just because there -- the impact of tariffs are actually starting to flow through. With that said, our other segment of POS, MX POS, we've [Technical Difficulty] within in the app. But again, it's starting from a small base. So that's really a '26 directive for us. Operator: The next question comes from Vasu Govil of KBW. Vasundhara Govil: I guess the first one, just on the gross profit guide. I know the guide implies a pretty meaningful step-up here in the fourth quarter. I think, Tim, you alluded to it a little bit before, but maybe you could just remind us what drives that acceleration from 3Q to 4Q? Tim O’Leary: Sure. I think there's a couple of factors. So some of it is the higher organic growth we think we're going to see in the Merchant Solutions segment based on what we've seen already in just some of the October trends in addition to some of the onboarded larger customer wins. And we've been -- we think, conservative relative to the ramp on those in the balance of the year. But then you've obviously -- you've got the impact of the acquisitions, right? So we acquired Boom Commerce in the middle of the quarter. So we had a partial quarter impact in Q3 and then DMS, which we closed on October 1, right? So we'll get a full quarter impact of that in Q4. So there is an acquisition-related impact there as well, which gives us a lot of comfort around what we see for Q4. Vasundhara Govil: That's super helpful. And I guess just thank you for the preliminary color on next year. I know it's still preliminary and there are probably a lot of puts and takes there. But just historically, you benchmarked yourself as a low double-digit grower. Obviously, the macro is a little bit of a challenge here. But anything you can give us on sort of how you're thinking about the building blocks and the puts and takes to get to that high single-digit range? Tim O’Leary: Sure. I think it's continued mid-single-digit organic growth on the Merchant Solutions side, followed by low double-digit growth in Payables and what we think is going to be high teens to 20% type growth in Treasury Solutions. Obviously, some of the growth rate in Treasury Solutions has come down just given a lot of large numbers, but continue to see very strong trends there. As Tom referenced, we had our largest quarterly increase in deposits under administration this quarter. We grew deposits under administration by $200 million since Q2 and you see that accelerating. So despite some of the lower interest rates, we're outrunning that with continuing to grow the franchise and grow what we're seeing on the deposits under administration across our customer base. So to your point, it is early. We'll have more details on our full year outlook on the Q4 earnings call, but I just wanted to give everybody at least an initial guidance on how we're seeing next year based on current trends and the acquisitions in addition to just some of the new customers we onboarded already that we're seeing some impact from, but not a lot yet. Thomas Priore: If I may just remark on that, what will influence that as we guide through the year is enterprise clients, they operate a little bit differently in that you'll start to absorb their portfolio, particularly in the ISV space, right? You'll start to absorb their portfolio as they extend the solutions throughout their client base. So to the extent those are -- those accelerate, then things pick up. So that's really what we're balancing out. And just prudence seems to be the best path. And we have a high degree of confidence in what has been reflected. Yes. And thank you, by the way, for joining us. It's great to have you. Operator: This concludes our question-and-answer session. I would like to turn the call back over to Tom Priore for any closing remarks. Thomas Priore: All right. Well, I want to thank everyone once again for all of your focus on priority and for really helping us deliver our value story to investors. And for those investors on the call, thank you for your ongoing support. We will get back to work. Operator: The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.
Operator: Good morning, ladies and gentlemen. My name is Lilly, and I will be your operator for today. Welcome to Knight Therapeutics Third Quarter 2025 Results Conference Call. Before turning the call over to Ms. Samira Sakhia, President and CEO of Knight, listeners are reminded that portions of today's discussion may, by their nature, necessarily involve risks and uncertainties that could cause actual results to differ materially from the contemplated by the forward-looking statements. The company considers the assumptions on which these forward-looking statements are based to be reasonable at the time that they were prepared, but cautions that these assumptions regarding the future events many of which are beyond the control of the company and its subsidiaries may ultimately prove to be incorrect. The company disclaims any intentions or obligation to update or revise any forward-looking statements, whether a result of new information and/or future events, except as required by law. We would also like to remind you questions during today's call will be taken from analysts only. Should there be any further questions, please contact Knight's Investor Relations department via e-mail to ir@knightpx.com or via phone at (514) 484-4483. I would like to remind everyone that this call is being recorded today, November 6, 2025. I would now like to turn the meeting over to your host for today's call, Ms. Samira Sakhia. Please go ahead. Samira Sakhia: Thank you, Lilly. Good morning, everyone, and welcome to Knight Therapeutics Third Quarter 2025 Conference Call. I'm joined on today's call with Amal Khouri, our Chief Business Officer; and Arvind Utchanah, our Chief Financial Officer. I'm excited to announce that we achieved record high adjusted revenues of $319 million as well as record high adjusted EBITDA of approximately $49 million for the 9 months period ended September 30, 2025. During that period, our revenues grew by approximately $48 million or 18% compared to the same period last year. This growth was not only driven by the Paladin and Sumitomo transactions, which contributed $27 million of incremental revenues, but also our key promoted products, which delivered organic growth of 12% on a constant currency basis. In addition to achieving record financial results, we have continued to strengthen our oncology portfolio. This quarter, we expanded our partnership with Incyte by in-licensing the LatAm rights to 2 innovative drugs, retifanlimab and axatilimab. Furthermore, we have advanced our pipeline with the launches of 3 products in multiple countries. We have launched JORNAY PM in Canada, MINJUVI in Argentina and PEMAZYRE in both Brazil and Mexico. Moving on to our regulatory update, in the third quarter, we received a rejection from our -- of our marketing authorization application for TAVALISSE from Anvisa, the Brazilian Health Agency. We have already submitted an appeal to Anvisa, which could take up to 14 months. In addition, subsequent to the quarter, we have received a notice of noncompliance or NON from Health Canada on the drug submission for Qelbree. The NON requires additional information, which we will submit in 2026. Despite these setbacks on these 2 products, we expect to address the health agency's request and bring both drugs to market. Moving on to the NCIB, in August 2025, Knight launched an NCIB under which we can purchase for cancellation up to 3 million common shares over the next 12 months. Subsequent to the quarter, we purchased 389,000 shares at an average price of $5.84 for an aggregate cash consideration of $2.3 million. I will now turn the call over to Arvind to provide an update on our financial results. Arvind Utchanah: Thank you, Samira. When speaking of our financial results, I will refer to adjusted EBITDA and financial results at constant currency, which are non-IFRS measures as well as adjusted EBITDA per share, which is a non-IFRS ratio. Knight defined adjusted EBITDA as operating income or loss, excluding amortization and impairment of noncurrent assets, depreciation, the impact of accounting under hyperinflation, acquisition costs and transaction costs, inventory step-up expense and other nonrecurring expenses, but to include costs related to leases. We define adjusted EBITDA per share as adjusted EBITDA over the number of common shares outstanding at the end of the respective period. In addition, revenues and financial results at constant currency are also non-GAAP measures. Financial results at constant currency are obtained by translating the prior period results at the average foreign exchange rates in effect during the current period, except for Argentina, where we only exclude hyperinflation. Adjusted gross margin is defined as revenues less cost of goods sold, adjusted for the impact of accounting under both hyperinflation and purchase price accounting. Furthermore, my discussion on operating results will refer to figures that exclude hyperinflation unless otherwise noted. For the third quarter of 2025, we delivered record revenues of $122.6 million, an increase of $31.2 million or 34% versus the same period last year. On a constant currency basis, revenues increased by approximately $29 million or 31%. The Paladin and Sumitomo portfolios contributed to $25 million of incremental revenues. The rest of the variance was mainly driven by our key promoted products, which grew by $5.5 million or 8% on a constant currency basis as well as purchasing patterns of certain products. This was partly offset by declines in our mature and branded generic products and the termination of a nonstrategic agreement in Colombia. Moving on to revenues by therapeutic area, the oncology and hematology portfolio delivered $38.3 million in Q3 2025, relatively unchanged compared to the same period last year. Excluding the termination of a nonstrategic distribution agreement in Colombia and on a constant currency basis, the portfolio increased by just under $1 million or 2%. The increase was driven by our key promoted products, which grew by $2.8 million or 15% as a result of the growth of AKYNZEO, the launch of MINJUVI and the addition of both ORGOVYX and ONICIT. This growth was partly offset by declines in our mature and branded generics products due to their life cycle. Our infectious disease portfolio delivered approximately $37.2 million, an increase of $3.4 million or 10%. On a constant currency basis, the portfolio grew by $2.3 million or 6% compared to the same period last year. The increase was due to the growth of CRESEMBA and the purchasing patterns of certain products. Turning to our other specialty therapeutic area, the portfolio generated $47.1 million in revenues, an increase of $26.3 million or 127% compared to the same period last year. The incremental revenues from the Paladin and Sumitomo portfolio were $23.4 million. The rest of the variance was driven by the launches of IMVEXXY and BIJUVA and the purchasing patterns of certain customers. Now moving on to gross margin, we reported adjusted gross margin of $59.9 million in Q3 2025 versus $43 million in Q3 last year. The adjusted gross margin as a percentage of adjusted revenues increased by 2%, going from 47% in Q3 2024 to 49% in Q3 2025. The increase is mainly explained by the addition of the Paladin and Sumitomo portfolios, resulting in the higher weighting of the Canadian business in Q3 2025 when compared to Q3 2024. I will now turn to our operating expenses, excluding amortization. For the third quarter, our operating expenses were $39.7 million, an increase of $9 million or 30% compared to the same period last year. The increase was driven by higher selling and marketing as well as R&D expenses. Our selling and marketing expenses increased by $4.5 million, mainly driven by the expansion of our sales and commercial structure behind the addition of the Paladin and Sumitomo portfolios. In addition to structure, the increase included higher promotion and marketing expenses for the promoted brands acquired in the Paladin and Sumitomo transactions, including ORGOVYX, MYFEMBREE, XCOPRI, ENVARSUS as well as spend on our prelaunch and recently launched brands, including JORNAY PM, IMVEXXY, MINJUVI, TAVALISSE, Qelbree and PEMAZYRE. Our R&D expenses increased by $3.5 million due to the expansion of our scientific affairs structure, including field-based personnel related to the Paladin and Sumitomo portfolios. In addition to structure, the increase included incremental medical, regulatory and pharmacovigilance spend on the Paladin and Sumitomo portfolios as well as on our pipeline and recent launches. Moving on to adjusted EBITDA, for the third quarter of 2025, we reported $21 million of adjusted EBITDA, an increase of $7.5 million or 56% compared to the same period last year. The increase was mainly driven by the higher adjusted gross margin, partly offset by higher operating expenses. Our adjusted EBITDA per share was $0.21, an increase of $0.08 or 62% compared to the same period last year. I will now cover our financial assets, which are valued at $94 million. In the third quarter, we recorded a net loss of $4.6 million driven by the mark-to-market revaluations of our strategic fund investments. As a reminder, our funds continue to be a source of cash. During 2025, we received net proceeds of $5.7 million and $45 million since 2020. Moving on to our cash position and cash flows, at the end of Q3, our net debt position was just under $1 million. We held $96.5 million in debt and $95.6 million in cash and marketable securities. During the quarter, we generated cash inflows from operations of $10 million despite an investment of $11 million in working capital. The increase in working capital was due to the higher accounts receivable given the growth in our Canadian operations, partly offset by a decrease in inventory and an increase in accounts payable. Finally, as announced last week, we have closed the syndication process with a group of 4 lenders and doubled our revolving credit facility from USD 50 million to USD 100 million, with an accordion feature for another USD 100 million. This facility is secured by Knight assets held in Canada, Luxembourg and Uruguay and has an initial term of 3 years with the option to extend annually for an additional 1-year term. As a reminder, we drew down CAD 60 million from the facility in Q2 to fund part of the Paladin acquisition. I will now turn the call back to Samira. Samira Sakhia: Thank you, Arvind. Now on to our financial outlook for fiscal 2025, I would like to remind everyone that the guidance provided assumes that there is no material adjustment due to hyperinflation accounting in Argentina. In addition, our guidance is based on a number of assumptions, which are described in our press release. Should any of these assumptions differ, the actual results may vary materially. We are increasing our outlook for fiscal 2025 and expect to generate revenues between $430 million and $440 million and an adjusted EBITDA between 13.5% to 14.5% of revenues. The increase in our financial outlook is driven primarily by the strong performance of our promoted products. Our team has been extremely successful in executing on our pan-American ex-U.S. strategy and building a profitable business. In the first 9 months, we have delivered record results. We in-licensed 3 new products, and we completed 2 acquisitions, which strengthened our Canadian operations. We are already starting Q4 on a high note. At the beginning of the quarter, we announced the relaunch of ORGOVYX and MYFEMBREE. And just last week, we announced the launches of JORNAY PM in Canada and MINJUVI in Argentina. We also added more flexibility to our balance sheet upon closing the syndication of the revolving credit facility. Following the closing of this credit facility, we can now borrow up to an additional $100 million and another $135 million through the accordion feature. This is in addition to the $95 million of cash and marketable securities that we reported at the end of Q3. With our expanded portfolio, increased operational scale and capital flexibility, we remain well positioned to drive long-term value and deliver on our mission to acquire, in-license, develop and commercialize pharmaceutical products for Canada and Latin America. This concludes our formal remarks. I would now like to open up the call for questions. Operator: Before we begin, may I please remind you questions during today's call will be taken from analysts only. Should there be any further questions, please contact Knight's Investor Relations department via e-mail to ir@knightpx.com or via phone at (514) 484-4483. [Operator Instructions] Your first question comes from Michael Freeman of Raymond James. Michael Freeman: Congratulations on these results. I wonder if you could spend some time and dig into the organic growth of the branded products a bit further. What products stood out? What geographies stood out? What do you think drove this very positive performance? Samira Sakhia: So it's really across the board where we're seeing good performance. So we're seeing good performance in our oncology portfolio. AKYNZEO, the launch of MINJUVI. We're seeing it on CRESEMBA. We had some buying patterns on AmBisome even though we didn't have MOH in the quarter. We're seeing it -- we continue to see growth of LENVIMA in Colombia. We're seeing growth in Canada behind -- these are not in the organic, but again, ORGOVYX, MYFEMBREE, XCOPRI, so all of these products are growing. And what I would highlight is in the Canadian portfolio, Q3 was an integration quarter. As you recall, we only closed in the middle of June. The team was -- yes, the teams were in the field, but there was a lot of focus on integrating. And now we're -- now, as we announced at the beginning of the quarter, the field force is completely in place. Everybody has been trained. We've launched -- relaunched ORGOVYX, MYFEMBREE and the team is on XCOPRI, they're on JORNAY PM. So we expect to have all of these products continuing to grow in Q4 and into next year. Michael Freeman: Okay. Okay. I appreciate all that color. Now on the expansion of your credit facility, and it looks like you're shoring up capacity. I wonder if you could describe if -- where your geographic focus will be when it comes to future business development, future potential M&A. There has been a lot of activity in Canada recently. Should we expect that to continue or maybe more a broadly distributed effort? Amal Khouri: Michael, it's Amal. I think you can expect really more of the same as we've been doing and executing in the last few years. So really across all of our countries, and also in terms of type of deal as well, like whether it's acquiring products with existing sales, acquiring -- and that includes acquiring one product at a time, portfolio of products or even M&A as well as pipeline products as well. So really more of the -- more execution -- more of the same execution as we've been doing across our markets. Samira Sakhia: And I just wanted to highlight, if you look at this year, we've had the 2 transactions that we had for Canada, but we had multiple transactions that also had LatAm. So the license agreement, the Incyte agreement expansion was for 2 products for LatAm. Honestly, it was for LatAm. If you look at last year, we had JORNAY PM, we had Incyte's products, both for Canada and Latin America. And I'm sure I'm missing a couple of other deals that we signed last year. But it's really -- we are a partnering organization. We're going to do what's right for the business, and we have to be flexible for our territories. And the fact that we have all of these territories allows us to be extremely productive when it comes to our transactions. Michael Freeman: Okay. And I can ask one more quick one. The -- your agreements with the Brazilian Ministry of Health, these renew on an annual basis. I wonder if there's any news relating to the renewal of your contracts with the MOH on Amazon. Samira Sakhia: Sure. So we did sign at the end of last year. That agreement -- they bought what they've bought so far this year. We are in discussions with them for their 2026 purchases. We -- it's a government organization. They take their time. We're dealing with bureaucrats. It could be -- we -- it's really still too early to tell whether -- when this agreement gets signed and if there will be a shipment in Q4. And I know I'm talking at the beginning of November, and there's not a lot of weeks left in the year. But again, I'm -- we're dealing with bureaucrats and it could either get signed this year with a small shipment this year or it gets signed later in the year or early next, and we ship everything in 2026. Operator: Your next question comes from David Martin of Bloom Burton. David Martin: Congratulations on the quarter. The first one is a follow-up to the last question. For the Amazon Ministry of Health in Brazil, I think previously, there had been a competitor. Is there a competitor now? Or are you going into this as the sole source? Samira Sakhia: At this time, there's -- we don't see -- the competitor is not there. So we are a single source, and we expect that -- like I said, the team has been in discussions, discussions continue. We do expect something -- we will be successful in this, but it's a question of time at this point. David Martin: Okay. Got it. Can you provide more color on the Brazilian action on TAVALISSE and Health Canada on Qelbree? What are the regulators looking for? Are these things that are in your control or out of your control, such as run another trial? And you mentioned 14 months for the response in Brazil. Once you refile Qelbree, how long do you expect it will take Health Canada to render a decision? Samira Sakhia: So on both, we didn't really provide details. What I -- so in the case of Qelbree, it is not going back to doing more clinical trials. And our team is working on the response. We expect to refile in 2026 and get approval by the end of 2026. In the case of TAVALISSE, it's really more on a technicality, and that is why we are appealing to Anvisa. And we -- the normal course of this appeal process is in the range of 14 months, and we'll continue to pursue that. And again, I'm confident that TAVALISSE will get approval even if worst case, we have to refile the product. David Martin: Okay. Okay. And one last quick question. You mentioned Q3 was an integration quarter in Canada. Were there headcounts in Q3 that will be reduced in Q4? Samira Sakhia: So as you know, in the integration at the end of last Q, we had announced that we had restructured 20-some percent. At the end of this quarter, we've announced that we've restructured about 30%. The integration was not just in relation to restructuring the teams, but really on the commercial front, where we are bringing the Paladin team onto the new portfolio that -- into the new products that Knight was launching, including JORNAY PM, including the Sumitomo portfolios. There was a lot of territory assignment, product training. So while, yes, people were in the field, I would say activity was a bit lower. So going into Q4, our activities are actually ramping up. Operator: Your next question comes from Scott McAuley of Paradigm Capital. Scott McAuley: A lot has been touched on already, but I wanted to highlight the EBITDA margin expansion for 2025, which is great to see as we're kind of nearing the end of the year. I know you haven't given guidance for 2026, but kind of the levels you're looking for 2025, like do you see those as sustainable going forward even with, as you say, you're launching new products and investing in the platform for the next little while and the new product growth? Samira Sakhia: So what I will say is we will guide to 2026 when we announce March. As I said in the earlier question that there was a slowdown of activity in Q3. That activity picks up and there's more products that are launching next year. So all in all, more investments, we're going to continue to have a lot of investment behind new products. Scott McAuley: Yes, absolutely. That's great. Another thing is on the cash flow. I know the cash flow from operations is a little lumpy, but it's great to see, I think it was $10 million this quarter, $20 million last quarter versus kind of single digits in kind of a number of quarters in the past. So are you seeing some more normalization of that? Should we continue to expect kind of relatively lumpy or swings in that kind of cash flow from operations perspective? Samira Sakhia: Sure. So one of the things is we're a very healthy company. We generate good EBITDA and a good EBITDA from cash. Where we get impacted is really in association with inventory that comes with some lumpiness. So whether we acquire an asset or whether we are preparing for a launch or some purchasing commitments that we have with our partners. So it remains -- it could be lumpy. But in general, we are aiming -- and you have to look -- you can't look at it on a quarter-by-quarter basis, you have to look at it over multiple quarters at a time. And we aim to be between 60% to 80% cash flow as a percentage of EBITDA. Scott McAuley: That's great. Good to hear. And just lastly, on the M&A front, obviously, with the increased credit facility gives you guys some more firepower. Just wanted to check in terms of visibility on the entire territories. I know you highlighted signing more deals that take advantage of Canada and throughout LatAm. In terms of conversations you're having or the things you're looking at, are you seeing more of those type of interest for signing for products that take advantage of your entire geographic reach? Amal Khouri: Scott, this is Amal. I think we're seeing like on the fact that we cover the footprint that we have, we've been getting very positive feedback from potential partners, but also existing partners that it's much easier for them to deal with one company that covers all of these markets. At the same time, and I think Samira mentioned it earlier, we do remain flexible because in some cases, for example, there are companies who have their own affiliates in Canada. So in that case, we do a deal just for LatAm. So we have that flexibility, but we also have the ability to execute on the entire territory, and we have been getting good feedback, and you see it in the deal flow. We've been relatively consistent and productive. In the last few years, we've been averaging about 3 deals per year. Of course, it varies like from 1 year to the other, but it's been a really consistent productive deal flow. Operator: [Operator Instructions] Your next question comes from David Martin of Bloom Burton. David Martin: I have 2 follow-ups. The first one, what does the launch schedule look like for your branded generics business? Are you launching a few products each quarter? Do you expect there'll be a bolus of new products launched sometime in the near term? Samira Sakhia: So in our branded generics, we have a couple of products that are launching in Argentina in the next few months. So between the end of this Q to kind of first half of next quarter. These products will be relatively small. We have a pipeline, and it's in our pipeline table kind of when the timings of those launches will be but they pace over several years. I believe the earliest probably starts in '27. And we're really rebuilding that pipeline at this point in time. David Martin: Are these a couple in Argentina over the next few months, are they the first you've launched in a while? Or have there been others in previous quarters? Samira Sakhia: They're the first in a while. There's been a few that launched, but it would have been in smaller territories like a Chile, which basically provides cash flow, it's opportunistic. It's at market access. It provides us a tool when it comes to market access and negotiating with accounts relatively small, but again, good for the business. David Martin: Okay. And last question. The XBIs moved up about 20% in the third quarter. Knight's other financial assets were a little down. Can you walk us through the gives and takes on that? I would have expected maybe your financial assets would have increased. Samira Sakhia: I'm going to take a wing at it and then maybe Arvind can add. So our portfolio is venture cap funds. A lot of those assets are private companies, and we follow what the fund managers, the VC is doing to account for the write-downs or the write-ups. In the case of the assets that are in that portfolio, we do take an increase or decrease based on how they are performing in the public markets. And this quarter, we did have one of those assets on which there was a decline in the share price. We continue to monitor. It is -- it seems to be coming back. There may be a small write-up going into -- when we report Q4. Arvind, I'm not sure if you wanted to add anything. Arvind Utchanah: That's correct. And I would just add that some of the biotech do hold some public equities. And that too has been very volatile going up and down depending on the share price at the end of each quarter. Operator: The next question comes from Michael Freeman. [Operator Instructions]. Michael Freeman: Yes, one follow-up. I just wanted to ask how we should be thinking about SG&A moving forward? Do we expect things to be stable through the end of the year? And then, also, should we expect a ramp through 2026 as you are launching your slate of products? Samira Sakhia: So what I can say is that we are already in a lot of launch -- over this year, multiple things have been changing along the way. We've added a whole lot of portfolio, a whole lot of products that are in our -- in what we just signed needs promotion activities. As I said, in Q3, kind of due to integration, some of the activities were less than what would be normally in Q3. So as we go into Q4, where there is a full field force that is out in Canada, you can expect a bit of a rise. Going into next year, and again, we don't guide towards quarters, but we have JORNAY PM. JORNAY PM will continue to be part of that. It's launched mid-Q4. We have MINJUVI launching in Argentina. We have TAVALISSE launching in in Mexico, and we have a new portfolios that we just licensed ZYNYZ, Niktimvo. And again, there will be prelaunch efforts behind both of those products. We have MINJUVI follicular, which is a second indication for MINJUVI, that will be launching some point next year in Brazil. So we are building a great portfolio, and each one of these products requires investment. Operator: There are no further questions at this time. I will now turn the call over to Ms. Sakhia. Please continue. Samira Sakhia: Thank you, Lilly. Once again, thank you for the confidence in the Knight team and joining our Q3 2025 conference call. Have a great morning. Operator: Ladies and gentlemen, this concludes today's conference. You may now disconnect your lines at this time. Thank you for your participation.
Operator: Good morning, ladies and gentlemen, and welcome to the Baylin Technologies Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] This call is being recorded today, November 6, 2025. I'll now turn the call over to Kelly Myles, Director of Marketing and Investor Relations of Baylin Technologies. Please go ahead. Kelly Myles: Hello, and welcome, everyone. Thank you for joining the call this morning to review our third quarter 2025 financial results. On the call today from Baylin are Leighton Carroll, Chief Executive Officer; and Cliff Gary, Chief Financial Officer. We will be available for questions at the end of the presentation. Before we begin, let me make it clear that our comments today may include forward-looking statements and information as well as answers to questions that could imply future expectations about the prospects and financial performance of the business for the rest of 2025 and beyond and include the use of non-IFRS measures. These statements are subject to risks, uncertainties and assumptions. Accordingly, actual performance could differ materially from statements made or information provided today, so you should not place undue reliance on them. We also do not intend to update forward-looking statements or information, except as required by law. I ask that you read our legal disclaimers and explanation of the use of non-IFRS measures and refer you to the risks and assumptions outlined in our public disclosures, in particular, the sections entitled Forward-Looking Statements and Risk Factors in our annual information form for the year ended December 31, 2024, and our other filings, which are available on SEDAR+. Our third quarter results were released after market close yesterday. The press release, financial statements and MD&A are available on SEDAR+ as well as our website at baylintech.com and otcmarkets.com. I would now like to turn the call over to Leighton. Leighton Carroll: Thank you, Kelly. As we indicated in our last earnings call, we foresaw softer market conditions in Q3 and discussed that. As a result, our top line revenue was $16.8 million. There actually were a couple of additional factors to that I'll talk about here in a second. We obviously did $22.5 million in Q2 of '25 and did $20.7 million in Q3 of '24. The decline was primarily driven by, in the case of our embedded business, a situation of an elevated customer inventory level in a key product, which caused lower order flow-through. And then secondly, we had a large amplifier package that was to ship in September. And in the month of September, and it was obviously going to be meaningful revenue in our satellite business, we wouldn't be talking about it. In September, they came to us and said, because of the importance of the system, it's for a U.S. DoD application, they wanted to delay shipment for 30 days, and they would pay us for additional burn-in or effectively testing time and keeping the systems powered on of that amplifier package. That moved -- clearly, you can't recognize revenue in that situation. That moved that revenue into October. And that was very material. So the number was actually a bit lower than I was anticipating because we had anticipated, particularly that Satcom business to have flown through. But it's -- when a customer asks you to do something like that, no, so you can make a number is probably not the right answer. Separately from that, and I think people know this about us, we've really always focused on how do we improve our margins and how do we operate efficiently. Gross margin on a percentage basis was 43.7% on the lower revenue. That comes to $7.3 million. Now obviously, that's a decrease year-over-year that pretty -- over $2 million, but conversely, because of that focus on, I would say, cost control, operational efficiency and what we're doing with product mix despite being in a little more of a challenging environment as we got to the back half of this year, our adjusted EBITDA was $0.6 million, which is only effectively $300,000 lower than the same period last year, understanding that the same period last year had substantially higher revenues than what we were -- what we produced in this quarter. Obviously, I'm not satisfied with this level of performance. But I do think it speaks to in the long term, and I do fully believe this, the business as revenues continue to rise, and this is part of where in the next -- as I get to the second half of what my speaking, I'll talk about '26, the improving margins and coming back to a growth profile if you're able to have this level of gross margins in a down environment, it kind of -- I like where we're going for next year still. With that said, I'll now hand it over to Cliff Gary to walk through the financial information, after which, obviously, I'll talk a little bit more. Cliff Gary: Thank you, Leighton, and good morning, everyone. The third quarter presented several challenges with revenue totaling $16.8 million, representing a 19% decline compared to the same period last year. This decrease was primarily driven by the lower demand and customer order pushouts in our embedded and Satcom business lines. Despite this, we maintained a gross margin of 43.4%, reflecting disciplined operational execution. We also made meaningful progress in cost control, reducing operating expenses from $9.1 million in Q3 of 2024 to $7.6 million in the current quarter, aided by lower incentive provisions and a continued focus on aligning costs with revenue levels. Adjusted EBITDA came in at $0.6 million, down $0.3 million year-over-year, while the quarter resulted in an operating loss of $0.3 million compared to a $0.4 million profit in Q3 of 2024. Finance expenses and fair value adjustments were $0.8 million lower, helping to narrow our net loss to $1.1 million, an improvement from the $1.4 million net loss in the same quarter last year. On the cash flow front, operating activities saw a modest outflow of $0.1 million, largely due to a $2.3 million escrow payment related to the 2018 Advantech acquisition. Excluding this payment, operating cash flow would have been a positive $2.2 million, driven by working capital reductions in response to lower revenue levels. This escrow payment was offset by the issuance of preferred shares for the same amount, resulting in a $1 million cash inflow from financing activities after debt and lease payments. We ended the quarter with $5.3 million in cash and cash equivalents, up from $3.7 million in Q3 2024 and $4.3 million at the end of Q2 2025. We remain fully compliant with our lending covenants. Our net debt decreased to $11.4 million, a 20% reduction from the prior year-end figure of $14.3 million, thanks to $2.8 million year-to-date cash generated from operations. While the quarter affected our prior guidance on business conditions, our ability to preserve margins, reduce costs and strengthen our balance sheet underscores the resilience of our business. These efforts position us well for future growth. With that, I'll now turn the call back to Leighton. Leighton Carroll: All right. Thank you, Cliff. Look, we said that the back half of the year, we foresaw that it was going to be softer. We obviously had a bang out Q2, right? And I would love that to be the case every quarter, but we saw this coming. We knew it wasn't going to be the case. And hopefully, you've heard, at least from some of the numbers, we took steps and took steps early to continue addressing cost structure and look at margin improvement and obviously, to try to run efficiently. Looking ahead, and I think I said this in the second quarter earnings, we actually anticipate similar results in the fourth quarter. Wireless Infrastructure remains strong, right? It is -- it was fascinating to see a business grow 40% in a very down market in '24. Budget was set higher and guess what, they're ahead of plan. That -- I don't see that stopping, and I like how that sets us up into '26. The challenge has been that we expected the softness in the embedded line. And then Satcom, the order flow has been at lower levels, and that's what is reflected in some of the overall backlog numbers. Despite these challenges, we remain firmly committed to our strategic pillars, executing market-driven strategies that make sense for us and deliver customer value, maintaining and continuing to focus on cost discipline, being very careful with how we prioritize and spend on R&D and focusing on revenue growth and margin enhancement. In the long term, I think these will serve us well. Encouragingly, we expect really '26, we'll see increased sales volumes from new and existing customers in our embedded line. We actually believe that as we get out of this year and get into next year that, that line will start to strengthen. I do expect -- and I'm actually very excited about some of the new technology that we're doing in infrastructure that we even have now just in trial and new use cases that are being open to us through our carrier partners. And if you haven't seen it, please take a look at what Deutsche Telekom produced. They actually produced a YouTube video, I've never seen this in my career, about one of our products and what it did for them in the Hockenheimring with 250,000 people, honestly, bananas. It tells me I think we are going in a really good place in infrastructure. And then obviously, we're looking at leaner operations and a more efficient cost structure in Satcom, coupled with the expectation we have a very large pipeline of bids currently. And given what's been happening in the industry, I actually think it's setting that business up for obviously, a better '26, but the plan is longer term, a more sustained, higher-margin operating business that will deliver to the bottom line. The wireless -- I'll talk about each of the businesses quickly. The Wireless Infrastructure business line really continued strong year-over-year growth. I mean, keep in mind that last year was a bang-out year. Seasonality in that business, this is not a Baylin thing. Wireless Infrastructure, Q4 is always a lower sales or revenue volume order. And easiest place to point to, Verizon shuts down their warehouses, they will not take any more order flow on December 15 as an example. So you got -- you start getting to the holiday period, you may get some higher ordering, but the fulfillment and ability to turn that to revenue typically has some seasonality to it. I do like where we are with what's going on in our multi-beam antennas. I do like what's going on as we're expanding globally. And obviously, you have someone like Deutsche Telekom do call you and say they want to do a press release and mention your company by name. Other European carriers, we actually had a Tier 1 English carrier reach out to us and say, that was very impressive. We've now quoted antennas for them. So I like the trend. I like where we're going, and I like some of the new technology. I do expect Wireless Infrastructure is going to clearly beat 2024 numbers and beat their budget, which is a cool thing. And given that it's the highest margin profile -- has the highest margin profile of our businesses, I like that this is going to continue to drive and help the company long term. The embedded line, it was softer Q3 '25 than it was last year. It's really around some customer pushouts. We had a program -- and it's a multiyear program, and it's actually -- they've told us it's coming back in '26, which is a positive, but it has been really down this year. Well, that was largely offset in prior quarters by a different program. that has been doing well. And we're having growth with other customers on other programs. But the second program that I mentioned, which has a nice profile to it, they ran the ODM, who we work with, ran into oversupply in Q3. What's interesting is they actually are starting to pull through orders again in Q4, but we do nevertheless think that the profile of that business will be down year-over-year for the entire year. With that said, the improvements in gross margin, both of you guys kind of know this, I'm a manager gross margin guy, which means manage your costs, get your pricing strategies right, seeing improved gross margins and what that speaks to and how you get there, I think it reflects very well on the embedded team and sets us up, hopefully, for a nice 2026. The satellite business, obviously, there's some -- have been some major changes, particularly in order flow. I've talked about that previously. The pipeline remains strong. We actually had a nice press release where some of our Genesis amplifiers, we had customer orders from a Middle Eastern broadcaster. Part of the reason -- there's an old saying you can't cost cut your way to success. You have to cut your cost and manage your costs, but you also have to innovate. The book, when the purchase orders were received to when the amplifiers were shipped, in that case, now, we obviously had the inventory in hand. There was a lot of things there, but that was 60 days. To put that in comparison, some of the legacy products would be 6 months or more. And being able to do that with -- over the course, and this is kind of the technology evolution in this product stack with less people and less complexity lends itself to higher margins in the long term. We're going through that transition now while we're taking cost out, given the lower order flow. Conversely, given what we're seeing in the pipeline and what we've seen out of some of our competitors, I like -- I do think that our pipeline is going to start converting as we get deeper into fourth quarter and certainly into Q1 of '26, which will allow this business to effectively come through a low point with some restructuring and get to a better place for the long term. That's effectively the vision for it. So obviously, lower performance this year. I think we've been pretty transparent about this. But given the focus on operating discipline and long-term outcome and that realistically, the performance of the business despite these challenges in '25 will look substantively similar, if not identical to '24, it basically means that we're continuing to do the things we need to do to improve the business, create that level of resiliency and get to further growth in '26 and beyond, which is, to be honest, what we foresee. I couldn't do this without our employees. They have to put up with me, my executive team and some challenging environments. And if you go back 4 years and a quarter when I walked in the door, they've been through a lot, but God bless them, we have a lot of talent and people who really believe in what we're building because a lot of what we do is cool and it matters. So I remain confident in our long-term outlook, and we're going to look on building on the places we're growing, fix things that need to be fixed and get them back to growth and go from there. With that, that concludes our formal remarks. Operator, we're happy to take any questions. Operator: [Operator Instructions] Our first question today will come from Daniel Rosenberg, Paradigm Capital. Daniel Rosenberg: My first question comes around this R&D spend and the product road map. I was wondering, as you think about your 3 main business lines, how you think about the product set and where you need to invest for future growth opportunities? Leighton Carroll: Yes. No, thank you, Daniel. Great question. So having a remarkable capacity for stating the obvious, we rightsize R&D to opportunity and growth, but that is different by different business. Wireless Infrastructure, I'm very thankful for our team of engineers just outside of Ottawa. Honestly, I think they're world-class. We are growing, and we are having some really interesting opportunities led by both the big 3 U.S. and the big 3 Canadian carriers and for different use cases, probably not a surprise, that is a place we are clearly going to continue to invest. And because of the growth and margin profile, a place that over time, I think you will see more engineering resources going into. The embedded team is very different. It's more, what I would say, programmatic. And the embedded team is not a product house, right? The embedded group, it's really a solution house that uses RF engineering to create, in some cases, very complex but high-quality RF solutions that are either embedded or part of another person's product. It's why there's a Charter Communications router these days, and we're working on one that has even more. But the one that's being produced today, it has 14 antennas in it, and it's a small box. That is a huge challenge to make that work and perform correctly, part of why we get used, but that's part of a program we've won. So the engineering spend is maybe perhaps less R&D and more solution driving into key revenue. It's not like we're developing an independent technology in that shop, if that makes sense. Hope I answered that right. Within the satellite business, it has been looking at the legacy products, and they could be at times difficult to produce and the internals of them could be, I would argue, overly complex, which for our team in Quebec meant it could be challenging. It was in some cases, more job shop working to produce something, this one is not the same thing I produced the last time. We've been spending our money there and the innovations there, not just to improve the products and the functionality, which is really where we're going in the Genesis line, but designed for manufacturability, common component architecture. But given where we've been in Satcom with the softness in revenue and needed changes in cost structure, we've effectively been addressing cost structure, direct labor side, some indirect, obviously, looking at fixed cost structures and how to address those. But while striving to preserve engineering talent on the road map to drive the new efficiencies and products, to me, that was the place to do it. We drive additional growth into that business, it will -- much like we're seeing on the wireless side, the infrastructure side, it will be opportunistic driven. Where we are right now, there's -- it's about driving efficiencies and where the puck is going, so to speak, whereas in infrastructure, we have some clear use cases where we need to go run at this now and apply our engineering talent there. I know that may have been a long-winded answer, but hopefully, that was -- gave you some insights. Daniel Rosenberg: I appreciate that color. So clearly, infrastructure, there's a big opportunity for you there and hence the focus. I just want to dive deeper on the Satcom. I'm just -- if we look past 12 months, like 2 years or 5 years for this business, I just think about the trends in defense spending and just geopolitics and all of that, is there opportunity for you guys to build a position there? Leighton Carroll: That's 100% part of the playbook. That is a great question. So stating the obvious, 2025 has certainly been a wonky year. But as things materialize through the year, it became very clear to us that Europe would start to pivot to more of a pronounced defense spending cycle. The U.S. is certainly going to continue to invest heavily in defense spending. But given what happened at the beginning of the year with DOGE, with [ tariffs ] and the customer instability that caused, we're obviously COSMO compliance. So we're tariff exempt for what we produce in Kirkland. But there was a lot of instability in the beginning of the year. And then you layer on Europe is now pivoting, and we -- as even I mentioned the amplifiers package, which is not immaterial that was delayed from Q3 to Q4. That's a defense spending application. We actually see the opportunities in defense spending for us rising. We actually have made changes in personnel in Europe to focus on defense spending and focus on unlocking other opportunities for us. And I do -- but the challenge is, particularly on the European side, we deal with government entities, and I wish they move fast, but that is not the reality. We do see defense spending becoming a higher component of what we produce, particularly in the, I would say, the back half of '26 to '27. But it's not like an immediate thing right now, which is effectively part of what we're seeing in the quarterly results. Daniel Rosenberg: And so the infrastructure opportunity, I was wondering if you could speak to just the playbook in terms of capturing kind of more share of some massive customers that you have. Could you just speak to -- is it about a road map of new products that gets incremental different programs? Or is it -- is there -- with the product set that you have now, just more purchases, more volume in terms of this 5G rollout that's happening? And maybe if you could just give some context into how you see this deployment cycle going? Like what inning are we in, in terms of small cells and 5G and the like? Leighton Carroll: Yes. So 5G is going to continue. We actually -- so I use North America as maybe a proxy. But if you roll back to, call it, '21, '22 and maybe the first 6 months of '23, there was a lot of spending in Wireless Infrastructure. Some of that was readjusting for COVID. You also had the dynamic in the U.S. of T-Mobile acquiring Sprint, retiring a network, putting new network assets up. You had AT&T and Verizon in that period deploying C-band assets. There was a ton of spending. 2024, even though there was continued spending on wireless networks, it was honestly the lowest capital spend market in the last 5 or 6. And I would argue dollar adjusted in the last 10. Well, we grew 40%. How did we do that? We grew by taking advantages of specific use cases, specific competitive advantages that we have been building into multi-beams and some of the things we do with specific small cells, even in-building wireless. If I go back to kind of that macro cycle, as we get to '25, '26, '27, most of what I've seen, and I agree with this is, it will be incrementally higher spending. So what typically happens every 10 years, there's a new G, right? So we started off with just analog cellular, then there was 2G, then there was 3G, then there was 4G around 2020. So like 3G was -- came out right around the year 2000, 4G 2010. 5G started just before 2020, but 2020 was really the kind of that we're starting to see more and more 5G. 2030 will be 6G. There's still a lot of discussion on what 6G will be. Is it going to bring AI into the network, network slicing, all these various permutations. But the one thing that is constant in each of these cycles is the data usage continues to grow unabated, it's actually 2 things. And Wireless carriers acquire and deploy new spectrum assets, right? You can look at AT&T's acquisition of EchoStar. They're not buying that not to deploy it. They're buying it because they need and want to deploy it, and they have a broader strategic vision for what they're going to do with that spectrum. And there's certainly a lot of calls even in the Big Beautiful Bill for more. How does that help us? What are those opportunities? So in the pure macro sense, investment in what we do will continue to happen, and it creates more opportunities to bring in new technology, deploy more wireless spectrum, add efficiencies to carriers. How that translates for us specifically and some of the things that we've been up to, right? We initially focused on stop when I got here, stop doing certain things, start doing certain things where we felt we could drive competitive advantage, but the use cases would matter to carriers. We've always been great in small cells. And by the way, even though I didn't talk about them, we continue to invest in them. Why is that? So we knew 2024 was going to be a terrible year for small cells. We grew in different ways. But we knew 2025, we'd start seeing it come back. Guess what, it has. Our balance by product type is really strong right now, probably the best it's ever been. We actually see as more data use comes out and new spectrum comes out, wireless carriers don't always want to deploy more and more cell towers. It's very expensive. Doing infill with small cells or upgrading existing small cells with additional spectrum, by definition, creates more opportunity for us because we're so strong in that space. Then when you get to the multi-beam technology, similar thing. Multi-beams was originally -- we started doing temporary deployments. And then it was for certain stadium applications. Then it was more -- now because wireless carriers and now, by the way, 3POs, like when I say it's a third-party operator, but that's the easiest proxies to that. And I'm not saying that with X or Y or Z, we're doing this specifically, but the American Towers, the Crown Castles, the SBA, the Boingos, the Boldyn, the Cellnex in Europe, guys like that, they actually own infrastructure assets that can include franchise -- everything from franchise rights to deploy small cells on behalf of carriers in a place like New York City to owning the rights to deploy a system in a stadium or a huge concert venue. And then obviously, tower assets. A lot of those guys are now using multi-beams because they see the value on that, and that is helping us capture growth. And then finally, we have 2 new use cases in wireless. I'm very excited about where -- just quickly, in a situation where a wireless carrier has a cell site that the amount of stuff they have deployed is getting saturated. We're seeing carriers now deploy our multi-beams as a more cost-efficient way to add capacity to those types of sectors. That's not going to stop. And that opens up lots of new sites for us, and it's actually pretty exciting. And then separately, we have another technology that is currently in trial that is solving another regulatory problem for wireless carriers. When we've been out and talking to wireless carriers about this, we actually had 7 -- just talking to the technology concepts 7 Tier 1 carriers ask us for trials. That doesn't happen unless they think you've got something. We are in the process of bringing that to market. We're starting in home field with the Canadian carrier as our trial customer. If that does what we think it will do, and it's -- we got to get the economics right. We got to get -- the functionality has to match what everyone thinks it will do. But if those things get right, that opens up a new growth opportunity. So the way that I think about it is the embedded business has been kind of the Steady Eddie business. It's never going to hockey stick up or down. The Satcom business has been a solid performer, but in the face of a downturn with a certain cost structure, it can -- it needs to have some improvements to it, and it takes time to do the innovation we needed to do there because of the complexity of the product. We're doing those things, but the growth engine for us has turned into the Wireless Infrastructure group. And I don't think that's going to stop. And that's where I like how it sets up for the future because I think what we're doing should continue to roll. Daniel Rosenberg: And just last question for me. As you think about that infrastructure opportunity, could you speak about the kind of operating leverage as volumes go up on the products you have, like once you're in procurement efficiencies around sales, just how we could think about, I guess, the incremental margin on that business? Leighton Carroll: Yes. No, great question. Look, if we get crazy volumes, will we need to add resources and capabilities? Yes, I'm sure. But it's not linear by any stretch. One thing that going through a turnaround like we have been doing these past few years is that you better get really freaking operationally efficient and yet effective or you die. And we have done that. It's the way I would describe it is we have levers we can pull at certain times on that growth, but we foresee that growth to be pretty efficient. Obviously, on your manufacturing and production side, scaling tends to be with the exception of your indirect and fixed costs, a bit more linear. And we'll obviously look to enhance that. But the core team and what we do, we don't -- that doesn't need to change materially. Obviously, growth will lean into new opportunities, either in engineering or adding sellers as appropriate. But it's clearly not linear, which means the business should continue to grow and ideally have margin growth. Conversely, we have had some situations where I had a Tier 1 U.S. carrier come to our business and say, these 3 specific models, we see these as high runners for us. And we want to set up a volume discount arrangement with you where if we get past, call it, $5 million, $10 million in orders, we get a discount on the overall purchase price, which effectively would lower the net margin for that product. It doesn't take a genius to say, okay, having a high percentage number on, say, $500,000 in sales versus a, call it, a -- it's not -- I'm not talking single digits, but more than 10 way less than 25. I obviously don't want to reveal anything, but a discount somewhere in that window at $10 million. You do the math, that is way more money to the bottom line. That's not percentage margin growth, that's raw margin growth. And at the end of the day, getting raw margin growth is the name of the game, but doing that in a way where you're still protecting what you do for your business. And that's hopefully philosophically gives you an aid. So I think over time, there may be -- we may not have the same raw percentage, but the idea is the bottom line number continues to roll and grow up. Operator: There are no further questions at this time. 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 Genworth Financial's Third Quarter 2025 Earnings Conference Call. My name is Lisa, and I'll be your coordinator today. [Operator Instructions] As a reminder, the conference is being recorded for replay purposes. [Operator Instructions] I would now like to turn the presentation over to Christine Jewell, Head of Investor Relations. Please go ahead. Christine Jewell: Thank you, and good morning. Welcome to Genworth's Third Quarter 2025 Earnings Call. The slide presentation that accompanies this call is available on the Investor Relations section of the Genworth website investors.genworth.com. Our earnings release and financial supplement can also be found there, and we encourage you to review these materials. Speaking today will be Tom McInerney, President and Chief Executive Officer; and Jerome Upton, Chief Financial Officer. Following our prepared remarks, we will open the call up for a question-and-answer period. In addition to our speakers, Jamala Arland, President and CEO of our U.S. Life Insurance business; Greg Karawan, General Counsel; Kelly Saltzgaber, Chief Investment Officer; and Samir Shah, CEO of CareScout Services, will also be available to take your questions. During the call this morning, we may make various forward-looking statements. Our actual results may differ materially from such statements. We advise you to read the cautionary notes regarding forward-looking statements in our earnings release and related presentation as well as the risk factors of our most recent annual report on Form 10-K as filed with the SEC. This morning's discussion also includes non-GAAP financial measures that we believe may be meaningful to investors. In our investor materials, non-GAAP measures have been reconciled to GAAP where required in accordance with SEC rules. Also, references to statutory results are estimates due to the timing of the filing of the statutory statements. And now I'll turn the call over to our President and CEO, Tom McInerney. Thomas McInerney: Thank you, Christine, and thank you for taking the time to join our third quarter earnings call this morning. Genworth reported solid net income of $116 million with adjusted operating income of $17 million or $0.04 per share. This quarter's results were driven again by strong performance from Enact, our mortgage insurance subsidiary, which contributed $134 million to Genworth's adjusted operating income. Our estimated pretax statutory income for our U.S. life insurance companies was approximately $68 million on a year-to-date basis through the end of the third quarter, including the net favorable impacts to annuities from equity market and interest rate movements. Genworth ended the quarter with a healthy liquidity position, holding $254 million of cash and liquid assets. Genworth continues to execute against our 3 strategic priorities. First, we continue to create value for shareholders through Enact's growing market value and capital returns earned through our approximately 81% ownership stake in the company. Enact remains a key source of cash to Genworth, fueling our share repurchases and growth investments in CareScout. In the third quarter, we received $110 million of capital returns from Enact, bringing us to a total of $1.2 billion received from Enact since its IPO in 2021. Enact announced yesterday that it now expects to return approximately $500 million of capital to shareholders this year, highlighting the continued strong performance of its business. Supported by these strong cash flows, we continue to execute our own share repurchase strategy through the third quarter. On September 18, we announced a new $350 million repurchase authorization, underscoring the Board's confidence in Genworth's strategy and financial condition. We've made strong progress returning capital through share repurchases at prices that, in our view, represent a discount to intrinsic value. Turning to our second strategic priority. We made additional progress in our self-sustaining and customer-centric LTC, life and annuity legacy businesses. In the third quarter, Genworth secured $44 million of gross incremental premium approvals with an average premium increase of 63%. Our multiyear rate action plan has achieved $31.8 billion in net present value since it began in 2012, driven primarily by benefit reductions and premium increases. The MYRAP continues to be our most effective lever for stabilizing our legacy books of business. As we've said recently, we continue to expect approvals to be smaller this year versus last year in alignment with our plans. Finally, we continue to drive future growth through CareScout. CareScout has made several important announcements in recent weeks as we execute on our strategy to build a comprehensive agent care platform that helps people understand, find and fund the quality of long-term care they need. In CareScout Services, we're maintaining a rapid pace of network expansion. The CareScout Quality Network now includes over 700 providers with more than 950 locations nationwide, covering over 95% of the U.S. population aged 65 and older. This quarter, we continued to add providers in high-demand markets and areas where we can further strengthen the network. Each provider meets CareScout's rigorous credentialing standards, ensuring quality and consistency for consumers who rely on our services. CareScout Services achieved another strong quarter of matches between LTC policyholders and CQN home care providers. We have now achieved more than 2,500 matches year-to-date through October across 48 states, exceeding our original match goal for the year. We now expect to finish 2025 with over 3,000 matches. The CareScout Quality Network has expanded access to consumers in all 50 states and anyone searching for home care can visit carescout.com to filter by location and care needs to connect with quality providers. As CareScout's network expands and brand awareness grows, we expect increased utilization for consumers as well as a higher share of Genworth's long-term care claimants to choose CQN providers. This will help policyholders stretch every benefit dollar further and generate claim savings for Genworth over time. We also continue to work with other insurance carriers managing their closed LTC blocks. Two pilot programs are in progress, and we are in various stages of engagement with 3 other LTC insurers. We also took an important strategic step with the acquisition of Seniorly, a leading platform with a large network of senior living communities that help families with care planning and placement through its growing adviser network. The transaction has now closed and our focus is on integration to enhance and extend our value proposition to millions of aging consumers navigating aging and care decisions. As we expand the CareScout Quality Network to span across both home care and assisted living, we can help a growing number of older adults who can no longer live alone and are seeking assisted living options. The acquisition also accelerates our expansion into the direct-to-consumer channel, allowing us to reach more aging adults and families beyond Genworth's policyholder base. Seniorly attracts thousands of consumers every month who are exploring different aging care solutions, including senior living options. Based on their individual needs, we can now connect these consumers to the full range of CareScout offerings from personalized care plans to our national network of home care providers and assisted living communities. Over the years, Seniorly has developed deep expertise in combining technology with a human touch to guide families through the aging journey. This approach aligns perfectly with CareScout's mission to deliver high-quality personalized support to families navigating long-term care decisions. We believe the strong strategic and cultural alignment positions CareScout for continued growth and leadership as we build a trusted aging care platform of the future. As the CareScout Quality Network expands to include assisted living communities, we will shift to a revenue model that is different from home care services. Unlike our ongoing discount structure for home care services, CareScout will earn a onetime placement fee when a customer successfully moves into the contracted community. This model is in line with how the broader industry operates. Through this transition, our consumer value proposition around quality, price and service remains in place. We anticipate having a diversified group of communities in the network along different price points to enable more choice for consumers. As our care teams help aging consumers find the right community and the level of care for them, we look forward to helping families avoid unnecessary spend and enable more stable claim patterns for insurers. In parallel with expanding the network, we're scaling additional fee-for-service offerings that generate a growing stream of recurring revenue. Our new care plans product launched in the second quarter continues to gain momentum with consumers and B2B audiences. For a fee of $250, consumers receive a virtual evaluation with a licensed nurse and a personalized care plan outlining practical strategies and local resources to support their aging journey. We plan to launch an in-person evaluation option in the fourth quarter. Over time, we expect to expand both the range of services CareScout offers and the number of customers we serve. Turning to CareScout Insurance. We advanced our strategy to roll out innovative funding solutions that address the rising need for long-term care. On October 1, we launched Care Assurance, CareScout's inaugural stand-alone LTC insurance product. This marks a foundational milestone for CareScout's insurance business with the product now approved in 37 states with additional approvals pending. The CareScout Assurance product is easy to understand and features customizable levels of coverage, inflation protection and individualized policyholder experiences. It also provides access to the CareScout Quality Network for trusted sources of care and blends coverage with personalized service, enabling policyholders to maximize the value of every benefit dollar. We have designed the product to reduce risk, provide attractive returns and minimize the need for future premium increases. Looking ahead towards future offerings, our next product will be an innovative hybrid LTC design that pairs a minimum LTC benefit with low-cost equity funds for accumulation. We're also advancing worksite and association group offerings to broaden distribution through employers and other partners, and we hope to bring these products to market in the near term. As we have said before, from a capital standpoint, our initial 2025 investment of $85 million represents the majority of our planned investment in CareScout Insurance over the next few years. Future capital contributions may vary based on sales level and mix in addition to investment performance and operating expenses. From services to insurance, CareScout is building a human-centered tech-enabled platform designed to simplify and dignify the agent journey. We will continue to grow organically and evaluate select inorganic opportunities as we add care settings, products and customers. Next, I'll provide a quick update on the AXA litigation. As noted last quarter, the U.K. High Court in July issued a favorable judgment holding Santander liable for losses related to the misselling of payment protection insurance. In October, Santander was granted permission to appeal the judgment. We continue to expect this process to take 12 to 18 months and remain confident in AXA's position. If the ruling is upheld, we expect to recover approximately $750 million, subject to exchange rates at that time. And recoveries are not included in our capital allocation plans, but if and when funds are received, we will look to deploy them in line with our priorities, investing in CareScout, returning capital to shareholders and reducing debt. Before I turn the call over to Jerome, I'd like to acknowledge the introduction of the supporting our Seniors Act bipartisan legislation authored by Senator Jacky Rosen of Nevada and Senator John Boozman of Arkansas. This measure will create a national Advisory Commission to assess and provide the Congress specific recommendations on how to improve long-term care service delivery, affordability and workforce adequacy. This legislation uses long-term care needs through a comprehensive lens, echoing the philosophy of CareScout, which helps aging Americans at every step of the process to understand, find and fund the long-term care they need. I'm encouraged by policymakers' increasing attention towards addressing the growing demand and cost for long-term care in the United States as the 70 million baby boomers age and we will continue to work with congressional and other leaders to help advance responsible solutions that meet the moment. In closing, we're pleased with the strong progress we've made across Genworth's 3 strategic priorities, supported by Enact's performance. We're confident in our ability to maintain this momentum and deliver on our objectives going forward. Jerome Upton: Thank you, Tom, and good morning, everyone. We continue to build on our solid foundation, enhance our financial flexibility and execute on our strategic priorities. Enact once again delivered robust operating performance and maintained a strong capital and liquidity position. We also advanced our multiyear rate action plan, made significant progress advancing CareScout and continued to return capital to shareholders. I'll start with an overview of our financial performance and drivers, followed by an update on our investment portfolio and holding company liquidity before we open the call for Q&A. As shown on Slide 9, third quarter adjusted operating income was $17 million, driven by Enact. Our long-term care Insurance segment reported an adjusted operating loss of $100 million, driven by a remeasurement loss primarily related to unfavorable actual variances from expected experience or A2E. The unfavorable A2E of $107 million pretax was driven by lower terminations and higher benefit utilization. As we previously noted, in 2023 and 2024, we saw an average quarterly loss of approximately $65 million in LTC related to A2E. While results can vary quarter-to-quarter, we still expect full year performance could track closely to that historical average. As a reminder, these GAAP fluctuations do not impact our cash flows, economic value or how we manage the business. Life and Annuities reported adjusted operating income of $4 million in the third quarter. This included an adjusted operating loss of $15 million in life insurance, which improved versus the prior quarter and prior year due to favorable mortality, offset by adjusted operating income of $19 million from annuities. Corporate and Other reported an adjusted operating loss of $21 million for the third quarter, including a $7 million valuation allowance reduction on certain deferred tax assets. Excluding this item, results were consistent with the prior quarter and prior year, reflecting continued investment in CareScout and ongoing holding company debt service. Now taking a closer look at Enact's third quarter performance on Slide 10. Enact delivered $134 million in adjusted operating income, down slightly versus the prior quarter and down 9% versus the prior year, reflecting a lower reserve release. Primary insurance in force grew slightly year-over-year to $272 billion, supported by new insurance written and continued elevated persistency. As shown on Slide 11, Enact's favorable $45 million pretax reserve release drove a loss ratio of 15%. Enact's estimated PMIER sufficiency ratio remained strong at 162% or approximately $1.9 billion above requirements. Genworth's share of Enact's book value, including AOCI, has increased to $4.3 billion at the end of the third quarter, up from $4.1 billion at year-end 2024. This book value growth includes the significant capital returns to Genworth, including $110 million returned in the third quarter. Looking ahead, Enact continues to operate with solid business fundamentals and a strong balance sheet. Enact has recently taken several actions to further enhance its capital and financial flexibility. During the quarter, Enact secured a new forward quota share reinsurance agreement covering the 2027 book year and executed a new $435 million 5-year revolving credit facility. In October, Enact secured an excess of loss reinsurance agreement, also covering a portion of the 2027 book year. With these actions, underscoring the business' commitment to continuing to build financial flexibility, Enact remains well positioned to navigate the uncertainties in the macroeconomic environment. As Tom mentioned, Enact now expects to return a total of approximately $500 million to its shareholders in 2025. Based on our approximate 81% ownership position, we expect to receive around $405 million from Enact for the full year, up from our prior estimate of $325 million. Turning to long-term care insurance, starting on Slide 12. We continue to proactively manage LTC risk and maintain self-sustainability in the legacy U.S. life insurance companies. Our multiyear rate action plan or MYRAP, continues to be our most effective tool for reducing tail risk in LTC. As of the end of the third quarter, we have achieved approximately $31.8 billion of in-force rate actions on a net present value basis. Rate increase approvals this year have been lower than recent years as expected, given large approvals in prior years, but we do anticipate higher approvals in the fourth quarter than we have received on a quarterly basis so far this year. As part of the MYRAP, we offer a suite of options to help policyholders manage premium increases while maintaining meaningful coverage and to enable us to reduce our exposure to certain higher cost benefit features such as 5% compound benefit inflation options and large lifetime benefit amounts. About 61% of policyholders offered a benefit reduction have elected to do so, lowering our long-term risk. These initiatives have helped reduce our exposure to individual LTC policies. with the 5% compound benefit inflation feature decreasing notably to approximately 36%, down from 57% in 2014. In addition to the MYRAP and other benefit reduction strategies, we're reducing risk in innovative ways, including through the CareScout Quality Network and our Live Well | Age Well intervention program, which deliver value for policyholders while also driving claim savings over time. As we said before, we are committed to managing the U.S. life insurance companies as a closed system, leveraging their existing reserves and capital to cover future claims. We will not put capital into the legacy life insurance companies and given the long-tail nature of our LTC insurance policies with peak claim years still over a decade away, we do not expect capital returns from these companies. Slide 13 shows statutory pretax results for the U.S. life insurance companies with a loss of $12 million for the quarter. The LTC loss of $75 million reflected new claims growth as the block ages and higher benefit utilization. Earnings from in-force rate actions of $337 million were up from $322 million in the prior year, excluding the impact of the legal settlements, reflecting continued strong progress on the MYRAP. As a reminder, the prior year included an $88 million benefit from the implementation of the LTC legal settlements, which are now complete. Life Insurance reported a loss of $2 million, including a benefit from favorable mortality in the quarter, and our annuity products reported income of $65 million, reflecting the net favorable impact of equity market and interest rate movements in the quarter. The consolidated risk-based capital ratio for Genworth Life Insurance Company, or GLIC, is estimated to be 303% at the end of September, down slightly since the end of June as the statutory loss was offset by unrealized investment gains. GLIC's consolidated balance sheet remains sound with capital and surplus of $3.6 billion as of the end of September. Our final statutory results will be available on our investor website with our third quarter filings later this month. As we look ahead, I'd like to discuss our approach to this year's annual assumption review, which will be completed in the fourth quarter. While our review is still ongoing, we have been monitoring key trends and can provide some preliminary perspectives. In LTC, our review is primarily focused on short-term trends and key assumptions such as benefit utilization, incidents, terminations and in-force rate actions, which include benefit reduction initiatives. We face pressure from higher benefit utilization and cost of care inflation. We will evaluate this pressure relative to the tailwinds of additional premium rate increases and benefit reductions as well as other initiatives, which will reduce the overall impact in the aggregate. For our life and annuity products, we are reviewing mortality, lapse rates and the potential impacts of the recent changes in interest rates. In parallel with the assumption review, we are conducting statutory cash flow testing for our life insurance companies. While this process is not yet complete, our initial assessment indicates that GLIC margin should remain positive. We will discuss the results of our assumption reviews and statutory cash flow testing on our fourth quarter earnings call. Turning to Slide 14. We continue to see solid performance from our investment portfolio, where the majority of our assets are investment-grade fixed maturities held to support our long-duration liabilities. New cash flows invested in our life insurance companies during the quarter, including alternatives, achieved yields of approximately 6.8%. Our alternative assets program, which is largely focused in diversified private equity investments and has targeted returns of approximately 12% continues to deliver strong results. In the quarter, we saw strong mark-to-market increases on these assets, which was a key driver of our net income, representing a significant portion of our net investment gains in the quarter. We remain focused on growing this program prudently within regulatory limitations due to its robust track record of returns, diversification benefits and natural fit with long-term liabilities. Next, turning to the holding company on Slide 15. We received $110 million in capital from Enact and contributed the remainder of our initial capital investment of $85 million into the new CareScout insurance company. We ended the quarter with $254 million of cash and liquid assets. When evaluating holding company liquidity for the purpose of capital allocation and calculating the buffer to our debt service target, we exclude approximately $145 million cash held for future obligations, including advanced cash payments from our subsidiaries. Turning to capital on Slide 16. We continue to expect to invest approximately $45 million to $50 million in CareScout services in 2025 as we continue to build out the platform. This investment will go towards adding new products and customers, establishing a strong foundation to scale the business. This total excludes our payment of approximately $15 million for our strategic acquisition of Seniorly, which was funded from our existing holding company cash in the fourth quarter. Moving to shareholder returns. As Tom mentioned, we're very pleased that the Board authorized a new share repurchase program of $350 million. We repurchased $76 million of shares in the third quarter at an average price of $8.44 per share and another $29 million in October. For the full year 2025, we now expect to allocate between $200 million to $225 million to share repurchases. This range may vary depending on business performance, market conditions, holding company cash and our share price. We will continue to create value for shareholders through our share repurchase program. Our holding company debt stands at $790 million, and we have financial flexibility given the strength of our balance sheet and sustainable cash flows from Enact. We maintain a disciplined capital structure with a cash interest coverage ratio on debt service of approximately 7x. As Tom discussed, Santander's request for an appeal in the AXA Santander litigation has been granted. If the appeal is favorably resolved, Genworth still expects to recover at that time approximately $750 million, subject to movements in foreign exchange rates. We do not expect to pay taxes on this recovery. The new share repurchase authorization and updated share buyback guidance do not factor in any proceeds from the AXA litigation. If received, such proceeds could support incremental shareholder returns. Our capital allocation priorities remain unchanged. We will continue to invest in long-term growth through CareScout, return cash to shareholders through our share repurchase program when our share price trades below intrinsic value and opportunistically retire debt. In closing, we are delivering on our strategic priorities while proactively managing our liabilities and risk. The multiyear rate action plan and additional risk mitigation strategies are ensuring the self-sustainability of the legacy LTC block, and we will continue to focus on delivering sustainable long-term growth through Enact and CareScout while returning meaningful value to shareholders through share repurchases and opportunistic debt retirement. Now let's open up the line for questions. Operator: [Operator Instructions] It appears there are no questions at this time. Ladies and gentlemen, I would now turn the call back over to Mr. McInerney for closing comments. Thomas McInerney: Thank you very much, Lisa. And I want to thank everybody for joining the call today and for your continued interest in Genworth. And I'll turn the call back over to Lisa. Operator: And our first question comes from Pete Enderlin with MAZ Partners. Peter Enderlin: Yes. Okay. Well, first of all, congratulations on the way you've continued to manage all the multiple complicated moving pieces of this whole strategic picture. But second -- and this is kind of a hard question to ask and answer, I guess, but is there any meaningful way you can talk about the ultimate strategic long-term resolution of the LTC situation for the company? I mean you've done a lot to improve it itself and also your approach to it with the new operations you're undertaking. But if you look out, I don't know, 10, 20 years, whatever, where does that thing end up in relation to Genworth itself? Thomas McInerney: So Pete, that's a significant question. And I would say, one, we continue to focus on making sure of the self-sustainability of the legacy life companies, and we're making significant progress with premium increases and benefit reductions. Second, as one of the slides shows, there are 71 million Americans 65 and older. There are 70 million baby boomers, 95% of whom do not have long-term care insurance. So CareScout Services is really designed to work with them if they do end up with long-term care disabilities and the projection is that 2/3 of baby boomers, Americans when they reach their 80s will have need for long-term care. CareScout Services is well positioned to help them assess what their care needs are, come up with care plans, and we've talked about the pricing on those and then refer those who need care to either our home care quality network or the assisted living communities. And obviously, the Seniorly acquisition really significantly expanded that network by about 3,000. So I think it's a huge market because of the aging baby boomers. And there are not a lot of players left today in the LTC space. So we think it's a big market. We're well positioned both on the service side, helping people decide how much care they need and where to get it. And then we offer discounts and incentives. And then on the insurance side, we have our first product that we are launching now, and there's a number of products that will be developed and brought to the market starting in the first quarter. So we're very optimistic given the size of the market, our 50 years of expertise in the market and the 2 CareScout units that we're very well positioned to take advantage of a big and growing need for Americans needing to figure out what care they need, find the care and then have us provide funding solutions for them. Peter Enderlin: Is it too simplistic to say that the legacy LTC business is basically going to be a runoff and then the rest of it would be a stand-alone business that could eventually be literally separated from Genworth itself? Thomas McInerney: So we're -- the new CareScout businesses are not connected to the legacy Genworth companies, they are owned, obviously, by the parent. And so yes, I mean, for the legacy business, it's a runoff, it's a long runoff because probably of the 1 million policyholders we have individual and group that runoff will be 30 years or more. But all the CareScout opportunities are in a separate business that will be run managed separately. And to your point, Pete, it will be able to stand on their own separate apart from the legacy LTC company. Operator: [Operator Instructions] We'll take our next question from Ross Levin with Arbiter. Ross Levin: My question is, at one point, you were generating some statutory income out of the legacy life or long-term care business. It seems like that's flipped to slightly negative over the last several quarters. Could you just talk -- I know it's small numbers in the context of the whole, but could you just talk about what's driven the transition to somewhat negative statutory earnings? Thomas McInerney: Sure. Jerome, do you want to handle that? Jerome Upton: Ross, thank you for the question. I would just highlight from a statutory income perspective, the biggest driver right now of the pressure that we're feeling is long-term care, and that's where the pressure is normally coming from. And the driver of that is basically we continue to see claims go up, and we continue to see pressure from benefit utilization. And what we do with that is we take all of that and we prioritize that and put that in our multiyear rate action plan, and we've been executing very, very well against our multiyear rate action plan, which provides some offset. But there's no doubt there's pressure from a long-term care perspective because of the claims. And those claims will continue to increase over the next several years because we've got some large blocks that are maturing. That's the biggest driver. Number two, life has been pressured from a mortality perspective, and that pressure has continued to come through. That has been offset in part because of the strength in the equity markets with our annuity program. So we have annuities, which when the equity markets go up, we get -- have some favorability that come through our statutory earnings. The one thing that I will -- and also the one thing I would highlight is we had legal settlements coming through in the prior year, which tamped down the pressure that we felt in LTC. And now those legal settlements are complete. The one thing from a U.S. Life perspective, we focus on the MYRAP. That business, we have told our investors that we are not going to put money in the business. We're not going to take money out of the business. We're focused on closing that gap with a multiyear rate action plan, and we're telling our investors to value the business at 0. Ross Levin: Yes. Understood. I guess to the extent that maybe several quarters ago or a year or 2 ago, someone might have felt you were getting ahead of things in terms of being able to generate some statutory income via some of the modifications you were able to negotiate with your state regulators. Like why -- what has caused us to sort of fall behind the curve again, if that makes any sense or... Jerome Upton: So Ross, you may -- there's a couple of things that I would highlight for you. Number one, several years ago, COVID was a highly pressured situation overall geographically in the population. But it created additional terminations or deaths that came through, and we saw some favorability or profitability that came through during COVID. That's number one. That is behind us now. Number two, we had some settlements, some very large settlements that came through that also increased our earnings or tamped down the pressure that we're feeling. And those are now gone, and we're seeing some of the larger books that we have in our in-force block and our LTC in-force block coming through and claims are going up. Thomas McInerney: The only thing I would add to that, Ross, is I do think you are going to see quarter-to-quarter variation. There'll be some quarters where we'll have statutory earnings. Usually, the first quarter of the year is a good one these claim terminations are higher than other quarters. It's always hard to predict when states, particularly large states, will grant premium increases. And so depending on the timing of that, it could impact quarter-to-quarter results. In addition, we have a significant plan to continue to be successful in getting benefit reductions. I think what the slides show that we're at 60%, 61% have taken a benefit reduction. That also helps. So I think over the long run, the statutory income will -- I think of it as breakeven. There will be quarters that will be positive, quarters negative but breakeven over time. And we really do depend on the MYRAP premium increases, benefit reductions. I think over time, we've done extremely well and certainly compared to others in the industry. But it is going to continue to be the case that from a statutory perspective, quarter-to-quarter, there'll be positive quarters and negative quarters. But overall, as Jerome said, we value the business as we think we'll be able to ultimately achieve through the MYRAP enough premium increases, benefit reductions to pay all the claims that we forecast going forward. Ross Levin: Okay. So if you achieve your ambition in terms of the MYRAP, you would not expect to ultimately generate statutory income out of the legacy long-term care block? Thomas McInerney: Well, I think we look at that as the premium increases and benefit reductions will allow us to be at breakeven going forward and be able to pay all the claims that we project. Operator: It appears that there are no questions at this time. Ladies and gentlemen, I will now turn the call back over to Mr. McInerney for closing comments. Thomas McInerney: Thank you very much, Lisa, and thank you to Pete and Ross for those questions. I think they are very good questions, and hopefully, we addressed them well. Thank you to all of you joining the call today. We appreciate your interest and your ownership in the company and look forward to catching up with you when we release the fourth quarter results in February. And with that, Lisa, I'll turn the call back to you to close out the call. Operator: Ladies and gentlemen, this concludes Genworth Financial's Third Quarter Conference Call. Thank you for your participation. At this time, the call will end.
Operator: Good day, and thank you for standing by. Welcome to the WSP Global, Inc. Third Quarter 2025 Results Conference Call and Webcast. [Operator Instructions] Please note that today's conference is being recorded. I would now like to turn the conference over to your first speaker, Quentin Weber from Investor Relations. Please go ahead. Quentin Weber: Thank you, and thank you for joining our call today. We will discuss our Q3 2025 performance followed by a Q&A session. Alexandre L'Heureux, our President and CEO; and Alain Michaud, our CFO are joining us this morning. Please note that this call is also accessible via webcast on our website. During the call, we will make forward-looking statements. Actual results could differ from those expressed or implied. We undertake no obligation to update or revise any of these statements. Relevant factors that could cause actual results to differ materially from those forward-looking statements are listed in the MD&A for the quarter ended September 27, 2025, which can be found on SEDAR+ and on our website. In addition, during the call, we may refer to specific non-IFRS measures. These measures are also defined in the MD&A for the year ending December 31, 2024. Our MD&A includes reconciliations of non-IFRS measures to the most directly comparable IFRS measures. Management believes that these non-IFRS measures provide useful information to investors regarding the corporation's financial condition and results of operations as they provide additional critical metrics of its performance. These non-IFRS measures are not recognized under IFRS, do not have any standardized meaning prescribed under IFRS and may differ from similarly named measures reported by other issuers and accordingly, may not be comparable. These measures should not be considered as a substitute for the related financial information prepared by IFRS. With that, I will now turn the call over to Alexandre. Alexandre L'Heureux: Thank you, Quentin, and thank you all for joining us today. Let me start by saying that WSP underlying performance was strong in the quarter. Net revenues, adjusted EBITDA and adjusted net earnings increased by approximately 16%, 20% and 32%, respectively, despite continued fluid market dynamics. Among other things, our results highlight very robust margin improvement, strong free cash flow generation and exceptional performance from POWER Engineers as we celebrate the first year of the closing of the acquisition. Let me now expand on 3 key highlights. First, a few comments on our top line performance. If you turn to Page 5 in today's investor presentation, we highlight a healthy underlying business performance with mid-single-digit organic growth for the quarter. In fact, across our 3 largest segments, Canada, the Americas and EMEA, we delivered mid- to high single-digit organic growth when isolating the impact of a significant project upside in Canada in Q3 2024 and the historical high level of storm-related assignment in the U.S. in Q3 2024 versus the historical low level of such assignments in Q3 2025. In Asia Pacific, we are observing early signals of improvement, including healthy growth in backlog and in New Zealand delivering modest organic growth in net revenue, a first in the last 5 quarters. Second, on profitability. Adjusted EBITDA increased by almost 20% in dollar terms during the quarter. We reached a record high margin at 20.2% representing an improvement of 70 basis points for the quarter and 50 basis points over the 9-month period, supported by continued focus on productivity. In addition, our solid results reflect the absorption of optimization and rightsizing costs, which impacted margin by 30 basis points in the third quarter and 40 basis points year-to-date. Third, I am very pleased with our cash performance, a continuation of our first 2 quarters. Free cash flow reached almost $900 million for the 9-month period, an increase of $645 million compared to last year. DSO stood at 71 days within our targeted range at historical low level for third quarter. We are well on track to exceed our 100% conversion target of annual free cash flow to net earnings. Let's now review our regional operation. Starting with Canada. Net revenue organic growth reached 6% for the quarter when adjusted to exclude the impact of a favorable project in Q3 2024. Looking at the next -- at the year-to-date performance, the region delivered a healthy net revenue organic growth of 7%. Canada delivered an impressive margin of 27.8%, representing a 100 basis point increase compared to Q3 2024 and leading margins across our global platform. Lastly, Canada's backlog grew 15% organically since the beginning of the year. In the Americas, net revenue organic growth stood at 6.6% when adjusting for the lower level of emergency response services in the United States, a standout contributor to our performance in the U.S. and not included in the 6.6% just stated has been POWER Engineers, which posted net revenue organic growth in the mid-teens in both the third quarter and the first 9 months of 2025. Moving to EMEA. Performance exceeded expectations in the U.K. with 11% net revenue organic growth driven by strong positioning as a Tier 1 player in the country. The Nordics showed encouraging signs of improvement, supported by growing backlog, specifically in Sweden. Overall, EMEA delivered 6.4% net revenue organic growth for the quarter and 4.8% year-to-date. Turning to APAC. New Zealand posted modest growth in the quarter, and the backlog has increased significantly year-to-date. In Australia, we are seeing the backlog trending upward, although some clients' decision are affecting its accessibility. Now let's move to M&A. On October 9, we closed the acquisition of Ricardo, a milestone that marks an important step that moves us closer to our strategic ambitions. Ricardo brings world-class expertise in advisory, energy addition and transition, air quality, water solutions and rail strengthening our position in the U.K., Australia and the Netherlands. Our teams are actively engaged in integration activities, including setting up different work streams of importance, our clients' teams are coming together to assess net revenue opportunities. Moving on to POWER Engineers, Q3 marked the first anniversary of our firms coming together, a milestone defined by exceptional results, strong execution and accelerating demand for power and energy services. Over the past year, POWER Engineers has delivered organic growth in net revenue in the mid-teens and is now contributing to WSP margin expansion. From the outset, we recognized a significant potential for revenue synergies. Since the acquisition, that potential has translated in action. Together, we have built a robust pursuit pipeline exceeding $1.4 billion, actively tracking synergies across more than 300 opportunities. One year later, we are proud of the remarkable progress we have made together. Now let's briefly discuss our end markets. Our overall Power and Energy business is performing very well, and our backlog has grown steadily over the past 2 years, reflecting strong market demand for power and energy-related services. This momentum extends to our property and buildings business, which delivered strong results in the AI and the cloud infrastructure sectors. In Q3 2025, we secured data center project wins across the U.S.A., Canada, Chile, Sweden, Norway, Thailand, Australia and Singapore, underscoring our leadership in the global data center market. At the same time, in the commercial real estate market, we are gaining traction in refurbishment and retrofit projects, driven by rising office occupancy and the urgent need to upgrade assets at risk of becoming stranded, further reinforcing our premier position in this space. Meanwhile, our Earth & Environment business continues to see strong demand globally for permitting new energy assets, including power lines, nuclear facilities and hydrogen pipelines. In contrast, some clients have chosen to defer capital projects, which influence the pace of our field season, specifically in Canada and in the U.S. On the Transportation & Infrastructure front, Aviation continues to experience a strong post-pandemic recovery with airports worldwide investing heavily in expansion program, and we recently secured a single mandate to expand Heathrow Airport, which is operating at capacity and undertaking an extensive improvement to meet the mid-21st century air transport demand. Another key win during the quarter was WSP confirmed participation in the Toronto Pearson Airports accelerator program, which delivers vital upgrades and airport assets. Rail and transit remain in demand, and we celebrate 2 major wins this quarter. The Eglinton Crosstown West Extension Station Rail and system contract in Canada and the Uppsala light rail project in Sweden, a 17-kilometer new line valued at $1 billion that support the city climate neutral initiative. In the United States, investment in asset renewal continues highlighted by our recent mandate to modernize the Briarcliff-Peekskill Parkway in Westchester County, New York. This environmental assessment aims to enhance safety and resilience for this 13-kilometer corridor amid evolving climate requirements. Overall, we see continued momentum and positive momentum, but let me state the obvious. We are currently evolving in fluid market dynamics, including, amongst other things, shifting client priorities and evolving geopolitical context. Despite this reality, our key markets are performing well, industry trends remain current and our performance underscores the resilience of our diversified platform and the strength of our execution. Now over to you, Alain. Alain Michaud: Thanks, Alex, and hello, everyone. I'm very pleased with our results this quarter. For the third quarter, revenue and net revenues increased by approximately 14% and 16%, respectively, displaying solid performance and healthy underlying fundamentals. The increase was attributable to acquisition growth of 10.1% and organic revenue growth of 3.7%. POWER Engineers continue to demonstrate strong growth with a mid-teens organic growth rate compared to Q3 2024. And as a reminder, starting in Q4, POWER Engineers will contribute to our organic growth. Backlog reached $16.4 billion, up 10.6% in the 12-month period, representing approximately 11 months of revenue and a book-to-burn ratio above 1. Moving on to profitability. Adjusted EBITDA in the quarter amounted to $700 million, compared to $585 million in the third quarter of 2024, an increase of approximately 20%. Of interest, we are very proud of the significant milestone reached this quarter with adjusted EBITDA margin reaching a record high of 20.2%, compared to 19.5% in Q3 2024, an increase of 70 basis points, mainly due to our continued focus on productivity. And excluding optimization and restructuring costs, our margin increased 100 basis points in the quarter. Adjusted net earnings for the quarter reached approximately $370 million or $2.82 per share, up 32% and 26% respectively compared to the third quarter of 2024. The increase was mainly attributable to higher adjusted EBITDA and upside in tax expenses and financing costs. As for our cash position, I'm particularly pleased with our continued performance and cash flow generation. Free cash flow was approximately $890 million for the 9-month period ended September 27, 2025, representing an improvement of $645 million compared to the corresponding period in '24. The trailing 12 months of free cash flow totaled $1.5 billion, representing 1.7x net earnings attributable to shareholders. This strong outcome reflects our ongoing focus on working capital management and optimization under our new ERP platform. DSO stood at 71 days on September 27, 2025 compared to 80 days last year, a record for a third quarter. Net debt to adjusted EBITDA ratio stood at 1.4x, which is within our target range of 1 to 2x and allow us to appropriate -- with the appropriate flexibility to deploy capital. On our ERP program, the 2025 deployment proceeded as planned, and we're now preparing for 2026, which will result in 95% of our platform under the new ERP with key regions and entities, including POWER Engineers, Ricardo, Australia, New Zealand and Sweden set to come on board. This milestone represents a critical step in the evolution of our support function. And once fully implemented, these changes will enable us to unlock further efficiencies across the organization, and serve as an additional lever for margin expansion over time. Regarding our financial expectations for the year, we have revised and increased our 2025 financial outlook with net revenue now expected to range between $13.8 billion and $14 billion and adjusted EBITDA between $2.54 billion to $2.56 billion. We are, therefore, well aligned to reach or exceed the higher end of our initial financial outlook issued in February 2025. As a reminder, our '25 financial outlook reflects the expected contribution for Ricardo plc in the fourth quarter. The acquisition closed 2 weeks after the start of Q4, which means we will not capture a full quarter of net revenue. Finally, with the Atlantic hurricane season now essentially behind us, we expect the condition observed this quarter in the U.S. to extend into Q4 2025. For context, these services contributed to approximately $70 million in net revenue in Q4 2024, one of the highest volume recorded in the past 3 decades. As a result, our year-over-year comparison for the Americas segment in Q4 2025 will be influenced by this exceptionally strong prior year baseline. We're also closely monitoring the current U.S. government shutdown, which adds another layer of uncertainty to the operating environment. On that, back to you, Alex. Alexandre L'Heureux: Thank you, Alain. As we close the third quarter, I want to emphasize that what truly stands out the resilience of our diversified platform. Despite evolving market dynamics, WSP adapted and delivered a strong performance, underpinned by disciplined execution, operational excellence and a clear focus on long-term value creation. The recent acquisition of Ricardo further strengthens our capabilities in advisory and energy transition, air quality, and rail, positioning us to capture opportunities in high-growth sectors globally. We have the financial strength and flexibility to deploy capital for strategic acquisitions in a fragmented market, supported by a robust balance sheet and disciplined approach to M&A. Our pipelines remain healthy with opportunities aligned to our core markets and grow priorities. As 2025 draws to a close, we look ahead to 2026 with measured optimism and confident and our ability to adapt to evolving market conditions and continue delivering value to our clients and our shareholders. Our diversified platform, our strategic focus and our operational discipline position us well to navigate what lies ahead. Thank you for your continued trust and support. With that, we can open the lines to questions -- for questions. Operator: [Operator Instructions] And the questions come from the line of Steven Fisher from UBS. Steven Fisher: So on POWER Engineers, congrats on the 1-year anniversary. And so now that you're into the second year of your ownership, just curious what you see as being different during the second year of ownership versus the first year? Is it kind of the main focus of capturing that $1.4 billion pipeline that you said? Is that your main priority? Or is it anything else? And do you think you can maintain this mid-teens growth rate from here? Alexandre L'Heureux: Very, very good question. I mean in times where there's a lot of noise and things are fluid, actually consistency is oftentimes, something very, very positive and welcome. And frankly, what I expect in 2026 is hopefully something very similar to 2025 for POWER Engineer. We have a great backlog. We worked for a great blue-chip list of our clients. And with what we know today, I don't see why the growth profile of POWER Engineer would change in 2026 versus 2025. Alain Michaud: And if you look at the overall activity in '25 with POWER, we've done a large part of the integration process. The last milestone is the ERP on Jan 1, '26 -- for most of 2026, will be a year where we're fully combined and harmonized together in our ways of working. So it makes us feel positive about 2026 for POWER Engineers. Steven Fisher: And then I guess a bigger picture here. When you adjust the growth in the quarter for the 2024 project and the emergency work, you're still seeing maybe a little slowdown in organic growth this quarter overall. So as you look forward to next year, just curious in your confidence in any reacceleration. And if you think you can reaccelerate your organic growth, which markets do you think could become more positive versus those that might see a little bit of deceleration and thinking about mostly regionally, but curious if there's any end market color that would make it different? Alexandre L'Heureux: Well, I would respectfully disagree with you, I think when you adjust for emergency responses. And again, let me remind everyone, I mean, last year, we've been tracking the fee revenue that we've been delivering with -- during emergency responses in the fall for the last 3 years, all the way back to the Parsons Brinckerhoff acquisition. And last year was the fourth highest in 30 years level of response and services that we delivered in Q3 and Q4 in our history. And this year will be the fourth lowest in 30 years. So we felt that we needed to highlight that to you because once you adjust for this, I mean, I'm quite pleased given all of the noise that we hear in the marketplace right now. People don't talk much about the government shutdown, but we're past a month now, impossible to issue permitting, impossible to get anything done. And despite all of that, I mean we continue to perform in mid-single digits, high-single digits. So I'm quite pleased with that. Going into 2026, the pipeline of opportunities is still very strong. You look at the -- our win rate, which actually in 2025 has increased as opposed to decrease. I mean if we can get the noise aside for a second and gain more stability in the marketplace, I think we'll have clients a lot more in a better position to deploy capital. So going into 2026, I actually believe that it should be a good year for WSP. Operator: We are now going to proceed with our next question, and the questions come from the line of Chris Murray from ATB Capital Markets. Chris Murray: Looking at the margin profile, first of all, congratulations on getting over 20%, it's a bit of a target for a while. But one of the things that sort of stuck out to me is when I looked at the kind of the difference between organic growth and change in headcount, in almost all the regions, organic growth has outstripped the change in headcount. And I'm just starting to wonder if there's something that's a structural change in the business? I know you referenced some productivity. But just how do we think about the relationship between your ability to generate organic growth and your headcount as we go into the next couple of years? Alexandre L'Heureux: That's a great question. I'm pleased that you're highlighting that. I think this is more of a long-term trend than a yearly trend or a change over the course of this year. If you go back the last 10 years, you'll see that the fee per employee that we have been generating over the course of the last decade has consistently increased. So in other words, we're doing more with less. And DAP is the result of many levers that we are pulling as an organization, one being more productive. WSP -- we -- you look at the margin profile and what we have been able to achieve in the last 5 years, the resulting effect of all this is obviously us being more productive, running a tighter ship. I think we cannot exclude also technology. We are using technology. And also, we have entered sectors and markets where we are able to charge a higher rate for the work that we do. In recent years, we've entered in a big way in mining consulting. We are the largest mining consultant in the world. There's not one large mine in the world that WSP is not involved in. And we are able to have a higher charge-out rate for this. Same thing in the POWER sector more recently. So I could go on like this and on for a long time. But over the year, we've changed our project mix. But more importantly, with the use of technology, and that will continue to accelerate. And also how productive we have been, we have been able to do a lot more with less. Chris Murray: And then to that point, I think I hear Alain talk about like the ERP system is almost ready to go. We're seeing sort of these trends in productivity. Is it fair to think that the year-over-year growth just -- should drive margins? Like usually, there's a fairly standard kind of spread on margins, call it, 50, 60, 70 basis points, that comes as a natural absorption. Is there an ability to change that to accelerate that margin improvement? Alexandre L'Heureux: I'm not sure I understand your question, but I think over the last few years, if I look back at our track record, I mean, over the years, we have been able to increase our margin profile, good year, bad year, around 50 basis points, Alain, something like that, which has been consistent. To move a global organization of our size by 0.5 point -- by 50 basis points every year to me is a great improvement. And I think would be -- would be leading our peer group, I would argue, in the average peer group. So I'm quite pleased with that. Do I see ways to continue to accelerate that? I can tell you that's what we do every day. We're trying to work very hard to continue to make those improvements. And as a friendly reminder, this year, we've absorbed a lot of redundancy in structural cost, that would have increased by 40 basis points, our already increased margin profile. So if you strip that out, I think the margin improvement this year has been just extraordinary. Chris Murray: And then just one last one for me. The Canadian budget came down, lots of talk about infrastructure and infrastructure spend. But a lot of those announcements have already been tied to projects that have been made. How are you seeing the change in the Canadian environment with respect to federal stimulus for infrastructure and spending? Alexandre L'Heureux: Well, I think the focus on infrastructure spending in Canada has always been there. I think where I felt past governments and current governments is, it's one thing to be focused on infrastructure, it's another to deploy the capital and accelerate the spend on infrastructure. Hopefully, this government is very focused on deploying rapidly the funding. So I think the focus on infrastructure is not the issue is to make sure that we deploy the capital rapidly. But certainly, I saw this budget very positively when it was announced. Operator: We are now going to proceed with our next question, and the questions come from the line of Michael Tupholme from TD Cowen. Michael Tupholme: Just wanted to ask you about the APAC region, see if you can talk a little bit more about the improvements that you're seeing in that segment and how we should think about organic growth in APAC over coming quarters? Alexandre L'Heureux: First and foremost, we see a strong growth in the backlog at this point in time. Increased growth in the backlog at this point in both New Zealand and Australia, which is an early, but positive signal. We also see our win rate increasing. And we also see the proposal activity level to slowly increasing as well. So these are our early signs. As I mentioned earlier on this morning, New Zealand recorded positive organic growth for the first time in 5 quarters. So hopefully, this will bodes well for the future. I think Australia is a few quarters behind New Zealand. How many? We'll assess that as we are entering 2026. To me, Australia, and I've mentioned it during the last quarter, we are totally committed to the region. But if you look back at the type of organic growth that we generated in the last 5, 6 years in Australia, I think it's absolutely normal that a country goes through a period of pause after such a big spend in infrastructure. But longer term, I'm quite positive about the country. So long story short, Michael, if I'm being asked to look into my crystal ball, I think it's going to take a few quarters in Australia to see better results. Michael Tupholme: That's definitely helpful. And then just somewhat related on the... Alexandre L'Heureux: Sorry, Michael. And by the way, I wanted to be crystal clear on this. This is not self-inflicted to WSP. This is more structural for the country. So what's true for us is true for everyone else. I can tell you that. Michael Tupholme: No, that makes sense. And then just secondly, just as it relates to the rightsizing costs in the quarter and the corresponding margin impact. Was that entirely in the APAC segments or did some other segments also experience some rightsizing costs and margin impact? And I guess, are we -- are you through those rightsizing costs? Or do you expect there to be more overcoming quarters in any regions? Alexandre L'Heureux: There's obviously Australia and New Zealand, there have been some, but there's been some others elsewhere. I mean, in the Nordics as well in recent years, we've -- with the cooling off of the infrastructure spend, especially in the private sector with the war, Russia, which is next door neighbor to the Nordics, I think there's been a slowdown. The good news again is we're seeing a strong backlog growth now. And I talked about a large project that was awarded to us in Sweden. So I'm feeling good again around the country and the regions. And for the first time in many quarters now, I feel things are picking up. So that's positive. But to be specific about your question, I mean, we've been rightsizing pretty much everywhere. I mentioned also the field season this summer, which was probably not as good as expected in Canada and in the U.S. because of the fluid market conditions, I think people are more in a wait-and-see approach. So we had to rightsize our field employees over the course of the summer. But again, we absorb all of that, and we're able to deliver actually, I think you would agree, fantastic EBITDA margin in Canada, for instance. Operator: We are now going to proceed with our next question, and the questions come from the line of Frederic Bastien from Raymond James. Frederic Bastien: Super pleased with the margins. That's hats off, that's excellent. Looking back 10 years ago, I would have never imagined you could get there, but it's amazing and the fact that you're still going for more is even more encouraging. Just a question on the M&A side. Are you seeing the competitive backdrop for M&A showing signs of improvement in your -- in today's fluid environment? I would suspect so, but I don't want to make a conclusion on my own. So I would love to get your opinion. Alexandre L'Heureux: Yes. Frederic, very good question. Look, we -- less than 12 months ago, we completed POWER Engineer. This was our largest acquisition in our history. So as you can imagine, I wanted us to do a good job at delivering the value of this acquisition. Earlier this year, we completed and announced the acquisition of Ricardo, which will contribute to the bottom line starting next quarter. And as I said, the pipeline is healthy. If my memory is not failing me, we finished the quarter with a leverage of 1.4x EBITDA. So as you can imagine, we are in a very solid position. And I would like, obviously, to continue to use our balance sheet and use the position of strength that we're in, given our diversified platform to be opportunistic and continue to grow platform. Frederic Bastien: It seems like there's not a week that goes by that there's rumors about WSP buying a company X, company Y, company Z. Would you care to comment on that? Alexandre L'Heureux: I don't think anyone should be surprised because I'm probably the biggest supporter and avid supporter of consolidation in our industry. So I'm not surprised that our name is being thrown around with possible rumors. Obviously, I'm not going to comment on those rumors. But I was a big proponent of our model 10 years ago, and I continue to be. And as I said, if we have an opportunity to use our balance sheet, we will. Frederic Bastien: So normal course of business for you guys, basically? Alexandre L'Heureux: Yes. Operator: [Operator Instructions] We are now going to proceed with our next question, and the questions come from the line of Anshul Agarwal from CIBC. Anshul Agarwal: So I just have one question on your APAC region. So this quarter, WSP reported a strong EBITDA margin improvement in APAC. So could you just please provide some color on what is driving these margins specifically in APAC? Alexandre L'Heureux: Look, we have been busy since the beginning of the year to set up the business for future success. That's the way I would describe it. We want our Australian business and our New Zealand business to be as fit as possible to be in a position to take advantage when the market picks up again. And as I said, we see early signs of that with the backlog growing in the mid- to high single digit this year that the business is fit to take advantage of that. Operator: [Operator Instructions] We have no further questions at this time. So I'll hand back to you for closing remarks. Alexandre L'Heureux: Well, I think there's one additional question. Operator: Yes, we just have a question that just arrived. Alexandre L'Heureux: Okay. We'll take it. Operator: The questions come from the line of Jonathan Goldman from Scotiabank. Jonathan Goldman: Just wanted to echo the comments about the phenomenal margin performance and that was despite the restructuring. But when do you anticipate completing all the restructuring activities? Alexandre L'Heureux: Well, we always, always streamline our business. But this year, the reason why we mentioned it, Jonathan, is because, obviously, it's been more predominant than perhaps other years. We had to do it, as I said, in the Asia Pacific region. We've done it in our Asia region. We've done it in our Nordics region. We've done it in the field for field workers in Canada and the U.S. this summer. So because of the size of it, we highlight it -- we did highlight it. Do I think it's going to slow down? I think we've done a lot of that work already. It's been done already, but we should expect to continue to have some. Jonathan Goldman: And then Alex, you kind of alluded to this a bit, I think in an earlier question. But have the government shutdowns in the U.S. impacted the business significantly or at all, I guess, in Q4? And if we're not looking at organic growth, are there other metrics we can track or maybe ask for color about win rate, close activity that might be a better marker of underlying demand in the U.S.? Alexandre L'Heureux: I would say that so far, the shutdown has had a minimal impact. But I would then finish my sentence by saying but. So the point I'm making here is that they cannot go on forever. At some point in time, I'll give you an example, the Environmental Protection Agency that are issuing permits, 90% of the staff has been referred, so nothing is being done right now. So for us, right now, no or minimal impact. But if it was to go on for another month or 2, I mean, clearly, the entire industry will suffer from this. So for now good, but more color to be provided in Q4 at the end when and if we are not seeing any further improvement in that regard. Jonathan Goldman: And maybe one more for me on M&A. You talked about this earlier. And clearly, you guys are always open for business. But is there any area, region, vertical that you're looking at specifically or anyone now that you find more attractive versus other sort of sectors, whether it's power, nuclear or anything that you're looking at specifically? Alexandre L'Heureux: Yes, we are focused on at this moment on North America. So certainly, despite all the noise that we hear and the tension between our 2 countries, Canada, U.S. WSP, we believe that, one, if not the best place to do work and business in our space is North America. So we continue to be focused on North America. And obviously, if I had an opportunity to continue to grow our platform and the sectors that we're trying to build at the moment, power, water, project management services, transportation even. I mean that obviously is something that I would like to be in a position to do. Jonathan Goldman: You certainly have the platform to do it. Operator: We are now going to proceed with our next question, and the questions come from the line of Maxim Sytchev from National Bank of Canada Capital Markets. Maxim Sytchev: Just a quick one for me as most questions have been already asked. In terms of U.K. growth acceleration, do you mind maybe providing a bit more color in terms of what's happening there because the headlines overall seem to be less than bullion, but clearly, you are finding ways to grow there. So would love to hear some comments. Alexandre L'Heureux: Well, I think you're absolutely right. We are the leading firm in the U.K., and I'm saying that very humbly and respectfully to our peer group. And you are right in saying that we're finding ways to grow at a very high rate this year. We have an incredible leadership team in the U.K. and our win rate is outstanding. And we're going into 2026 with the same ambitions. So we'll see and more to come when we discuss our outlook for 2026, but I feel we're in a good position in the U.K. Operator: We have no further questions. I will now hand back to you for closing remarks. Thank you. Alexandre L'Heureux: Well, thank you again for attending this call, and we look forward to updating you on our outlook in 2026 during the next conference call. In the meantime, I'd like to wish you a great day. Thank you very much. Operator: This concludes today's conference call. Thank you all for participating. You may now disconnect your lines. Thank you, and have a good rest of your day.
Debbie Stewart: Good morning, and welcome to Aveanna's third quarter 2025 earnings call. I am Debbie Stewart, the company's Chief Accounting Officer. With me today is Jeff Shaner, our Chief Executive Officer; and Matt Buckhalter, our Chief Financial Officer. During this call, we will make forward-looking statements. Risk factors that may impact those statements and could cause actual future results to differ materially from currently projected results are described in this morning's press release and the reports we file with the SEC. The company does not undertake any duty to update such forward-looking statements. Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these measures can be found in this morning's press release, which is posted on our website, aveanna.com, and in our most recent quarterly report on Form 10-Q when filed. With that, I will turn the call over to Aveanna's Chief Executive Officer, Jeff Shaner. Jeff? Jeffrey Shaner: Thank you, Debbie. Good morning, and thank you for joining us today. We appreciate each of you investing your time this morning to better understand our Q3 2025 results and how we are moving Aveanna forward in 2025. My initial comments will briefly highlight our third quarter results, along with the steps we are taking to address the labor markets and our ongoing efforts with government and preferred payers to create additional capacity. I will then provide updates on the Thrive Skilled Pediatrics integration, the current regulatory environment and year 3 of our strategic plan before turning the call over to Matt to provide further details into the quarter. Moving to highlights for the third quarter. Revenue for the third quarter was approximately $622 million, representing a 22.2% increase over the prior year period. Third quarter adjusted EBITDA was $80.1 million, representing a 67.5% increase over the prior year period, primarily due to the improved rate and volume environment and continued cost savings initiatives. We continue to execute our strategic transformation strategy, focusing on obtaining adequate rates from our payer and government partners for the services we provide, which is clearly evidenced in our third quarter results. As we have previously discussed, the labor environment represented the primary challenge that we needed to address to see Aveanna resume the growth trajectory that we believed our company could achieve. It is important to note our industry does not have a demand problem. The demand for home and community-based care continues to be strong with both state and federal governments and managed care organizations asking for solutions that create more capacity while reducing the total cost of care. Our Q3 results highlight that we continue to align our objectives with those of our preferred payers and government partners. By focusing our clinical capacity on our preferred payers, we achieved solid year-over-year growth in revenue and adjusted EBITDA. We also experienced improvement in our caregiver hiring and retention trends by aligning our efforts with those payers willing to engage with us on enhanced reimbursement rates and value-based agreements. While we continue to operate in a challenging environment, our preferred payer strategy supports our ability to achieve normalized growth rates in all 3 of our business segments. Since our second quarter earnings call, I am pleased with the continued progress we have made on several of our rate improvement initiatives with both government and payer partners as well as continued signs of improvement in the caregiver labor market. Specifically, as it relates to our private duty services business, our government affairs strategy for 2025 is twofold. First, we are advancing our legislative agenda to improve reimbursement rates in at least 10 states. And second, we continue to advocate for Medicaid rate integrity on behalf of children with complex medical conditions. We have a strong advocacy presence with both federal and state legislatures as well as solid support from our governors across our national footprint. State legislators have continued to recognize how meaningful private duty nursing is to the overall cost savings and improved outcomes of our nation's most vulnerable children. As it relates to private duty services rate updates, we achieved 10 rate enhancements this year. which is -- which was in line with our expectations. At this point, our private duty services legislative agenda is primarily wrapped up for this year, and we have transitioned our efforts towards similar legislative goals for 2026. Now moving on to preferred payer initiatives. Our goal for 2025 was to increase the number of private duty services preferred payer agreements from 22 to 30. We added 5 additional preferred payer agreements in Q3 and are currently positioned at 30 agreements in total. Aveanna's preferred payer strategy continues to gain momentum along with the Thrive SPC acquisition, which broadened our strategy into 2 new states, Kansas and New Mexico. Additionally, our Q3 preferred payer agreements account for approximately 56% of our total PDS MCO volumes, inclusive of our recent Thrive acquisition. This positive momentum in preferred payer volumes continues to highlight the shift in our caregiver capacity and recruitment efforts towards our private duty services preferred payer partners. Now moving to our preferred payer progress in home health. Our goal for 2025 was to maintain our episodic payer mix above 70% while returning to a more normalized growth rate. I am pleased to report in Q3, our episodic mix was 77% and our total episodic volume growth was 14.2% compared with the prior year period. The continued investments in clinical outcomes, sales resources and a focused approach to growth is now paying dividends with Q3 total admissions of 9,700 in total or 9% growth over the prior year period. We have 45 preferred payer agreements in home health. Our dedicated focus on aligning our home health caregiver capacity with those payers willing to reimburse us on an episodic basis has led to positive year-over-year growth and improvement in our clinical and financial outcomes. Finally, as we have achieved our desired preferred payer model in private duty services and home health and hospice, we are proceeding with a similar strategy in our Medical Solutions business. We're in the mid-stages of implementing our preferred payer strategy in Medical Solutions and believe it will be fully realized by early 2026. To date, we have 18 preferred payers in Medical Solutions, and we expect that number to grow as we achieve our desired preferred payer model. Our gross margins have stabilized in our desired range as we align our clinical capacity with those payers that value our services and pay us in a timely fashion. I am pleased with our Q3 volume of approximately 91,000 unique patients served as we work to achieve our target operating model. While we expect our volume growth to be muted for the remainder of the year, we are experiencing improvement in our clinical outcomes, customer satisfaction and financial outcomes. Our Medical Solutions business is well on its way to achieving its target operating model, and we look forward to updating you on its continued progress. We are encouraged by our rate increases, preferred payer agreements and subsequent recruiting results. Our business has demonstrated solid signs of recovery as we achieve our rate goals previously discussed. Home and community-based care will continue to grow, and Aveanna is a comprehensive platform with a diverse payer base, providing a cost-effective, high-quality alternative to higher cost care settings. And most importantly, we provide this care in the most desirable setting, the comfort of our patients' home. As it relates to our recent acquisition of Thrive Skill Pediatrics, I am very pleased with the integration efforts and the continued focus on superior clinical and customer experiences with our patients and families. We are on target to complete our integration by the end of this year. Our leadership team has done a nice job staying focused on our mission while achieving the expected synergies in this transaction. The Thrive acquisition is accretive to our '25 results and a great addition to our Aveanna family. Now turning to the current regulatory environment with Medicaid and Medicare updates. We continue to be quite busy with our advocacy efforts. We have focused our efforts on 2 fronts: supporting overall Medicaid policy and defending the Medicare home health benefit for American seniors. On the Medicaid front, we continue to believe our patient population fared relatively well in the OBBBA legislation. Pediatric and adult patients with complex medical conditions were not directly targeted in the bill, and our view is that PDM was mostly insulated in the almost $1 trillion cut to Medicaid. With that said, we are experiencing general headwinds with state Medicaid directors and governors as they plan for potentially less overall Medicaid funding and shouldering more of their Medicaid costs in the future. As it relates to the proposed home health rule for calendar year 2026, we continue to voice our disappointment by the significance of these proposed cuts. We are aligned with the National Alliance for Care at Home and our home health peers in our strong opposition to this proposed rule. Since our last call, we've had many productive conversations with legislative leaders, both Republican and Democrat as well as CMS leadership on the devastating impacts of the proposed home health rule. We submitted our comment letter during the CMS open comment period and have continued to advocate in all 38 Aveanna states for the current administration, CMS and Congress to halt any cuts to home health. We do expect to receive the final calendar year 2026 rule in the coming days. And although not overly material to Aveanna's 2026 results, this rule is critically important to millions of seniors in America. Before I turn the call over to Matt, let me comment on our strategic plan and enhanced outlook for 2025. We will continue to focus our efforts on 5 primary strategic initiatives. first, enhancing partnerships with government partners and preferred payers to create additional capacity and growth; second, identifying cost efficiencies and synergies that allow us to leverage our growth; third, modernizing our Medical Solutions business to achieve our target operating model; fourth, managing our capital structure and collecting our cash while producing positive free cash flow; and finally, engaging our leaders and employees in delivering our Aveanna mission. Based on the strength of our third quarter and year-to-date results, we now anticipate 2025 revenue to be greater than $2.375 billion and adjusted EBITDA to be greater than $300 million. We believe this enhanced 2025 outlook provides a prudent view considering the challenges we still face with the evolving regulatory environment. In closing, I'm incredibly proud of our Aveanna team and their dedication to executing our strategic transformation while holding our mission at the core of everything we do. We offer a cost-effective patient-preferred and clinically sophisticated solution for our patients and families. Furthermore, we are the right solution for our payers, referral sources and government partners. With that, let me turn the call over to Matt to provide further details on the quarter and our 2025 outlook. Matt? Matt Buckhalter: Thank you, Jeff, and good morning. I'll first talk about our third quarter financial results and liquidity before providing additional details on our improved outlook for 2025. Starting with top line. we saw revenues rise 22.2% over the prior year period to $621.9 million. We achieved year-over-year revenue growth in 2 of our operating divisions, led by our Private Duty Services and Home Health and Hospice division, which grew by 25.6% and 15.3% compared to the prior year quarter. Consolidated gross margin was $202.8 million or 32.6%. Consolidated adjusted EBITDA was $80.1 million, a 67.5% increase as compared to the prior year. This growth reflects an improved rate environment, increased volumes as well as enhanced operational efficiencies. Now taking a deeper look into each of our segments. Starting with Private Duty Services. Revenue for the quarter was approximately $514 million, a 25.6% increase and was driven by approximately 11.8 million hours of care, a volume increase of 12.9% over the prior year. Q3 revenue per hour of $43.51 was up 12.7% compared to the prior year quarter, primarily driven by preferred payer volume growth and the rate enhancements previously discussed. We remain optimistic about our ability to attract caregivers and address market demands for our services when we obtain acceptable reimbursement rates. Turning to our cost of labor and gross margin metrics. We achieved $149.3 million of gross margin or 29%. The cost of revenue rate of $30.89 in Q3 was up $2.27 or 8.9% from the prior year period. Our Q3 spread per hour was $12.62. We expect spread per hour to normalize as we continue to make ongoing adjustments to caregiver wages to support higher volumes and improve clinical outcomes. Moving on to our Home Health and Hospice segment. Revenue for the quarter was approximately $62.4 million, a 15.3% increase over the prior year. Revenue was driven by 9,700 total admissions with approximately 77% being episodic and 12,900 total episodes of care, up 14.2% from the prior year quarter. Medicare revenue per episode was $3,215, up 3.6% from the prior year quarter. We continue to focus on rightsizing our approach to growth in the near term by focusing on preferred payers that reimburse us on an episodic basis. This episodic focus has accelerated our margin expansion and improved our clinical outcomes. With episodic admissions well over 70%, we have achieved our goal of rightsizing our margin profile and enhancing our clinical offerings. We are pleased with our Q3 gross margin of 53.3%, representing our continued focus on cost initiatives to achieve our targeted margin profile. Our home health and hospice platform is dedicated to creating value through effective operational management and the delivery of exceptional patient care. Now to our Medical Solutions segment results for Q3. During the quarter, we produced revenue of $45.1 million, essentially flat from the prior year period. Revenue was driven by approximately 91,000 unique patients served and revenue per UPS of approximately $495, up 0.6% over the prior year period. Gross margin was approximately $20.3 million or 45% for the quarter. As Jeff mentioned, we continue to implement initiatives to be more effective and efficient with our operations to achieve our targeted operating model. We are accelerating our preferred payer strategy at Medical Solutions by aligning our capacity with those payers that value our resources and appropriately reimburse us for the services we provide. We expect gross margins to normalize in the 42% to 44% range and UPS to accelerate its growth as we implement our targeted operating model. While I'm pleased with the integration efforts to date, we are entering the final push to complete our efficiency efforts and get back to focusing on growth in Medical Solutions. In summary, we continue to fight through a difficult environment while keeping our patients care at the center of everything we do. It's clear to us that aligning caregiver capacity to those preferred payers who value our partnership is the path forward at Aveanna. With the positive momentum we experienced in Q3, we remain optimistic that such trends will extend throughout 2025. We will continue to pass through wage improvements and other benefits to our caregivers and the ongoing effort to better improve volumes. Now moving to our balance sheet and liquidity. At the end of the third quarter, we had liquidity of approximately $479 million, representing cash on hand of approximately $146 million, $106 million of availability under our securitization facility and approximately $227 million of availability on our revolver, which was undrawn as of the end of the quarter. We had $23 million in outstanding letters of credit at the end of Q3. During the quarter, we refinanced our first lien credit facility and increased the revolving credit facility's availability from $170 million to $250 million. The combined $1.325 billion of first lien term loan was also extended and is now set to mature in 2032. These actions enhance our balance sheet strength and liquidity, allowing us to continue executing on our strategic priorities. This progress underscores our strong operating performance and the confidence our financing partners have in Aveanna. On the debt service front, we had approximately $1.49 billion of variable rate debt at the end of Q3. Of this amount, $520 million is hedged with fixed rate swaps and $880 million is subject to an interest rate cap, which limits further exposure to increases in SOFR above 3%. Accordingly, substantially all of our variable rate debt is hedged. Our interest rate swaps extend through June 2026 and our interest rate caps extend through February 2027. Looking at year-to-date cash flow. Cash generated by operating activities was $76.1 million and free cash flow was $86.2 million. We are encouraged by the strong cash collections and expect to generate additional free cash flow throughout the remainder of the year. Before I hand the call over to the operator for Q&A, let me take a moment to address our improved outlook for 2025. As Jeff mentioned, we now expect full year revenue to be greater than $2.375 billion and adjusted EBITDA to be greater than $300 million. As a reminder, this year's fourth quarter includes an additional 53rd week, which will have a positive impact on both revenue and earnings. The presence of this extra week means the current fiscal year contains an additional week of business activity compared to most years. As we reflect on our Q3 results, I'd like to take a moment to express my sincere gratitude to our Aveanna teammates. These strong results would not have been possible without your hard work and dedication. Looking ahead, I'm excited for the continued execution of our 2025 strategic plan and look forward to providing you with further updates at the end of Q4. With that, let me turn the call over to the operator.[ id="-1" name="Operator" /> [Operator Instructions] First question comes from Pito Chickering with Deutsche Bank. Pito Chickering: Nice quarter. Every year, the fourth quarter EBITDA has been higher than the third quarter. Are there any headwinds that we should think about for the fourth quarter? Just trying to understand the implied guidance that you have for the fourth quarter after a very strong third quarter? Or is this just a standard conservatism that you've been doing for the past few years? Jeffrey Shaner: Thanks for your question. And we're going to take that as a compliment. Thank you. Peter, this is our 11th quarter of beat and raise. And I think as we think of Q3, we were very proud of the results, a clean quarter, a very clean quarter in Q3. Q4 with the exception of the 53rd week that Matt talked about to a 14th week in Q4 should be very similar to Q3. We do have some seasonality that we play through at the end of the year. So the last part of the quarter has a little bit of holiday seasonality. But no, fundamentally, we think of Q4 in the same realm as we think of the performance of the business in Q3. And again, we've created a prudent -- we use the word prudent, some people call it conservative view of a beat and raise mentality. We are proud to have raised revenue at least $75 million and raised EBITDA of at least $30 million quarter-over-quarter. And if I go back to how we started the year, we started the year with a goal to achieve $200 million of EBITDA and both organically and with the addition of Thrive, which you'll hear us keep talking about Thrive has been a great little tuck-in acquisition for us, great business addition to our core business. We'll have raised guidance after 3 quarters, $100 million of EBITDA, or 50% guidance raise. So again, we continue to be a conservative group. We love the beat and raise mentality, but raising guidance over 3 quarters by $100 million on a 200 basis is, in our mind, still good days' work. Matt Buckhalter: Yes, Jeff, I'll just add to that, that obviously, operational performance has been amazing by the team, but also the exceptional care that the team has been delivering as well. I'll get back to it though. There's a lot more work to do, Pito. I mean, we're going to get back to work. We're going to continue to chop wood and go do and do what we do best. We're going to continue to focus on providing not only the best patient care. We're also going to continue to strengthen our balance sheet, deleverage our organization once again, as you saw significant leverage coming down from the beginning of the year to where we ended Q3, and we'll continue to see that in the out quarters as well. Pito Chickering: Great. And then sort of a follow-up here. You've scaled up your preferred payer agreements throughout 2025, which makes some pretty funky sequential growth this year. In the last couple of years, EBITDA has been about 26% of annual EBITDA. So is it fair to take third quarter results and annualize that as you think about launch pad for 2026 earnings and even that could be conservative, I guess, with the 5 preferred payers that you signed this quarter? Jeffrey Shaner: It's a fair question, Pito. Again, we'll start with we're staying focused on finishing the year strong. So our goals right now are to finish out 2025 and finish out strong. We would point people to. There's a lot of momentum in the business, as you pointed out, PDS and our HHH businesses are both just hitting their strides in great ways. Med Solutions, we still are working through, and I hope you read into our comments that Med Solutions, we're doing a tremendous amount of work. We're very proud of our team what they're doing as we speak. But I want to finish that over the next kind of 3 to 4 months, so they can get back to the growth algorithm that we have gotten used to. Two things I'll point out just to keep in mind, one, we had a significant amount of wage pass-through as the year has played out. And so Matt will keep bringing us back to -- if you look at Q2, we pointed out $9 million of timing related and wage pass-through. We had additional wage pass-through in Q3. We're still passing additional wage through in Q4. So that will continue to play through the first part of next year. And then we talked about 10 rate wins this year. It's really more than 10, but it nets down with a couple of temporary rate decreases that are in place. So we had a great year in rate wins, but we are feeling and we are hearing the general headwinds of state Medicaid systems. So we expect a similar rate story from a total number of rate wins next year, but we are working through and hearing general headwinds as the OBBBA reality has just settled in on Medicaid systems. So we would point people towards that general headwinds as we fight through '26 Medicaid rates throughout North America. That's why we love being in 29 states and continuing to grow. We love each Medicaid system is uniquely different. And I'd expect us to do more Thrive-like acquisitions in '26 to continue to build out more Medicaid states. [ id="-1" name="Operator" /> [Operator Instructions] Next question, Brian Tanquilut with Jefferies. Brian Tanquilut: Congrats on a solid quarter. Maybe, Jeff, just to follow up on that comment you made. So in PDS, you've seen nice strength in hours, obviously. And as we think about the rate increases you've received year-to-date -- I mean, I think that translates into better hours. Is that the right jumping off point in terms of like kind of like your capacity as we think about 2026? And then maybe for Matt, as a follow-up. Historically, you've kind of spoken about a 10 to 10.50 spread rate in PDS. So how should we think about the path to that level? Or is that still the right level to be thinking about considering that you've got rate increases flowing through and there's a timing dynamic? Jeffrey Shaner: I think I'd pick up the Q3 PDS volume of just over 11.8 million hours of care being delivered. That obviously includes the Thrive acquisition. I would tell you that's the full impact of the Thrive acquisition in that Thrive at 13% year-over-year growth, Thrive was about 5% of that 13%. So it still keeps our volume in line with where it was in Q2 at 6% or 7% volume growth. But I think that 11.8 million hours is the right basis to move into Q4. We'll have some seasonality, some normal seasonality as we move into 2026. I think as I mentioned to Pito, a lot of our rate wins were pent-up rate wins from '24 moving into '25. We expect, as we reset our legislative goals for 2026, we'll probably still set a goal of being double-digit rate wins. But as we've said last quarter, we'll say again, and we'll say next quarter, we expect those rate wins to be smaller in nature, 2%, 3%, very specific like holiday overtime rates. So as we work with our government partners, we do expect those -- the PDS rate wins to be generally smaller than they've been over the course of the last 2.5 years. The great part is we're prepared for that. We're well positioned for that. As it relates to the preferred payers and the 5 additional rate wins, Thrive helped that. The addition of New Mexico and Kansas as 2 brand-new MCO states helped us in that execution. But that was the thesis of why we did the Thrive acquisition was to roll that new markets and the current business into our relationships, and it's played out exactly as we would have expected. So I expect us to continue to execute additional preferred payer wins in Q4, and we'll reset that goal for 2026. Matt Buckhalter: Yes. And Brian, to your point on the spread itself, as expected, Q3 came right back in line with our Q1 expectations. We made sure to discuss Q2 ad nauseam last quarter for people to understand that, that was a little bit hot. But gross margin settled in line nicely, right around 29% for our PDS segment. That's in line with our expectations. It's probably a little bit on the higher end of that 26% to 28% range that we've come to guide to in the long run here. But looking ahead, there's still additional wage pass-through to include to our caregivers. And so we'll do those wages along with some other benefits, but that will bleed into 2026 as well. So not only will that only occur in Q4, but we'll see that in Q1 and Q2 of next year, too. Brian Tanquilut: That makes sense. And then, Matt, maybe my follow-up would be just on the balance sheet. So now that you've done your refi, your EBITDA base has gone up, so the leverage ratio has gone down. I mean how should we be thinking about your views on cap structure and then maybe capital deployment towards acquisitions? Matt Buckhalter: Awesome question. Yes, really proud of our teams and what they've been able to accomplish. These great operating results and clinical results have allowed us to really focus on our cash collections as well. It takes a village to be able to do that on a continuous basis. But $86 million of free cash flow year-to-date, that's amazing expectations from our team and what we've been able to achieve. We'll add to that in Q4 as well, though Q3 is historically our best quarter for free cash flow generation as well. But looking ahead, we'll continue to do that. We'll bring in additional free cash flow in 2026. And we'll use that for potential M&A opportunities. But we're going to do what makes the most sense at Aveanna and whether that is deploying for M&A or paying down debt, we'll just be thoughtful on any dollars that we use. [ id="-1" name="Operator" /> Next question, Benjamin Rossi with JPMorgan. Benjamin Rossi: I guess just turning to the value-based care contracting, I guess when thinking about your progress towards your broader goal of, I guess, signing 10 VBC contracts this year, can you just walk us through the market appetite you're seeing from your payer partners here? And then have you seen any shift in how payers are maybe viewing value-based care contracts for private duty nursing going forward? Jeffrey Shaner: Ben, thanks for the question. Yes, I think the answer is just more and more and more and more. So I'll go back to the Thrive acquisition and why it made as much sense and why we'll do more Thrive-like acquisitions in PDS moving forward. And that is that our preferred payers just want more nurses and they want more of our capacity. And even we are limited on how much nursing capacity we can give them. So as we talk to our now 30 preferred payers, and again, many of them are national to national leading Medicaid payers in America, they just want more of what we have to offer, both in the amount of nurses, but also the relationship that we have that is tied to total cost of care through HBR and fill rates. So I think as we've had conversations even this week with some of our national payers. And although it takes time to add that value-based agreement, and just as a reminder, we have bonus only, so it's only upside. So there's no -- we don't take institutional risk today in any of our value-based agreements. So it's upside rewards only. Based on our ability to bend the cost curve, most of our payers are just wanting more of Aveanna and more of what we have to offer. And so I can tell you from having closed the Thrive transaction, we've gotten a couple of nice feedback from our payer leaders, how impressed they were and how proud they are that we've been able to deploy more nurses to their families and their patients. So I'd expect that trend to continue as we reset our goals for 2026, but no slowdown from our MCO partners. They want more of what we have to offer. Benjamin Rossi: Great. Just a follow-up, maybe on the home health hospice front, seeing a nice volume growth there, episodic mix picked up nicely. cost of revenue, it seems like that maybe ticked up a bit and was a bit of a drag on gross margin. I guess anything going on within that segment from the expense side just with growth out there otherwise outpacing top line? Matt Buckhalter: No, nothing crazy there, Ben. Obviously, thanks for looking at that 15.3% growth in that division is outstanding. Hospice phenomenal growth, episodic growth, amazing, 77% admissions are coming in as episodic as well. Those are also delivering great care afterwards. Those are funneling right into great star ratings for our teams on top of it. 53.3% gross margin, that's right in line with our expectations, 55% and change last quarter. It was a little bit hot, and we kind of alluded to that one. We're continuing to invest in some training through some hard ways programs with that team, but really just nothing to be concerned about. It's right in line with our expectations. Jeffrey Shaner: And I think Matt said it well, Ben, it's 3 years' worth of work. So again, it's 3 years' worth of our team staying focused on the preferred payer strategy. And again, as we think of Med Solutions, think of what you're seeing now in home health and hospice as what the future of Med Solutions will be where we drive the majority of our volume will be aligned with our preferred payers, and that really is what drives our growth. But no, Matt said it well. Really proud of our home health and hospice team. They've done a great job. And they've stayed focused on episodic care, which is the right payment model for that business. [ id="-1" name="Operator" /> Next question comes from Raj Kumar with Stephens. Raj Kumar: Maybe kind of uncovering the hours growth, decently strong. So just maybe trying to get the disclosures on kind of how census or patients served trended relative to the hours per census yield and kind of remaining opportunities that as you kind of think about the spread normalizing and the company being able to hire and retain more nurses to be able to serve more volumes. So maybe just trying to kind of break that out and kind of how much more room is there on the kind of hours per census side? And then kind of what are you kind of seeing from a census opportunity perspective as well? Jeffrey Shaner: Yes. I would say they're directionally in line with each other, Raj. Obviously, I would go back to the statement that everybody is always asking for more and they're needing more. And whether that is our current census that we have on there or patients that are waiting in the hospital to be discharged onto our service as well. So with the preferred payer strategy, we have been able to staff more hours and also pay our caregivers more to staff more hours and work more hours at the same time. But correlated effect, there's still high demand within our preferred payers and outside of it. We -- there's just unlimited -- there's just limited capacity with those caregivers, and there always will be, unfortunately. So as we lean into these relationships, we're going to do our best to fill as many shifts as possible on behalf of our patients and really drive that growth that you're seeing in our volume right now. Raj Kumar: Got it. And then maybe on the home health and hospice side, just with the preferred payer strategy, maybe just kind of want to be able to compare kind of overall reimbursement on your episodic rates versus fee-for-service and kind of where that discount kind of stands or even if you're kind of at reaching parity, just maybe any information on that would be helpful as well. Jeffrey Shaner: Yes. I wouldn't say we're reaching parity. So it's why we focus at almost 80%. We've said 70% is our target. It wouldn't shop me if we move that to greater than 75% now that we've been 4 quarters in a row at north of 75% episodic. It's the way of the future in this business. It is -- I think our peers have figured it out. We figured it out. Episodic is the right way to think of it. It's a fair reimbursement for great clinical care and great outcomes. And so -- but I wouldn't say there's parity between non-episodic and episodic. There's not parity, and it's why we do very little of it. And it hasn't hurt us. It hasn't -- our referral sources understand it. Our payer partners understand it. Just like PDS, they want more nursing, more therapy care, and they want a lower total cost of care for geriatric patients. So yes, you'll see us stay focused on this level of care with this payer, these payers being the focus. And it wouldn't shock me if we start touching 80% of our business on a go-forward basis. We are that committed to be an episodic provider in home health. [ id="-1" name="Operator" /> Next question, A.J. Rice with UBS. Albert Rice: First, just, obviously, you've made a big push and been successful in getting these preferred payers set up in the PDS business. I wonder if you have had enough time to sort of see over time how that relationship has evolved. Do you get annual updates consistent with what you've been getting historically? Have you seen it evolve in any way that's worth calling out? Jeffrey Shaner: A.J., thank you for the question. I think I would say we're in year 4 of our longest, most mature relationships, and we're in year 3 of a lot of the other relationships. So to your point, we're a couple of years into this. I think some of the things that kind of popped out of this that maybe we didn't know going into it or didn't strategize was some of the soft things like collections and working together to help specific high acute families get home and stay home. And just some of the other things like value-based agreement add-ons. The rate is what starts to -- rate and wage, so let me be specific. The incremental rate we get, the majority of it goes to wage as we've talked about now for 3 years to the nurses. But some of the soft stuff that then kind of adds on over time really becomes the value-based agreement, but also the collections. And we talked this year about having millions of dollars of better collections. And some of that is from calling our payer partners and having them help us with some aged accounts, and they've just been great partners on that front. So that's some of the soft stuff that's come. But I'll also say like they pick up the phone and just they'll call us on a tough patient that has been back to the hospital 3 or 4 times in a few months, and they'll ask us to dive in and really address that patient to help the family. And that's some of the benefits that we're able to get them. We don't ask for rate enhancements from our preferred payers every year. So we're thoughtful on when we go back to the well with them on needing some kind of COLA or cost of living. Sometimes that is every other year or every third year. So let me go back to some of those conversations. It's a productive conversation. It's how much do we need to move nurse wages to continue to meet their needs. And -- but I think as we said before, out of all 30 preferred payers, whether they've been with us for 4 years or 4 months, every one of them wants more of our nurses, and that is the constant theme we hear from all of our payers. Albert Rice: Okay. Maybe for my follow-up, just thinking about the organic and inorganic growth in PDS as well as in adult home care. Some of your peers are saying, if we can just get the final rate notice done, that could open the floodgates, give us more clarity on deals and where to look for expansion opportunities. Others are saying that's not enough. We need more clarity on the long-term reimbursement profile. On the PDS side, you're saying you're seeing a little caution in some states. I guess I'm just wondering, is there anywhere where you're thinking about leaning in more to new opportunities, growth, either organic development or acquisitions or where you're being a little more cautious? Jeffrey Shaner: I'll go back to who we are to start with. Almost 80% of our company is generated from our PDS segment. So that is the underpinning of Aveanna always has been and certainly is. We added 2 new states with Thrive. So we're now in 29 Medicaid states. I think Matt and I'd tell you, we'd like to be in about 38, maybe 40 total Medicaid states. There's a couple of key states that our large national Medicaid partners are in that we're not like Ohio, West Virginia, Kentucky, those states, we don't have any Medicaid presence there today. So over time, we'd like to fill those states in. But we want to continue to expand our Medicaid reach, both pediatric and adult. We're a skilled focused company, as you know, A.J. So we always lead with skilled services, nursing services, that is our focus. And then, I guess, Matt, pivoting back to home health, we're in a good position that only today about 10% of our revenue is in home health and hospice. We're big believers in home health. We believe home health is the right solution for American seniors, and we'd like to see a nice rule settle here. But Matt, how do you think about deployment? Matt Buckhalter: Yes. No, I just would go back to that. We're always going to continue to advocate on behalf of our patients and our families regardless of the industry, regardless of the division. We're going to continue to what we do best. We're going to deliver that exceptional patient care that people know us for. We're going to do that most cost-efficient setting in that patient's home. And then regardless of any policy changes out there, A.J., we're going to focus on that quality care, operational efficiencies and those close partnerships with our payers. We think that by maintaining those really high standards and demonstrating really good clinical outcomes, everything will work out in the long run here. I think we're well positioned with our size, scale and density and technology and our clinical outcomes that these partnerships will continue to grow and that will be on the right side of health care that we will be a cost savings to the health care system. [ id="-1" name="Operator" /> Andrew Mok with Barclays. Andrew Mok: Just a follow-up on the hours growth. Can you spike out the contribution of Thrive in the quarter and how volumes performed on a same-store basis? Because it still looks like a pretty meaningful increase year-over-year. And once Thrive is fully integrated, what's the annualized earnings contribution expected in that? Matt Buckhalter: Yes, Andrew, with the Thrive business, first off, it's a really great business. The team has done a really nice job integrating it into the Aveanna organization. Q3, to your point, reflects that full financial impact of Thrive. It was in there for a very full quarter on there. If you go back and look at our Q2 on an hours basis, we were mid- to high single digits out there. That's exactly organically what Aveanna was doing as well in Q3. The incremental, what you're seeing is from Thrive. What we talked about previously, Thrive is coming in at roughly $100 million of revenue and about 7.5x multiple from the purchase price post synergies itself. We're going to be just a little bit north about that, but the team has done a phenomenal job getting after synergies, integrating the organization and really bringing them into to be part of Aveanna. Jeffrey Shaner: I think Matt has said that well. Like we've been -- we guide people over 3 to 5 years that PDS should be in that kind of 4% to 5% organic growth rate. We've been a couple of points north of that now for 3 quarters plus. Q3 represented that organically, we were in that same kind of 6.5%, 7% organic and then the nice addition of Thrive. And again, I think as we came out of Q2, we guided people to think of Q2 as $79 million versus $88 million because of the $9 million of timing. And then we said there's a couple of million dollars or more of wage pass-through. So we thought that the organic business would land kind of in the mid- to high 70s, which is where it did. And then as Matt talked about, the addition of Thrive comfortably settled us right at that $80 million amount. And that's the full impact. We're wrapping up integration literally in the month of November, and we have some AR runoff into early mid next year as normal as the systems run off, but we're really putting the integration to bed here in the month of November and excited to go do it again. Andrew Mok: Great. I wanted to follow up on some of the comments around the uncertainty around state budgets and the indirect impact that might have on reimbursement. Are those comments more directional in nature? Or are there specific actions that states are taking that are driving that more prudent posture? Jeffrey Shaner: It's more directional in nature, but we spent the entire year talking to both governors, state Medicaid budget directors and the key majority leaders in almost 30 states. And it's been the same -- similar conversation in all 29 states, which is a little bit of uncertainty, a little bit of let's see how this shakes out, a little bit of we want to see how the OBBBA settles in. So I think at this point, most states have kind of figured out what it means to them. Some Wisconsin was a big winner this year. Wisconsin had a major increase to their Medicaid PDN rate. And -- but we had a couple of states who temporarily put in 2%, 3% reductions just so they could balance their 2026 budget. So we've seen a little bit of everything in the process. But I think as we think of '26 and '27, we think that, that generally in nature, there's going to be some headwinds that states have to work through. Matt Buckhalter: Yes. I think the diversity of the 29 states [Technical Difficulty] for a nice position for some states win, some states hold, some states are going to just be out there for a little bit, but that diversification is a positive for Aveanna. [Technical Difficulty] Jeffrey Shaner: Sorry, we didn't hear the question. John Ransom: You went on mute for a minute. So just going back to your payer relationships, you said you offer to bend the cost curve and it's an upside only deal. What does that mean exactly? And my follow-up is, does having a payer deal in pediatrics grease the skids for a payer deal in home health and hospice and Med Solutions? Jeffrey Shaner: That's great. Let me start with the second one because the second one is easier than the first one. And I'll use United or if you just think about United, our answer would be no. It's 2 totally separate sections of the payer itself. United Community, which is our Medicaid business is totally different than the United Medicare Advantage. We talk to both sides of United in this example, but the paths never really cross inside of their shop. So in most of our payer partners, talking to a Medicaid pediatric rate person is -- has very little benefit to the Medicare geriatric. Many times, they don't even know who the peer is in nature. So unfortunately, unfortunately, it doesn't bleed over. But going back to your first question about our payer contracts. So first of all, each of our 9 -- I think, 9 to date value-based agreements are in addition to an enhanced rate. So all of 30 of our preferred payers have an enhanced rate, which means enhanced wage for the nurse in those cases. All 9 of the value-based agreements are different in nature. Even some of those with the same payer, they're different. But most of them focus on really 2 fundamental things. One is fill rate, the amount of hours that we've been authorized to fill. And the goal is that we fill as many of those hours as possible. The payer wants us to fill 100%. Most of our targets are between 80% and 90%, where our goals are is to land between 80% and 90% fill rate. And then the second part is really HBR or MLR, however they think of it as some form of a target cost for the actual services that we provide and really tying to acute care spend, right? So reducing the acute care spend. Most of our 9 contracts have something to do with the 2 of them. There may be a third and fourth like customer satisfaction and other feedback from customers, but most of them are driven by HBR percentage and a fill rate target. John Ransom: And just to ask the obvious question, so the fact that you're -- you just have more nurses, you have more athletes on the field, you can -- one phone call from them, they can get more spots filled than calling 5 of your smaller competitors. Is it -- I know it's probably not that simple, but is that a big piece of it, I would think? Jeffrey Shaner: It's scale. They want scale. They want scale of nurses, but also scale of geography. They want technology. They want our clinical outcomes. They want the best. But yes, they want more nurses. And most of these payers, if you think of their geography, they're -- in a state like Texas, they're in both Dallas, but they're also maybe in South Texas. So it's urban and very rural, and they want both. They want you to cover both of those with equal tenacity. But yes, they want our alignment of our nurses and our scale with their scale of their other beneficiaries. But yes, that is -- you've nailed it. [ id="-1" name="Operator" /> Next question, Ben Hendrick from RBC Capital Markets. Michael Murray: This is Michael Murray on for Ben. We're getting a lot of questions on the sustainability of growth of the preferred payer relationships. Could you give us an idea of the room to run here? You targeted 30 in 2025. Any idea what the goal would be for 2026? And then what is the potential to increase the number of patients you take within a preferred payer relationship? Jeffrey Shaner: I guess I'll start with -- some people ask us what inning are you in, in the preferred payer strategy. And clearly, we're past the first inning, but we're way before the ninth inning, I'll put it in that way. We're somewhere in the middle of the story. We've added volume metrics in PDS. Our goal would be at some point in the future to add a volume metric in Med Solutions tied to the number of preferred payer accounts. If you think of our PDS volumes today, we announced this quarter, 56% of our MCO volumes are aligned with the preferred payer. I think that would tell you we're a little bit more halfway there. We've said before, we don't think that we'll get to 100% of the MCO volumes being with preferred payer, but we should get to the low to mid-80s and maybe one day, the high 80s in percentages over the next couple of years. So I think as we reset our goals, we met as a team a few weeks ago and started planning for '26. We're in our budgets as we speak now. As we reset our goals for '26, clearly, 30% is no longer the goal. We'll be somewhere in the mid- to high 30s, maybe even approaching 40%. But it's also the value and why we're looking for additional markets. I mean Thrive is a great example. I mean we added 2 brand-new states. We picked up a couple of preferred payers in those states right out of the gate, enhanced relationships. So I'd tell you, there's just -- there's still a long, long runway in front of us. And again, what we're doing in Med Solutions is exactly the same as what we've done in productivity services and Home Health and Hospice, which is define the preferred payers, define the target operating model and then align our capacity with those payers. And that's what you'll hear us talk about in '26 for Med Solutions. Michael Murray: And then I had a follow-up question on capital structure. I wanted to see what your intermediate leverage targets were. And do you anticipate hitting those through EBITDA growth? Or would you use cash flow to pay down debt? Matt Buckhalter: Great question, Michael. And obviously, once again, really impressed with the team being not only a free cash flow generating organization, but a meaningful free cash flow generating organization, $146 million of cash on hand in the quarter. That's phenomenal work from the team through cash collections and operations efforts. We're currently sitting at, what, 4.62x net leverage currently. I mean, we're down almost 3 turns of leverage this year. We were 2.77 turns last year. We've got line of sight to continue deleveraging the organization in the out quarters as well. We have an internal goal to make sure we have a 3 handle in front of that. I mean that's something we're going to be at. We probably won't be -- we won't be there wrapping up this year, but into '26 and into '27 to have a 3 handle in front of that. We'll be thoughtful with our dry powder. It's always nice to have dry powder sitting out there for some potential deals that might come through. But if it makes the most sense to the organization, we're not afraid of paying down debt at the same time. So I think thoughtfulness is what you should take away from this one. But right now, we're going to sit on that and see if any opportunities arise. [ id="-1" name="Operator" /> Next question, David MacDonald with Truist Securities. David MacDonald: Guys, just one left. Just kind of curious, wanted to piggyback on A.J.'s question from earlier. Just with regards to home health and some of the uncertainty there. I'm just curious, has that impacted the strength of the pipeline of opportunities there for you guys? And what would you kind of need to see in terms of the final rule to get comfortable starting to potentially more meaningfully deploy capital there, just given some of the reimbursement uncertainty? Jeffrey Shaner: Yes. It's a great question, David. And we've had a lot of -- there's been a lot of activity in the last 6 months, small, medium-sized activity in both Medicaid and Medicare, both home health and hospice on the Medicare side from an M&A standpoint. And we've looked at a bunch of little or tuck-in type opportunities on both Medicaid and Medicare. We've not been in a position today where we've been ready to pull the trigger on a home health or hospice asset pending the final rule. Our expectations are that the rule would be somewhere close to neutral to 0. That's probably a little bit of aggressive expectation, but that is the ask that we have on hand, as you know, from the industry at large, is basically a multiyear pause and no cuts. We will leverage the 78% of the business to grow the 10% of the business. We've said that before, we mean it. So we'll leverage our Medicaid book to grow on the Medicare side. We're really not a hospice buyer at mid-teens multiples, right? So we're more disciplined as a buyer. We like to buy where we can buy in the high single digits, low double digits and have a clear path to mid double -- sorry, mid-single digits post synergies. So we'd like to see something that is close to 0 or effectively 0 as -- by the way, we expect to see that next week. So our intel says that, that probably is coming out late next week or certainly the following week. So we will know soon enough. And I think for all of us, as you know, David, it's just getting certainty. Just give us a certain answer that we can read into the future with this administration and then we're ready to go to work. [ id="-1" name="Operator" /> I would like to turn the floor over to Jeff for closing remarks. Jeffrey Shaner: Thank you, Stacy, and thank you so much for your interest in our Aveanna story. We look forward to updating you on our continued progress right after the first of the year. Thank you, and have a great day. [ id="-1" name="Operator" /> This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.
Operator: Greetings, and welcome to the Pebblebrook Hotel Trust' Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Raymond Martz, Co-President and Chief Financial Officer. Thank you, sir. You may begin. Raymond Martz: All right. Thank you, Christine, and good morning, everyone. Welcome to our third quarter 2025 earnings call. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer; and Tom Fisher, our Co-President and Chief Investment Officer. But before we start, I'd like to remind everyone that our remarks are effective as of today, November 6, 2025. Our comments may include forward-looking statements that are subject to various risks and uncertainties. Please refer to our SEC filings for a detailed discussion of these risk factors and visit our website for reconciliations of any non-GAAP financial measures mentioned today. Now let's jump into the quarter. We're pleased to report that our third quarter performance was in line with our outlook in a challenging quarter shaped by heightened geopolitical and macroeconomic uncertainty as well as an unfavorable holiday calendar shift, we again delivered solid operating results and industry-leading cost controls. This execution sets us up well for 2026, given the robust convention and major event calendars across our markets. Same-property hotel EBITDA totaled $105.4 million, in line with our midpoint, while adjusted EBITDA came in at $99.2 million, exceeding our midpoint by $2.2 million. Adjusted FFO per share was $0.51, $0.03 above our midpoint. Together, these results reflect the resilience of our operating model, our relentless focus on driving operating efficiencies and our disciplined cost management. On the ground, performance was led by our properties in San Francisco and Chicago, alongside strong contributions from several of our recently redeveloped resorts, including Newport Harbor Island Resort and Jekyll Island Club Resort. Turning to portfolio trends. Same-property occupancy increased nearly 190 basis points, while ADR declined 5.4%, resulting in a 3.1% decline in RevPAR and a 1.5% drop in same-property total RevPAR. If you exclude Los Angeles and Washington, D.C., our 2 most challenged markets in the quarter, total RevPAR actually was up 0.6%. The decline in ADR was primarily driven by competitive pricing in D.C. and L.A., stemming from disruptions related to the ICE activity and the National Guard deployments. We also saw more demand coming through lower-priced booking channels, offsetting softer group attendance and government travel. Even so, occupancy increased in 6 of our 7 urban markets and across nearly all of our resorts. San Francisco was once again the standout. RevPAR rose 8.3% in Q3 on a 690 basis point jump in occupancy, driving EBITDA higher by 10.9%. Growth was broad-based with increases fueled by an active convention calendar and a continued recovery in both business travel and leisure demand. Results would have been even stronger but for the massive Dreamforce citywide convention shifting into October from September of the previous year. Importantly, positive momentum continues in San Francisco with a very strong fourth quarter well underway. No doubt, San Francisco has gone from a laggard to a leader led by the AI revolution, which is headquartered in the city and by San Francisco's tremendous progress in becoming a cleaner, safer and more vibrant city. Chicago also posted another solid quarter with RevPAR increasing 2.3% on healthy leisure events such as concerts and sports, improving weekday corporate travel and stronger weekend leisure. These positive results were achieved despite Chicago facing an extremely difficult comp to last year when the city hosted the Democratic National Convention in August. Both San Francisco and Chicago continue to pace well through year-end and into 2026, which reflects one of the many reasons we're more constructive on next year. Our resort portfolio also remained resilient with total RevPAR increasing by 0.7%, led by exceptional growth at Newport Harbor Island Resort, where RevPAR jumped 29% and total RevPAR surged an impressive 35.9% versus its pre-renovation performance in 2023. Jekyll Island Club Resort generated an 8% RevPAR increase with total RevPAR growing over 11%, while Estancia La Jolla's RevPAR rose 5.7%. These properties illustrate the power of our redevelopment program, which is driving market share gains and growing profitability as these properties climb towards stabilization. Across our urban markets, performance was more mixed. Urban total RevPAR declined 2.7% as strength in San Francisco and Chicago was offset by ongoing weakness in Los Angeles and Washington, D.C. and the lighter year-over-year convention calendars in Boston and San Diego. Washington, D.C. was our softest market, with RevPAR down 16.4% due to reduced government and government-related travel demand and lower tourism activity. We expect these challenges to persist throughout much of Q4 given the federal government shutdown. However, the setup in D.C. should improve significantly in 2026 with more normalized federal travel, a favorable convention calendar and numerous America 250 events. In Los Angeles, RevPAR declined 10.4%, driven entirely by rain. Greater price competition emerged from the negative impact of the devastating fires earlier in the year and the pressure did not decline in Q3 as the ICE rates and National Guard deployments created a perception of disruption and safety concerns, driving continued rate pressure. Conditions are stabilizing as the political environment cools and entertainment production gradually improves. So we expect L.A. to only be a minor headwind in the fourth quarter. Boston and San Diego experienced year-over-year declines attributed to lighter convention calendars in the city as well as softer group attendance. San Diego has also been negatively impacted all year by the significant cutback in federal government travel. That said, both markets continue to exhibit steady underlying trends in leisure and business travel. On a monthly basis, July same-property total RevPAR decreased 1.1%. August was essentially flat and September fell 3.3% with the midweek timing of the Jewish holidays being a major headwind for September as expected. On the revenue side, same-property out-of-room revenues grew 1.7%, supported by stronger event space utilization, elevated food and beverage performance and the benefit of upgraded amenities across our redeveloped properties. Transient demand strengthened by 3.8% in Q3 as the booking window remains shorter, aided by growth in our wholesale and consortia channels. Group occupancy declined by 2%, primarily due to lighter-than-expected attendance at health care, education and government attended or related events. This trend is consistent with the national data STR has been publishing, which we also highlighted last quarter. On the operating expense side, execution remained excellent. Same-property hotel expenses before fixed costs rose just 0.4% year-over-year. And on a per occupied room basis, expenses declined about 2%. That's another quarter of exceptional operating discipline by our hotel teams and asset managers, creating efficiencies and lowering operating costs. Turning to LaPlaya in Naples, Florida. Our weather resiliency improvements are just a week or 2 away from being substantially complete. We expect LaPlaya to generate approximately $36.6 million in adjusted EBITDA this year, including both hotel EBITDA and BI income. This compares to $42.8 million in 2024, which benefited from elevated BI collections following Hurricane Ian. On the capital side, we invested $14.2 million in the quarter and remain on track to invest $65 million to $75 million this year, reflecting a return to a normalized capital investment pace following our now completed multiyear redevelopment program. This lower run rate supports higher discretionary free cash flow and gives us more balance sheet flexibility. We also entered into an agreement to sell one of our hotels for $72 million with a buyer having provided a nonrefundable deposit under the contract. Consistent with the purchase agreement, we can't disclose a specific hotel or buyer at this time. The property has been classified as held for sale, and we expect the transaction to close in the fourth quarter, subject to customary closing conditions. That said, there is no assurance that the sale will be completed on these terms or the time. The potential disposition is not reflected in our fourth quarter or full year outlook. Shifting to our balance sheet. We remain extremely pleased with the successful $400 million offering of 1.625% convertible notes we completed in September. We used these proceeds to retire $400 million of our 1.75% convertible notes due 2026 at a 2% discount to par, leaving a very manageable $350 million outstanding. We also concurrently repurchased $50 million worth of common shares during the quarter at a significant discount to NAV, which is accretive to FFO and NAV per share. We ended Q3 with $232 million of cash, and we expect to generate over $100 million in free cash flow by the end of 2026. Our plan is straightforward: use cash on hand and free cash flow to take out the remaining convertible notes maturing in December 2026. All told, it was another quarter of disciplined execution amid a choppy and uncertain demand backdrop. And with that, I'll hand it over to Jon to provide more details on the third quarter, our outlook for Q4 and a look ahead to 2026. Jon? Jon Bortz: Thanks, Ray. When we look at the industry's performance, the third quarter looked a lot like the second, only a bit softer. Demand was slightly down year-over-year, and that caused renewed pricing competition, which led to a lack of ADR growth. Group demand was most pressured. It was lower in all 3 months due to reduced government travel, weaker international participation at conventions and conferences and some increasing attrition. Transient demand, including leisure, held up better. It remained positive versus last year. That mix favored weekends over weekdays for the broader industry and for Pebblebrook. In terms of industry performance by price point or scale, there remains a sharp divide between the upper and lower ends of the market. Premium hotels and resorts continue to perform better, while the bottom half is seeing much more weakness as cost-conscious consumers pull back on their discretionary spending. In Q3, we faced the same fundamental challenges as the industry, but the localized disruptions in L.A. and Washington, D.C. drove our third quarter performance below the industry average. To put that disruptive impact into perspective, L.A. and D.C. represented roughly $7 million of the $7.9 million year-over-year decline in same-property hotel EBITDA. Throughout our portfolio, we continue to see a recovery in business transient travel. Like the industry, group room nights and group revenues were slightly negative in the quarter versus last year, while business and leisure transient demand continued to improve. Due to the resiliency of leisure demand, weekend occupancies were up all across our portfolio, urban and resort, demonstrating the continued appeal of our high-quality properties, especially for leisure and social group customers. Weekday occupancy also grew due to the continuing recovery in business transient travel and our team's focus on replacing group and government shortfalls and rebuilding overall occupancies through discounted wholesale and consortia channels. I'd also like to briefly highlight the performance at our redeveloped properties because it's a key part of our improved performance in '25, and it should provide a similar boost in 2026. We praised the terrific performance of Newport Harbor Island Resort last quarter, and it deserves that praise again this quarter. In Q3, Newport led the way in our portfolio, delivering $11.8 million of EBITDA in its most important seasonal quarter, up $2.9 million year-over-year on a 21.6% total revenue increase and strong flow-through. That's exactly the ramp we expected from the comprehensive $50 million transformation completed last spring. That's a higher quality overall resort experience with more compelling venues, delivering increased event capacity and a richer food and beverage mix, all together driving higher ADRs and higher out-of-room guest spend. For the full year, we now expect Newport to generate almost $17 million of EBITDA, ahead of the $13.6 million at acquisition and much higher than our forecast just 90 days ago. We're very excited about Newport's future. Hats off to the resorts operating team. And 2025 is just our first full year of post redevelopment operations. So we believe the resort is well positioned to generate even stronger performance over the next few years as it continues its ramp and it benefits from increased exposure to group and leisure demand. And Newport is just one example of the benefits of our strategic redevelopment program. Our comprehensively upgraded and transformed hotels and resorts across our portfolio are gaining share and growing cash flow with more runway ahead. This includes, among others, Estancia La Jolla, Chaminade Resort & Spa in Santa Cruz, Hotel Zena and Viceroy in D.C., 1 Hotel San Francisco, Hilton Gaslamp, Margaritaville Gaslamp, L'Auberge Del Mar and Jekyll Island Club Resort. These properties are demonstrating the benefits of the transformative nature of our redevelopment program through sustained market share gains, higher out-of-room spend and higher profitability. Operationally, our teams again did the hard things well in the quarter. They found efficiencies and controlled costs. Same-property total expenses were limited to just 0.7% growth. On a per occupied room basis, costs declined. That's a direct result of our team's relentless focus on improving every aspect of our operating cost structure through our strategic productivity and efficiency program. On the technology front, we continue to pilot AI-enabled tools aimed at improving hiring, retention, service delivery, cleanliness and overall productivity across our portfolio. The pace of AI and robotics innovation is accelerating rapidly, and we're working closely with Curator to identify and implement the most impactful solutions. We expect the hotel operating model to look quite different in a few years from now, and we intend to stay ahead of that curve. We've also begun implementing some of the new technologies aimed at reducing energy and water usage, and we're investing in new systems, including solar and HVAC upgrades, where the ROI is compelling. Now shifting to the fourth quarter. We remain cautious on Q4 given the macroeconomic outlook and the ongoing uncertainty related to the government shutdown, tariff policy, governmental efforts to reduce government spending and the ultimate impact of these policies on the economy. While it's becoming increasingly clear where the level of most travel -- tariffs, sorry, are likely to settle, particularly with the most recent events in Asia, we believe both businesses and consumers remain more cautious until there's more clarity on the details of these agreements and until the shutdown ends. Economists agree as they continue to forecast slower growth in the near-term. Specifically, the government shutdown now in its sixth week is clearly hurting travel. Government travel and travel to visit with the government is down all over the country, and it's obviously much more pronounced in Washington, D.C. Many business and leisure travelers are becoming more hesitant about air travel while the shutdown persists. Unfortunately, we've seen a notable increase in government and government-related cancellations everywhere, and we've experienced slower pickup in many markets around the country, especially in D.C. and to a lesser extent, in San Diego. This negative impact is now showing up in the STR numbers for the industry. RevPAR growth, which was primed for a very positive October is now trending closer to slightly negative for the month. Our preliminary October results were more favorable. Total RevPAR increased approximately 4%. This illustrates the benefits of our high-quality properties and the added and enhanced venues, event spaces and amenities throughout our portfolio. Our concern, of course, for the rest of the quarter is that, air travel is likely to be impacted at increasing levels as the shutdown lengthens and then the recovery may be more gradual once the shutdown ends. DOT's announcement last night of a 10% reduction of flights beginning Friday won't help demand unless it leads to a quicker resolution of the shutdown. As a result, it's difficult to forecast the rest of Q4, but our current outlook assumes the shutdown will end soon. As of October 1, our revenue pace for Q4 was ahead of last year by 2.1% or $2.6 million. This represents an improvement from 90 days ago. With the government shutdown lasting the entire month of October and already a week in November, the positive pace for Q4 has likely been negatively impacted, but we don't yet have data on that, and we won't for a few more days. Our Q4 outlook assumes same-property RevPAR will range between minus 1.25% to up 2%, with total RevPAR between a negative 1.25% and a positive 2.7%. On the cost side, due to the benefits of our strategic efficiency and productivity efforts, we expect total hotel expenses to grow just 0.8% at the midpoint. That means expenses per occupied room should decline again in Q4. As we look ahead to 2026, we remain cautiously optimistic due to our belief that fundamentals provide a favorable setup for next year. We believe macroeconomic uncertainty will fade. Hotel demand is likely to normalize with GDP growth, and we know new supply will remain at historically low levels. I know there are many professional prognosticators who are currently forecasting limited RevPAR growth for 2026, but there are several significant pluses for next year, both for the industry and specifically for our portfolio. Let's start with prospects for favorable demand growth in 2026 and a return to the positive correlation between GDP growth and hotel industry demand growth. I know some skeptics out there believe there's no longer a correlation, but we don't fall into that camp. As the monkey is saying, I'm a believer, we strongly believe that our industry has experienced a unique set of factors that have temporarily disrupted the correlation. And as these factors fade or disappear, demand growth should resume its positive historical connection to GDP growth. Listen to these numbers for annual hotel room night demand growth beginning back in 2010. 2010, 7.2%, coming out of the Great Financial Recession. 2011, 4.6%, still recovering from the GFC. 2012, 2.8%; 2013, 1.5%; 2014, 3.9%; 2015, 2.4%; '16, 1.6%; '17, 2.2%; '18, 2.2%; and 2019, 1.5%. Pretty consistent and healthy demand growth for every year in the economic cycle. I'm going to skip '20 to '22, which were pandemic impacted with huge negative and then positive volatility. So for '23, demand growth was 1% with continuing normalization from the pandemic growth blip in '22. 2024, 0.6% with the first 3 quarters of normalization. And for 2025 year-to-date through September, it was negative 0.2% with massive disruptions from government cutbacks, material declines in international inbound travel due to nationalistic rhetoric and significant economic uncertainty due to arguably the most significant policy uncertainty in the past 50 years. Could there be more material disruptions in the future? Of course, there could be. However, we believe it's more likely that much of this uncertainty dissipates and the business and investment-friendly legislation passed a few months ago, combined with the benefits of significant deregulation will finally begin to kick in, in a very favorable way and provide a nice tailwind for the macroeconomic environment in 2026. And the supply picture continues to provide a fundamental tailwind for the industry and for us in our markets. There is very little supply being added in the industry, and new construction starts continue to run lower than deliveries. Given that it takes 3 to 4 years to deliver new high-rise urban or resort properties from the first shovel in the ground, the runway for recovery and improvement is long. Whenever we get to the runway, which we hope is next year. The other significant tailwind for 2026 is that, the holiday calendar next year is meaningfully more favorable than 2025. For example, for all you sweet hearts out there, take note, Valentine's Day falls on a Saturday next year versus a Friday this year. The gang here is cracking me up. And it also falls over the President's Day weekend, creating the potential for a much stronger leisure weekend with less midweek disruption. Juneteenth shifts to a Friday from a Thursday, reducing the negative impact on a weekday business travel -- on weekday business travel from the holiday. July 4 moves to a Saturday from a Friday, creating the perfect weekend for all the America 250 celebrations. The Jewish holidays in the fall occur either over a weekend or a Monday, thank God, causing less of a negative impact on business travel for those 2 weeks. Halloween falls on a Saturday next year versus a Friday this year. That's a definite treat for less midweek disruption. Christmas provides a nice gift by moving closer to the weekend, creating a more favorable long weekend for holiday leisure travel and New Year's Eve also moves closer to a weekend, creating a better pattern for leisure travel to celebrate the year-end. The hotel industry will also benefit from a uniquely active major events calendar next year. Numerous cities will be boosted from the World Cup being hosted in the U.S. and from many activities surrounding America's 250th anniversary celebration. For Pebblebrook, we expect to benefit from all these tailwinds as well as a few of our own. Based on what we know today, we believe we'll outperform the industry next year. Our redeveloped properties, which are still ramping up, will contribute to this outperformance. Several of our urban markets, including San Francisco, Portland and Chicago, are primed to continue their recoveries. L.A. comps will be much easier due to the negative impact from the fires and other safety-related disruptions. D.C. too has easy comps for next year, along with a stronger convention calendar. On top of that, we expect to see significant incremental demand from a multitude of major events across our portfolio, 28 World Cup matches across our markets, featuring 8 matches in L.A., 7 matches each in Boston and Miami and 6 in San Francisco. NCAA men's basketball tournament rounds in 4 of our markets, the 250th U.S. anniversary celebrations in D.C., Boston and likely other cities, the Super Bowl in San Francisco, the NBA All-Star game in Los Angeles and the College Football National Championship game in Miami. While most of these major events have yet to put many rooms on the books for next year, except for the Super Bowl in San Francisco, our group and total revenue pace for next year are currently favorable. As of October 1, 2026 group room nights were up 4.1%, ADR is ahead by almost 3% and group revenues are up over 7% or $7.6 million over 2025. Total revenue pace, including both group and transient, is up by 6.1% or $9 million ahead of the same time last year. So while none of this guarantees a great year, the setup for 2026 is very positive. We've got a favorable pace. We have easy comps in L.A. D.C. should settle down. San Francisco is recovering very strongly. We've got significant upside from our numerous redevelopments. The holiday calendar is meaningfully more favorable next year. The uniquely strong calendar of events will materially benefit our markets and business uncertainty is likely to significantly dissipate as tariff policy is resolved and as business investment ramps substantially through AI and reshoring. As a result, we're optimistic about a positive trajectory for next year. By executing on our strategic plan, driving revenue, maximizing efficiencies and growing free cash flow, we're creating the foundation for strong, durable long-term value creation. We have a solid balance sheet, a redeveloped portfolio and a very favorable multiyear supply setup, which positions us well to take advantage of a growing economy. We just need the macro to finally fall into place without major disruptions. That wraps up our prepared remarks. Christine, we're ready to open it up for Q&A. Operator: [Operator Instructions] Our first question comes from the line of Gregory Miller with Truist. Gregory Miller: First off, very detailed and helpful commentary on 2026. I'd like to ask about San Francisco lodging performance given some encouraging trends as of late. I could ask several questions about how you see the market today, but I'll start with a few items in particular. Looking at CoStar data, there has been some encouraging room rate growth, especially during major convention citywides [indiscernible] and obviously, there are many potential citywide sellout days ahead in the next couple of quarters. I'm curious what you're seeing in terms of the level of confidence from hoteliers in the market to push room rates during high occupancy nights and any implications to your properties? Jon Bortz: Yes, Greg. So thanks for the focus on San Francisco. Obviously, it's an important market for us, and it's not been a good market for many years. But this year, it's really cranking on all cylinders at this point. And I think your question about rate is really where the market is heading, which is -- and there's a big opportunity that I think has begun to already be capitalized on to push rate, not just over the citywide dates where compression clearly occurs, but much more so on weekdays and certain weekends when there are major events in the city. But as it relates to weekdays, I think what we're seeing is regular Monday, Tuesday, Wednesday nights without a citywide are still selling out. And that increase -- very significant increase in demand is allowing our teams to push rate and do it with increasing confidence. And I think as that permeates through the market, I think we'll continue to see that. I mean we have a lot of rate growth to recover from 2019. And I think we've started to see it, but I think that will be a much bigger part of where we go next year in addition to obviously being able to take advantage of both Super Bowl, which, of course, will drive significantly higher rates as well as World Cup, which will not only drive rates, but even more importantly, drive significant occupancy growth in the market. Raymond Martz: And Greg, also just about your question of momentum building in '26. The convention center, the room nights on the books for '26, it's made a lot of really good progress since the start of the year, thanks to SF Travel is doing a great job with the new leadership there. Just to give you an example, they booked over 100,000 room nights or 100,000 room nights have gone definite for '26 since the start of the year. So that's about a 20% increase. So we started the year with '26 convention demand looking like it would be down in '25. It's actually now up in a pretty short amount of time. So it shows the positive momentum there. And the number of sellout nights we had, what, 44 days in '25 that we had over -- redeemed as kind of sellout nights, that's projected to increase in '26. So to Jon's point, we have more opportunities there for hull some great compression opportunities. Jon Bortz: And I think one of the things that's kind of unique about San Francisco, obviously, you've got a big factor in that AI and much of technology and biomedical is headquartered there. But a lot of the conventions and citywides that occur in San Francisco are corporate led. And as a result of that, corporate tends to book much more short term than the bigger associations do. So bringing in that major corporate-sponsored events like Microsoft Ignite, which is occurring here in November, where they just canceled out of 2 other markets for '26 and '27 and have signed up to be here in San Francisco. So we're really encouraged about the positive momentum there. Gregory Miller: That's all very helpful. Maybe switch gears on a different demand segment in San Francisco. We get a lot of investor questions that relate to transient corporate and specifically how the AI industry is impacting demand at this point or maybe the next couple of months. I'm curious if you could provide a little more context in terms of what you're seeing as of late and perhaps your expectations for the fourth quarter. Jon Bortz: Sure. Well, I mean, what we've been seeing and increasingly over the course of the year are more and more companies that we've never heard of. And they're booking not just transient business, they're booking in-house group, they're booking, recruiting people coming in, looking for jobs. They're booking training in our hotels in the marketplace. And some of these have grown to the point where they have their own conferences like Snowflake, which I guess, didn't exist, I don't know, at least certainly people didn't know about 3 or 4 years ago. So it's definitely having an impact on those Tuesday -- those Monday, Tuesday and Wednesdays that I talked about within the market. And so, it's extremely encouraging. They're also coming in. They're taking a lot of office space. Obviously, people have read the stories about these companies growing and they're taking space quickly after they take space because they're growing so fast. The other thing we've seen is, a significant number of IPOs of companies based in San Francisco over the last 6 months. And again, that's capital flowing into the industry that's being used for growth, and that growth involves to a great extent, high-caliber people being hired. Operator: Our next question comes from the line of Cooper Clark with Wells Fargo. Cooper Clark: You continue to make really strong progress on the expense side. Could you provide color on how much of that is the result of reduced headcount? And is it fair to assume we see labor costs moderate into '26? Jon Bortz: Yes. I mean I think -- I mean, I've been in the business since the early '90s. And through every cycle, we reduced the headcount of our hotels. Our people become more efficient, more productive, and that's continuing. There's additional tools that people can use. We're better at scheduling through utilization of these tools. We're making fewer mistakes. When it comes to scheduling, we're using third-party services less as a result of more efficient scheduling as examples. So we think that will continue. That's our relentless focus. And yes, I think the wage side because of the front-end loading of a lot of these city labor contracts, we think that next year, the wage rate growth will be less than it was this year, albeit a little of that will be offset by probably health care costs that are going to be -- that are going to grow at a higher cost -- a higher rate than they did this year. But overall, it should be lower in terms of the growth rate of those wages and benefits combined. But our focus is on everything that we do in our hotels. It's on how are we more efficient utilizing energy. There's new tools. There's better ways to operate our hotels to use less power, to use less water. It's good for the planet. It's good for the bottom line financially at the end of the day. It's what our customers want. It's more consistent with their values. It's focused on insurance, how do we lower insurance? How do we reduce accidents? Some of that is operating best practices. Some of that involves physical improvements and changes to our properties. How do we increase resiliency from weather? So we have less downtime and less damage. It's infrastructure improvements, roofing, window ceiling, new windows, sealants. It's all sorts of things through the portfolio. It's how do we reduce credit card commissions, how do we encourage people to pay by ACH? All of that is a focus. It's really every line item that we have on our income statements. And it's going to be a significant focus as far as the eye can see, particularly as we get new tools that are AI-enabled or boosted, robotics become a more important factor. And as the quality of that service becomes better, in fact, in many cases, likely better than what a human can provide ultimately. So certainly more knowledge individually. So we're very encouraged about where the opportunities are to lower costs as we move forward, improve the quality of work for our employees and deal with some of the shortages that are occurring and that we think will occur as a lot of our workforce ages and is not being replaced by others willing to do the same jobs. Cooper Clark: Okay. That's really helpful. And then shifting to L.A. I appreciate some of the more positive commentary on L.A. into the fourth quarter. Could you just talk about how we should think about L.A. into 2026, given what should be softer comps, but some continued challenges on the demand and labor side of things? I guess, said differently, do you expect L.A. to continue to drag on results from a RevPAR and EBITDA perspective over the next 12 months relative to the rest of your portfolio? Jon Bortz: Yes, Cooper, we -- well, we think actually it will be one of our better performers next year because of the easy comps, the recovery that we are seeing sort of renormalizing back in the market. And then the discussion and data that we're getting related to the future ramping of TV and movie production in the state based upon the approvals of those that are going before the film commission that's providing these grants. From what we see, the big ramp-up of that, there's a small increase that we should see probably not here in the fourth quarter, but in the first quarter of next year, but then a bigger ramp in the second quarter because there's a 6-month requirement that once the application has been approved that they start production in the market. So the doubling -- more than doubling of the credits that the state is providing for production in California is really kicking in by the middle of next year. So look, presuming we don't have any major events, we don't have political issues going on that disrupt the perception of safety or quality of life or the beauty of the visit. We think L.A. will be a big tailwind for us in the portfolio next year. Operator: Our next question comes from the line of Smedes Rose with Citi. Bennett Rose: I appreciate all your detail talking about next year. But I wanted to just ask you a little bit about maybe -- I mean you have an asset held for sale. Just kind of what are you seeing overall in the transaction market in terms of just, I guess, overall pricing? And where are you, I guess, going forward in terms of trying to execute on potential asset sales, assuming there's kind of a constructive transaction market? Thomas C. Fisher: Smedes, it's Tom. Thanks for the question. So I think just as a general backdrop, the transaction market has kind of been gyrating between risk-on and risk-off all year. The one constant throughout the year, however, has been the debt markets. The debt markets have been improving. They're getting more competitive. There's more availability, there's better pricing. And in some instances, it's actually becoming an alternative to a sale for many sellers from that perspective. Because I think on the equity side, again, it's kind of more risk-on, risk-off. I think would be government shutdown, would be kind of flat to negative operating performance that you see in the weekly and monthly stars. I think star reports, we're just kind of at a pause right now until there's a little more macro clarity. But what I would say to you is, over the course of the last 60, 90 days, we've seen, I think, a real pent-up demand by investors. You've seen some larger transactions take place. You've seen a return of some of the bigger private equity names. You've seen some of the owner operators. So I think there -- my sense here is that, there's just -- they're all just waiting for that catalyst. And I think if you listen to what Jon had indicated in our call about 2026, I think once things turn and there's better visibility, I think there's going to be a lot of pent-up demand for transactions moving forward. I think the risk-off situation right now is nobody really wants negative leverage and they're focused on smaller deals and those will continue. But until there's some clarity, I think we're going to be a little bit of a pause here. Jon Bortz: And I think from a strategy perspective, our focus continues to be to sell assets and use that capital to take advantage of the public-private arbitrage opportunity to buy our stock back, pay down debt, remain leverage neutral or slightly reduce leverage over time. But I think from the disposition perspective, there have been new entrants into the market. There's certainly a lot more high net worth individuals out there looking at lodging where they might not have previously because I think folks see the potential upside opportunity and the ability to take advantage of what are historically pretty low per key values, particularly as it relates to what has been continuously increasing, which is the replacement cost of hotels. So I think we're encouraged, but I think what we need, and we've continued to need and we've talked about this before is, we need operations to turn positive. It's hard for a buyer to buy into a market that's declining. They need to see things go up. Everybody is well aware of the long runway of limited supply growth, which will allow for both occupancy and rate to grow arguably faster than inflation, which is what it's done historically. But it's got to turn. So I think that's where we're going. And hopefully, we have fewer of these macro disruptions next year. Bennett Rose: That's helpful. And then I was just wondering, just -- you mentioned that you continue to see, which we hear generally across the states, a real discrepancy between higher-end leisure customers and then lower end. And just within your portfolio, what are a couple of examples, I guess, of sort of higher-end resorts where you saw solid maybe RevPAR gains year-over-year and maybe a couple where they were weaker, just given the composition of the customers that go to those properties? Raymond Martz: Smedes, well, there's a couple of other moving parts. I mean you take Newport Harbor as an example, which caters to people who are from Boston and New York. So we have a very strong leisure component there and also very strong corporate demand. Our demand has been tremendous there. As we cited during the call, the RevPAR up double-digit, 30-plus when you look at those levels over year-over-year. So those are examples where we're also benefiting from the redevelopment side there, but that's where we continue to have less price sensitivity. When you get to some of the markets, maybe in some markets, say, like in South Florida for Key West, there's a little more pricing sensitivity. But we've adjusted our revenue management strategies accordingly. So we actually did okay there. But like I think we're opening up channels to look at other sort of customer bases and doing our best there. But I think overall, the quality level of our hotels are so higher. We're a little more insulated versus if you start going down the quality spectrum, and you're seeing in STR numbers much more than our resorts. Jon Bortz: And I think a couple of other examples would be LaPlaya in Naples and Inn on Fifth in Naples, both luxury properties, a fair bit of insensitivity to pricing by our customers down there. L'Auberge Del Mar in Del Mar out in California would be another example of a property at much higher average rates, relatively small property where the customers, again, are relatively insensitive to pricing, but very sensitive to us providing them good service. So those would be a couple of other examples. Operator: Our next question comes from the line of Duane Pfennigwerth with Evercore ISI. Duane Pfennigwerth: Jon, on government shutdown impacts, given your time in D.C., any perspective on how quickly this activity can spool back up? Because if I think about this year, we already absorbed the DOGE impacts earlier in the year. I assume you had won some of that back, but maybe not all of that back, and now we have the shutdown. So I don't know if you covered it in your extensive 2026 event navigation, which was very helpful. But have you sized the impact from the government sector this year in totality? And how big of a tailwind could it be next year? Jon Bortz: Yes. It's funny. These things are a little harder to estimate. I mean we can look at where government is, and it's probably been down about 1/3 to 40% of what it was the year before. That probably represents, in total, about 1 point to 2 points of total demand for our portfolio and probably fairly similar for the overall industry, although probably more heavily weighted at the low to middle end, generally speaking. The shutdown is a different matter because it's impacting more -- way more than just government travel. It's impacting people who have discretionary travel, which is what most travel is at the end of the day. So it's more about people who get anxious about flying. It's more about people who don't want to put up or take the risk of cancellations or big delays that they're concerned about and that the media will be keen to report about. So it's a hard thing to measure, but it's material as is the continuing imbalance of international -- domestic outbound and international inbound. I mean you've got one that's at 120% of 2019 levels, and you have inbound in the 80s of 2019 levels. That could reverse, but it's going to take it sort of creating a different perception on the part of our government's desire to welcome people into the country. And frankly, we're not seeing that yet, although we hope to see that certainly for World Cup next year, which is something that's really important to the President and the administration. Duane Pfennigwerth: And then just relatedly, I ask you the same question I asked was, given that the assumption that we have a no storm fall and we're not like rebuilding this fall on the Gulf Coast, what does that allow you to do and thinking more about like 2026? Jon Bortz: So I think the first thing it allows us to do is sell a property that's not been damaged. One of the things we were hearing from clients in Naples, as an example, is, gosh, you've had all these storms in the last few years. We've had to move our meetings to other markets or other properties. Is this going to ever end? Or is this the new pattern? And having a year where there's no impact, I think, is helpful from a sales perspective. Certainly easier to sell when you don't have that. It's easier to sell when you have a property that's primed and in great condition, which is not what we had last year in terms of selling for this year. So I think it bodes well for, again, LaPlaya to ramp from $25 million of EBITDA this year to maybe closer to $30 million next year on its way to hopefully getting back to that $35 million or $36 million level of where it was heading in 2022. Operator: Our next question comes from the line of Michael Bellisario with Baird. Michael Bellisario: Jon, you mentioned attrition or increased attrition during the quarter. Can you dig in there a little bit more? What markets -- what segments did you see that? And presumably, that's continued into the fourth quarter? Just any added color on short-term booking trends would be helpful. Jon Bortz: Yes. I mean it varied through the portfolio in markets, but it was much more visibly related to government and government-related, but you don't always know what's government-related until the customer declares it. And in a lot of cases, it involves education. A lot of these conferences are supported by grants or the departments are supported by grants, which they're not getting, they're frozen or they don't expect to get, as you know, with the disruption going on with the universities. So a lot of it is related to those sectors. We're not really seeing it in technology. We're not really seeing it in medical, biomedical. We do see it some in other conventions where the attendance is lower and it relates to associations where the people are paying their own way. And you get some of that 3%, 4%, 5% falloff in attendance that results from that. So it's not something that -- I mean, interestingly, I think still on a year-over-year basis, our attrition payments were less this year than they were last year for Q3. So it's certainly not at a high level yet, but it's more clearly impacting those groups that are somehow related to government. Raymond Martz: Yes. So, Michael, we're not highly concerned with the attrition cancellation. It's not heading in a really bad direction, but it's certainly something we do monitor because it does go quarter-to-quarter because that's usually maybe early canary in the coal mine, so to speak, if companies are feeling differently about their spending. So nothing materially that we're concerned about, but we continue to monitor it. Operator: Our next question comes from the line of Jay Kornreich with Cantor Fitzgerald. Jay Kornreich: I just wanted to follow-up on the leisure transient side of the portfolio. The recently renovated resorts have all been performing quite well. But just curious, how would you characterize kind of the overall leisure customer and its price sensitivity these days? And as you look out towards next year, on the same-store part of the portfolio, do you feel like there's more upside from that leisure customer improving or more from the urban side of the portfolio? Jon Bortz: Well, interestingly, I mean, the leisure customer impacts our urban properties to a meaningful extent. I mean our cities are, in many cases, very heavily tourist destinations. And when I think about -- when we think about next year, I would say a couple of things. First of all, some of the few cities like D.C., as an example, and L.A., leisure has been meaningfully impacted this year. We should see a recovery next year. I mean when the government shuts down, the Smithsonians closed. Museums are closed here in town. There's not a lot to see here if you were a leisure guest. If you're a group coming from a high school or a middle school somewhere coming to spend their 3, 4, 5 days in D.C., they're not coming right now because there's nothing to do. So that's definitely something that should be a tailwind unless government is going to be shut down next year. And so, I think from a leisure perspective, as the economy improves, and leisure customers feel better about their jobs, I think leisure will continue to improve. I mean I think it's lost on people that if you -- we were trying to highlight this. If you look at the weekends in the third quarter, they were up year-over-year in occupancy and demand. So the leisure customer has been resilient, but they have become more price sensitive. And as you work your way down the price spectrum, they get more and more -- the customers at those properties are more and more price sensitive. And you're seeing it in the differing rate declines that STR reports every week and every month. Raymond Martz: And Jay, I think where we also counter our portfolio is a little bit different is all the redevelopment that we've completed over the last couple of years, that's paying huge dividends. So that's fighting through maybe some of the weaknesses that could be some of these consumers. If you look at our projects that we completed in '23 and '24, we've gained over 700 basis points of penetration over -- year-over-year. So that's a really a good direction there, which helps us counter maybe some weaknesses you may have in individual consumers. Operator: Our next question comes from the line of Aryeh Klein with BMO Capital Markets. Aryeh Klein: Jon, I appreciate all the color on the disconnect between demand and GDP growth. And I was hoping you can touch more on why you think that disconnect has happened? And what gives you the confidence that, that resolved? And I guess alongside that, do you think that the growth in AI investments where building data centers doesn't provide all that much benefit to lodging demand has distorted the relationship between the 2 and just that maybe the underbelly of the economy isn't all that healthy that can continue into next year? Jon Bortz: Sure. Well, I think the disconnect has a lot to do with some of these major policy disruptions and it has to do with sort of the normalization following the pandemic. I mean we had a big demand recovery. We had customers back in '22 as an example, that had no pricing sensitivity whatsoever. And you remember those comments we made about people buying up for suites, and that was the first product that went in our property and nobody really cared what anything cost because we couldn't even meet all the demand that was there. We didn't have the staff to service it. That had to normalize. And I think the other thing that's had a negative impact on that correlation is this international domestic imbalance, which is really large. And keep in mind, an individual who goes abroad or comes here is usually spending -- I mean, I think here, it's -- the average is somewhere between 10 days to 2 weeks abroad. I think it's a little more like 7 to 10 days of the outbound. But that differential has gotten really, really wide post pandemic, and it's not recovered. And so, I think that's a big part of it, too, Aryeh. I don't think it has anything to do with data centers and the GDP really isn't as good because you have to -- these things -- it's about direct and indirect, right? There's a lot of money being invested. Where is it ultimately going? Ultimately, it's going to go to people and businesses and corporate profits and wages and benefits and bonuses. And so, ultimately, it gets around to enhance the economy. And that -- it doesn't really matter all that much what it gets invested into unless it's -- I don't know, it would have to be something that went out of business really rapidly. But -- so I do think all that capital, I mean -- and it's not just data centers. You've got a lot of manufacturing reshoring. You have to have materials for that. You've got to ship that stuff. You've got to put it into place. You have to hire a lot of workers to do it. You have to rent a lot of equipment to build those things. You've got to build a lot of new electricity and buy all the equipment. I mean it goes on and on and on. And you still have the vast majority of the CHIPS money that hasn't gone out the door yet. You have a lot of the infrastructure bill money. I mean, you can just go online and ask how much of that money has gone out the door. The majority of it still has not gone out the door for infrastructure, but it's been authorized. So a lot of these disruptions, hopefully, international begins to normalize over time. It's not in our thoughts for '26. You noticed we didn't mention of that reversing. I mean the dollar, when it retreated in the first half of the year has recovered a lot of that retreat. That's not good for international inbound and it hurts outbound. So I think that's in the pocket. It's something that will ultimately normalize, but I wouldn't count on it for next year unless we see a reversal in the dollar. And some of this other rhetoric that's caused people to go elsewhere. Aryeh Klein: Maybe just a quick follow-up. Just for the World Cup for next year, any early thoughts on the magnitude or the potential tailwind that, that can add to RevPAR for next year? Jon Bortz: Yes. I mean I think some of the brands or prognosticators have suggested it's maybe 30 basis points or 40 basis points of improvement in RevPAR next year. I tend to think it's probably a little more than that for our portfolio given the number of matches that we have. The challenge is, I mean, we've gone -- we've done a lot of research on it with our teams. And if you go to the last World Cup, 70% of the business was booked within 30 days of the matches. What gets booked ahead of time, and we have started to see some of it is some of the group that is regardless of what team is playing and where they're playing. So we would expect it to be very last minute. We haven't announced the teams yet. There are some, obviously, that are -- that have already qualified, but still the majority have not. Not only have they not determined all the teams, but they haven't said where any of the teams are going to be playing. So all of that just means it's going to be pretty short term. But the other positive is, there's 50% more teams this year than there were last year, I mean, in the last World Cup. We've gone from 32 to 48 teams. That's also a big positive for the overall impact. So I think it will be -- I think a lot of it's going to happen late first quarter and second quarter and really the final 30 days before the matches in both June and July. And that just means everybody is going to hold out and keep things frozen until then. Operator: Our next question comes from the line of Chris Darling with Green Street. Chris Darling: Going back to San Francisco, we've obviously talked about how the market has plenty of momentum behind it. I think importantly, it seems like investor sentiment has really changed for the positive as well. With that in mind, Jon, curious where your head is at strategically in regards to your remaining exposure there. Do you think now might be the time to consider divesting some of your remaining assets? Or does it make more sense in your mind to sort of ride the recovery wave out over the next couple of years? Jon Bortz: Well, I think from a general perspective, all of our hotels are available for a buyer, particularly strategic buyers because of the flexibility of our properties, all of our properties in San Francisco can be available without management and brand. So ultimately, there's a lot of flexibility there. I think where we are is, it will depend on pricing. I mean there's going to be a really strong growth. We believe in that strong growth. I mean we think we have assets that we think will double or triple their yields over the next 3 years in that market. And we believe you could easily see double-digit RevPAR growth for the next 3 to 5 years there, given the recovery that's needed in rates, the momentum that's going on with the underlying industries and growing confidence as occupancy gets rebuilt here in the market. So we've got great political leadership there. At this point, I think it will just depend upon pricing, whether we would sell in that market or not. We would just have to take into account what we believe the growth levels are going to be. Operator: Mr. Bortz, we have no further questions at this time. I'd like to turn the floor back to you for closing comments. Jon Bortz: Thanks, Christine. Thanks, everybody, for participating. Sorry, we ran long. We had a lot of thoughts we wanted to convey. We look forward to talking to you in February next year, but I'm sure we'll speak to many of you at NAREIT in Dallas next month. Thank you very much. Operator: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
Operator: Good day, and thank you for standing by. Welcome to the Appian Third Quarter 2025 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, Brian Denyeau from ICR. Go ahead. Brian Denyeau: Thank you. Good morning, and thank you for joining us. Today, we'll review Appian's third quarter 2025 financial results. With me are Matt Calkins, Chairman and Chief Executive Officer; and Serge Tanjga, Chief Financial Officer. After prepared remarks, we'll open the call for questions. During this call, we may make statements related to our business that are considered forward-looking. These include comments related to our financial results, trends and guidance for the fourth quarter and full year 2025, the duration and impact of the current U.S. government shutdown, the benefits of our platform, industry and market trends, our go-to-market and growth strategy, our market opportunity and ability to expand our leadership position, our ability to maintain and upsell existing customers and our ability to acquire new customers. These statements reflect our views only as of today and don't represent our views as of any subsequent date. We do not intend to update these statements as a result of new information unless required by law. Actual results may differ materially from expectations due to the risks and uncertainties described in our SEC filings. Additionally, non-GAAP financial measures will be discussed on this conference call. Reconciliations of GAAP to non-GAAP financial measures are provided in our earnings release. With that, I'd like to turn the call over to our CEO, Matt Calkins. Matt? Matthew Calkins: Thanks, Brian, and thank you, everyone, for joining us today. In the third quarter of 2025, Appian's cloud subscriptions revenue grew 21% to $113.6 million. Subscriptions revenue grew 20% to $147.2 million. Total revenue grew 21% to $187.0 million. Adjusted EBITDA was $32.2 million. This quarter, Appian made big strides on our 2 efficiency metrics. Our go-to-market productivity ratio rose to 3.5. This is the ninth consecutive quarterly increase, see Slide 4. We keep getting more from our sales and marketing dollars, an intended outcome of our strategy over the last few years. In Q3, our weighted Rule of 40 score was 39, up from 31 last quarter. As a reminder, Appian's weighted Rule of 40 puts double weight on cloud subscriptions revenue growth compared to adjusted EBITDA margin. The AI revolution took an important turn this summer. Businesses started to realize that AI isn't as valuable unless it's connected to real work and that you need a process or a workflow to make that connection. The most important factor was probably the July MIT report that told us that 95% of AI implementations were getting no return. As MIT wrote, "The standout performers are those embedding themselves inside workflows. And people are getting the message. Looking at Google Search trends, the term AI moderately increased over the past 12 months, but the combination of AI in terms like process and workflow spiked this summer. News outlets like Forbes and Fast Company are publishing headlines like why AI isn't delivering the value you expected and good AI innovation means focusing on workflow, not cutting jobs. This trend also matches my personal experience and customer conversations. I see corporations quickly losing interest in stand-alone AI deployments and favoring the use of AI in the context of a process. This new realization is not a surprise to Appian nor to you if you've been listening to our calls for the last couple of years. We have said consistently that AI forms one corner of an essential trio of technologies and AI triangle, if you like, in which AI is dependent upon each of the others. I've never had trouble convincing people that AI is only as good as the data you give it. It's obvious that AI agents cannot research cases, reach conclusions, solve problems or get smarter without 360-degree access to data. Our data fabric remains the gold standard in providing data to AI without having to migrate it. Only recently have people started naturally agreeing with my second assertion that AI is only as good as the work you give it. AI will add more value if it works on the more valuable tasks. And the most valuable tasks involve many workers and many steps and are coordinated in a process. As such, process is an essential tool in connecting AI to meaningful work. With industry-leading process technology, we offer the missing link between AI and today's most important jobs. When you combine AI, data and process, you can address bigger work and create bigger value. We call this serious AI. It's an exciting crossroads at which to do business, and we are not new here. Appian has orchestrated enterprise business processes for over 2 decades. We are recognized by industry analysts as a leader in process orchestration, business workflow automation, digital process automation and most recently, the inaugural Gartner Magic Quadrant for business orchestration and automation technologies. I'd like to share with you a few examples of serious AI. First, a global pharmaceutical company and 7-figure cloud ARR customer manages its global anti-bribery and corruption practices on our platform. Appian already automates the company's highly regulated process for approving interactions with external health care practitioners and vendors. However, cycle times are slowed. By the many human reviews the customer built into its process. In Q3, it purchased a 7-figure software deal to deploy Appian AI. Now our agents will ingest hundreds of thousands of requests, validate compliance and recommend a status. This major pharma company expects to speed up the critical process by 80% with Appian. Next, a U.S. military command became a new Appian customer in Q3 and will use our platform to automate end-to-end warehouse fulfillment processes. Upon receipt of goods, Appian AI agents will extract shipment data and open a case on our platform, so warehouse workers can validate the package and approve it for distribution. Meanwhile, back-office staff will track fulfillment status and coordinate logistics. Before Appian, the organization had prolonged distributions because its processes were disjointed and manual. Now the combination of Appian AI and data fabric will reduce processing time from weeks to minutes. Customers see strong quantifiable value using Appian AI in their core processes. Organizations have reported 36% reduction in invoice processing times, 83% faster patient intake, 3x faster audit processing and 95% automation of the order management process, good ROI, and they're willing to pay for it. Today, over 1/4 of our customer base pays for Appian AI. Of those paying AI users, nearly half use our AI-powered intelligent document processing or IDP. This is a really powerful offering. Appian IDP agents can ingest a wide range of complex documents from unstructured e-mails to medical reports and insurance claims. Our agents read documents with 95% to 99% accuracy, which is significantly better than the 60% accuracy rate of traditional document recognition technology. For example, one international insurer uses Appian IDP to optimize its underwriting processes and save millions of dollars a year. These strengths are why Gartner ranked Appian #1 in automated processing use cases for IDP in their 2025 Critical Capabilities report. Appian IDP agents take autonomous action. They explore data from across the enterprise to inform their decision-making on each new document. Once they contextualize and understand the incoming document, they launch actions in the form of Appian processes. For example, a global insurer purchased a 7-figure cloud software deal to automate its underwriting process and became a new Appian customer in Q3. Appian's AI agents will ingest e-mails and policy forms, open cases and automatically decline ineligible submissions. The insurer expects to improve its auto declination rate by 20% and grow its written premiums practice to $10 billion within the next 3 years using Appian. Early in 2024, we launched an AI product for improving government procurement. You may remember it, it's called ProcureSight. We collected a ton of publicly available government procurement data sets and connected that to our process technology so our users could publish smarter RFPs. 96 U.S. government agencies and sub-agencies have adopted it so far. Now customers are purchasing advanced levels of the offering to embed the AI into their procurement workflows and connect it to both public and private data sets. For example, a U.S. Air and Space agency already automated its contract writing process with Appian technology. This quarter, it signed a 7-figure deal to automate additional phases of its procurement process with more prebuilt Appian solutions featuring AI. I usually talk about releases after they happen, but we have a big one in 10 days, and I'd like to share it with you now. We're launching a major feature called Agent Studio that's going to enable the most powerful agents we've ever made with easy code-free natural language configuration. This is a highly anticipated feature judging by the oversubscription on the beta program and the widespread pre-GA deployment. The technology is poised for broad usage on release to triage customer complaints, initiate credit checks and loan applications and conduct background reviews. Most of you are familiar with Appian's multiyear quest to focus on the top end of our market. Appian has a particular advantage upmarket, and it shows in the data. Appian suits the needs of the executive buyer and the large enterprise and the mission-critical use case. Compared to last Q3, Appian booked over 50% more new 7-figure software deals. We're pleased with our federal sector performance this fiscal year, which grew faster than our overall business. Our upmarket strategy will continue to drive momentum in the U.S. public sector once the government reopens. I'll share 2 big wins from Q3. First, a major restaurant franchise operator plans to open 1,000 new locations next year. In Q3, it purchased Appian Cloud licenses and became a new customer after the Chief Technology Officer of a peer organization endorsed our platform. The customer's restaurant opening process used to take several months because the franchise and third parties worked across siloed systems. Now it will use Appian to unify the enterprise and create a comprehensive workflow to reduce opening time lines by 40%. Finally, a U.S. military branch and existing Appian customer is under executive mandate to modernize core systems and improve operational agility within a fixed time period. This quarter, it purchased Appian software to decommission and flexible systems supporting its complex incident management process. Now Appian will provide a consolidated and more feature-rich application to manage hundreds of thousands of cases annually. Appian's serious AI offering and upmarket strategy continue to drive our growth while expanding margins. I think you can see in the fact that 25% of our customers now pay for AI and in our 50% increase in 7-figure deals. and in our 9 quarters of rising go-to-market efficiency and in our adjusted EBITDA margin of 17% the power and timeliness of our business model. With that, I'll hand the call to Serge. Srdjan Tanjga: Thanks, Matt. I'll begin with a detailed review of our third quarter results and then finish with our outlook for the fourth quarter and full fiscal year 2025. Starting with our Q3 results. Appian exceeded the guidance ranges we provided in our key metrics of cloud revenue, total revenue and adjusted EBITDA. Strength in the quarter was driven by the traction we are seeing with AI and continued momentum in our focus on the high end of the market, as Matt mentioned in his remarks. Cloud subscription revenue was $113.6 million, an increase of 21% year-over-year. On a constant currency basis, cloud subscription revenue increased 18% year-over-year for the fourth straight quarter of growth in mid- to high teens. Total subscription revenue was $147.2 million, an increase of 20% year-over-year. On a constant currency basis, total subscription revenue grew 17%. Professional services revenue was $39.8 million, up 29% compared to the third quarter of 2024. As a reminder, services revenue can be volatile quarter-to-quarter. Subscription revenue represented 79% of total revenue compared to 80% in the year ago period and 78% in the prior quarter. Total revenue was $187 million, an increase of 21% year-over-year. On a constant currency basis, total revenue grew 19%. Slide 8 of our earnings presentation shows the history of our constant currency growth rates. Our cloud subscription revenue retention rate was 111% in Q3 compared to 117% a year ago and 111% in the prior quarter. Our international operations contributed 40% of total revenue compared to 36% in the year ago period. Cloud net new ACV bookings were approximately 90% of total net new software bookings in Q3 compared to 88% in the prior year. Q3 cloud net new ACV growth was the strongest we've seen so far this year. Now let's turn to profitability metrics. I'll be discussing our results on a non-GAAP basis unless otherwise noted. Gross margin was 77%, unchanged from the year ago period and compared to 75% in the prior quarter. Our subscription gross profit margin was 88% compared to 89% in the year ago period and 87% in the prior quarter. Professional services gross margin was 34% compared to 30% in the year ago period and 33% in the prior quarter. Total operating expenses were $113.6 million, up from $110.2 million in the year ago period. The 3% growth in OpEx reflects both our continued focus on efficiency as well as approximately $6 million in marketing, training and consulting expenses that were originally forecast in Q3, but we now expect to incur in Q4. Adjusted EBITDA was $32.2 million versus our guidance of $9 million to $12 million and compared to adjusted EBITDA of $10.8 million in the year ago period. This outperformance relative to our guide was largely driven by greater-than-expected revenue as well as the timing of expenses I just referenced. Net income was $24.4 million or $0.32 per diluted share compared to a net income of $1.8 million or $0.02 per diluted share for the third quarter of 2024. This is based on 74.6 million diluted shares outstanding for the third quarter of 2025 and 74.2 million diluted shares outstanding for the third quarter of 2024. Turning to our balance sheet. As of September 30, 2025, cash and cash equivalents and investments were $191.6 million compared to $159.9 million at the end of last year. For the third quarter, cash provided by operations was $18.7 million compared to $8.2 million cash used by operations for the same period last year. Turning to guidance. For the fourth quarter of 2025, cloud subscription revenue is expected to be between $115 million and $117 million, representing year-over-year growth between 16% and 18%. Total revenue is expected to be between $187 million and $191 million, representing year-over-year growth between 12% and 15%. Adjusted EBITDA for the fourth quarter of 2025 is expected to be between $10 million and $13 million. Non-GAAP earnings per share is expected to be between $0.04 and $0.08. This assumes 74.5 million fully diluted weighted average shares outstanding. For the full year 2025, we are increasing our guidance for cloud subscription revenue and total revenue. We're also increasing our overall adjusted EBITDA range for the year. Cloud subscription revenue is expected to be between $435 million and $437 million, representing year-over-year growth of between 18% and 19%. Total revenue is expected to be between $711 million and $715 million, representing year-over-year growth of 15% to 16%. Adjusted EBITDA is now expected to range between $67 million and $70 million for an approximately 10% margin at the midpoint of the range. Non-GAAP earnings per share is expected to be between $0.50 and $0.54. This assumes 74.6 million fully diluted weighted average shares outstanding. Our guidance assumes the following: First, we anticipate term license revenue to be flat on a year-over-year basis in Q4 and to grow in the mid-single digits for the full year. Second, we expect professional services to grow in the teens for both the fourth quarter and the full year. Third, total other income and interest expense will be approximately $3.2 million in Q4 and $13.8 million for the full year 2025. Fourth, our guidance assumes FX rates as of early in November. Finally, I want to explain how the ongoing government shutdown is reflected in our guidance. We've been cautious in our approach, and we assumed a modest amount of disruption in our guidance. However, we do assume that the government will reopen in the coming weeks. Since we don't know how long the shutdown will last, we wanted to help you understand the impact on our guidance in a hypothetical scenario that the shutdown continues through year-end. In that scenario, we believe that we could -- there could be up to $10 million impact versus this revenue and EBITDA guidance. The vast majority of this scenario impact will be to our term license revenue, a meaningful portion of which is related to renewals. We would expect only a small potential impact to cloud subscription revenue and professional services margin in this scenario. We are confident that whatever impact we might see from the shutdown in Q4 is just a function of timing. In closing, we're pleased with our Q3 results, particularly our continued improvements in profitability. We're energized by the opportunity we see ahead of us, and we'll continue to invest responsibly to maximize our long-term value. Now we'll turn the call over for questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Sanjit Singh with Morgan Stanley. Sanjit Singh: I wanted, Matt, to talk about, I think Serge mentioned that cloud ACV bookings this quarter was the strongest of the year. I was wondering where -- like where that strength was derived from, whether it was particular industry, whether it was a strong Fed quarter? Was it an enterprise? Just love to get some color on that. And then I have a follow-up. Matthew Calkins: Yes. First of all, I'm not going to attribute it to any sector. I think it was a broad strengthening. I think it's the continuation of our upmarket strategy and the traction we're getting with AI. That's where I'm going to have to attribute it. Sanjit Singh: Awesome. And then on the go-to-market side, right, we're seeing kind of sustained growth rates in cloud, the margins are headed higher. You've seen a multi-quarter improvement in sort of go-to-market efficiency. Where do you think we are like if we use the baseball analogy in terms of that sort of go-to-market transformation? Are we sort of well along the path? Or do you still see go-to-market productivity enhancements continuing to effectuate for the -- going into next year? Srdjan Tanjga: Yes, Sanjit, let me take that. So we're very pleased with the progress that we're making. As you noted, we've now seen cloud subscription revenue growth stable in the mid- to high teens on a constant currency basis for 4 quarters in a row, and we've continued seeing the improvements in our go-to-market productivity metrics. And what that really means is just that our focus upmarket and resulting in higher sales productivity. And so we're making great progress in our move-up market. Where we are in terms of innings, I would say maybe fourth or fifth inning because what we're going to do now going into next year is returning to growth in our sales org. So we focused our efforts on our existing sales org over the last, call it, 12 to 18 months, and we've seen significant improvements in execution and focus and improvements. And now the goal is to return to growth and continue improving productivity while we also grow the size of the org. Because to us, the key goal here is really to create a sustainable compounding growth engine. And for that, we need to both grow our coverage, which we have plenty of space to do as well as maintain and continue improving our productivity. Operator: Our next question comes from the line of Steve Enders with Citi. Steven Enders: I guess I want to start on just the Fed side, and I appreciate the call out for Q4. But I guess I want to understand a little bit better just the impact that maybe you were seeing from the efficiency focus from the government this year? And maybe how does that play out in the big budget flush quarter in 3Q versus maybe how you were originally thinking about it? Matthew Calkins: Yes. Let me say that I love what's happened to the government overall in its purchasing patterns this year. And the shutdown is a temporary thing, but the changes the government has instituted in the way they approach technology, those are more long-lasting. Efficiency has become the priority. The government is willing to see software as the answer. It's open-minded about using AI. It's willing to do direct deals with an organization like Appian, like a midsized software firm. These are all enormously positive changes. And then we've got the temporary negative of the shutdown. So overall, I'm really bullish about the government business. Steven Enders: Okay. That's good to hear. And then I want to ask on AI Studio and that release coming out in the next couple of weeks. I guess what has been the feedback so far from the early customer program? And how are you kind of envisioning the monetization for that product as that starts to get rolled out into general availability for customers? Matthew Calkins: Yes. First of all, let me say that not only do we have the most oversubscribed beta program we've ever had, we also had the most positive feedback from the most different users we've ever had. So this is a much anticipated release. It's really taking the -- we're pioneering what's possible with AI agents. And I could go into detail, but I'll keep this short. We're very excited about the release. We feel like it's going to make a big difference for a lot of customers, and it puts us in the in the vanguard of innovation, what you can do with agents and process together. So that's really exciting. What else did you ask about? Srdjan Tanjga: Let me jump on modernization. So monetization will go in the form of continued expansion of our AI advanced tier. So Agent Studio will be available in the AI advanced tier. And as Matt mentioned, roughly 1/4 of our customer base is now paying us for AI. So incremental features like Agent Studio will continue pushing that number higher. And then secondly, there will be elements of consumption as a part of Agent Studio. And as customer use cases, in particular, drive, that will be an incremental driver of growth in the long term, but it's an important incremental lever. Operator: The next question comes from the line of Raimo Lenschow with Barclays. Raimo Lenschow: Congrats from me as well. I had 2 quick questions, one for Matt, one for Serge. Matt, if I think AI and AI adoption, we obviously are in a bit of a race. A lot of vendors are trying to do -- stake out their claim here and trying to be like the center of the universe. Can you think -- can you kind of discuss a little bit what kind of -- what do you think the determining factor will be for someone that can deliver versus someone that just has more marketing slides? And then I have one follow-up for Serge. Matthew Calkins: Yes. Okay. So the AI market is going to be interesting in the next couple of years. First of all, I think it's essential to differentiate between those who are creating the AI and those who are creating a complement for AI. Our technology is explicitly intended as a complement like a car is to an engine. We mean to enhance the capabilities of AI and to bring that power into the hands of our customers. So specifically, we take that AI and we give it connection, which is to say we connect it to data across the enterprise, connect it to workers. We give it secondly, coordination, which is to say we tell it when it's its job, when does it take a turn, who does it give the work to when it's finished. That coordination makes it part of a valuable process. And finally, we give it governance, which allows it to -- you get oversight and auditability and changeability and guardrails. Those are essential components and they stake out process as a technology as being a really essential complement to AI going forward. I think that realization began in the summer, but it's going to continue. And I think we're going to see process accepted -- process software accepted as a complement to AI software. Now in terms of how we differentiate from others who would provide process software, I'd say we've got a natural advantage here in that we've been focused on process and data fabric for a long time. Lately, it's become obvious that those things are essential complements to AI, but we were in this and leading this long before it was known. And therefore, we've got a big head start over anybody who's seen the writing on the wall and is now going to scramble to try to create process software or a data fabric like we already have. Raimo Lenschow: Yes. Okay. Perfect. Makes sense. And then, Serge, for you, the -- obviously, there was timing in the profitability number this quarter, and that's why the guidance is for Q4. If you think about the overall profitability performance, though, that's kind of something that you guys will be measured on. Like where -- what -- how do you see if you kind of take away the timing differences? Where -- what path we are on there? And how do you think it from here now that you've been in the job for a little bit longer? Srdjan Tanjga: Yes. Thanks for the question, Raimo. And I think you're right. I think the better way to think about our profitability is to sort of zoom out from quarter-over-quarter dynamics related to timing and seasonality and focus on the full year. So we're guiding to EBITDA margin at 10% at the midpoint of the range, which we think is a significant milestone from us, particularly when you think about where we've come from over the last couple of years. And that's really the credit to focus on efficiency and improving productivity across the company, but especially in our sales org. As we look going forward, the key for us is to develop -- to deliver sustainable revenue growth and continued margin expansion. I would say, though, as we think about next year, in particular, in the context of what we've done this year and how much we've exceeded our own expectations when it comes to margin, I would expect more modest margin expansion ahead. Operator: The next question comes from the line of Devin with KeyBanc Capital Markets. Devin Au: First one I have is I just want to dive into your international performance there. I think you mentioned the mix uptick in 40% total, which kind of implies growth in the 30% range, which is a very nice acceleration there. Any color you can kind of give us on what's driving the strength there? Any differences in types of sectors gaining traction? And are you perhaps seeing more uptiering or AI adoption in international versus the U.S.? Matthew Calkins: This is a broad wave, but you're right, it's AI, and it's succeeding at connecting higher in organizations, having higher-level conversations, addressing larger projects, creating more value. We do that by connecting AI to real work and making it pertinent to decision-makers at the top of the organization. I've got to say that's the biggest driver. Srdjan Tanjga: I just want to say on the more pedantic side, FX was also helpful here because obviously, dollar has depreciated versus foreign currency. So that's part of the drive. But to Matt's point, not -- by far, not the whole thing. Devin Au: Yes. No, that's helpful. And then just one quick one for Serge. Professional services, the gross margin there, really strong, close to 35% in the quarter. Any additional color you can give us on what's driving that uptick? And how should we think about that level in terms of sustainable gross margin for professional services moving forward? Srdjan Tanjga: Yes. We're very happy with our performance in professional services, both in revenue as well as in margins. And the way that I think about our professional services org is that it's a highly strategic asset for us. Our customers like the high-quality implementation, and that's why they're willing to pay a premium, and that's why we have the margins that we have. And then the other thing is that professional services drives ARR growth and increasingly AI adoptions because our customers are more likely to turn to our professional services or for AI implementations. When it comes to margins, we are very happy with the performance in this quarter. I will say that the margin is particularly high because we've exceeded our bookings expectations, and that's resulted in much higher utilization of our team, frankly, probably a little bit higher than sustainable. People are working weekends and not taking vacations. So maybe the 34% level isn't quite sustainable, but we think high profitability going forward is also in the cards. Operator: [Operator Instructions] Our next call comes from the line of Derrick Wood with TD Cowen. James Wood: Matt, we're seeing some software vendors move into forward deployed engineer models to help accelerate adoption. How are you thinking about the services model in the context of Appian and AI deployments and potentially kind of lean in around FTEs? Matthew Calkins: Yes. Well, look, our model well predates the phrase forward deployed engineer, which I always thought was a bit amusing. But we have gained benefits as an innovator from emphasizing CS over the years. We have always put CS forward. They've been a differentiated innovative force. They've been able to develop our new technologies into fruition and demonstrate to customers. And it's helped us -- it's an accelerant. It's helped us move faster and deploy our new benefits into the user base. So Appian is a technology-led organization. We've always won through superior technology and the CS force has helped us bring that -- the benefits of that technology to our users. It also, along the way, allows us to get greater retention, greater expansion, better relationships with our customers, a direct pipeline, and it's a terrific route for talent to come up through the organization. So we are unapologetically a services featuring software organization. I think it's worked great for us, particularly in our position as an innovator. James Wood: Great. And Serge, can you help us understand just the bridge between your cloud net revenue retention rate at 111% and cloud growth at mid- upper teens over the last 4 quarters. Is the delta from migrations that aren't counted in the NRR? Or how should we think about the relationship between these 2 metrics? Srdjan Tanjga: Yes. Thanks for the question. So the net retention rate was 111%, which is stable compared to the quarter ago. And we talked a little bit about this metric in the past. Expansion from our existing customers is very important to us. Obviously, it's one of our key drivers of growth. But it's not the only one, right? We also go after new customers, and we've been very successful over the past year, in particular, of winning some large new logos straight out of the gate, which I found very impressive given the -- where we are in our upmarket journey. And the -- so it's the net ARR retention is a part of the growth story, but not the whole growth story. The other thing we talked about in the past is that our net revenue retention is a bit backward looking, meaning that we look at revenue over the prior 4 quarters for customers who had been with us in the 4 quarters before that. So it tends to lag trends in revenue. And that's why you can see a discrepancy between those 2 at times, but it has nothing to do with the migrations. We don't see very much in the way of migrations from on-prem to the cloud. In fact, we see continued healthy growth on-prem, which you also see this quarter. Operator: The next question comes from the line of Jake Roberge with William Blair. Jacob Roberge: Just wanted to double-click into the expectation to grow sales headcount again next year. Can you talk about how you're expecting to balance those investments with just the continued margin expansion? Srdjan Tanjga: Yes. So as I mentioned, and I'll kind of go across the board, but starting, of course, with our biggest expense line, sales and marketing. We've achieved improvements in productivity and our efficiency metrics that you see over the last 12 or so months, roughly in flat headcount. And that is sort of the right way to approach it if you think about it, because as you move upmarket, as you focus on better execution, we've also brought in new sales leadership, you don't want to be doing that while at the same time growing headcount. You want to do one thing at a time. But now we're at a moment in which we feel confident because we made significant improvement when it comes to our productivity that we want to return to what I would describe as moderate headcount growth. And the key goal for us, again, is to build a sustainable growth engine. And to do that is, first, you need a large market, we have it. And then secondly, you need to expand your coverage and continue growing your productivity. We've done well on productivity. Now we got to return back to expanding coverage. So as we think about -- obviously, we're not providing guidance today. But as we think about sort of the mix between growth and margins for next year, we expect to deliver both. But margin expansion, particularly in the context of what we've just accomplished over the last 2 years, we're forecasting 10% EBITDA margin at the midpoint of the range for this full year versus negative 10% 2 years ago. We are going to be more modest as far as our margin expansion because we're increasingly confident in our ability to create this sustainable growth engine. Jacob Roberge: Okay. That's helpful. And then we're hearing that this legacy app transformation opportunity is seeing a pretty meaningful uptick in interest right now. I know you've been building some new solutions in that area. Can you talk about how you're thinking about addressing that opportunity moving forward? Matthew Calkins: All right. First of all, that was not an entirely clear question. There was some breakup on the line, but I think I heard enough of it to answer it. correctly, and you could just tell me if I miss any detail. You're asking about the modernization opportunity, which is essentially the conversion of legacy applications into a modern platform. And we intend to be -- we are now, but we intend to be a leader as this market grows to large scale. I do think it's going to be a substantial, a meaningful new software market. I think we're extremely well positioned for it. We've been in the modernization market for a decade already, and we have performed some admirable and publicly recognized modernization projects. But today, of course, the volume is going to increase dramatically because AI makes it easier to extricate and understand existing legacy applications and also to rewrite them in a new platform, in this case, Appian. We've got a number of advantages that I think will really differentiate us in this market. First and most importantly, that if you're going to port an application from a legacy platform, by all means you should port it to a platform that is the opposite of legacy, a flexible growth tracking, scalable, feature-rich platform like Appian would be ideal for porting your old applications. Secondly, we handle the job of recreating an application in a really collaborative way. So there's a deep collaboration between AI and the developer, where AI will propose things and the developer can modify. And we just saw another demo of this yesterday. It's spectacular. I'm really impressed with the technology we put together. I think there's nothing like it. We're going to create a dialogue, which is just what you need for the most important applications. This isn't a simple delegation and you move one stack of code into another stack of code. It's about reinventing an old application, making it better, maybe combining it with other applications along the way and creating something that suits the modern moment. That's not just a mere translation. Even if AI could do the whole translation, it would be insufficient. It's a collaboration. And so that, to me, is the golden key to getting modernization right is creating a rich collaboration so that those old applications aren't just ported. They're not just translated, they're recreated for -- on a better platform for the moment, right? So that's what we're focused on. I love this market. We didn't talk about it much in the prepared remarks today because we understand that we got to -- we have to emphasize agents this time. We got a new launch there, but our excitement is undiminished. Operator: And this does conclude the question-and-answer session and the program. Thank you for your participation in today's conference. You may now disconnect.
Operator: Greetings, and welcome to the Bloomin' Brands Fiscal Third Quarter 2025 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Tara Kurian, Senior Vice President, IR, FP&A and International. Thank you, Ms. Kurian. You may begin. Tara Kurian: Thank you, and good morning, everyone. With me on today's call are Mike Spanos, our Chief Executive Officer; and Eric Christel, Executive Vice President and Chief Financial Officer. By now, you should have access to our fiscal third quarter 2025 earnings release and our Investor Presentation slides, both of which can be found on our website at www.bloominbrands.com in the Investors section. Throughout this conference call, we will be presenting results on an adjusted basis. An explanation of our use of non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures appear in our earnings release and Investor Presentation on our website as previously described. Before we begin formal remarks, I'd like to remind everyone that part of our discussion today will include forward-looking statements, including a discussion of recent trends. These statements are subject to numerous risks and uncertainties that could cause actual results to differ in a material way from our forward-looking statements. Some of these risks are mentioned in our earnings release. Others are discussed in our SEC filings, which are available at www.sec.gov. During today's call, we'll provide a brief recap of our financial performance for the fiscal third quarter 2025, current thoughts on fiscal 2025 guidance and our turnaround strategy. Once we've completed these remarks, we'll open the call up for questions. With that, I would now like to turn the call over to Mike Spanos. Michael Spanos: Thanks, Tara, and good morning, everyone. On today's call, we will discuss three topics. First, I will summarize my observations during my first year and our actions against our operational priorities that we communicated in February to simplify the agenda, deliver a great guest experience and turnaround Outback. Second, Eric and I will review our third quarter results and updated guidance for this year. And third, I am very excited for Eric and I to share the details of our turnaround strategy. I would also like to welcome Eric to his first earnings call. Let's start with my observations and our progress against our operational priorities. We have a great culture and team, and it is a privilege to lead this team as we embark upon our turnaround. Bloomin' Brands is a company of restaurants with four founder-inspired brands. Our culture and spirit as an organization is grounded in our principles and beliefs inspiring how we serve each other and our guests. It unites us with a common vision that our success achieved one restaurant at a time, measured by growth in sales and profits and is the result of taking care of our people and guests. To build upon that culture and execute a strategic transformation, it is important to get the right leadership team in place. The changes made to the team this year have reinforced the culture grounded in our founders' principles and beliefs, executing with an operational mindset and a passion for guest hospitality. We each bring different but critical and complementary experiences and skills to the table. Our recently announced Fleming's brand President, Pat English, exemplifies a passion for the team, our guests and consistency of execution. Pat has 35 years of fine dining operational leadership experience, including two decades with Fleming's. Our brand Presidents are all new to role this year. And importantly, they are all operators that collectively average 34 years of restaurant industry experience. I would also like to thank Sheilina Henry for her leadership and impact on the Fleming's and Bloomin' Brands business over her impressive 13-year career with the organization. We wish her the best in her future. In addition to our culture and team, we have iconic brands with strong equity, strong cash flow, a healthy balance sheet and ample liquidity to enable a turnaround. We compete in large and growing categories like steak and Italian. However, we faced several critical challenges, including overly complex menus, unclear brand positioning, inconsistent guest experiences, a gap in steak quality and diminishing value perception. We had drifted away from making decisions centered on the guest experience. Solving these challenges, especially at Outback, are necessary to turn around the company. Our leadership team started addressing these problems with a focus on the three operating priorities. Our approach is to control what we can control, meet the guests where they are while keeping execution simpler for our restaurant teams. To simplify the agenda, we refranchised our restaurants in Brazil, streamlined our corporate structure by removing layers, reduced menu SKUs by 10% to 20% and reduced LTOs that added complexity in the restaurants. To deliver a great guest experience, we knew we needed to address the consistency of execution in food, service, experience and value; the what you get for what you pay for value equation. We introduced everyday value offers in all of our casual dining brands, leading with the Aussie 3-Course at Outback, which is resonating with our guests and is easily executed. Part of delivering a great guest experience is making it simpler and smoother. In order to achieve that while gaining critical service feedback at the individual restaurant level, we installed Ziosk across the Outback system. Over 85% of our guests use Ziosk to pay for their meal, saving them time and improving table turns by about 5 to 7 minutes. We are also using guest feedback on their experience as a recognition and coaching tool at each restaurant. Our Ziosk data shows that our efforts are working. We have seen dine-in customer metrics improve several points across intent to return, steak accuracy, value and overall satisfaction. And the last of our operating priorities was to turn around Outback. We all believe that we can reenergize the brand and deliver sustainable growth. And most importantly, our Outbackers believe in the future potential. In addition to these elements I've already mentioned, Pat Hafner and the Outback team committed themselves to listening, learning and serving our Outbackers and guests and focusing on being in restaurant during peak hours and days. The success of our restaurant business is determined on the ground, and there is no substitute for getting our leaders in the restaurants when it matters. Between Ziosk and over 200 restaurant visits by Pat and myself, we are committed to raising the bar on standards and recipe execution for great food and service while removing complexity for our Outbackers. We also needed to test and learn. Earlier this year, we had 14 restaurants in test, which were largely focused on menu simplification, innovation and guest experience. In September, we expanded the test to 42 restaurants across several markets. These restaurants have integrated test cells with steak quality, menu innovation, enhanced service models and value components. Throughout this year, we also ran isolated tests focused specifically on steak quality and changes to the service model. These tests have accelerated our learnings, influenced our immediate business actions, validated our strategic initiatives and provided us with a better understanding of the change management realities of scaling improvements, which heavily influenced the sequencing we have planned for the initiatives in our turnaround strategy for Outback. We will maintain a test-and-learn culture here at Outback, and we plan to use our test environments to continue to refine and test new ideas. Turning to our third quarter results and updated guidance for 2025. Our focus this past year on our operational priorities is translating into improved guest metrics and sales and traffic gains, putting us in a strengthened position to execute our turnaround strategy. We believe our Q3 momentum is reflective of these foundational efforts. Our Q3 sales comp was up 120 basis points, which was 130 basis points better than Q2. And U.S. traffic was negative 10 basis points, which was 190 basis points better than Q2. While our focus has been primarily on Outback over the last year, all brands achieved positive comp sales growth this quarter for the first time since Q1 2023. All casual dining brands executed value offers to meet the guests where they are economically. Outback comp sales were up 40 basis points with traffic flat. This was the first quarter of positive comp sales for Outback since Q2 of 2023. Outback continues to see traffic from the Aussie 3-Course offering, which starts with an entry price point of $14.99, and we continue to see about two-thirds of guests trading up to the higher tiers of $17.99 and $20.99. We have also seen a significant improvement in Outback's brand trust by plus 6 points year-over-year and improvements in guest scores across food, service, value and atmosphere. Additionally, we are encouraged by our improved media ROI as we are being disciplined in communicating the right message in the right channels and at the right times to drive efficiency and effectiveness. Our higher returns gives us increased conviction in the marketing investment we have planned to make as part of the Outback turnaround. Carrabba's comp sales were up 410 basis points with positive traffic of 60 basis points. Its growth was led by in-restaurant value of Dinner and Dolce for two for $45, experiential wine dinners, lunch and off-premises. Bonefish comp sales were up 80 basis points with traffic of negative 170 basis points. This was the first quarter of positive comp sales for Bonefish since Q2 of 2023. Its recent improvement has been driven by day of the week offers with $5 Martini Margarita Mondays and $7 Bang Wednesdays and its pre-fixed lunch offerings Sardine at $14.90. Fleming's comp sales were up 120 basis points, with traffic down 120 basis points. Fleming's has maintained its sales momentum with in-restaurant traffic driven by experiential events, elevated service and its events and catering platforms. We are excited with our momentum, but we know we need to continue to improve our results to grow market share. We know in-restaurant dining is our biggest opportunity. We know it will take time to reverse our market share trends, and we remain focused on improving our execution every day. Let me turn it over to Eric to review our financial performance for the quarter before we cover the strategy update. Eric Christel: Thank you, Mike, and good morning, everyone. I would like to start by providing a recap of our continuing operations financial performance for the fiscal third quarter of 2025. Total revenues were $929 million compared to $910 million last year. Restaurant sales were up, driven by the net impact of restaurant openings and closures as well as U.S. comparable restaurant sales. This was partially offset by a decline in franchise and other revenue as the royalty rate on Brazil this year is less than the intercompany royalty received last year. As Mike mentioned, U.S. comparable restaurant sales were up 120 basis points and traffic was down 10 basis points. Though these results were below the casual dining industry, they exceeded our expectations as improvements begin to take hold. Average check increased 1.3% compared to 2024 as we continue to invest in value offers for our guests. Off-premises sales were 24% of total U.S. sales in the quarter, consistent with Q3 last year. Outback's off-premises mix of sales were 26% in the quarter, and Carrabba's were 34%. Our GAAP diluted loss per share was $0.54 compared to a loss of $0.01 per share last year. Our Q3 adjusted diluted loss was $0.03 per share versus earnings of $0.11 per share last year. Negative $0.03 was above our guidance range of negative $0.10 to negative $0.15. The primary difference between GAAP and adjusted diluted loss per share is approximately $43 million of adjustments incurred in Q3 2025 as a result of the restaurant closures and impairments, transformational and restructuring activities, foreign currency forward contracts that partially offset risk associated with the purchase price installment payments on the Brazil transaction and a change in our employee benefits policy. Q3 adjusted operating margins were 0.8% versus 2.3% last year. The 150 basis point difference between this year and last year was driven by: one, COGS inflation of 4.9%. We lapped a significant rebate from Q3 of last year, which drove a higher inflation rate this quarter. We expect the full year COGS inflation to be between 3% and 3.5%. Two, labor inflation of 3.3% as we continue to experience inflationary pressure on wages. We expect the full year labor inflation to be approximately 3.5%. And three, higher operating and supply expenses, mostly driven by inflation as well as 60 basis points from higher insurance expense. As it relates to our 33% retained ownership in Brazil, which is classified using equity method investment accounting, we recognized a loss of $300,000 in Q3. This was slightly better than our expectation, driven by updated estimates on the stepped-up fair value basis of accounting for the assets. We expect the total impact on the full year to be approximately negative $5 million. Turning to our capital structure in Q3. Total debt net of cash is $896 million. Our leverage metrics are 4.3x on a lease adjusted net leverage basis and 2.9x on a net-debt-to-adjusted-EBITDA basis. We expect the second installment of the Brazil refranchising transaction to be received this month, and we will apply the proceeds to our revolver. We anticipate this payment to be approximately $122 million, adjusting for an updated FX rate and withholding taxes. This does include approximately $15 million of interest income on the receivable. We expect lease adjusted net leverage to move from 4.3x to 4.0x and net-debt-to-EBITDA to move from 2.9x to 2.5x on a pro forma basis with the proceeds applied to the Q3 balance. Turning to our guidance. We are raising our U.S. comp sales guidance range for the full year to be between flat to positive 50 basis points, driven primarily by our current momentum. We are raising our adjusted diluted earnings per share range to be $1.10 to $1.15. As a reminder, we are in a tax benefit situation driven by FICA tip credits relative to earnings. We expect an adjusted tax benefit in the range of approximately $10 million to $12 million in 2025, which is included in our updated guidance. We continue to track toward capital expenditures of approximately $190 million for the full year. As it relates to the fourth quarter 2025, we expect U.S. comparable restaurant sales to be between positive 50 basis points and positive 150 basis points. We expect Aussie 3-Course to continue to have a positive impact on our sales as we are lapping underperforming promotions from 2024. We expect Q4 adjusted diluted earnings per share to be between $0.23 and $0.28. This earnings per share range includes an estimated negative impact from our 33% Brazil ownership to be approximately $1.5 million. Let me turn it back over to Mike to walk through the strategy update. Michael Spanos: Thanks, Eric. As I mentioned, our strong Q3 results and operating momentum give us confidence to now launch our holistic turnaround strategy focused on Outback Steakhouse. Through our testing this year, we identified no-regret investments that are critical to the success of the turnaround. Our Outbackers and our guests are telling us that these are the right things to do and are consistent with our foundation in terms of quality, service and experience. And we know they are required to deliver sustainable profit growth and market share gains. We have identified approximately $75 million of investments across 2026 through 2028, with approximately $50 million being spent in 2026. The investments will be across state quality, service, our people, the guest experience and marketing. We will offset the turnaround investments with approximately $80 million of non-guest-facing productivity in 2026 through 2028 with approximately $30 million occurring in 2026. In simple terms, 2026 is the year with the majority of investments with a net investment of approximately $20 million. Eric will provide additional details of how this is allocated across each of these areas. Our turnaround strategy is based on four strategic platforms, which are to: one, deliver a remarkable dine-in experience; two, drive brand relevancy, a steakhouse. Our investments include investing in the quality and cuts of the steaks to deliver a competitive and craveable lineup that delivers value. We are also investing in our cooking equipment, including expanding [ chart roll ] capacity that we will have the optimal cooking platform across steaks and other proteins. We are committed to the consistent training necessary to ensure we continue to have the exceptional steak quality, taste, specs and accuracy. In our tests, these steak enhancements delivered an average 10-point lift across guest satisfaction, taste, value, intent to reorder and quality perception. These gains, combined with enthusiastic Outbacker feedback, give us strong conviction to move forward with investing in our steak quality nationally later this month. Another element of our remarkable dine-in experience is craveable service. As I mentioned on the last call, we identified that our 6 tables to 1 server ratio during peak hours wasn't providing the right level of guest interaction and Outbacker satisfaction. We believe a reduced ratio of four tables per server during peak times, which is more in line with casual dining best practices, will allow our Outbackers to provide a more consistent and enhanced experience for our guests. Similar to steak excellence, we ran independent tests earlier this year with a reduced table-to-server ratio. We saw an increase in our intent to return, attentiveness and likelihood to recommend service scores from our guests. Our operators in the test also had positive feedback because servers have the time to positively engage with their guests. These results and feedback give us confidence in rolling the service model out across the Outback system starting in Q2 of next year once we have the execution of our enhanced steak lineup right. The final element of delivering a remarkable dining experience is consistency of execution. We are leading with an operational mindset that prioritizes the guest first and is delivered with great food and great service. As I mentioned earlier, our leaders are in our restaurants during peak hours to focus on operational excellence and accountability to standards. We are leveraging technology to help our restaurant leaders more easily check for outliers and guest metric scores. Our strong focus on consistency of execution this past year as demonstrated by the strong business momentum in Q3 and improved guest metric scores gives us further confidence in the turnaround plan. The second platform is to drive brand relevancy. We need to make Outback more relevant. Outback Steakhouse has incredible brand equity. It is the pioneer of the casual steakhouse industry. We have strong brand awareness and a tremendous opportunity to convert that awareness into restaurant visits. To do so, we must differentiate Outback's brand positioning, building greater relevancy while deepening the connection with our guests and emphasizing that we are first and foremost a steakhouse. Fundamentally, we are going back to the core greatness of the Outback brand. Outback led through craveable food, value and an emotional connection with the server and managing partner. However, the key differentiator was the fun, casual and adventuresome Australian spirit. Focusing on No Rules, Just Right and hospitality is the core of the brand culture and the heart of the experience that created loyalty with our guests. Our intent is simple, come as our guest, leave as our mate. Sharpened brand positioning will serve as a foundational element of our turnaround, helping to recruit new guests, reengage lapsed users and drive frequency among our loyal base. We are also leaning into steak-centric equity in our brand communication. We're reasserting Outback's authority in steak through menu redesign, refreshed creative and elevated food photography that showcases our craveable steakforward offerings. Guests will see our revamped high-quality steak lineup front and center, highlighting the thickness, freshness and craftsmanship of every cut, along with our signature Outback seasoning that sets us apart. The steak-centric focus will also strengthen our value equation by offering menu variety and affordability across multiple price points, enhancing what guests get for what they pay for. We will continue to lead with depth and steak excellence while leveraging our non-steak protein variety with disciplined breadth. Supporting the brand's relevancy is marketing effectiveness. Over the past year, we've significantly improved our marketing efficiency by redirecting spend towards digital channels and simplifying our message to make it more focused and impactful. Our marketing actions earlier this year drive our conviction to further evolve our media strategy, shifting from a legacy mix of 70% linear TV and 30% digital to approximately a mix of 40% linear TV and 60% digital. This change reflects how guests now consume media ensures we deliver the right message through the right channels and at the right time to maximize traffic and returns. With renewed confidence in our brand positioning and turnaround momentum, we plan to increase our marketing investments next year. The third platform, reignite a culture of ownership and fun. Our turnaround will be delivered by and through our people. Every brand has a feel guide. It's a small booklet that explains the principles and beliefs for the brand. Every Outbacker has one, I have one. It states that our success is based on our belief that people want to be part of something they can be proud of, is fun and that includes and values them. Outbackers have pride and ownership in the success of the restaurant. To enhance our already strong culture, we are making investments across leadership development, engagement, training, field compensation and recognition. This begins with ensuring we have the right managing partner for every one of our restaurants. Our managing partners are owners and leaders. Restaurants with stability in the managing partner role have been proven to be our most successful, including having the lowest hourly turnover and strong engagement, leading to improved performance. To retain the best partners, they need to be compensated competitively and incentivized to drive the operational priorities. We are committed to our people, and we know that when we take care of our people, our Outbackers serve each other and the guests with pride and ownership. Our fourth platform is invest in our restaurants. As I've said on prior calls, we need to invest back into our restaurants. Our goal is to touch nearly all of the Outback restaurants by the end of 2028 with targeted initiatives to refresh the interior and exterior. With this asset refresh, we will focus on guest-facing areas, the areas that make a positive impact in restaurant ambience. We have tested various remodel scopes this year, and we'll leverage learnings as we roll out the asset refresh broadly. These investments and this renewed focus gives us confidence that our guests will have a better in-restaurant experience to complement the other platforms of the turnaround. I will now turn it back over to Eric to walk through the investments, productivity and capital allocation. Eric Christel: Thanks, Mike. As we think about the constructs for next year, Mike mentioned there are no regret investments that support and enable the turnaround. These total to approximately $50 million in 2026, we expect this to be the bulk of the turnaround investments. These investments will be offset by approximately $30 million of productivity for a net investment of approximately $20 million in 2026. The $50 million of investment will primarily be concentrated in Q2 through Q4 of next year and will support the investments in center-of-the-plate food quality, including steak excellence improvements and menu redesign of approximately $25 million, investing in service and the guest experience of approximately $7 million and investing in our people of approximately $8 million. We also intend to increase our marketing spend by approximately $10 million as part of the overall $50 million investment. In addition to the approximate $50 million of turnaround investments in 2026, we plan to invest approximately $25 million across 2027 and 2028 for a total investment cost of approximately $75 million. The majority of the $25 million will be an increase in marketing spend to support the turnaround efforts. In addition to the approximate $30 million of productivity savings for 2026, we have identified an additional $50 million of non-guest-facing productivity across 2027 and 2028 for a total of approximately $80 million in productivity. For productivity, we are targeting areas that are non-guest facing. We are negotiating costs with suppliers, optimizing product selections and eliminating unnecessary vendor spend. We are also focused on tighter processes in the restaurants, leveraging technology for increased data visibility and outlier management. We are optimizing labor scheduling and focusing on areas where we can simplify operations in the back of the house. In total, we estimate savings next year to be approximately $30 million spread relatively evenly throughout the year. These savings apply across brands and at the corporate level. On our capital allocation, our strategy will be twofold: one, to invest in the base business as well as our restaurants; and two, to pay down debt. Capital expenditures next year will be slightly more than what we will spend this year with the primary change in capital being a shift of dollars previously spent on new restaurants towards restaurant asset refreshes and remodels. As Mike mentioned, we are focused on refreshing nearly 100% of the Outbacks by the end of 2028. We will get started in Q1 next year, and we'll look to spend an average of $400,000 per unit. The great news is we are modeling our approach after Carrabba's, demonstrated the success of a lighter touch, guest-facing focused asset refresh strategy that also yielded traffic improvements and improved employee satisfaction. This year, we completed a detailed review of our restaurant base and identified 21 underperforming restaurants, which we closed last week. We also identified 22 restaurants in which we would not renew the lease. Most of those leases expire in the next four years. Our goal is to focus our resources on the remaining healthier restaurants. As part of our new capital allocation strategy, we suspended the dividend. We believe that the best use of capital today is to invest in our restaurants, our guests and our employees and are confident that this will deliver sustainable growth in our business. In terms of leverage, our goal is to reach 3.0x on a lease-adjusted leverage basis by the end of 2028. As such, we'll use available free cash flow to pay down debt. As we think about 2026, there are two items we are monitoring closely that will influence our annual guidance, and that is: one, where beef inflation lands for next year; and two, visibility into expected tariff impacts. With this in mind and aligned with our historical cadence, we will provide detailed 2026 guidance on our February earnings call as well as how we are thinking of our go-forward multiyear targets once we establish our 2026 baseline. Let me turn it back over to Mike. Michael Spanos: Thanks, Eric. We have covered a lot of material, and we'll update you in February with further details, as Eric stated. In summary, we are highly confident our strategy will firmly place Outback Steakhouse on the right course for sustainable, long-term and profitable growth. Through this strategy, we will, one, deliver a remarkable dining experience through improved steak quality, enhanced service and consistency of execution; two, drive brand relevancy to differentiate Outback with a return to our brand roots; three, reignite a culture of ownership and fun with a commitment to our people; four, invest in our restaurants to refresh approximately 100% of Outbacks by 2028. We will enable this strategy with non-guest-facing productivity savings, a balanced capital allocation and a strong management team. We have the right team in place to execute this turnaround and have momentum. Our leadership team is aligned and committed to the turnaround. We all have confidence in the success of Outback Steakhouse and more broadly, Bloomin' Brands. We know that when we invest in the guest, give Outbackers the tools to succeed and provide a quality dining experience, Outback can and does win. This is evident in the initial improvements in metrics such as guest satisfaction and intent to return. We will continue to be transparent on our progress and our actions. Lastly and most importantly, all of our results and future potential would not be possible without the dedication, the commitment and the leadership of our people in the restaurants and the restaurant support center. Every day, they show up and give their best to the guests and each other. I'm incredibly proud of our Outbackers, our [ Micos ], our anglers and our associates. Thank you for what you do and your commitment to making the Bloomin' Brands turnaround a success. With that, let me open up the call for questions. Operator: [Operator Instructions] Our first question comes from Jeff Bernstein with Barclays. Anisha Datt: This is Anisha Datt on for Jeff Bernstein. I wanted to ask a question on comps. You highlighted strong momentum in Q3. Can you expand on whether that strength carried into October across all the brands and what factors contributed to sustaining that performance? Michael Spanos: So our Q3 trends have continued into Q4, and our Q4 guidance and full year guidance assumes that those trends maintain. And second part of your question, I just think we're meeting the consumer where they're at. We're creating the right variety of affordable entry price points, value, an example of that's been the Aussie 3-Course. Anisha Datt: Okay, great. And as a follow-up, are you seeing any underlying macro weakness that might be masked by your improved [ results ]? Michael Spanos: We had encouraging trends across the board when I look at the quarter. Traffic improvements and growth, they were consistent in all the brands, and that was across income groups and ages. Check averages were also up low to mid-single digits across income groups and age groups. And we did see larger party sizes offset by slightly lower PPA. Maybe where we saw a little bit of slight check management was in the cohorts over 65 years old, and that was predominantly in beer, wine and liquor. But importantly, what we liked is they chose to dine out based on the visitation results, which were positive. So to me, what this tells me is it's just another validation that dining out remains a very affordable luxury. Consumers, regardless of their income levels or their age, they want to get out. They want to prioritize experiences, other forms of discretionary spending. And I think we did -- we're mindful of the environment, which means we got to keep meeting the consumer and the guests where they're at economically. Operator: Our next question comes from Jeffrey Farmer with Gordon Haskett. Jeffrey Farmer: You just touched on it, but just I was hoping to get a little bit of a deeper dive into how the company materially outperformed the Q3 same-store sales guidance, specifically sort of the factors that contributed to that better or much stronger-than-expected result. Michael Spanos: Jeff, I think it was a couple of things predominantly. One is we're just executing with more consistency of execution, and that starts with our leaders. Our leaders are tremendous. They're out there with the teams during peak hours. And I just think that's given us a great executional dividend. That's the first thing. And then the second thing in all of our casual dining brands, I think our marketers and operators did a great job, again, focusing on meeting the guests where they are at regardless of the economic cohort. And you think about the brands, Aussie 3-Course at Outback, very, very positive. At Carrabba's, the team did a great job with experiential wine dinners. Bonefish, we had everything from $5 Margarita Mondays. We had $14.90 prefixed lunch menus. And we've done a really nice job at Carrabba's and Outback with $10 take-home, just getting that average check up. So I think that's what it is. It's just really being there, meeting the guests where they're at and providing the right what you get for what you pay for relationship. Jeffrey Farmer: Okay. And again, you just touched on it with the cohorts. But obviously, as you know, there's a lot of focus on income cohorts, age cohorts, relative trends across those cohorts. But can you share some detail about what you're seeing with the Outback customer base? And maybe more specifically, how does the Outback customer base sort of stack out or shake out across income and age cohorts? Michael Spanos: As I said, for the quarter, we saw consistent performance across all the age and the income groups across Outback, steady, consistent growth that was there. And we had flat traffic, and that was consistent in all those groups. There were no outliers. Value is working for us. Operator: Our next question comes from John Ivankoe with JPMorgan. Unknown Analyst: This is [ Christopher ] for John. The question is on remodels. You mentioned an average CapEx of $400,000 per unit. But as there are some stores that are over 20 years old, it could suggest that there's a bit more needed. Could you potentially like bucket by number of units, what the various spend levels could be? Michael Spanos: Well, I'm not going to get into the specifics of buckets per spend. But as Eric said, we're highly confident that our asset refresh plan, it enables us to touch every -- nearly every Outback over the next three years. And they're very targeted initiatives, and it allows us to refresh the interior and exterior at an average cost of about $400,000 per location. We're going to focus on the guest-facing areas, and we're going to focus on what makes a positive impact to the guest. What I would add is, if you go back to previous calls, we talked about our outside maintenance survey data. We use that to really be very surgical. We also have tested various remodel scopes that we also talked about. We're leveraging those learnings. And lastly, Pat led this at Carrabba's. We were very excited with what we saw post those light touch refreshes. We saw 100 basis points to 200 basis points of traffic lift post those. So some will be higher, some will be lower, but we think with targeted initiatives, we can really do a good job hitting nearly all of them by the end of 2028. Unknown Analyst: And as a follow-up on average check, do you see further investment here in order to drive component of value and ultimately traffic? Michael Spanos: No, I don't think so. The way I would answer that is, first, based off the tests, feedback from our Outbackers, our own work, we believe this is the right investment level across each of the elements of the strategy. Now we're going to be judicious in analyzing those investments and making sure we're getting the right returns. And it also implies that if we see really good returns and there's a benefit, we're going to consider looking to invest more. And as I said since I joined, we're going to be highly transparent about what we do every step of the way. Operator: Our next question comes from Brian Mullan with Piper Sandler. Brian Mullan: Just a question on the marketing part. I think you addressed this some in the prepared remarks, but it sounds like investments in marketing are going to be a part of the turnaround process. Just talk about how maybe you're going to phase this in over the next couple of years. I imagine there's a balance that can drive traffic in the short-term, but maybe you want to make sure the product and service model is right. So just talk about the approach and how that will build. Michael Spanos: Yeah, Brian, I'll take it to how we're thinking about the sequencing of investments. Specifically to marketing, the incremental marketing is assumed to begin predominantly in the second half of 2026. That's $10 million. And then as Eric said, we would look to add another $10 million in '27 and another $10 million in '28. Obviously, it's pay-as-you-go. And you're right, we have thought about the total execution of the platforms in a more of a sequential manner because we want to be very thoughtful that we allow our Outbackers to be brilliant at the basics. We don't want to overload them with tasks. So step one was get the operational priorities, get the foundation of base execution right. That's what we've been honed in on this year. Second, we're launching steak quality at the end of this month. And we're going to work hard at getting that right. And then in Q2 of '26, we'll launch the elements of the service model. And then after that comes the marketing. And then the nice thing about Ziosk, it's going to allow us to keep evaluating location-by-location, geography-by-geography on how we're doing on the execution. Brian Mullan: Okay. And then just a modeling clarification on the closures. Can you give us a sense of what brands those will be at -- concentrated at? And then with all the assessing of the portfolio you've done this year, do you think you're done on the closure front or as you progress another year or two, could there potentially be a little bit more? Michael Spanos: Yeah. The closures were Outback, Bonefish and Carrabba's. At this time, we don't see any more action needed. As we said, we've been very thorough in our asset evaluation over this last year, and that's where we're at, at this point. Operator: Our next question comes from Jon Tower with Citi. Jon Tower: Maybe just digging into the Aussie 3-Course, can you help us think about or speak to how that mixed in during the third quarter? It sounds like it's been relatively successful in terms of the different levels that you're offering the guests. And how are you thinking about this business or this value platform going into 2026? Obviously, beef inflation is out there. It's well discussed amongst investors. How are you thinking about holding the line on pricing there should we run into a fairly significant wall of beef inflation over the next 12 or 24 months? Michael Spanos: Yeah, Jon, so I got two questions there. So first on your question about Aussie 3-Course. We -- we're very pleased. We like the results in Aussie 3-Course, and it's mixing exactly where we expected it to. And as I said, what I like about it is two-thirds of the guests are trading up and that's $17.99, $20.99. And what I didn't comment as well, we got a lot of guests trading up on desserts as well, which is really encouraging. They're spending an extra $3 to get a Chocolate Thunder versus getting the Cheesecake. So very consistent with what we expected. And our plans consistent with '25 are to continue in all the casual dining brands to have a value offer because we need to be very mindful of pricing with inflation, but we also have to meet the guests where they're at to get them to engage and a lot of them show up thinking they're going to buy the Aussie 3-Course course and they pick a picture on the menu and they eat something else. And that's a good dynamic. In terms of beef, what I would say is for '25, we see this as a mid-single digits reality. We'll communicate what we see beef doing in February when we get to the 2026 guidance. But I'd say two other things. One, we like the resiliency of the beef category. It continues to grow. Americans are engaging it. And one other thing that I think is important is the relative value works for us. And what I mean by that is we're getting a lot of guest feedback that guests know they can come into Outback, get a perfectly cooked steak at a great value, get a couple of sides, get a great experience and they're out of the house, but yet it's almost the same cost as what they're paying for beef at retail. And what that again tells me is Americans want to get out, they're going to prioritize getting out of the house into casual dining over other discretionary spending. Jon Tower: Yeah, it makes sense to me. People don't want to risk the idea of screwing up a steak at home, go to you guys and get a good experience in the process as well. So I guess one of the other questions that I had, you had offered a lot with respect to the business transformation over the next 12 to 36 months. I'm curious, you talked about menu redesign and some of the savings behind are running through the P&L. I'm just curious, do you feel like the menu is also optimized today? I think you've gone through and cleaned up some of the SKUs of the past 12-plus months, but do you feel like there's more to be done there or are you at a good point today? Michael Spanos: We can do more. Menu redesign is definitely a journey. I like what we did when we reduced 10% to 20% of the SKUs this last year to simplify the complexity for the back of the house as well as the front of the house. But revenue management is fluid. Part of menu design is creating affordability and a variety of entry price points. We're going to continue to iterate on that. And that's also, by the way, what we're using our 42 test locations for. We're using that as a good learning lab across the board to understand assortment, choice, affordability and what the guest wants. Operator: Our next question comes from Brian Vaccaro with Raymond James. Brian Vaccaro: Thanks for all the detail and the turnaround, really helpful. Just on a couple of the aspects there. You talked about improving the steak quality. Could you elaborate on some of the changes you're making there, whether it be changes in product spec, the types of steaks maybe that you'll be featuring or changes in cooking procedures? Michael Spanos: Yeah, Brian, it's a really good question. So in terms of steak quality, I start with what I said in the prepared remarks that we're getting back to our roots of steak excellence and just being a great steakhouse. And that's depth of our steak lineup. We're also going to have breadth and discipline in the non-steak proteins, which has been a big differentiator for us over the years going back to the founders. We do with this steak lineup, we're going to launch the end of this month. We believe we've got the best steaks in the category. And right now, I think we've got the best barrel cut fillets out there. We're really excited about the Sirloin. We think it's going to have a better performance, better tenderness. We're going to be -- I really like our Ribeye lineup that's going to be coming. And we're going to have just, I think, a great thick cut strip. And I'll leave it at that. But the Outbackers, they're really proud. The pride to sell is high. And to me, that's what just gives me a lot of conviction and confidence we're doing the right thing here. Brian Vaccaro: All right. And also just on the guest experience and talking about the consistency of execution. Is there any way to level set either currently sort of -- or the rate of improvement, but just sort of level set what you're seeing in any metrics and what you're tracking on that? Like do you track the percentage of guests with the problem or other metrics that you might be able to share and how that might be improving year-on-year across the system or within your test markets, your test pilot stores, the 42 stores? And then maybe as a tack-on to that, you talked about investing in your managers. And just maybe some more color on the changes to their comp plan or how they're being incentivized sort of tying their compensation to the performance of the stores that they're managing. Michael Spanos: Yeah, you bet, Brian. So on the survey data, we've looked at a few different things. One is we've looked at comprehensive satisfaction surveys. We've used that, especially on the steak work. We also have just leveraged the heck out of Ziosk. And specifically on Ziosk, we look at intent to return, we look at guest satisfaction. We look at complaints per 10,000, and we're able to compartmentalize or bucket those by location, by JVP to really get at the issues. So that -- I think -- and we're going to continue to do that. In terms of the MP comp, what I'd say there is our principles and beliefs, the culture is grounded in our managing partners. We know that growing the sales and profits of every restaurant starts with our partners. And therefore, we are making investments in the field compensation. We need to ensure we're competitive in the market. That allows us to have the right partners enroll. And that structure that drives that ownership aligns -- has got to align with our business objectives. What's exciting is those investments in field compensation, they're going to always enhance the team member, the guest experience, and we've seen lower hourly, lower manager turnover when we have tenured partners enroll. As far as the specifics, I want to be -- I want to directly and first communicate to our partners. And I'll leave it at that here. Out of respect to them, we need to have the discussion directly with them on how we're moving forward. Operator: Our next question comes from Sara Senatore with Bank of America. Sara Senatore: Just I guess one quick housekeeping question and then a question about Ziosk. Could you just let me know how much price you had on the menu? I'm just trying to reconcile, I think it was probably like kind of 4% price versus a more modest increase in check, but then what you said about seeing some good spending patterns by -- across different cohorts. So if you could just talk to that dynamic? And then like I said, I have a question on Ziosk. Eric Christel: Sure. Hi Sarah, it's Eric. So our Q3 pricing was up 3.7%. That's just a tick slightly higher than our full year guidance of mid-3s. And also, we expect Q4 to also be in the mid-3s on pricing. So pretty balanced. Sara Senatore: And then the mix component, was that smaller parties or I guess, was that mix across the different concepts? Just like I said, the average check was up less than that. So just wanted to make sure I understood that dynamic. Eric Christel: Yeah. So we're seeing pretty consistent mix within our expectations of about down 2%. It's really driven by the Aussie 3-Course, $10 Take Home, a lot of the experiential dinners and other events that are happening across the four brands. Sara Senatore: Got it. Okay. And then could you talk about sort of the functionality that Ziosk has? I'm wondering how you kind of balance -- I mean, as you pointed out, the service experience is really important to full-service brands. So how do you balance kind of what you digitize or automate through Ziosk versus what is an interaction with the server? I know different full-service brands have had different views on whether it should just be kind of pay at the table versus ordering capabilities versus things like games. So your, I guess, philosophy on that. Michael Spanos: Well, part of a remarkable dine-in experience is the emotional connection that our guests feel with our servers and our partners. That is foundational. That's not going away. At the same time, we know a lot of guests want things simpler, faster, easier, and they want to engage in technology. So what we get out of Ziosk, I think, are a few things that we like. Number one, we've got over 85% of our guests love to use it to pay, and that's really nice in terms of table turns and they get out of the restaurant faster, and we're going to continue to enable that. Second, we have -- we love the engagement rate where they give us feedback and that gives us real-time data at each restaurant by shift for coaching and recognition. Third, we do leverage it for gaming. So that's worked. And then there are certain menu items that guests can reorder, order on their own. But it is -- to order off the menu, you're going through our server. Operator: Our next question comes from Teddy Farley with Goldman Sachs. Edward Farley: I have a follow-up on the marketing part. Can you give any color on how you're planning on communicating the business turnaround with consumers to drive trial at Outback, particularly with lapsed guests who might have somewhat of an outdated image of what you'll be offering? And then kind of similarly to that, any color on how you would be trying to drive trial and frequency, specifically with the younger cohort? I assume that the shift toward digital advertising is probably part of that, but any additional color you could add would be appreciated. Michael Spanos: Yeah. You actually -- you got it right. First, you got to start with the marketing brings folks in the restaurant, but we got to execute really well because that brings them back. And that part of that is word of mouth. So to me, you start there. In terms of the brand communication, which has been after a lot of good work on the strategic brand positioning, we will be steak-centric and there will also be an element of emotional connection and you're going to get that hospitality experience that's going to be in there as well as the value components we get. We're going to stay clear to that. We're going to be back to the Aussie roots. And now as far as -- so that's the right message. As far as the channels, you're right, we're moving more towards a 40% linear TV, 60% digital. That's going to give us both better ROIs and also to be targeted in terms of retention and recruitment. And so we'll look at which non-protein items that we get a little more direct on digital to recruit some younger cohorts, and that's part of the work we're doing. But again, what I want to stress is we're not going to do that -- we're not going to turn on that extra marketing until we're really confident we are tight on execution, consistency of execution on steak and service. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mike Spanos for any closing remarks. Michael Spanos: Thank you once again for your investment and support of Bloomin' Brands. I want to close by thanking our people for their passion, their ownership and commitment to each other and our guests. We are on our path forward because of you. Thank you. Operator: This concludes the conference. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning. Welcome to Lantheus' Third Quarter 2025 Conference Call. [Operator Instructions] This call is being recorded, and a replay will be available in the Investors section of the company's website approximately 2 hours after the completion of the call and will be archived for at least 30 days. I'll now turn the call over to Mark Kinarney, Vice President of Investor Relations. Mark? Mark Kinarney: Thank you. Good morning. With me today are Brian Markison, our CEO; and Bob Marshall, our CFO. We will begin with prepared remarks and then take your questions. This morning, we issued a press release, which was furnished to the SEC under Form 8-K reporting our third quarter 2025 results. The release and today's slide presentation are available on the Investors section of our website. Any comments could include forward-looking statements. Actual results may differ materially from these statements due to a variety of risks and uncertainties, which are detailed in our SEC filings. Discussions will also include certain non-GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP financial measures is included in the Investors section of our website. I will now turn the call over to our CEO, Brian. Brian Markison: Thank you, Mark, and good morning, everyone. In addition to the earnings press release issued this morning, we announced a leadership transition plan to guide Lantheus into its next chapter of long-term growth. As a part of this plan, I will retire from Lantheus at the end of this year and transition into an advisory role. Mary Anne Heino, our current Board Chairperson and prior CEO, will assume the role of Executive Chairperson now and serve as interim CEO following my retirement. This structure allows Mary Anne and me to work closely together with our leadership team to ensure a smooth transition over the coming months. Mary Ann led Lantheus as CEO for 9 years, driving significant growth throughout her tenure before becoming Chairperson in early 2024. With her extensive industry experience and deep knowledge of Lantheus, Mary Anne is well-positioned to continue executing our strategy and driving momentum while we prepare for the expected launch of our new F-18 PSMA PET formulation. The Board has initiated a comprehensive CEO search led by our Lead Independent Director to identify and appoint our next CEO, who will build on our strong foundation. We also announced that our President, Paul Blanchfield, will be leaving Lantheus for a new opportunity. We thank Paul for his many contributions and wish him continued success in his new role. I would also like to note that Amanda Morgan will return from leave and continue in her role as Chief Commercial Officer, reporting directly to Mary Anne. Before Bob and I review the business performance, I want to express what an honor it has been to serve on the Board and lead such a talented and purpose-driven group of employees at Lantheus. I am proud of our collective achievements and the remarkable progress we've made to strengthen Lantheus' position as the leading radiopharmaceutical focused company. We executed a series of strategic transactions, including the acquisitions of Life Molecular Imaging, Evergreen Theragnostics and Meilleur Technologies, along with key licensing agreements. These transactions diversified our revenue streams, expanded our capabilities across the radiopharmaceutical value chain and positioned us for successful regulatory submissions. Most importantly, they enabled us to build a robust and innovative pipeline of radiodiagnostics, including advancing our position in the growing Alzheimer's disease imaging market and our early-stage radiotherapeutic products. Now turning to the Lantheus results. In the third quarter, our top priority was and remains executing our commercial strategy to maximize the long-term value of our prostate cancer franchise. Our PYLARIFY results for this quarter reflect our ongoing efforts to maintain a disciplined approach to pricing and to raise awareness of PYLARIFY's clinical differentiation. The pricing stabilization across our accounts that began early in the third quarter has continued and actions we implemented in the second and third quarters to maintain our market leadership will continue to play out over time. Looking ahead, we are preparing for the potential approval of our new F-18 formulation in 2026. We anticipate this will qualify for 3 years of transitional pass-through payment status, supporting our PSMA PET franchise growth beginning in late 2026 and into 2027. Now turning to PYLARIFY. Sales were $240.6 million during the quarter, down approximately 7% year-over-year, with U.S. volumes up 3.3% and down slightly sequentially due to seasonality, both consistent with our expectations. And further to that point, large institutions continued to diversify their PSMA agents across PYLARIFY and gallium-68 agents, while smaller accounts grew in line with market rates. Importantly, our educational efforts and customer feedback reflects increasing recognition of PYLARIFY's clinical value. And anecdotally, we are seeing some sites return after trialing alternatives. As I mentioned earlier, signs of pricing stabilization persisted throughout the third quarter and into October. We are preparing for the expected launch of our new F-18 PSMA PET formulation, which optimizes the manufacturing process to potentially increase batch size by approximately 50%, which could enhance production efficiency, supply resilience and enable increased patient access. We plan to introduce this new agent to the market following the receipt of coding, coverage and reimbursement, including a HCPCS code and transitional pass-through payment status. We expect this plan to level the reimbursement playing field. For the remainder of '25, we expect low single-digit volume growth offset by further price compression as 340B or best price resets in the fourth quarter as a result of the 2-quarter lag in government price reporting, reflecting price concessions offered in the second quarter. Importantly, we do not anticipate any material changes to 340B from the fourth quarter into the first quarter of 2026 as PYLARIFY's in-market best price remained consistent from the second quarter to the third quarter of this year. These resets are factored into our guidance, and we are actively mitigating the impact through targeted commercial strategies. Our focus remains on preserving the long-term value of our PSMA PET franchise. DEFINITY continues to deliver consistent performance, growing more than 6% year-over-year despite experiencing slight unfavorable customer mix in the quarter. We remain confident in DEFINITY's market leadership and the continued growth of the ultrasound-enhancing agent market. DEFINITY's success continues to be anchored in its proven clinical and commercial value at 24-year track record of clinical application and continued customer satisfaction. Turning now to our neurology franchise. We see significant growth potential in the U.S. Alzheimer's disease radiodiagnostic market, driven by rising prevalence, expanded PET imaging guidelines and increasing use of amyloid beta and tau PET imaging agents alongside disease-modifying therapies. Today, there are 2 approved therapies and more than 100 in development, including approximately 30 tau-directed therapies and 40 beta-directed amyloid therapies, underscoring the critical role PET imaging can play in diagnosis and treatment selection. In the third quarter, Neuraceq delivered sales consistent with expectations. Neuraceq is our F-18 PET imaging agent used to detect beta amyloid plaques in patients being evaluated for Alzheimer's disease and select patients for amyloid beta-directed therapy and is already enhancing the depth of our relationships with nuclear medicine customers and our manufacturing partners. Our strategy for Neuraceq focuses on 3 main priorities: first, expanding geographic coverage to ensure broad access across leading Alzheimer's centers and community practices, including with the recent addition of 2 new PMFs in Southern California and Illinois. Neuraceq, has growing geographic coverage in the U.S. across 20 PMFs, and we plan to launch 6 additional PMFs in '26. Second, improving availability and scheduling flexibility; and third, leveraging revised appropriate use criteria or AUC, and updated benefit manager guidelines, which recommend repeat scanning. We are advancing MK-6240, RF-18 PET imaging agent for detecting tau in adults being evaluated for Alzheimer's disease, and the FDA has set a PDUFA date of August 13, 2026. Our NDA submission was supported by data from 2 pivotal Phase III clinical trials, which evaluated MK-6240's performance in detecting tau pathology in early Alzheimer's disease. These studies met their co-primary endpoints of sensitivity and specificity to detect tau tangles. MK-6240 previously received fast track designation reinforcing its potential to address a significant unmet need in Alzheimer's disease diagnostics. We believe PET imaging is foundational to the diagnosis and management of Alzheimer's disease. The recent FDA approval of blood-based biomarkers is an important advancement, enabling earlier identification of patients. We believe these tests will expand the readily addressable market over time and complement, not replace the critical value PET imaging provides in visualizing and quantifying disease. In addition to our work progressing our new F-18 PSMA PET formulation and for MK-6240, we also are planning for potential approval of LNTH2501 which is also known as OCTEVY, which is a PET diagnostic imaging kit targeting somatostatin receptor-positive neuroendocrine tumors or as we commonly refer to them, NETs. If approved, LNTH2501 may complement Lantheus' therapeutic candidate, PNT2003 as part of a theragnostic pair, advancing the company's strategy to deliver integrated diagnostic and therapeutic solutions for patients with cancer. These 4 products strategically diversify our business and further solidify Lantheus' position as the nuclear medicine partner of choice. As we execute our strategy and advance our leadership in radiopharmaceuticals, we remain focused on delivering strong financial performance and disciplined capital allocation. To provide more detail on our third quarter results and outlook, I'll now turn the call over to Bob. Robert Marshall: Thank you, Brian, and good morning, everyone. I'll provide details of the third quarter 2025 financials, focusing on adjusted results with comparisons to the prior year quarter, unless otherwise noted. Turning to the details. Consolidated net revenue for the third quarter was $384 million, an increase of 1.4%. Radiopharmaceutical Oncology, currently PYLARIFY, contributed $240.6 million of sales, down 7.4%. U.S. volumes were up 3.3% year-over-year and down slightly sequentially due to seasonality as expected. Precision Diagnostic revenue of $129.7 million was up 25%. Highlights include sales of DEFINITY at $81.8 million, 6.3% higher, along with TechneLite revenue of $21.1 million, up 3.2% Additionally, Neuraceq contributed $20.4 million in the abbreviated quarter. Lastly, strategic partnerships and other revenue was $13.7 million, down 10.1%, driven mainly by our investigational product candidate, MK-6240 at $6 million of revenue, down 39.9% due mainly to the timing of milestones received in the prior year quarter not repeated. Gross profit margin for the third quarter was 53.5%, a decrease of 471 basis points. The decrease is mainly attributable to unfavorable pricing impacts to margin, the inclusion of Evergreen and LMI margin profiles and E&O charges, which accounted for approximately 50 basis points of gross margin headwind in the quarter. Operating expenses at 32.4% of net revenue were 775 basis points higher than the prior year rate, but generally in line with previously guided underlying spending levels with the inclusion of both Evergreen and LMI as well as additional investments in our R&D pipeline. Operating income for the quarter was $119.6 million or a decrease of 27.6%. Other income and expense were $2.4 million of expense. This is slightly lower than expected due to a decreased cash position from the $100 million of shares repurchased during the quarter that resulted in lower net interest income to offset interest expense. Total adjustments in the quarter were $74.8 million of expense before taxes. Of this amount, $24.5 million and $14.6 million of expense is associated with noncash stock and incentive plans and acquired intangible amortization, respectively. Nonrecurring expenses tied to closing and integrating our announced acquisitions and divestiture totaled $34.8 million. Our effective tax rate was 26.9%. The resulting net income for the third quarter was $27.8 million and $85.7 million on an adjusted basis, a decrease of 30.9%. GAAP fully diluted earnings per share for the third quarter were $0.41 and $1.27 on an adjusted basis, a decrease of 25.3%. Now turning to cash flow. Third quarter operating cash flow totaled $105.3 million, down $69.8 million from the prior year. The variance is driven in part by M&A fees and integration cash costs incurred in the quarter of $35.1 million. Capital expenditures totaled $10.6 million, down $5.2 million. Free cash flow, which we define as operating cash flow less capital expenditures, was $94.7 million, $64.6 million lower than the prior year period. During the quarter, the company invested $100 million in its own shares at an average price of $56.94 for 1.756 million shares. Also, the company completed the acquisition of Life Molecular with an outlay of approximately $309 million net of cash acquired. Taken together, cash and cash equivalents, net of restricted cash now stand at $382 million. We have access to our $750 million undrawn bank revolver and are comfortable with our strong liquidity position. Turning now to our updated guidance for the full year of 2025. We are narrowing our view of full year revenue to the higher end of the range to reflect recent trends we saw throughout Q3 as well as quarter-to-date. Principally, we estimate that PYLARIFY will come in towards the higher end of the prior range of $940 million to $965 million. Neuraceq's contribution should also trend to the higher end of the prior range. Taken together, full year revenue is now expected to be in a range of $1.49 billion to $1.51 billion from the prior range of $1.475 billion to $1.51 billion. We are also narrowing our estimates of adjusted EPS to a range of $5.50 to $5.65 versus the prior guide of $5.50 to $5.70. With that, let me turn the call back over to Brian. Brian Markison: Thank you, Bob. As I mentioned earlier, I look forward to collaborating with Mary Anne and the Board over the coming months and supporting Lantheus in an advisory role after retiring. In the meantime, I remain committed to advancing and executing our strategy. This includes continuing to build on Lantheus' strong leadership position in radiopharmaceuticals. We're staying laser-focused on driving PYLARIFY commercial execution as we prepare for the next chapter of our prostate cancer franchise. We're also advancing our strategic diversification plan, including the ongoing integration of our recent acquisitions and preparing for 4 near-term product approvals that we expect to fuel our next wave of growth. The talented teams from Life Molecular Imaging and Evergreen significantly strengthen Lantheus' ability to execute operationally and commercially and ultimately allow us to expand our patient impact. And we're advancing our innovative investigational assets across oncology, neurology and cardiology and expanding our commercial portfolio that enables clinicians to fight follow disease to deliver better patient outcomes. It's been a privilege to lead Lantheus as CEO. Together, we have built a robust radiodiagnostic and radiotherapeutic pipeline, position Lantheus for successful regulatory submissions and strengthened our capabilities and expertise in the growing Alzheimer's disease radiodiagnostics market and across the radiopharmaceutical value chain. I'm confident that Lantheus is well positioned to drive long-term growth and enhance value for all our stakeholders. And with that, operator, I'll now turn it over to questions and answers. Thank you. Operator: [Operator Instructions] Our first question comes from the line of Roanna Ruiz from Leerink Partners. Roanna Clarissa Ruiz: I want to extend my best wishes to you, Brian, on your next endeavor. So, a quick question for me. I noticed on -- you were talking about the PYLARIFY and Neuraceq likely being in the higher end of range of guidance based on trends in the quarter and to date. So, I was curious if you could elaborate on those, what strategies are getting traction here? And how could those continue into 2026? Brian Markison: Thanks, Roanna. And I'll take the beginning of it and then flip it to Bob. And by the way, welcome back, and congratulations to you. I think what you're seeing with PYLARIFY is, as we reflected in the prepared remarks, the stabilization in the PSMA market, we have, I would think, weathered the storm appropriately with execution as we changed from an ASP reimbursement environment to one of MUC. And we're seeing customers that are trialing different agents actually come back to PYLARIFY, and that's quite rewarding. So, with Neuraceq, it's really all about expansion and availability. It's a great amyloid tracer under the Life Molecular Imaging umbrella. It has not had the resources to expand in a way that we have with PYLARIFY. So, it's all about for us, availability, expansion, being there for our customers and also driving our portfolio. Bob, do you care to comment? Robert Marshall: Yes. I mean to kind of tack on to that, the visibility that we have as we look to the balance of this year, obviously, our focus is on executing the strategy that we've had in place. which we'll continue to do. But it's still a competitive market. And so, we will continue to monitor that extremely closely, particularly as we go into the new year. So, I'm not going to comment on '26 as we're not in a place to provide guidance. But when we do, it will take into consideration all the different market and environmental dynamics that we see at that time. Operator: Our next question comes from the line of Richard Newitter from Truist. Richard Newitter: I wanted to just ask actually a couple. I know you're not giving '26 guidance but is there -- I think investors are definitely focused on the possibility of any major resets coming. So, anything you can highlight relative to where you see consensus? I think consensus earnings is around $575 million for next year. And PYLARIFY is hovering a little over $900 million. It sounds like with the step-up in visibility today around PYLARIFY, that might not be a bad place to be. But anything you can comment on '26, even if it's just directional relative to consensus, that would be helpful. Brian Markison: Yes, Rich, I appreciate the question. We're not going to comment on '26 guidance. I think what we can tell you and what we're seeing in the market right now is the stabilization of our account base. We're also seeing continued year-over-year and sequential volume growth for PYLARIFY. So, we're seeing a lot of promising signs as we focus on growing the market, preserving the growth and preparing for our launch of our new formulation. Operator: Our next question comes from the line of Matt Taylor from Jefferies. Matthew Taylor: I was hoping just because there's a lot of significant management changes, you could talk a little bit more about why now in terms of retiring, why Paul is leaving? I guess, what you're looking for in a new CEO and how long that process could take? Brian Markison: Yes. Thank you. I appreciate the question. Well, first, let's uncouple the 2 management changes with Paul and Brian. Paul is going to a great opportunity. It's wonderful. We're excited for him, and it's also gratifying to Lantheus that we continue to turn out some great executives into the marketplace. As for me, my decision is personal. I've got 9 grandchildren. And actually, I think # 9 was the tipping point for me. So, when I came into the role, it was not with any expectation that this would be a long-term assignment, and that I came in to rebuild a pipeline, rebuild an R&D organization and position this company for sustained long-term growth. And I feel really, really good about doing that. So, it's time for me to step aside. But the other thing that's really good here that we should take note of is that Mary Anne is very close to this business. She was the CEO for 9 years. She has been part of it as a Board Chair for the past 2 years, and we have worked very closely together for the past 13 years. This is a seamless transition with an expert who's coming back in on an interim basis as we've also announced a CEO search. Our Lead Independent Director is heading up that search. It will be comprehensive. And obviously, we're looking for outstanding individuals that can take this company to the future. How long the process will take, I can't determine that. And right now, it's very early in stages. So, you can look at industry averages from announcements like this, the time of new placement and you can figure it out for yourself. But this is a very attractive role for an up-and-coming rising CEO candidate. And I have no question that we are going to find an outstanding person to come in here and build for the future. Operator: Our next question comes from the line of Paul Choi from Goldman Sachs. Our next question comes from the line of Yuan Zhi from B. Riley. Yuan Zhi: One advantage of F-18 label PYLARIFY is they are produced in 20 or 40 doses per batch. Since competitor Gozellix come to the market, do you notice that they are producing in cyclotron with a similar number of doses per batch and taking market shares away from your high-volume customers? Brian Markison: Thanks, Yuan. I appreciate the question. We're not seeing a lot of impact from Gozellix produced by the cyclotron. We're seeing actually, as I mentioned in the prepared remarks, very good and consistent growth with our smaller accounts that have more capacity and they are growing with the market. But we are seeing in our much larger accounts, those sharing, if you will, with Gallium-68, but those are the accounts that have a tremendous amount of volume. But we are not seeing any real impact that I can measure right now from Gozellix on a cyclotron. So, I'm not at the moment concerned about that. Operator: Our next question comes from the line of Larry Solow from CJS Securities. Unknown Analyst: It's Pete Lucas for Larry. Just one question. If you could give us a little more color on the competitive landscape in the Alzheimer's imaging market, particularly on the tau tango side of the market and how MK-6240 is positioned against other products? Brian Markison: Yes. Thanks, Pete. Great question. So again, MK-6240 has been filed with an expected PDUFA date of August 13 and 26. I think we look at MK-6240 as a second-generation tau agent. Tau is the only agent commercially available today. There is a lot of interesting information out of different clinical trials, one notably the head study out of University of Pittsburgh, where they directly compare these tracers, all the tau agents, whether they're investigational or the one commercially available head-to-head, if you will. And the superiority of MK-6240 is in evidence and reported in these studies, and we've discussed it in previous earnings calls. I think the major thing to look for here as the marketplace evolves and guidelines evolve, clearly, the role of tau is going to become increasingly more important as you look at staging, longitudinal management and tracking. And also what tau gives you the ability to do is look at where in the brain the tangles are, if you will, and what parts of the brain are they affecting -- and how does the patient with AD really behave, whether it's memory, whether it's balance, whether it's speech, all of these things come into play when looking at tau and assessing its disposition in the brain of an Alzheimer's disease patient. So, we feel that MK has a significant competitive advantage. However, I would like to point out that the market is relatively immature for tau and the beta amyloid market is really exploding right now in front of us. Operator: Our next question comes from the line of Tara Bancroft from TD Cowen. Tara Bancroft: So, I'm wondering if you could tell us more about the various factors and maybe feedback that you're hearing from your partners that are leading the market to reach this pricing stabilization exactly? And then along that line, do you believe that this will remain kind of a 3-player market in the near-term, like into 2026, given the various pass-through dynamics that are expected next year for you and for others? Brian Markison: Yes. In the near-term, I expect it to be a 3-player market. I think in a competitive market like ours and given the success we've had simply looking at the revenues we reported for PYLARIFY, you naturally do attract competition. We think the stabilization we're seeing and our description of our strategy to be disciplined on price has played through in the marketplace with our accounts and our customers. The other thing to note is our service is top notch. Our ability to deliver doses on time in full is unparalleled. And I think that service quotient and our team in the field, along with our PMF partners needs to be recognized as part of our success. So, it's not simply introducing another agent. It's also having the feet on the street and the knowledge that we have to really execute. The other part of this, though, is the clinical differentiation of PYLARIFY is really beginning to shine, if you'll excuse the pun. I think in patients with low-volume disease where they're suspected of a recurrence or even on initial staging and diagnosis, PYLARIFY has a very clean and distinct signal and its sensitivity and specificity are really unparalleled. And you can just look at the other competitors' package inserts to compare them. So, in all, I believe this market stabilization we're seeing now is healthy. I think that customers are making the right decision for their patients. And I think our team in the field is really rocking it, and I expect continued growth out of this franchise. Operator: Our next question comes from the line of Justin Walsh from Jones Trading. Justin Walsh: What are your thoughts on the potential dynamics that could emerge in the PSMA imaging market as other clinically differentiated products enter? I know one potential competitor has a copper 64-based agent in late-stage development, and it would be great to hear how Lantheus will maintain your edge in the space. Brian Markison: Yes. I think the copper 64 agent is certainly of interest to us, and we are monitoring their progression carefully. I think when you look at real differences in the clinic, that will have to play out, but we're highly confident that our sensitivity and specificity at our network will continue to be the major force in the marketplace. So, we're watching it very carefully, and I really don't have too many concerns at the moment about that. Robert Marshall: And Justin, I'll just tack on. I just think that you're also talking about it launching into what is we believe will be a continuing market opportunity. So, a rising tide lifts all boats. Certainly, if there's a carve-out share for them, it would be into a market that is going to approach $3.5 billion plus by the end of the decade. A lot of that predicated on the growing use from an RLT perspective. I'll leave it at that. Operator: [Operator Instructions] Our next question comes from the line of Kemp Dolliver from Brookline Capital Markets. Brian Kemp Dolliver: Brian, what are you thinking regarding the pending Medicare hospital outpatient rule, which, a, is overdue and then also the possibility that they will transition to ASP from MUC. Brian Markison: Yes. I think when you look at the end of last year, there was a moment in time where we had ASP, then we didn't, then we had it again and then we didn't. And now we're in the MUC environment. I think the hill is a bit in disarray at the moment. However, we continue to lobby. We continue to work with CMS, and we're continuing to educate them. I think the belief out there, and certainly, we share this is that moving to ASP eventually is the right move for all parties involved. It simplifies everything from both our end and from CMS. However, I think at the moment with a bit of a disarray, it's hard to break through and have your voice heard. So, I think for '26, I'm not anticipating much change, but certainly for '27, we are predicting that there could be meaningful change to ASP. Operator: Our next question comes from the line of Yuan Zhu from B. Riley. Yuan Zhi: A follow-up from us. So now Neuraceq acquisition is complete, can you provide additional color on the growth trajectory from the past and looking forward as well as your plan to gain market share there? Brian Markison: Yes, I appreciate the follow-up question. I would love to talk about the historic trend line for Neuraceq, but those sales were not our audited numbers. So, I really can't really report on them too much. However, what I can say is we're seeing terrific growth from Neuraceq. October was an all-time high, and we expect that growth to continue. Robert Marshall: Yes. I mean -- and even to take it from an inorganic perspective, we do -- they have been healthy growth rates. I mean, let's just put it that. They've had a great year in 2025. We expect them to continue to grow from a market share opportunity perspective as we grow our PMF network, as Brian outlined in his prepared remarks and as well as bolstering the U.S. sales team that came with the acquisition who have all done a great job. We expect the opportunity from an expanded geographic presence to drive not only just the annualization of their contribution, but also to drive added value beyond that. Brian Markison: And I think what gives us a lot of confidence is the team from Life Molecular Imaging has been in the neuroscience space for quite some time. And their expertise is immediately grafted into our organization, and that gives us the ability to really hit the ground running and not lose any -- there's no real downtime with them. It's been a seamless transition and integration with them, and we really cherish a lot of our new employees. Operator: Thank you. Ladies and gentlemen, there are no further questions at this time. Thank you for participating in today's conference. This concludes the program. You may disconnect, and have a wonderful day.