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Operator: Good morning. This is the conference call operator. Welcome and thank you for joining the GTT Third Quarter 2025 Activity Update Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Philippe Berterottiere, Chairman of the Board and CEO of GTT. Please go ahead, sir. Philippe Berterottière: Well, good morning, everybody. I'm very pleased to present to you the Q3 2025 activity update. I am with Thierry Hochoa, the CFO of the GTT Group and with the entire Investment Relations team. Well, year 2025 first 9 months have been quite impressive. First of all, the fundamentals are excellent with 84 million ton per annum already decided. The revenue are approaching EUR 600 million on the first 9 months, which represents an increase of 29% compared to last year. We obtained a fairly diverse orders with LNG carriers; ethane carriers; FLNG, LNG as a fuel. All that led us to upgrade our 2025 outlook when we include Danelec. On key highlights, we introduced a new technology for LNG as a fuel that we named CUBIQ. We obtained approval in principle from Bureau Veritas. We completed the acquisition of Danelec, and we obtained a quite large contract from the Chinese shipyard, Hudong-Zhonghua for 24 LNG carriers. We continue our innovation efforts with the new partnership with Bloom Energy and Ponant Exploration Group on a new system for zero-emission ships. And we obtained a contract for an electrolyzer in Slovakia for 1 megawatt. If we look at our order book, we've received orders, 19 orders in the first 6 -- 9 months. So not taking into account the order we received in October. So 267 LNG carriers, which are guaranteeing our activity in the next years, 22 ethane carriers, 3 FLNG and 3 FSRU. If we look at the market, we can see that the activity in terms of SPA, sales and purchase agreement, for LNG for the contracts path to liquefaction facilities have been very important in the second and third quarter of 2025, and that is very much supporting the decisions for further FIDs. In fact, in terms of FIDs, we can see that this year has been phenomenal. It's an all-time record with 84 million tons decided as of today. It's historic. And that means that the outlook for LNG demand for the next year is very strong. So it's the supportive trends for LNG and for energy carrier orders are very strong. But the geopolitical context remains quite complex. I would say we could talk about that at large. But I would say that the instability of regulations between the 2 sides of the Pacific Ocean are creating a kind of concern, still perplexing the decisions of shipowners. I do hope that the recent discussions are going to be able to clarify that. In any case, the LNG carrier order inflow is expected to increase, backed by a strong long-term fundamentals on which we talked just a moment ago. As far as LNG as a fuel is concerned, we can see that the adoption of this fuel structure is continuing to grow very significantly. It's a very good news, very good news for the planet, very good news for GTT, as this LNG at a certain point of time is going to be transported by LNG carriers and also very good news for LNG as an actor in LNG as a fuel. We can see our market share. We are trying to enlarge this market share in introducing new solutions. And we've introduced CUBIQ, which is a new tank design, which aims at enlarging the -- increasing the cargo space, the space left for the cargo, facilitating the installation, so reducing the cost of building the tank, reducing the boil-off and so improving the total cost of return of our solution for the owners. In our digital activity, we are scaling up our efforts in a EUR 1.25 billion market with the acquisition of Danelec that we've completed in end of July. We are in a fast-growing market, and we do expect to be able to benefit from this growth. We are in this market in -- our ambition is to benefit from recurring revenues, which will balance our other activities and to develop revenue synergies that we are targeting between EUR 25 million to EUR 30 million by 2030. So key achievements. Well, I would say that during these first 9 months, we've released a new generation of VDR. Well, that shows you that the innovation activity, constant innovation activity of Danelec is very much in phase with what we do at GTT. And it's why the integration is going to be very easy as we are on the same wavelength. We've obtained new contracts with a very significant contract obtained from Hudong-Zhonghua for 24 LNG carriers with our SloShield system developed for mitigating the sloshing risks and optimizing cargo operations. Now I hand the mic to Thierry Hochoa, the Group CFO, who is going to present to you the consolidated revenues. Thierry Hochoa: Thank you, Philippe. Good morning, everyone. Now regarding our revenues for first 9 months of 2025. Revenues at EUR 600 million are up plus 29%, a strong increase compared to EUR 465 million for the first 9 months of 2024. Two main drivers to explain our revenue performance. The first driver is revenue from new builds standing at EUR 558 million, was up plus 30%, benefiting from a higher number of LNG and ethane carriers under construction. The second driver is linked to the digital activities at EUR 20 million was up plus 83% and including EUR 6.5 million of revenues of Danelec, our recent acquisition. Excluding Danelec, the digital revenue growth was plus 24% compared to last year. One comment on revenues from LNG as fuel. They are down by 32% at EUR 16 million and mainly explained by the strong competition. Regarding electrolyzers activities, revenue are down and stands at EUR 3.7 million for the first 9 months of 2025 compared to EUR 6.6 million for the first 9 months of 2024. This evolution is mainly due to the absence of contract in 2024 and the continuation of transition and repositioning of Elogen. Finally, revenues from services slightly decreased by 3% at EUR 18 million due to a lower level of reengineering studies, which are nonrecurring by nature, but offset by a robust certification activities. All in all, the activity of the first 9 months of 2025 remains very solid. I now back to Philippe for the outlook. Philippe Berterottière: Yes. Thank you, Thierry. Well, on the back of a very strong core business performance and the integration of Danelec over 5 months period, we are upgrading our outlook, assuming no significant delays in ship construction schedules. For our revenues, instead of range between EUR 750 million to EUR 800 million, we have now an estimated range of EUR 790 million to EUR 820 million. For our EBITDA, instead of a range between EUR 490 million to EUR 540 million, we have a range now between EUR 530 million to EUR 550 million. And our payout ratio will be at least 80% of our consolidated net income. So now we are going to answer to your questions. So please. Operator: [Operator Instructions] The first question is from Richard Dawson of Berenberg. Richard Dawson: First one is just on the order outlook for new LNG carrier orders because clearly, very supportive trends with new LNG capacity being sanctioned this year, but we're still seeing a bit of hesitation from shipowners really to place those orders with shipyards. So just through your conversations with your customers, when do you expect an acceleration to start to come for those LNG carrier orders? And then maybe second question is just on shipyard capacity across Korea and China. Has this slowdown in LNG carrier orders this year put some of those -- some of that planned expansion on hold? Where are we sort of in total slots for this year? Philippe Berterottière: Okay. Well, thank you very much for this question. I do agree with you about these hesitations. It's a perfect word for characterizing the current situation. In fact, the owners are weighing whether they should take the decision now. They are very much perplexed due to the instability in regulations. We had taxes on Chinese-built ships in the U.S. We don't have them anymore. We have taxes in China on ships, American ships. So they would like a more stable environment before taking decisions. Energy carriers are the most expensive commercial ships, and that's important investment decisions. So they are weighing the risks before taking these decisions. I can say that we have a lot of discussions with shipowners. They would like to move. They would like to know whether they can go to China. They would like to know what kind of competition they can benefit from between China and Korea. So that's considerations that for the time being, they are weighing. So when is it going to change? I think we may have orders in the last 2 months of this year. And I think that year 2026 will be significant in terms of ordering. And it goes back to your -- the second part of your question about slots. I don't think that there are many slots still available for building ships in shipyards for delivery in 2028. And so then it's in 2029. And I'm feeling that these slots are fairly far away for the needs that owners have. So there is going to be a kind of acceleration in the market. And your last question is the shipyard capacity. Well, the current flow of orders is not reducing the capacity of the yards as they are building. So the capacity out there as they are very -- this capacity are very active. And it's important for the shipyards to maintain these capacities. And it's why we can see some pricing, some prices, which are more aggressive than what they used to be. And I think it's a factor, which is going to help the acceleration in the order flow I was speaking about. Operator: The next question is from Jean-Luc Romain of CIC Market Solutions. Jean-Luc Romain: I have 2 questions, please. The first is about LNG as a fuel orders. We have seen several shipowners like CMA CGM and I think Evergreen, in Taiwan, ordering dual fuel vessels recently in Korea and China, not sure. Should it translate into orders for you? That's the first question. Second question is, as we are seeing a slowdown in order this year in new LNG carriers, should we expect a slowdown or stabilization of your new build sales in the next couple of years? Or should we expect those to decline a little? I'm speaking about the new build sales. Philippe Berterottière: For LNG as a fuel, when we have not announced a contract, I cannot comment on the fact that the contract is going to be for us. We -- it's a market where we have a market share, where we are trying to enlarge our market share and where we are going to -- where we are improving our offering, our solutions in order to do so. So it's a market with high competition where we are fighting hard. On the slowdown of orders and the consequences it means for the years to come, well, I would say that we are giving you figures about our revenues for the next coming years. And I send you to your computations to your work for assuming what the turnover is going to be, what the results are going to be for the next years. I cannot further help you. We are giving you all the information about that. What I can say that we may -- we are not seeing any kind of cancellations in our order book nor we see particularly delays in delivery. Operator: [Operator Instructions] The next question is from Henri Patricot of UBS. Henri Patricot: Two questions from my side, please. The first one on the market. I was wondering if you can comment on what you see as the potential impact of the delay to the IMO net zero framework, both for the core business and maybe driving a slower replacement of the fleet. And secondly, in terms of the speed of adoption for LNG as fuel. And then secondly, on deliveries for this year, I believe, you targeted something close to 100 deliveries in the core business. Is that still the case? It implies quite an uptick in the fourth quarter. Philippe Berterottière: Well, on the market for IMO, I think I hinted that in our last communication at the end of July for the first 6 months of the year. I was feeling that it was going too far, too quickly. And this -- the delay in the implementation of this regulation is not going to change the fundamental trend of the market for shipping, which is that shipping is switching to LNG. LNG is reducing the CO2 emissions and LNG is cheaper than other fuels. So cleaner and cheaper, it's 2 significant improvements. And whatever -- in spite of the delay of the IMO regulation implementation, there will be -- this evolution will continue. It's not going to cause a kind of slowdown, well, in the LNG carrier decisions as that is very much driven by the need for ships for new plants and also for replacement market. And there is clearly a need for replacing old ships, which are generating twice more CO2 than modern ships. And there are large parts of the world to begin with Europe, which are taxing CO2 emissions, heavily taxing CO2 emissions. So all these points are in place and are positive for LNG at large and positive for LNG as a fuel. On your second question, we expect to have still a strong activity in 2025. With compared to 2024, we had 66 orders; and up to now, we had in 2025, 58 orders. And we are going to have still a significant 58 deliveries. And of course, we are going to have still at the end, in the fourth quarter of this year, a very significant number of deliveries. Operator: The next question is from Jamie Franklin of Jefferies. Jamie Franklin: So firstly, just on LNG carriers. At the 1Q '25 update, you spoke to around 40 to 65 vessels still required for projects under construction. I just wanted to get a sense of how many of the orders that you've received in the last 6 months are for those under construction projects? And how many are for the newly FID projects this year, please? And then second question, just on Danelec. So the integration seems to be going well. Are you still actively pursuing new M&A opportunities now? Or are you waiting for the integration of Danelec to complete? And then if you are considering new opportunities, could we assume a similar size to Danelec? Philippe Berterottière: Okay. On LNG carriers, we -- I have not noticed when we said 40 to 65, but it's a time ago. But definitely, the orders we received this year are for existing projects and so are decreasing this number of projects decided before year 2025. And we have not received orders for the 84 million ton per annum decided in 2025. These are for deliveries in 2029, 2030 and 2031. So it's this long-term perspective, which are going to be supported by these investment decisions. And still, we consider that there are ships, which are needed for the projects decided before 2025. On M&A and Danelec, yes, I confirm that the integration with Danelec is going well. We -- the priority for the time being is to continue very well this integration. It's the best guarantee that we are going to be able to obtain the synergies that we were talking about and also that we are going to be able to benefit from the growth of the sectors where we are operating. We are looking at M&A possibilities. Of course, we are not -- meanwhile, we are not becoming blind to what we could find on the market. But I will say that for the time being, there is no opportunities, which are making sense. But it's not because there is nothing that we are not looking at that, and it's not because we have a priority succeeding the integration that we are not looking at what could make sense, which is our priority #1. Operator: The next question is from Kevin Roger of Kepler Cheuvreux. Kevin Roger: Sorry for that one, but it's a kind of follow-up because you used to give us the net numbers in terms of how many vessels you were seeing for the project that were sanctioned or under construction. So just if you can follow up as a kind of magnitude, the 84 million tons of projects that have been sanctioned year-to-date in '25, how many vessels do you consider are needed to transport this LNG worldwide? Just a kind of magnitude with the data that you have provided before. And the second one on Elogen, it seems that the restructuring is almost completed. H1, you booked quite a large provision, almost EUR 50 million. Any sense on if you're going to use all those provisions or if a bit more is needed? So just a comment maybe on this provision and where you think you're going to end with the restructuring? Philippe Berterottière: Okay. On the number of ships, what we can say on the 84 million tons per annum is that 17 million are not from Gulf of Mexico or Gulf of America, so to speak, to the rest of the world, where you have a very important shipping intensity and, in particular, as the Panama Canal is quite congested and where the shipping intensity is something like 2.3. In fact, I consider 67 million tons are from Gulf of Mexico to the rest of the world and the shipping intensity can be 2.3 or, let's say, 2 ships for a million ton, to be cautious. For the rest, the 17 million tonnes, you are on Mozambique to the rest of the world and the shipping intensity is probably 0.9 or 1 ship per million ton. So altogether, it's a very, very large number of ships. Let's say, without going to be too specific, far more than 100 ships to be ordered and probably something close or close to 150 -- around 150 ships ordered. As far Elogen is concerned, I'm going to hand the mic to Thierry. Thierry Hochoa: Yes. Thank you, Philippe. Yes, you're right to mention that we booked at the end of H1 2025, EUR 40 million of cost to restructure this affiliate. It's -- you have all the costs here. We do not expect additional cost because in this cost, I remind you, we have the final [ halt ] of Vendôme Gigafactory and the write-off of this asset. And you have as well provision for the workforce reduction plan. So we do not expect additional cost at the end of this year for Elogen. Operator: The next question is from Jean-Francois Granjon of ODDO BHF. Jean-Francois Granjon: Two questions from my side. The first one, could you come back on the LNG as a fuel. You mentioned some more intensive competition. So could you give us more color about that? And what do you expect for you in terms of growth and trend for the development of this business? Do you expect some more delay or more time due to the more competition you mentioned? And the second question concern Danelec. You also mentioned some cross-selling and synergy -- synergies at EUR 25 million to EUR 30 million. So in which timing do you expect that? And could you give -- explain us more how we can -- you expect to reach such level of synergy -- revenue synergy in the coming years? Philippe Berterottière: Okay. Thank you. Well, on energy as a fuel, we have competition from different containment technologies, which are called Type B or Type C and which are using a thick plate of stainless steel, which has to be welded in terms of operation, it can -- it's something, which is a bit complicated. But this technology has the merit to be very easy to install inside the ship. It can be lifted and pushed inside the ship. We -- which is very much liked by shipyards whenever they are quite busy. We need an installation in the ship, which is taking time and workmanship even though materials are far less expensive. We are existing in this market, and it's a fast-growing market. We are keeping on improving our solutions to better exist in this market. And you're going to see how we progress in this market in the years to come. As far as Danelec is concerned, we are planning synergies between EUR 25 million and EUR 30 million by 2030. And it's mainly obtained through cross-selling between the various activities of the various pools of Danelec. We had VPS, we had Ascenz Marorka, we have Danelec. And these 3 companies have a different portfolio of customers where we are going to try to sell the solutions of the others. That's basically where the synergies that we are going to try to obtain. Operator: Mr. Berterottiere, this was the last question of over the phone. Thierry Hochoa: Okay. Thank you. We do have one question coming from online from Jean-Philippe Desmartin at Edmond de Rothschild Asset Management. Succession planning of the CEO position at GTT, do you have an update to give? Philippe Berterottière: Well, what I will say is that the Special Committee of the Board of Directors is working on that and a proper information will be given in due time. So if there is no other question, I would like to thank you for having attended this conference, and I hope to see you soon. Thank you very much. Operator: Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.
Operator: Welcome to the IRADIMED CORPORATION Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] This call is being recorded today, November 3, 2025, and contains time-sensitive accurate information that is valid only for today. IRADIMED released its financial results for the third quarter of 2025. A copy of this press release announcing the company's earnings is available under the heading News on their website at iradimed.com. A copy of the press release was also furnished to the Securities and Exchange Commission on Form 8-K and can be found at sec.gov. This call is being broadcast live on the company's website at iradimed.com, and a replay will be available for the next 90 days. Some of the information in today's session will constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements focus on future performance, results, plans and events that may include the company's expected future results. IRADIMED reminds you that future results may differ materially from those forward-looking statements due to several risk factors. For a description of the relevant risks and uncertainties that may affect the company's business, please see the Risk Factors section in the company's most recent reports filed with the Securities and Exchange Commission, which may be obtained free from the SEC's website at sec.gov. I would now like to turn the call over to Roger Susi, President and Chief Executive Officer of IRADIMED Corporation. Mr. Susi? Roger Susi: Thank you, operator. Good morning, and thank you all for joining us on today's call. I am indeed very proud to report that IRADIMED achieved its 17th consecutive quarter of record revenue with the recent third quarter surpassing the 2024 third quarter by 16%. In the third quarter of 2025, we achieved revenue of $21.2 million. Our gross profit came in at 78% and earnings remained strong with GAAP diluted earnings per share increasing 8% from Q3 of '24. Pump shipments again led performance in the quarter as our 3860 MRI IV pump grew another 20% year-over-year in Q3. Our MR monitor sales have also continued to impress. I am also pleased to report that shipments of our MRI patient monitor grew by 16%, clearly showing that our emphasis on monitoring sales for 2025 is proving successful. Next, I want to touch on the planned rollout and commercial launch of the new 3870 MRI IV pump system, which was cleared in Q2. Let's recap what I have been saying about the #1 growth driver for the new 3870 pump. But first, yes, we anticipate a price increase of 10% to 14%. And yes, the 3870 design is such that we fully expect to penetrate the greenfield opportunity more effectively and also drive increased utilization among some of the existing customers who only use their older pumps rather sporadically. But most significant increases come from the large replacement opportunity, which is the #1 driver we see step changing the pump revenue and will continue to be our key growth driver in pump area for several years to come. It is very telling that even the old 3860 model delivered 20% growth in the third quarter. This is driven mainly by limiting, again, our extended maintenance offering to pumps under 7 years old -- to 2 pumps rather under 7 years old, which has brought in replacement orders for about 1/3 of the pumps in that 7 and up age group. With the new state-of-the-art 3870 pump having 20 years of technological advancement over the aging 3860, we anticipate a significant demand to replace the very large pool of older 3860 model pumps starting now at the 5-year and older level. Consider that in the U.S. market alone, there are approximately 6,300 5-plus year old or older 3860, [ 61 ] pump channels up for replacement. And we currently sell approximately 1,000 such channels annually in the domestic market. We will target adding another 1,000 channels per year in sales through replacement sales out of that existing 6,300 units that are over 5 years -- that are over 5 years old. This will be our target starting in Q2 and throughout the rest of 2026. And as you can see, replacing 1,000 channels per year leaves many thousands more to replace in the years to come. To put numbers to this opportunity for our domestic business only, selling north of 2,000 3870 pump channels annually at a slightly higher anticipated ASP, we would be approaching nearly a $50 million revenue run rate for pumps. Adding disposables and maintenance, international sales and the MR monitoring business, one can understand our confidence in breaking into the $100-plus million revenue range. I'd like to provide our thoughts as to timing on the rollout of the 3870. In December, we will deliver an initial order of 23 3870 systems, for which we will provide an extraordinarily level -- extraordinary high level of clinical support and monitoring of the use of the pumps through January and February to review and adjust planning based on user input. The full sales team rollout in the U.S. will begin after the national sales meeting in the third week of January. Given the time required for our hospital customers to be sold, approve funding and issue orders, we expect bookings to build beginning in Q2 and ramp significantly in the second half of the year. We expect to maintain quarterly revenue in the first half of 2026 through the increasing MRI monitoring business and our 3860 pump backlog. Now let's discuss our updated financial guidance. For the fourth quarter of 2025, we expect revenue now of $21.4 million to $22.4 million and anticipate GAAP diluted earnings per share of $0.43 to $0.47 and non-GAAP diluted EPS of $0.47 to $0.50. For the full year 2025, we are raising our guidance to $82.5 million to $83.5 million, up from our prior range of $80 million to $82.5 million. GAAP diluted earnings per share is now expected to be $1.68 to $1.72, up from $1.60 to $1.70. And non-GAAP diluted earnings per share is expected is $1.84 to $1.88, up from $1.76 to $1.86. We also remain committed to delivering value through our $0.17 per share quarterly dividend declared for Q4 and payable on November 25. I'll turn over the call to Jack Glenn, our CFO, now, to review the quarter's financial results. Jack? John Glenn: Thank you, Roger, and good morning, everyone. As in the past, our results are reported on a GAAP basis and non-GAAP basis. You can find a description of our non-GAAP operating measures in this morning's earnings release and a reconciliation of these non-GAAP measures to GAAP measure on the last page of today's release. For the 3 months ended September 30, 2025, we reported revenue of $21.2 million, a 16% increase from $18.3 million in the third quarter of 2024. This growth was driven by strong performance across our product lines with MRI compatible IV infusion pump systems contributing $8.3 million, up 20% year-over-year and patient vital signs monitoring systems contributing $6.9 million, up 16%. Disposable revenue grew 12% to $4.1 million, reflecting increased utilization of our devices, while ferromagnetic detection systems also saw solid gains. Domestic sales increased 19% to $18.1 million and international sales remained consistent at $3.1 million. Overall, domestic revenue accounted for 85% of total revenue for Q3 2025 compared to 83% for Q3 2024. Gross profit was $16.4 million, up 16% from $14.1 million in Q3 2024, with a gross margin of 78% compared to 77% in Q3 of 2024. The strong margin performance was especially noteworthy as we moved manufacturing operations into the new facility at the beginning of the quarter and stayed on track with our shipment and cost of goods sold targets. Operating expenses for the quarter were $9.7 million, up 15% from $8.4 million in Q3 of 2024, driven by higher sales and marketing expenses to support our growth and modest increases in general and administrative costs and research and development expenses. The increase in sales and marketing expenses was primarily due to higher sales commissions for our direct sales force in the U.S. as they exceeded their bookings plan in the quarter. Income from operations grew 17% to $6.8 million from $5.8 million in Q3 of 2024. Tax expense for the quarter was $1.7 million, resulting in an effective tax rate of 23.6%. The increase in the effective tax rate was primarily due to a catch-up in the quarter with our projected effective tax rate for the year now estimated at 22%. Net income was $5.6 million or $0.43 per diluted share, a 12% increase from $5 million or $0.40 per diluted share in Q3 of 2024. On a non-GAAP basis, net income was $6.1 million or $0.47 per diluted share, up 9% from $0.43, excluding $0.5 million of stock-based compensation expense net of tax. Now turning to our balance sheet. We ended the quarter with cash and cash equivalents of $56.5 million, up from $52.2 million at year-end 2024. Cash flow from operations was a strong $7 million for the quarter and $19 million year-to-date. Free cash flow, on non-GAAP measure, was $5.7 million for the quarter and $11 million year-to-date, reflecting capital expenditures of $8 million year-to-date, primarily related to the new facility. Final payments totaling approximately $1.3 million for the facility were made in the third quarter, bringing the total construction cost to approximately $13.3 million. And with that, I will now turn the call over for questions. Operator? Operator: [Operator Instructions] Our first question is going to come from the line of Frank Takkinen with Lake Street Capital Markets. Frank Takkinen: Congrats on the solid quarter and all the progress. I was hoping we could start with some more color around the kind of bridge to $50 million run rate in pumps. I appreciate the timing you laid out related to sales meeting, launching after that in January and then ramping the backlog in Q2 through mid-2026. When should we expect that to flow through to kind of revenue to that $50 million run rate? Can we see that in late '26? Or is that more of a 2027 event? Roger Susi: We should -- yes, Frank, it's Roger. Maybe I'll pick it up first and let Jack jump in if he has some more color for you. As I said, most of that -- given that we start pounding the pavement shall we say, to sell 3870 here in me mid-January, the early part. But by the time they get out there, you're basically half of Q1. And as I mentioned, orders don't just immediately get turned around even from people that are -- we think are pretty well pent up with desire to get a new pump now after at least 20 years of 3860. So yes, the story is in the back half of 2026 for revenue. We anticipate bookings and so forth, that we'll be able to report on in the first half, certainly. But the real revenue will start to ramp up in the third and fourth quarter. And so yes, by that fourth quarter, we think it will be pretty clear that we're doubling the number of pump channels that we're booking certainly and the revenues should start to reflect that as well. Frank Takkinen: Got it. That's helpful. And then I wanted to follow up on one comment in the press release. I think it was along the lines of despite some inefficiencies with the transition, we maintained a 78% gross margin. Quite honestly, I figured that would be followed with our gross margin was negatively impacted and below expectations, but that was still above expectations. Is it may be kind of hinting at the fact that you can get even better gross margins out of this product potentially into the 80%? Or how should we kind of read through on that inefficiencies and how that impacted the quarter? Roger Susi: Well, I think it shows that we did a great job. transition, moving the entire operation across Orlando essentially and getting it plugged in and running again, that we didn't have any glitch negatively impacting revenues and subsequently cost of goods. And -- but I think the real impact there is that the revenue -- the stuff that we didn't ship out by and large, in Q3 was heavily domestic. And so that is probably what accounts for that 1% boost in the gross margin. So can it be sustained? Well, as we get quarters where domestic business is a little bit on the lesser side from international business, that will fluctuate probably by that point. Operator: Our next question comes from the line of Kyle Bauser with ROTH Capital Partners. Kyle Bauser: Congrats on the great results. Maybe we can talk a little bit about inventory levels for 3860 and 3870. Maybe first on 3860. Obviously, demand is still very strong here. It doesn't sound like any air pockets, which is impressive. Is pricing stable on that? Or are you planning on maybe sort of providing any sort of discounted levels there as you kind of roll out that inventory and move into 3870? Roger Susi: Kyle, nice to have you on board here with us. By the way, and hope to meet face-to-face soon. But to answer your question, the question is simple, no. No. We haven't -- it's surprising maybe, but yes, that boost -- that gift that keeps on giving from these old 3860 pump orders is straight at the ASPs we've always enjoyed, no discounting, no, haven't done that. Kyle Bauser: Great. Great to hear. And maybe on -- how are you thinking about inventory levels for 3870 ahead of the launch? And what are current levels? Or do you expect -- how do you expect to manage that, et cetera? Roger Susi: Well, there's lots of money going there. I'll let Jack pick that one up. John Glenn: Sure. So good to hear from you, Kyle. So yes, as far as the inventory levels of 3860, certainly, we have the inventories and we'll plan the inventories for the backlog that we have currently with the 3860, which will be shipping throughout Q1 of next year and end of Q2, it looks like. As far as the 3870, we are beginning those buys now. And so you'll see in Q4, there certainly -- we're building up inventory for those 3870s and now will be appropriate build for Q1 and beyond. And so certainly, we have the working capital from that perspective, no issues there. Kyle Bauser: Okay. Appreciate that. And I don't want to get ahead of myself here since you're just kind of beginning the rollout into the U.S. But can you remind me plans eventually to secure entry into international markets for 3870 and how you're kind of thinking about that? Roger Susi: Yes. It's primarily a regulatory issue. There's the new MDR requirements to maintain your CE Mark for European community business. That's a heavy lift, but our regulatory folks, they came off of a long battle with FDA, as you know, to clear the 3870, but that was back in May. They took a breather, but they're hot and heavy on obtaining that MDR, let's call it a clearance, but it's a registration where the CE Mark. And that will -- that's what we're targeting to be done in Q4. So international business will switch over to the 3870 next year, 2027, I should say, not in 2026. We'll just be getting the MDR towards the latter part of 2026. Likewise, our other large market for pumps is Japan. And I'll be speaking with them. I'm in Japan calling on this call right now. I'm speaking to them here in the next day or 2 and working with the Japanese to clear the product here in Japan. We're going to do that simultaneously. But it probably still will be somewhere in the fourth quarter by the time we get that cleared. And then we'll switch Japan over. So both those largest international markets will be a 2027 kicked in. Kyle Bauser: Okay. Great. Appreciate that. And maybe just one more quick one. Glad to hear you're fully moved into the new facility. I think it's 2.5x the size of the previous facility. Correct me if I'm wrong. But any sense as to kind of what level of sales this could support or capacity, however you want to frame it? Roger Susi: Well, it is 2.5x the size. That's right. And we were doing $20 million a quarter out of that 2.5x smaller space. So the math of it's pretty equal. We don't see any reason why we can't get to $50 million a quarter in the new facility. And so yes, 2.5x. But unlike the old facility, we're not landlocked where we are. As you might recall, Jack mentioned the cost of construction of the building that we did pay cash and we built it with our cash flow. But we also purchased the 26 acres. The building sits on about 5 of it, 5 or 6 of that. So there's lots of space around us that's ours to -- and the way we constructed the building was so it could easily be expanded into that adjacent space that we own. So we have plenty of space without spending another nickel on any construction or buying more land. And to expand the production side of the building into the land that we already own is not that heavy of a lift. So we have, I guess, paid forward quite a ways these plenty capacity physically. Operator: Thank you. And this will conclude today's question-and-answer session. And I would now like to turn the conference back over to Roger Susi for closing remarks. Roger Susi: Thank you, operator, and I thank you all once again for joining today's call and look forward to displaying IRADIMED's ability to execute once again as we introduce our new MRI IV pump and capitalize on the huge replacement opportunity throughout 2026 and beyond. Thank you. Operator: Thank you. This concludes the call. You may now disconnect. Everyone, have a great day.
Operator: Good day, and welcome to the Cipher Mining Third Quarter 2025 Business Update Conference Call. [Operator Instructions] As a reminder, this call may be recorded. I would now like to turn the call over to Courtney Knight, Head of Investor Relations. Please go ahead. Courtney Knight: Good morning, and thank you for joining us on this conference call to address Cipher Mining's business update for the third quarter of 2025. Joining me on the call today are Tyler Page, Chief Executive Officer; Greg Mumford, Chief Financial Officer; and Edward Farrell, Senior Adviser and former Chief Financial Officer. Please note that our press release and presentation can be found on the Investor Relations section of the company's website, where this conference call will also be simultaneously webcast. Please also note that this conference call is the property of Cipher Mining and any taping or other reproduction is expressly prohibited without prior consent. Before we start, I'd like to remind you that the following discussion as well as our press release and presentation contain forward-looking statements. These statements include, but are not limited to, Cipher's financial outlook, business plans and objectives and other future events and developments, including statements about the market potential of our business operations, potential competition and our goals and strategies. Forward-looking statements and risks in this conference call, including responses to your questions, are based on current expectations as of today, and Cipher assumes no obligation to update or revise them, whether as a result of new developments or otherwise, except as required by law. Additionally, the following discussion may contain non-GAAP financial measures. We may use non-GAAP measures to describe the way in which we manage and operate our business. We reconcile non-GAAP measures to the most directly comparable GAAP measures, and you are encouraged to examine those reconciliations, which are filed at the end of our earnings release issued earlier this morning. I will now turn the call over to our CEO, Tyler Page. Tyler? Rodney Page: Thanks, Courtney. Good morning, everyone, and thank you for joining us today. I'm Tyler Page, CEO of Cipher Mining, and I'm pleased to welcome you to our third quarter 2025 business update call. The third quarter was truly transformative for Cipher as we made huge strides on our strategic pivot into the high-performance computing space and set the stage for what is, without question, the most exciting earnings update in our company's history. This quarter, we executed a pivotal transaction with Fluidstack and Google, which firmly established our credibility in the HPC space. Following that groundbreaking transaction and leveraging that success, we've now taken another major step forward. I'm thrilled to announce today that we've executed a second landmark HPC transaction, this time with Amazon Web Services. Partnering directly with one of the largest and most innovative companies in the world underscores Cipher's emergence as a trusted leader in next-generation compute infrastructure and confirms our full-scale transformation into an HPC data center developer. Our first HPC deal with Fluidstack and Google established not only Cipher's credibility as a data center developer for the world's most demanding tenants, but also the desirability of more remote areas of Texas for next-generation data centers. We have been talking to investors for over a year about this thesis and saying that we thought the market would evolve in our direction. Our second long-term lease this time with Amazon proves that neither we nor West Texas are one-hit wonders. Our second lease space is the world's largest hyperscaler directly on a 15-year lease at very attractive terms. This is not a fluke and will not be our last HPC deal. Under the agreement, we contracted 300 megawatts of gross capacity, and the project carries approximately $5.5 billion in contract revenue over the initial 15-year term. The capacity will be delivered in 2 phases beginning in July 2026 and completing in Q4 2026, with rent commencing in August of 2026. Given the strength of the lease we have secured, we believe that we will utilize debt financing to fund the majority of construction costs at the site and any remaining construction obligations will be funded from cash on hand with no need for further equity fundraising. With these milestones, Cipher has officially arrived as a leader in the HPC revolution, harnessing our sourcing expertise, energy assets, best-in-class team and operational excellence to power the world's most advanced computing workloads. Continuing with that momentum, we're proud to announce today that we've secured ownership in a joint venture to develop a 1-gigawatt site in West Texas. We expect to own approximately 95% of the JV once a turnkey HPC lease is executed, assuming standard lease and development terms. We are calling the site Colchis, which refers to the mythical home of the Golden Fleece and was a land of legendary wells located at the edge of the known world. For the past 1.5 years, conventional knowledge in the traditional data center industry has been that hyperscalers would not venture outside of major metropolitan areas and that our sites were at the edge of the world. But we have now conclusively proven those incumbents wrong. We will continue to do so at Colchis. This is the most significant addition to our development pipeline to date. This site features a fully executed 1-gigawatt Direct Connect Agreement with American Electric Power, providing dual interconnection capability and targeted power availability in 2028. The transaction also includes options to purchase up to 620 acres of land adjacent to the existing substation. The Colchis site checks every box for a premier HPC development opportunity, ample acreage, large-scale power capacity, availability of diverse fiber routes and dual interconnection capability. We have already begun to have early-stage discussions with potential tenants for the site. The execution of this transaction once again demonstrates our team's sourcing expertise and ability to secure some of the most attractive large-scale sites in the world. Cipher is one of the few companies in the world that can combine boots on the ground expertise working directly with landowners to source best-in-class sites with a deep technical sophistication needed to serve hyperscalers. This unique and powerful combination makes Cipher exceptionally well positioned to bridge the growing gap between the limited supply of suitable sites and surging large-scale tenant demand. The announcements we shared today are the results of years of hard work and the strong execution and momentum built over the past quarter. I'd like to take a moment to reflect on some of our third quarter successes. At the forefront of these highlights is our recent transaction with Fluidstack and Google, a transformative 10-year 168 critical IT megawatt AI Hosting Agreement that first positioned Cipher as a major developer in the HPC space. Under this agreement, Cipher will deliver 168 megawatts of critical IT load at our Barber Lake site in Colorado City, Texas, supported by up to 244 megawatts of total capacity. This project represents approximately $3 billion in contracted revenue over the initial 10-year term with options that could extend total contract value to roughly $7 billion over 20 years. Notably, construction is already underway at the site, and we are on track to deliver the full 168 megawatts of critical IT capacity by September 30, 2026. Importantly, Google is backstopping $1.4 billion of Fluidstack's obligations to support project financing and will receive warrants representing roughly a 5.4% pro forma equity stake in Cipher. Cipher will retain full ownership of the site and is in the process of securing debt to fund construction. We will provide more details around that construction financing in the near future. We believe and have now proven that Barber Lake was just the beginning, the first of several projects to capitalize on our team's sourcing expertise, proven development capabilities, strong industry relationships and unmatched construction track record. We look forward to continuing to partner with leading technology companies to secure HPC leases at our growing pipeline of sites. This expansion is well supported by our successful $1.3 billion convertible offering completed this quarter. This was the largest digital infrastructure convertible issuance to date and was roughly 7x oversubscribed, demonstrating investor confidence in our strategy and pipeline. The strong demand allowed us to take advantage of favorable market conditions, securing a 0% coupon and further strengthening our balance sheet. Greg will discuss the convertible offering in further depth later on the call. The Amazon transaction, the Fluidstack and Google transaction at Barber Lake, the addition of significant new capacity at Colchis and our successful convertible offering, all represent major milestones in advancing our HPC strategy. Together, these achievements expand our business model, secure substantial future capacity and strengthen our balance sheet, all positioning Cipher to capture the tremendous demand we're seeing and play a critical role in building the next generation of AI infrastructure. As we scale and expand our business model, our bitcoin mining business continues to generate meaningful cash flow. The company surpassed expectations this quarter and is now operating approximately 23.6 exahash per second of self-mining capacity. The same disciplined foundation we established in the bitcoin mining space, delivering 5 data centers on time and on budget will fuel our successful expansion into HPC. I'd now like to provide a brief overview of our energy portfolio, which highlights our execution across business lines and the strength of our pipeline going forward. On the mining side of the business, this quarter, we brought Black Pearl fully online, which grew our operational mining capacity from 423 megawatts to 477 megawatts across Odessa, Alborz, Bear, Chief and Black Pearl. In doing so, we exceeded our previous hash rate projections and achieved a total self-mining hash rate of approximately 23.6 exahash per second. In addition, our fleet efficiency stands at an extremely impressive 16.8 joules per terahash, making us among the most efficient miners in the industry. Our proprietary software, which allows us to dynamically curtail our data centers has proven to be a critical advantage in optimizing for profitability, maintaining low power prices and monetizing older rigs. This area of expertise is expected to remain a key competitive advantage in the future and in fact, maybe an increasingly valuable aspect of the business as the HPC landscape continues to evolve. Importantly, our current mining operations are fully funded, and we do not anticipate further investment in that side of the business as we prioritize our pipeline toward HPC. As discussed, this was a monumental quarter for Cipher in that we grew our contracted AI hosting capacity from 0 last quarter to 544 gross megawatts this quarter across 2 transactions with world-class partners. Behind that, we have a robust pipeline of 3.2 gigawatts of future capacity that spans from 2025 to 2029 and beyond. While we are extremely proud of our mining production, market dynamics, scarcity of energy capacity and frenzied demand from tenants has made it clear that the best use of our extensive pipeline of sites is for HPC workloads. We are in ongoing discussions on our pipeline with leading partners and look forward to prioritizing all of these sites for HPC development. Let's now turn to a review of our current operations on both sides of the business. At Barber Lake, we are constructing a data center for our industry-leading partners, Fluidstack and Google. Construction at the site is well underway. Ground has been broken, and both engineering and procurement are progressing smoothly. We've secured the necessary labor force and locked in most of the long lead time equipment, putting us in a strong position to meet all key construction milestones on schedule. We are firmly on track to deliver the full 168 megawatts of critical IT capacity by September 30, 2026. The lease is anticipated to commence the following month in October 2026. Note that we still retain 56 megawatts of current capacity at Barber Lake. These additional megawatts allow us to pursue an additional colocation agreement, potentially prioritizing different deal elements or to deploy our own compute at the site. Our team is carefully assessing the merits of all potential options to maximize the value of the remaining 56 megawatts in Phase 1. In addition, we maintained an MOU on an additional 500-megawatt upsize at the site, which would come online in 2029 to 2030. Given the site's ongoing development potential and live deal discussions, we look forward to providing further updates as things progress. Turning to our current mining operations. Slide 9 has a production summary across our 5 operational mining sites. Odessa is still the most significant part of our portfolio, representing approximately 56% of our bitcoin production in Q3. As of September, the current operating hash rate at the site is approximately 11.3 exahash per second using approximately 207 megawatts. Odessa's fleet efficiency stands at roughly 17.6 joules per terahash. On this page, we also provide the observed all-in electricity cost per bitcoin at our 5 sites. Moving down the page, Black Pearl began contributing significant cash flow to the business in the third quarter. The first 150 megawatts at the 300-megawatt site are currently mining approximately 10.1 exahash per second, exceeding prior guidance and contributing approximately 36% of production this quarter. Fleet efficiency at the site stands at an extremely impressive 13.9 joules per terahash. Lastly, we provided a combined overview of our joint venture data centers of Alborz, Bear and Chief. The 3 sites have a total power capacity of 120 megawatts and generate approximately 4.4 exahash per second. We own 49% of the JV sites and our portion recently generated roughly 9% of our overall bitcoin production in the third quarter. Let's now shift to an update on our development portfolio. Slide 11 provides an overview of our next to energize site in Andrews County, Texas called Stingray. The site features 100 megawatts of front-of-the-meter capacity, all necessary regulatory approvals and 250 acres of land adjacent to the transmission assets. In the third quarter, we continued development of the substation for the site and secured long lead time items, including transformers and high-voltage breakers. The site is on track to energize in the fourth quarter of 2026. Slide 12 outlines additional capacity spanning 2027 and beyond. Reveille located in Cotulla, Texas is on track to energize in Q2 2027. The site is fully approved for 70 megawatts, and we have initiated development of the substation. Given both Stingray and Reveille have secured interconnect approvals and established energization time lines, we've engaged with multiple prospective tenants and are in ongoing discussions to secure the most attractive lease agreements for these locations. Our 3Ms, Mikeska, Milsing and McLennan are all currently undergoing final interconnection approval processes and load studies have been completed at all 3 sites. The interim Oncor FEAs have been signed with Oncor for Mikeska and McLennan and the required deposits have been paid. We're targeting up to 500 megawatts of capacity at each of these sites. In addition to interconnection rights, our purchase options also include significant land parcels at each location, all of which are well suited for HPC data center development. We are confident these sites will be in high demand as development progresses. Last on this page is Colchis, which, as mentioned, is our latest site acquisition and the most substantial addition to our pipeline to date. The site features a fully executed 1-gigawatt Direct Connect Agreement with American Electric Power, providing dual interconnection capability and targeted power availability in 2028. The site is roughly 80 miles southwest of Abilene and around 80 miles southeast of our Barber Lake facility. As mentioned, the site is extremely well suited for HPC given its ample acreage, large-scale power capacity, availability of diverse fiber routes and dual interconnection capability. Last quarter, we discussed our strategy to position Cipher ahead of the curve in anticipation of the evolving AI data center landscape. Since then, we have executed 2 landmark HPC transactions as well as our most significant pipeline addition to date. With the industry moving even faster than we had anticipated, we are more confident than ever that Cipher is among the best positioned companies in the world to seize the near-term opportunities created by the growing power shortfall. Simply put, we are just getting started. I will now turn it over to our new CFO, Greg Mumford, for a review of our third quarter financials. Greg Mumford: Thanks, Tyler, and good morning to everyone on the call. I'm excited to join today's call as Cipher's new Chief Financial Officer. It's a privilege to be part of such an innovative company that's playing a key role in the evolution of digital infrastructure and high-performance computing. I want to start by expressing my gratitude to Ed Farrell for his leadership and many contributions over the past 5 years. Ed has built a world-class finance organization and leaves behind a strong foundation that positions Cipher well for its next phase of growth. The company is fortunate to have his continued guidance as a senior adviser during this transition period. As I step into this role, my focus will be on maintaining a disciplined approach to our financial strategy, broadening access to new funding sources and optimizing our overall cost of capital. We'll continue to take a thoughtful approach to capital allocation, ensuring we're maximizing sustainable long-term growth and driving value for our shareholders. I'm excited to work with Tyler, the leadership team and our talented finance organization to build on Cipher's strong momentum. To begin, I'd like to remind everyone that today I will be discussing our performance for the third quarter of 2025, which ended on September 30. I'd like to highlight that this quarter was marked not only by strong execution as we officially expanded into our HPC hosting and grew our pipeline, but also by disciplined capital raising that positions us to sustain and accelerate that momentum moving forward. During the quarter, we completed our second convertible offering, an upsized private placement of $1.3 billion of 0% convertible senior notes due 2031. This transaction reflected strong investor demand and confidence in Cipher's long-term strategy. The notes were issued with an initial conversion premium of approximately $16.03 per share, representing a 37.5% premium to our stock price at issuance. We also entered capped call transactions that increase the effect of conversion price to approximately $23.32 per share, substantially reducing potential dilution to our shareholders. The net proceeds from the offering were used to fund the cost of entering into the capped call transactions and will be used for construction at our 2 currently contracted HPC sites to advance our HPC strategy across our now 3.2 gigawatt development pipeline and for working capital and general corporate purposes. Importantly, this financing bolsters our balance sheet and reflects our disciplined approach to growth. We're very pleased with the market reception and believe this transaction positions Cipher well to capture the significant opportunities ahead in HPC and digital infrastructure. Let's now turn to a review of our financials, beginning with our sequential financial performance outlined on Slide 14. In the third quarter, our hash rate increased by 40%, driven by the energization and ramp-up of our Black Pearl facility, where Phase 1 of the 150-megawatt front-of-the-meter site came online in June. Black Pearl began the quarter contributing approximately 3.4 exahash per second and ramped up to approximately 10.1 exahash per second during the quarter. This led to a 35% increase in production as well as an increase in our electricity cost per bitcoin given Black Pearl is a front-of-the-meter site. The higher cost per bitcoin was also driven by an increase in network hash rate over the quarter. Moving down the slide, we reported $72 million in revenue, up 65% from $44 million in the prior quarter. This growth was driven primarily by the increase in bitcoin price and the increased production from Black Pearl. For the quarter, we reported a GAAP net loss of $3 million or $0.01 per share compared to a net loss of $46 million or $0.12 per share in the prior quarter. We are proud of the substantial quarter-over-quarter improvement in our results, particularly given that bottom line performance was impacted by higher depreciation expense. This depreciation expense reflects the assets placed into service at Black Pearl, including the deployment of latest generation rigs as well as the upgrade at Odessa completed in Q4 2024. Additionally, the bottom line continues to be influenced by changes in the fair value of our power purchase agreement at Odessa. These expected fluctuations reflect movements in forward power prices and the decaying time value of the remaining contract term, which extends through July 2027. As Ed has previously noted, the true benefit of this contract lies in its provision of long-term, low-cost fixed price power for our Odessa operations. This quarter, as part of the execution of our HPC lease at Barber Lake, we granted Google warrants as compensation for their commitment to backstop the lease payments from our tenant Fluidstack. These warrants are recorded at fair value and as a result, this quarter, we recognized a $32 million gain in change in fair value of the warrant liability. Excluding noncash expenses, such as the change in fair value of our power purchase agreement, share-based compensation, depreciation and amortization, deferred income taxes, the change in the fair value of the warrant liability and nonrecurring losses, we reported a third quarter adjusted earnings of $41 million or $0.10 per share, up roughly 34% from $30 million last quarter. Cash and cash equivalents increased significantly, driven by the $1.2 billion of net proceeds from our most recent convertible financing. Let's move on to Slide 15 and take a deeper look at the results of our operations. For the quarter, we mined 383 bitcoin at Odessa and 246 at Black Pearl, bringing our total production to 629 bitcoin mined in total across our wholly owned sites. This production generated $72 million in revenue at an average price of roughly $114,400 per bitcoin. This compares to the 434 bitcoin mined in Q2 2025 at an average price of $99,700 per bitcoin, resulting in $44 million in revenue. G&A expenses, which include IT, corporate insurance, professional fees and other public company costs decreased slightly both sequentially quarter-over-quarter and year-over-year. Depreciation and amortization expense totaled $60 million, up from prior periods, driven by the deployment of the new mining rigs over the last 12 months. Our oldest rigs in the fleet will be fully depreciated in Q4, but those rigs can remain productive and continue to generate attractive returns when deployed strategically. We recognized a small unrealized gain on our bitcoin holdings this quarter compared to a $17 million gain in Q2, reflecting a modest increase in the spot price at quarter end. We finished the quarter holding approximately 1,500 bitcoin in treasury. On our non-GAAP reconciliation, we reported a GAAP net loss of $3 million. Adjusting for $44 million in noncash and onetime items results in adjusted earnings of $41 million for the quarter, up from $30 million in the previous quarter. Now let's turn our attention to the balance sheet. On Slide 17, total current assets at quarter end were $1.4 billion, up from $220 million last quarter, driven primarily by the net proceeds of the $1.3 billion we received from our convertible offering. In addition, we held $170 million of bitcoin. As we have discussed in depth on our previous earnings calls, we actively manage our treasury, neither selling nor holding every bitcoin mined, and we remain disciplined in our approach to capital management. I'll quickly cover some additional balance sheet line items as of September 30. PP&E totaled $650 million, up 37% from $474 million. This increase is primarily related to equipment deployed at Black Pearl. Deposits on equipment of $8 million, down from $183 million last quarter, is primarily related to the reclassification of rigs at Black Pearl from deposits to in-use property and equipment. At the end of the third quarter, our equity interest in the Alborz, Bear and Chief JVs stood at $42 million. Moving down the balance sheet. Derivative assets were up primarily due to the inclusion of $90 million of capped calls associated with the new convertible note, which raises the effective conversion price of the convertible debt and effectively minimizes potential dilution to shareholders. Current liabilities increased this quarter due to the short-term classification of the Google warrants associated with the Fluidstack lease at Barber Lake. Lastly and importantly, I want to highlight that short-term borrowings remain at 0. We continue to manage the balance sheet conservatively, ensuring we're well positioned to meet any capital needs. Before we conclude, I'd like to thank everyone for joining today's call. We're proud of the tremendous progress we've made this quarter and the transformative growth we've achieved as we continue to expand our business lines, grow our pipeline and strengthen our balance sheet to support that growth. As always, we remain firmly committed to disciplined execution, capital efficiency and delivering long-term value for our shareholders. Thank you for your continued support, and we look forward to updating you on our progress in the next quarter. At this time, I will pause, and Tyler and I would be pleased to take any questions. Operator: [Operator Instructions] Our first question comes from Paul Golding with Macquarie. Paul Golding: Congrats on the announcement and all the progress on HPC. I wanted to start off with a question around the deal itself. 300 gross megawatts, Stingray, you have on track for energization, 100 megawatts in '26 and Barber Lake, you have 56 megawatts after the Fluidstack deal. How should we think about the distribution of power to deliver the 300 megawatts as well as maybe pricing across liquid and air cooled since you're delivering both. It looks like averaging out the deal is about $1.7 million per critical megawatt on my back of the envelope math. If you could just talk through some of those deal points on pricing as well as how you plan to deliver that capacity across your fleet. And then I have a follow-up. Rodney Page: Sure. Thanks, Paul. Thanks for the question. So let me start with the framework that the ink is still drying on the deal we signed with AWS. So there's some element of finalizing basis of design involved in giving you the exact numbers that will be represented. So they are taking 300 gross. We are recutting an existing air-cooled 150 megawatts. So there will be a quick time to market with the first phase of that build. The second build, we are still finalizing design and some of the debates that are happening are between speed to market, so speed to availability of the compute versus optimizing for highest critical IT load possible. That's not finalized yet. So I'd say that in general, if the whole site ends up air cooled, the PUE will be in line with the design we've got at Barber Lake, which shakes out at about 1.4, 1.45. Depending on the balance of what might be used with more of a liquid cooled approach, we could improve that by having the second phase have a higher -- or sorry, a lower PUE, a more efficient PUE. So still shaking out exactly where those numbers will be. As far as cost goes, which you referenced, it would be in line with, again, Barber Lake, what we've done in the past, we would expect the cost per critical IT megawatt to be in line with that estimate. Paul Golding: And you... Rodney Page: If not better, because we do have some infrastructure in place already that was bought in a cheaper market. Paul Golding: Got it. Appreciate that color. And then you also mentioned debt financing as a majority of CapEx sourcing and then cash on hand. Are you able to give any more detail around financing plans in terms of you're already developing the Fluidstack capacity. So is this cash on hand from prepayment deposits? And is there any kind of backstop here to help support project financing and going to market for that? Rodney Page: Let me give some high-level framework for that, and then Greg can chime in if he wants to talk about any specifics. So, 2 different structures. Obviously, the first deal is with Fluidstack and Google. That structure looks similar to one that's been out there in the market. Fair to say, we'll be looking to pursue our debt financing options for that in the coming days and weeks. And I would expect, depending on where the market is, those structures are not too dissimilar. So that's how we would envision probably how that shakes out. On the AWS lease, that is a direct-facing hyperscaler lease. I think it's the first of its kind among anyone that has converted from bitcoin mining to do a long-term 15-year direct-facing hyperscaler lease. That should be very financeable. As far as the sort of equity support for whatever shakes out in the final terms for that financing, keep in mind, we upsized the convert we did recently quite a bit. The market was so favorable that it went up all the way up to $1.3 billion offering. So we already have a fair amount of excess cash on hand. And by all estimates, we've got -- that should support what we would anticipate to be the equity piece of the financing to build the structure related to the AWS lease. Greg, would you give any other further color? Or is that enough, do you think? Greg Mumford: Yes. I mean, Tyler, I think you said it right earlier, is that we're not prepared to give specifics on the financing that we're looking at for the Google, Fluidstack deal, but we are exploring opportunities, and we'll be hopefully updating the market in short order. As it relates to the AWS deal, we think that there's going to be a lot of opportunities in front of us to explore different types of project or construction level financing, and we're going to work through those options and make sure that we're making the right decision. Operator: Our next question comes from Greg Lewis with BTIG. Gregory Lewis: I guess the first question is around the additional sourcing of power. Congratulations on that. It seems pretty tough. Tyler, as we think about and you're talking about things accelerating and kind of what's possible, could you kind of ballpark, how things are progressing and what you're seeing at ERCOT, you have the different -- the Ms that you've referenced 500 megawatts. When did those get in the queue? Obviously, we have some power coming online in '26. Just kind of an overall update on how we should be thinking about availability of power from that growth pipeline that you have. Rodney Page: Sure. So let me give some color as it relates on the sites that are awaiting final ERCOT approval. So a lot of this shakes down to -- so first of all, they've been in the queue for a while in all load studies and everything have been submitted. A little bit on the timing expectation shakes out to the sort of business operating model of the particular transmission distribution service provider you're working with. So in the case of Colchis, we're anticipating a 2028 energization. We have already paid a [ kayak ], so construction and advancing construction payment to assist with the work that the TDSP has to do. That's with AEP, and AEP is confident moving forward with that construction based on an expectation of having that site energized by 2028. So then that's where we are there. I mean, construction will be progressing on the AEP side, and we are in live discussions while they await that final approval from ERCOT. At Mikeska and McLennan, we have signed interim FEAs. So that's a requirement of the TDSP there, which is Oncor. So -- in those cases, again, the deposit is paid, but the construction will likely begin on the Oncor side once that final ERCOT approval is in hand, which we're anxiously awaiting. And then Milsing, we have not paid a deposit yet, again, working with a different TDSP there. Their process works a little bit different. So that's kind of the overall picture. And as far as ERCOT goes, it's hard to make any prediction with exact specificity. But given the progress in anticipation of where we think those sites will be available on the feedback from the TDSPs, we're confident in the time lines we've given. Gregory Lewis: Okay. Super helpful. And then on the optionality of the 56 megawatts, I think you mentioned potentially maybe offering your own AI cloud services. Could you talk a little bit about how we're thinking about that in terms of just bringing on another customer, maybe there's an option that could be extended? Just how we should think about that 56 megawatts? And maybe around the timing, is this something we want to kind of have buttoned up in the next 12, 18, 24 months? Or hey, it's out there and time is on our side? Rodney Page: So the answer is it depends. I think we've had a lot of questions and interest around the idea of owning and operating our own GPUs and then selling the compute to an offtaker. I think in general, we have been progressing slowly on that front because we want to make sure we're getting the best risk-adjusted returns for the megawatts we've got. So obviously, you can produce numbers that are higher on the revenue side if you're selling compute, but you're taking on a whole bunch of risks, much larger financing risks, GPU life cycle obsolescence risk, et cetera. I do think a key to making that business very attractive would be to lock up a long-term offtake with a highly credible counterparty for the compute. So we've seen those deals. We're looking at them. Candidly, I think the numbers we signed on our lease with AWS are better. I think we will probably both make more in terms of profits and with much, much, much less risk. So it still remains to be seen from our perspective what the best use of a megawatt is to make the most money, but we're in very active discussions in exploring all available business models. And obviously, as we sign up new 1-gigawatt sites, we're going to have a lot of optionality as things progress. As it relates to the specific 56 megawatts, I'm highly confident we will have some sort of deal there pretty soon. There is a lot of interest, both on using that capacity to operate our own GPUs and sell compute as well as have it leased on a colocation basis. It's fair to say that this market is literally getting more frenzied by the -- certainly by the week, if not the day. So rental rates on leases are going up rapidly. The level of interest is overwhelming. And so from our perspective, we're spoilt for choice. We've put ourselves in a very advantageous position. And so depending on which deals we think will produce the best risk-adjusted returns, that's how we'll proceed. But I do think the 56 megawatts there as well as the 100 megawatts at Stingray, the 70 megawatts at Reveille will all be taken up. If this market level of interest continues, we will not have an available megawatt. We have multiple parties interested in all those sites and locking them up as soon as possible. Gregory Lewis: Okay. Congrats on the AWS announcement. Operator: Our next question comes from Andrew Beale with Arete Research. Andrew Beale: Can I just ask, what are you thinking about the design of Colchis? And what do you think the likely CapEx of that as the greenfield will be per megawatt? And just thinking about ERCOT approval, can you talk about what getting the Google, Fluidstack and AWS leases does in helping your approvals at the other sites, such as the 3Ms. And how much difference partnering with AEP makes on that approval front? Rodney Page: Yes. Thank you very much for the question. So predicting the budgetary cost at Colchis is a little bit challenging only because that's going to be -- number one, again, that's another one. The ink is still drying on the acquisition. We're beginning to have exploratory conversations with folks that are interested in colocation there just given the size of it. But what we would do, I guess, I'd say in the interim would be we'll be deploying the CapEx for the minimum requirements at the site. So fiber, substation, land, water sourcing, et cetera. I would say I expect our build costs to be in line with what we've done at other sites if we are building the same colocation type access, which has generally been, call it, $9 million to $11 million for critical IT megawatt. Now that said, there could be inflation, prices could change, supply chains, et cetera. I don't have any reason to believe that the cost would be different per megawatt other than just the passage of time and those factors. So we will be able to give more details in the coming months and quarters. I think that candidly, with an expected availability of power in 2028, given the size of Colchis, we hope to find a partner before too long just because that's a tremendous construction time line and obligation, and so we'll have to get moving on it. But I have no reason to believe the cost would be any different. And then -- sorry, remind me of your second question again. I got lost there. Andrew Beale: Just about -- I mean, signing these leases with Google and AWS. I mean how does it help your 3Ms [ and other ] approvals? Rodney Page: Thank you. Yes, there's huge benefits to these partnerships. I think, again, up until a few months ago, I can't tell you how many times we heard no one's ever going to sign at those sites. No one's ever going to sign with a former bitcoin miner, at least not a traditional hyperscaler. That discussion is now over, obviously. And it probably won't be for us. It will be for others as well as other deals get signed across the ecosystem. I think every deal adds incremental credibility. We deserve a lot of credibility, anyone that got to know the quality of our team, their experience, the things they've built in the past. And just looking at Cipher's own track record, if you took the word bitcoin out and just said our team has delivered 5 data centers on time and on budget in this exact geographical region, there would be no reason to doubt what we say. It's just the traditional bias from incumbent industries against the word bitcoin. So I think every deal adds credibility with everyone, deals beget deals. And I talked about this a fair amount about striking our initial deals focusing on the quality of the counterparty and setting our business up as a franchise such that we can extract the most value from the entire pipeline we've got. And I'm happy to say that that's exactly what we're seeing. So every conversation gets a little bit easier, and we have a lot more credibility on new leases with regulators, with transmission distribution service providers. And truthfully, that [ kayak ], I mentioned in the case of Colchis, which is actually scheduled to go out shortly, that's what matters to ERCOT, right? So having more credibility and having money invested in the space and being a credible counterparty makes a transmission distribution service partner want to move forward on your project and spend their own money because they're more likely to get paid and the same on the ERCOT side. So all these things beget more success, and that's probably the biggest reason for optimism around here these days. Operator: Our next question comes from Michael Donovan with Compass Point. Michael Donovan: And congrats on the progress. I guess just in terms of supply chain, what are you seeing in terms of constraints for long lead assets? Rodney Page: Yes. So I mean, listen, I think we've talked about this over the years that we often work backwards in terms of what the long lead time items look like when we try to come up with a time line. And as a high-level generalization, that keys off of getting your substation in place. And then downstream from there on the HPC side, it matters a little bit in terms of basis of design for the particular site, which is driven by tenant requirements. But as a broad generalization, if they want backup gens to be there to provide the necessary uptime, those tend to be the next gating item in terms of time line. I'd say we have a great track record. Our team -- keep in mind, like our construction team comes from places like Vantage and Whiting-Turner and Google and Meta, very experienced in dealing with procuring all the items necessary for these data centers and have relationships up and down the supply chain. To give you a sense, I think back of the envelope in terms of Barber Lake, over 85% of the equipment, I think, is secured, including all long lead time items. So this is a process in each build spec and will continue to be that way. Generally, our risk now and anyone's risk now signing these deals is, of course, delivering the construction, financing whatever you're building and then delivering the construction on time. Our team has an excellent track record of that. I have no reason to expect we won't have the best performance of anyone in the space in terms of on-time delivery. The supply chain is kind of a moving thing, but I think we're really well positioned. And on the builds we've got, we feel very confident on our time lines, which are aggressive. Michael Donovan: That's helpful, Tyler. And then I guess my second question is a bit more esoteric. So I'm hearing discussions about sites being linked up to, let's say, you have a 500-megawatt site here, 500-megawatt site there to link them up to deliver 1-gigawatt campus for a specific workload. Are you hearing more of these types of discussions? And could we theoretically think of the 3Ms coming together for one large 1.5 megawatt or gigawatt campus? Rodney Page: I think it depends on how the market evolves. So there's no doubt that a lot of the hyperscalers seek sort of redundancy of data centers in the same geographical areas close together. I would say, look, we have a concentration of data center sites now a dozen basically in West Texas. I think that -- I don't think of like the 3Ms as being geographically close enough, at least in today's construct to think about linking them. I think it's beneficial that they're not like way far away. But I don't know that that's necessarily how folks would think of them. That phenomenon definitely exists, but I'm not sure I would group our sites in that manner. I think there's a lot of other efficiencies of scale of having workforce in that geographical area, et cetera, that it's great to have things concentrated, but we don't have sites that are necessarily 10 miles away or something like that. They tend to be a little bit further. Colchis, for example, is about, I think, 80 miles away from Barber Lake. I mean I'll say at a high level, we have -- those customers do like to have a conversation about potentially constructing their own availability zone, but we're not far enough along to say exactly like it would be these sites that would be like dedicated for that one tenant. Michael Donovan: Okay. Appreciate that, Tyler. The last one, I promise. So great progress at the edge of the earth. What are we -- what should we think about outside of Texas? Rodney Page: So great question. We are always looking at opportunities. We just happen to love Texas, and it seems that we always find the best opportunities. I do think that part of it is that there's a lot of things. Business is great in Texas. It's a great place to do business. It also has a history of risk takers and entrepreneurs that want to speculate on early-stage opportunities. I think it echoes oil and gas somewhat in that there are folks that will speculate on grid interconnections and take a risk on being able to get something. And maybe Cipher's secret sauce, to be honest with you, now that we've originated 12 sites down there is that we have a team that has demonstrated excellence at sourcing these sites from what I'll call kind of grid wildcatters or people that are early-stage investors and an interconnection opportunity, but are not prepared to develop the site at a high level that would be ready for an end user like a hyperscaler. I would argue that Cipher is basically the only firm. Maybe we have a handful of competitors, but I think we certainly do it best in that we can speak very credibly with that audience that originates these sites and at the same time, go have an all-day technical meeting with our entire construction and operations team with a hyperscaler and impress them as well. And so bridging that gap between, let's call it, early-stage speculation on grid opportunities and then delivering that to the highest quality end user we have in-house. And honestly, that's why I believe we're a tremendous growth stock opportunity. We're not just a basket of assets. The point being we're not going to stop developing these sites. Now to answer your question more directly, however, because I was just saying how wonderful Texas is, yes, we are looking at sites, particularly in PJM. Historically, we've looked at sites all over the world. Often, the economics haven't gotten to a position we like to be in. We do have a relentless focus on risk-adjusted returns here. And so often, things are either too risky to justify the investment or perhaps the price is too high. They're too mature. There's not enough risk that we feel like we can quantify better than others. So we are looking at PJM. That's a market we would like to expand into and stay tuned. I hope that we'll have announcements in the future. Operator: Our next question comes from Mike Colonnese with H.C. Wainwright & Co. Michael Colonnese: And congrats on the 2 big HPC deals here. Really great to see. I can appreciate the expected delivery time lines you provided with regards to the 2 contracts. But how should we think about the revenues layering in over the course of 2026 and beyond from the 2 agreements? Rodney Page: Yes. So the full delivery of the Fluidstack, Google deal is expected to be completed at the end of September next year, and so rent begins in October of '26. Amazon is, again, getting finalized, but it begins in August of next year. And then there'll be stages, though. The second stage would be closer to year-end of next year. Michael Colonnese: Got it. And then more of a high-level question, Tyler. In your view, what has changed for counterparties that has accelerated the pace of deal announcements we've seen in the space over the past month or so? It feels like the level of urgency from hyperscalers, neoclouds and some others has really picked up from where we were just a few months ago. So it would be great to get your thoughts there. Rodney Page: Yes. I mean, it's fair to say that in my 25-year professional career, I have never witnessed anything close to what is going on in the market right now. You asked why? I don't know. I listened to the podcast like everyone else and hear the CEOs of hyperscalers talking about a shortfall. My sense is that if you are a big, diversified cloud provider, it is easier to predict your capacity needs for the traditional cloud business out several years. I think the thing that has snuck up on everyone is the just meteoric rise in demand for AI. And what is happening now is not only is that demand off the charts, there's a scramble because those folks underestimated how much they need quickly. And of course, there's a little bit of a race between them. So right now, discussions are beyond -- every discussion starts with we want megawatts that are available right now. It has now become, we want anything in '26, and that's now become, we want anything in '27. Literally week-over-week, the tone changes and gets more excitable and in higher demand. And look, lease rates are going up, as you would expect in a market like that. I'm very happy with where we put our markers down to have the best possible anchor tenants in the world for our business. I think we have now some pricing strengths on our side to improve economics and improve deal terms. Again, the first 15-year long-term lease directly with a hyperscaler in our space, not only a hyperscaler, the biggest hyperscaler demonstrates just the balance of power coming to those with the scarce assets, which we very strategically arranged over the last few years. So I don't know if that level of frenzy can continue forever, but we do feel a little bit like the tip of the spear here just with what we get insight into. And I've been saying it for a while now, but the demand is just off the charts and only seems to get more off the charts. Operator: Our next question comes from Joseph Vafi with Canaccord Genuity. Joseph Vafi: Congrats on all this great progress and welcome on board, Greg, and congrats, Ed, on your retirement. Just a couple here. Just maybe just the most updated thoughts here, Tyler, on your behind-the-meter agreement and what comes next here for Black Pearl given that site and its unique power procurement and the expiration of that deal and then overlay on top of that, obviously, everything going on in the HPC environment. And how does that site evolve from here? Rodney Page: Joe, do you mean Odessa? You said Black Pearl, but our behind-the-meter PPA is at Odessa. Joseph Vafi: Yes. I'm sorry, yes, Odessa... Rodney Page: Yes, okay. Just wanted to make sure... Sorry for the before the market call. So yes, at Odessa. So for those -- just as a reminder, we have a PPA at an extraordinarily cheap price for electricity for 207 megawatts at our Odessa bitcoin mining facility that runs through the end of July 2027. That contract is extremely valuable. It is way in the money. We're carrying it at a decent value on our balance sheet. And that's because the price is fixed and so cheap for a while. It's fair to say that in these conversations that are frenzied for more power available now, we get a lot of interest in saying, "Hey, would you ever think about converting that site?" I think where we're sitting right now is that given our extraordinarily cheap cost of power there, mining bitcoin is a fantastic business there. HPC over time could be interesting there, but we're not in any rush given how strong our contract is and just what that implies for bitcoin mining economics. I think it's fair to say it could be a really good site. It is colocated with a natural gas generation facility that is owned by Vistra. And as things evolve, again, in relation to a question I answered earlier, as our credibility grows in the space, I think it's fair to say that more big names across the spectrum will look to Cipher to provide their data centers. So there is the possibility that something happens there, we would have to coordinate with our power provider Vistra and coordinate with a potential tenant. But we're not in any rush just given that the economics are locked in at very favorable levels there for another year and 3 quarters. Joseph Vafi: Sure. And then just really quickly, I may have missed it, but this deal with Microsoft. Is it going to be at one particular site? Or is it going to be distributed? I just don't know if I saw that in the press release. Rodney Page: So we haven't done a deal with Microsoft yet. I know it's confusing today because I think... Joseph Vafi: I'm sorry. Yes, I'm getting them all confused today. There was another one, yes, Amazon. Sorry about that. Rodney Page: But with -- no, that's fine. Amazon is at one large site that to convert from a bitcoin mining facility to HPC. Joseph Vafi: Right. But you haven't said who -- which site it is yet, I guess? Rodney Page: Yes, it's at the Black Pearl site. Operator: And our last question comes from John Todaro with Needham. John Todaro: Congrats on the lease. The time line seems pretty quick on getting that Black Pearl site for AWS delivered. Just wondering kind of if I'm missing something or the confidence in being able to deliver that? And then I have a quick follow-up. Rodney Page: Yes. So confidence is very high. Again, a lease like this is the result of a lot of deep technical meetings with their team. Keep in mind, at that site, we have built 150 megawatts to an extraordinarily high level of building quality. That is not like our other sites where we had a more limited time line and we may have used like a containerized solution. That -- it was always built with a long-term eye towards being convertible. I'm happy to say that, again, most of that site is immediately reusable on Phase 1 for 150 megawatts. So that's what drives that aggressive time line on the Phase 1 and the Phase 2, again, that's just relying on the conversations we've had, talking -- going through a procurement exercise and scoping out a supply chain time line. So I think we can easily meet it. But that aggressive time line is largely based that we're reconfiguring a site that was just built to a very high standard. John Todaro: Got it. That makes sense. And then my last one, just when you're procuring a site like Colchis, who are you competing with? Like, obviously, you're signing the major hyperscalers. Are they looking to build out some of their own sites at this point, too? Or is it mostly, I guess, maybe other bitcoin miners you're competing with? Rodney Page: Yes. So that's a great question. And again, I sort of alluded to this earlier, but this is, I think, the underappreciated growth equity aspect of our company, which is doing deals like that requires real local knowledge and understanding. Like this is like dealing directly with, by analogy, a wildcatter, right, typically. The hyperscalers are much more used to -- first of all, they're big institutions that move -- they're not quite as nimble as we are. But second of all, they're used to Jones Lang LaSalle bringing them a pretty deal deck for a completed data center or a site that is very polished and ready to present to them. They are not going local to understand the local requirements and dealing with whatever hairy situation there might be on some of these deals. We're, I would argue, certainly the best, if not the only company that has extremely high levels of credibility with that crowd for getting deals done, but also the ability to talk to hyperscalers. So there's this -- there's like layers of capital that come to a traditional commodities production business that just don't exist here. So we don't see as much competition from them at that level, and that's really part of our value. Operator: Thank you. That's all the time we have for today. I'd like to turn the call back over to CEO, Tyler Page, for closing remarks. Rodney Page: Well, thank you, everyone, for joining today. I want to call out Ed Farrell. Ed Farrell has been my right-hand man since day 1 at Cipher. We've had many internal thank yous and congratulations on his retirement and transition to senior adviser from Chief Financial Officer. But I wanted to take this opportunity to give a special investor thank you. As one of the largest shareholders of Cipher, I want to say thank you for all of us for the hard work he's done. I can tell everyone that's a shareholder, we would not have made it here without him. He's been amazing, and it's very exciting to get the company to where it is today on the back of his hard work. It's hard for me to believe that I'm not going to be able to walk around the office and have [ obscure ] godfather references anymore. I'm not going to be able to hear from him -- or I'm not going to be able to tell him rather that the Don needs to hear bad news right away. And I think every time I run into an obstacle that frustrates me, I'm not going to have Ed here to remind me that Tyler, this is the business we've chosen. But we are in great hands with Greg Mumford, our new CFO. And when we think about all the capital raising and optimization we've got to do going forward, we are in excellent hands. So thank you to Ed on behalf of all shareholders, and we wish you a fantastic retirement. Thanks, everyone. We'll talk to you soon. Operator: Thank you for your participation. You may now disconnect. Everyone, have a great day.
Operator: Greetings. Welcome to Freshpet's Third Quarter 2025 Earnings Call. [Operator Instructions] Please note today's conference is being recorded. At this time, I'll now turn the conference over to Rachel Ulsh, Vice President, Investor Relations and Corporate Communications. Thank you, Rachel. You may now begin. Rachel Perkins-Ulsh: Good morning, and welcome to Freshpet's third quarter 2025 earnings call and webcast. On today's call are Billy Cyr, Chief Executive Officer; and Ivan Garcia, Interim Chief Financial Officer. Nicki Baty, Chief Operating Officer, will also be available for Q&A. Before we begin, please remember that during the course of this call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements related to our strategies to accelerate growth, progress and opportunities and capital efficiencies, timing and impact of new technology, capital spending, adequacy of capacity, expectations to be free cash flow positive, 2025 guidance and 2027 targets. They involve risks and uncertainties that could cause actual results to differ materially from any forward-looking statements made today, including those associated with these statements and those discussed in our earnings press release and most recent filings with the SEC, including our 2024 annual report on Form 10-K, which are all available on our website. Please note that on today's call, management will refer to certain non-GAAP financial measures such as EBITDA and adjusted EBITDA, among others. While the company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for how management defines such non-GAAP measures, why management believes such non-GAAP measures are useful, a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP and limitations associated with such non-GAAP measures. Finally, the company has produced a presentation that contains many of the key metrics that will be discussed on this call. That presentation can be found on the company's investor website. Management's commentary will not specifically walk through the presentation on the call, rather, it is a summary of the results and guidance they will discuss today. With that, I'd like to turn the call over to Billy Cyr, Chief Executive Officer. William Cyr: Thank you, Rachel, and good morning, everyone. The message I would like you to take away from today's call is that we are quickly adjusting to the new economic reality and remain one of the best-performing pet food businesses. We continue to outperform the U.S. dog food category. We are building market share across every channel, and we are winning a disproportionate share of new pet parents. We also continue to deliver strong operating performance despite the slowdown in volume growth. Further, we have maintained financial discipline and appropriately manage our capital spending to match our growth. And that, in combination with strong operating performance has enabled us to achieve positive free cash flow in the third quarter and will enable us to become free cash flow positive for the full year, which is 1 year ahead of our original 2026 target. Taking a step back, the deceleration in sales growth this year was unprecedented. We clearly started this year expecting to operate in a much different environment and have had to shift our strategy to address these challenging and dynamic times. While we can't control consumer sentiment, we can adapt our consumer proposition and make sure we are best positioned to increase household penetration by winning both new and existing pet parents, while also improving our profitability and free cash flow generation. We believe we are taking all of the necessary steps to stabilize and then reaccelerate our top line growth by continuing to focus on areas that are within our control. To address the consumer environment, we have adjusted our media and go-to-market strategy to both reach and appeal to more households, while super serving our MVPs who account for 70% of our volume. This includes starting to test new digital touch points and expanding our focus and resources on e-commerce channels, including DTC. The transition to this updated and improved commercial framework began earlier this year, but it is an evolution, so we will gradually increase the investment behind it as we get increased evidence of its effectiveness. We are also doubling down on our 3 key strategies designed to expand the appeal of Freshpet, particularly amongst our MVPs. Those strategies are: first, best food. We believe that Freshpet's highly differentiated product offers an enhanced experience for our consumers that we need to highlight in order to expand our franchise. We launched a new media campaign at the end of August and early September, showing the lengths, we go to produce the best food and at the end of October, launched another new ad showcasing our ingredients. The new ads are much more focused on the benefits of fresh food than our previous creative and early in-market data is encouraging. Second, strong value proposition. We are operating in an environment where economic uncertainty has led to less trade-up than in the past. To address this, we have now launched our new complete nutrition bag product in select retailers to help encourage trial as well as new multipacks and bundles, both online and in-store for the more value-focused consumer. We have also sharpened our price point on our 1-pound chicken roll, which we believe will help drive more trial and increase household penetration. Third, improved accessibility. We continue to make good progress on the visibility and the availability of Freshpet, one of our greatest competitive advantages. You may recall that we showed a rendering of a fridge island back in February at the CAGNY conference, which is a new concept with a mix of both open air and closed-door fridges. It is designed to change the way the consumer shops the fresh pet food category, changing it from a search for a packaged good in an aisle to grocery shopping for your pet. We believe this is the next big unlock in our retail visibility and availability strategy and will create increased awareness of the brand and greater trial of our wide range of items. Last month, we started testing new fridge islands in the first 16 stores of a large mass retailer, and we've included a picture in our earnings presentation. It is still very early days, but we believe this expansion demonstrates how leading retailers view Freshpet as the future of the dog food category because of its enormous growth potential. We've also further increased distribution in a large club customer. We are in our first store in this retailer in April, 125 stores at the end of July and are now in 590 stores as of the end of September. The sales are still ramping up. However, we are very encouraged by the launch so far and the future potential. At another club retailer, we've also expanded our range to have a third SKU in select stores and have also just started a small test in a rural lifestyle retailer. As we look to the next leg of distribution, we expect the majority of growth to come from stores where we have or can have second and third fridges or outside of aisle placements like fridge islands as well as the online channel. We plan to leverage our retail strength where we are the clear category growth driver. And at the same time, we are really excited about our continued growth of e-commerce. We had another strong quarter of growth in digital orders, up 45%, and we recognize we are significantly underpenetrated in the e-commerce channel, including DTC. We are keenly focused on increasing our presence to capture the omnichannel and online customers and plan for this to be a more meaningful part of the business as we head into 2026. In total, we believe these strategies will enable us to reaccelerate our growth. Each of these strategies drive actions that we can control and leverage our unique capabilities and proposition. That will ensure that we will continue to outperform the category and drive the transition of the dog food business to fresh food regardless of the macro environment. Our efforts to adapt to the current environment are not limited to driving the top line. We are also focused on driving operational efficiency through a variety of approaches. First, via our new technology. The current demand environment means that our team has more available line time to lean in and test new technologies and formulations. We have been working on new bag technology since 2019 that is designed to produce significantly better products at a lower cost. It does this by increasing throughput, improving yields and reducing the amount of product that requires secondary processing. We expect this to result in increased bagged product margins and decrease the margin gap between bags and rolled products. Our goal is to deliver both meaningful product improvements and significantly improved economics. It can also unlock new innovation capabilities. The first new production scale line that uses this new technology is now fully installed and in the final stages of commissioning. We expect to produce salable products on that line in Q4, and we are very excited by what we have seen so far. Second, we are also taking a pragmatic approach to managing our capacity. It is not clear how long this period of consumer uncertainty will last, so we are using a variety of approaches to ensure that we have adequate capacity to meet our growing demand, but also don't get too far ahead of ourselves on capital spending and staffing. Fortunately, our facilities are running very well now, and that has provided us with free capacity. In conjunction with further operating improvements that we expect to deliver, we expect to have adequate capacity to support our growth for a while. We are a much more stable business than we were 3 or 4 years ago. And when you couple that with the new technology, it enables us to reduce our capital spending this year and next year. We do not believe that this reduction in CapEx will limit our ability to grow over the next 2 to 3 years as we already have $1.5 billion of installed capacity available to us if the growth reaccelerates and can add staffing as needed. Now I'll provide some highlights from the third quarter. Our third quarter net sales were $288.8 million, up 14% year-over-year, primarily driven by volume. Adjusted gross margin in the third quarter was 46.0% compared to 46.5% in the prior year period, and adjusted EBITDA in the third quarter was $54.6 million, up approximately $11 million or 25% year-over-year. From a category perspective, we continue to be the #1 dog food brand in U.S. food with a 95% market share within the gently cooked fresh, frozen branded dog food segment in Nielsen brick-and-mortar customers, defined as xAOC plus pet. We compete in the nearly $56 billion U.S. pet food category per Nielsen omnichannel data for the 52 weeks ended September 27, 2025. And within the nearly $38 billion U.S. dog food and treats segment, we have increased our market share to 3.9%. From a retail perspective, competitive entrants have not slowed our expansion to date. In fact, we believe that new competition will ultimately grow the category as we have seen many times before in other categories, such as Greek yogurt and coffee. Freshpet products are now in 29,745 stores, 24% of which have multiple fridges in the U.S. Looking ahead, we expect this percentage to increase as we add more fridges to the highest velocity stores. We ended the third quarter with 38,778 fridges or nearly 2.1 million cubic feet of retail space with an average of 20.1 SKUs in distribution. Our percent ACV in grocery, where we're the dog food market leader was 79% at quarter end and xAOC only 68%. From a household penetration and buy rate standpoint, we remain one of the only dog food companies that consistently grows both. Our household penetration as of September 28 was 14.8 million households, up 10% year-over-year, and total buy rate was $111, up 4% year-over-year. MVPs, which are our super heavy and ultra-heavy users are continuing to grow faster with a total of 2.3 million of those households, up 15% year-over-year. MVPs represented 70% of our sales in the latest 12 months with an average buy rate of $490. We are still growing households across every age and income group and gaining market share. The dog food category is declining, but Freshpet continues to be a clear winner. We are seeing that we are attracting a large portion of new pet parents, which is very encouraging. Turning to capacity. We feel good about our manufacturing footprint today. Ennis continues to be the most profitable Freshpet kitchen and accounts for approximately 38% of sales volume. Our overall operating effectiveness, or OEE, our measure of operating efficiency continues to improve and the new technology line in Bethlehem is expected to produce salable product later this quarter, as I mentioned a few minutes ago. This will be our 16th line across the network, and we are very excited by its potential. The technology to make fresh pet food is still very nascent, and we constantly try to push the limits and come up with ways to drive greater returns. Next spring, we also plan to retrofit another bag line in our Bethlehem kitchen with the light version of the new technology that could prove to deliver a meaningful portion of the same benefits of the full technology line with minimal line downtime to install the new technology and minimal CapEx. Our capital efficiency framework is center around 3 key areas: first, getting more volume out of existing lines, primarily through OEE improvements; second, getting more out of existing sites where whether that be finding ways to add more lines on our campuses or network optimization; and third, developing and implementing new technologies. We've made tremendous progress with this framework and believe there is still a significant opportunity to create incremental shareholder value. Now turning to our outlook for the remainder of the year. We are currently tracking to the lower end of our previous net sales and adjusted EBITDA guidance ranges. So we now expect net sales growth to be approximately 13% for the year and adjusted EBITDA to be between $190 million and $195 million. We are updating our CapEx guidance to approximately $140 million as we're able to shift more projects out. The silver lining of the slower-than-expected sales growth this year is it has now positioned us to achieve positive free cash flow a year earlier than anticipated, a significant company milestone. Ivan, our Interim CFO, will walk through more details of our 2025 guidance in a few minutes. In regard to our fiscal 2027 targets, we remain confident in our ability to achieve 48% adjusted gross margin and 22% adjusted EBITDA margin in 2027 if our sales volume growth is at least low teens. If we were to grow high single digits, we believe we can still achieve an adjusted EBITDA margin of approximately 20%. In summary, we have taken actions in strategic areas to focus on what we can control and make sure we continue to deliver category-leading growth, despite the current category softness and competitive entrants. Dog food has historically been one of the best, most recession-resistant categories, and we believe we are best positioned to capture the future growth of the category. We expect to continue to build market share, grow household penetration and win a disproportionate share of new pet parents to ultimately capture the lion's share of profit in the category, too. Before I hand it to Ivan, I want to address the ongoing CFO search. We've hired an independent executive search firm, and we have a very long list of very exciting candidates. We hope to select the next CFO quickly, but we will take our time to find the right person. In the interim, we are confident in Ivan and his team's capabilities and believe we can still deliver the necessary business results until we find a permanent successor. Ivan has been with Freshpet for 11 years, having joined the company shortly before the company went public in 2014 from KPMG. He has been involved in every aspect of our financial operations since then, including leading accounting, financial planning, systems development and our data analytics operation. Ivan is a trusted member of our team, and his move into the interim CFO role has been seamless. With that, I'll turn it over to Ivan to walk through more details of our financial results. Ivan? Ivan Garcia: Thanks, Billy, and good morning, everyone. The highlight of the third quarter results is that we demonstrated our ability to deliver category-leading growth, while also achieving positive free cash flow. Now let me provide more details on our financials and updated guidance. Third quarter net sales were $288.8 million, up 14% year-over-year. Volume contributed to 12.9% growth, and we had positive price/mix of 1.1%, primarily driven by mix. We saw broad-based consumption growth across channels. For Nielsen measured dollars, we saw 10% growth in xAOC, 10% in total U.S. Pet Retail Plus, 8% in U.S. Food and 2% growth in Pet Specialty. As a reminder, the third quarter benefited by about 1 point of growth from a slight shift in timing of orders from the end of June to early July, which we shared on the Q2 call. We also expanded into most of our major club retailer stores in the third quarter and initial pipeline shipments helped boost our shipments growth versus last year. When you net all of that out, we believe that consumption growth in the quarter was approximately 12%. Third quarter adjusted gross margin was 46% compared to 46.5% in the prior year period. The 50 basis point decrease was driven by reduced leverage on planned expenses, partially offset by lower input costs. The deleveraging of planned costs are a result of ending the quarter with lower inventory. Third quarter adjusted SG&A was 27.1% of net sales compared to 29.3% in the prior year period. This decrease was primarily due to a lower variable compensation accrual, partially offset by increased media as a percentage of net sales. We spent 11.2% of net sales on media in the quarter, up from 10.8% of net sales in the prior year period. Logistics costs were 5.5% of net sales in the quarter compared to 5.6% in the prior year period. This continues to be a great strength of ours and something that we're very proud of. Third quarter net income was $101.7 million compared to $11.9 million in the prior year period. The significant increase in net income was primarily due to the deferred income tax benefit resulting from the release of a $77.9 million valuation allowance in the current period, higher sales and decreased SG&A expense and was partially offset by a decrease in gross profit as a percentage of net sales. The release of the $77.9 million valuation allowance is being taken now because we have demonstrated consistent profitability over a meaningful period of time. As a result, our accumulated NOLs are now believed to have meaningful value. So they must flow through the P&L and end up on our balance sheet as an asset. We view this as another milestone in our progress towards becoming a highly profitable company. Third quarter adjusted EBITDA was $54.6 million compared to $43.5 million in the prior year period. This improvement was primarily driven by higher gross profit, partially offset by higher adjusted SG&A expenses. Capital spending for the third quarter was $35.2 million, while operating cash flow was $66.8 million, and we had cash on hand of $274.6 million at the end of the quarter. As Billy mentioned, we achieved positive free cash flow in the third quarter and now expect to be free cash flow positive for the full year. We intend to utilize our balance sheet to support our growth going forward with no need to raise outside capital. Now turning to guidance for 2025. As Billy said earlier, we are tracking to the lower end of guidance ranges we provided last quarter. So we now expect net sales growth of approximately 13% compared to our previous guidance of 13% to 16% growth year-over-year. We now expect adjusted EBITDA in the range of $190 million to $195 million compared to the previous guidance of $190 million to $210 million. We continue to expect adjusted EBITDA dollars and margin to improve in the fourth quarter compared to the third quarter. Media as a percent of sales for the year is expected to be greater than 2024. However, the fourth quarter will be the lowest total dollars spent and as a percent of net sales, in line with our past practices. We now anticipate adjusted gross margin to be flat year-over-year based on lower plant leverage related to our inventory levels, which caused a timing impact to our P&L. We have been able to successfully tighten our inventory without seeing any impact to fill rates. In regards to tariffs, we are currently seeing a small impact on vegetables sourced from Europe and mitigating them where we can. Capital expenditures are now projected to be approximately $140 million this year compared to our guidance last quarter of approximately $175 million and original guidance earlier this year of $250 million. We have included some impact from tariffs in the updated CapEx projection. The majority of our CapEx spend is focused on the installation of new capacity to support demand in the out years and the implementation of our new technology. But as Billy mentioned, we are seeing greater capital efficiencies in our existing facilities. While it's too early to provide guidance for next year, we do expect that ordinary CapEx for new capacity, fridges and maintenance will be in line with this year's spending. However, if our new production technology demonstrates the potential we are expecting and we have the opportunity to accelerate either conversions of existing lines or the installation of new lines using that technology, we would certainly consider those opportunities. We believe the new technology could generate sizable economic benefits, improve our competitive position and elevate the quality we can deliver to consumers. Similarly, if we have a breakthrough in the new distribution, particularly if it's a sizable expansion of the island fridges, we would also fund that initiative due to the significant growth it could deliver. In either case, it would not impact our ability to deliver positive free cash flow in 2026, but our CapEx spending could be higher than 2025. In summary, despite a challenging year, we are proud to have delivered another quarter of best-in-class CPG growth and demonstrated our cost discipline to deliver even stronger adjusted EBITDA margin expansion and become free cash flow positive. We believe Freshpet has a long runway for growth and is well positioned to capture the sales growth and profit growth of the high-growth fresh, frozen dog food category. That concludes our overview. We will now be glad to answer your questions. As a reminder, we ask that you please focus your questions on the quarter, guidance and the company's operations. Operator? Operator: [Operator Instructions] Our first question comes from the line of Peter Benedict with Baird. Peter Benedict: So my first is around kind of the new production technologies. Curious kind of maybe the time line on when you would make a decision on accelerating those implementations, I guess, next year. Maybe give us a little sense of maybe how this light version coming in the spring compares with maybe the full version. And Billy, as you -- if you roll this new technology out, you talked about improved quality. What does it mean for pricing? I mean, at these lower levels of sales, do you intend to kind of turn that into a more aggressive pricing structure in order to kind of reaccelerate the top line and take more share? Or how do you think about reinvesting those potential benefits? William Cyr: Great. Great. Thanks, Peter. Let me just start with, we're very excited by this new technology. As you heard in the recorded comments, the reality is we've been working on this for a long time. And what we see is the upside potential on it is enormous. We're still really early in the qualification of the first line. And so it's really hard for us to say exactly how long we'll watch that until we make a decision on expanding. It depends on how reliable the line is, how much of a benefit we get, the performance of the products in the market. So I don't want to get on the record with any comment about when we would make that decision because it's really going to be dependent upon the operating performance and the quality of the products we produce. The second line, the first conversion of an existing line, the light version that we talked about, will start up in the second quarter of this year. In terms of what's different about it and what makes it any different than the original technology, think of it as it has many of the same attributes, just not to the same degree. So there is a throughput benefit, but it may not be as significant. There's a yield benefit, but it may not be as significant. There could be some quality benefits and may not be quite as significant. But what is significant is that it can be -- those lines can be converted much more quickly at a much lower capital cost. And so we'll be watching as we start up that line and comparing the performance of that line against the initial line that we're putting in that's starting up now and having to make a decision about is less capital done more quickly on existing lines, a better idea than installing a new line that gives you all the benefits. And we really won't know that until we get the line up and running. So think of it as sometime in the back half of next year, we'll be able to make that assessment about whether or not that makes sense for us to accelerate the expansion of those lines. So in the end, I think it's a great place to be. We have 2 very promising technologies that are very, very different and that can make a big difference. On the second part of your question, which is about how we deal with the quality improvements and also potentially pricing. It's also too early for us to commit on whether or not we would do anything related to pricing. Our focus right now is to demonstrate the quality benefits of the product. Obviously, we have a strong interest in improving the margins on our bags because they're below our roles. But it's -- we'll be in a nice place when you can actually look at significant margin pickup and the opportunity to choose where you invest that, whether it goes to the bottom line or whether that goes into making -- sharpening our price point. I suspect that over time, you'll see a little bit of both. But for the most part, we are very determined to drive the margins up on our bag business, and that's one of the real benefits of this technology. Peter Benedict: That's helpful, Billy. And then I guess my follow-up question would be around the competitive dynamics in the space. You alluded to the recent entry, said it has not affected your kind of retail placement plans at this point, but maybe just any early learnings in terms of pricing, positioning? Just anything you would say about how you're seeing new competition, both at retail, but then also in some of the frozen areas, which are tangential and coming more online? William Cyr: Yes. Let me frame it at the -- I'll give you some top line thoughts. I'm going to hand it to Nicki to talk to you about what we're seeing with our retailers in their actions. But obviously, there's been an unusually large amount of activity in the space this year. We view that as a validation that the fresh category is a big long-term potential. Retailers have seen that. Retailers are recognizing that. And so that is a good validator for us, and it kind of gives us a sense that the investments that we've made, the position we've carved out is a really attractive one. So far, from a top line perspective, we haven't seen much impact on our business, certainly not from the executions that have happened to retail. Most of the things that have happened in retail to date have been relatively small and not very significant in their total size. It's just still a little too early to talk about what happened -- what's happening with the Blue Buffalo launch. It's only been out there for a couple of weeks. The one thing I would notice is we have seen a little bit of price discounting done by them already, which is something that we're not surprised by. That's sort of their calling card. That's the way they do business. Our approach so far has been to stick to the game plan that we've executed over the long haul, and we'll continue to stick to that game plan, but we also are very determined that we won't lose consumers on a price or value basis. But that's how I see the competitive environment. I'm going turn to Nicki, and she can talk a little bit more about how our customers are reacting to it. Nicola Baty: Thanks, Billy, and thanks also, Peter. So despite the increasing competition coming into the category at the moment, we've been really pleased with, I think, a number of the metrics that we would use to just assess our retailer engagement. As Billy said in the upfront comments, we've grown our cubic feet by 12% this year. We've had 13% improvement in distribution as well and also been making some good ground either in some new retailers where we've been testing some other ones where we've had some full national rollout with certainly in the club area. And then a strong signal, I think, from one of the largest retailers of really starting to get behind improved visibility for fresh and have us leading the way with some new island units. So despite that competitive backdrop, I think we've actually had one of our best years in terms of fridge placements and support from retailers. I think where that's going is for us, a very strong endorsement that the fresh/frozen segment is very much here to stay and the only area that's leading growth. And to touch on the velocity point that Billy made, it's very early days. The competitive set at retail level is certainly relatively small in terms of velocities that they're seeing per store per week. We've been seeing, again, very strong velocities in those stores that new players are coming into. So we've certainly seen no impact. But we are watching very closely. The key data set we'll be using in the coming months is much more of our panel data to just make sure that there's no switching, certainly with our occasional households or any loss of retention. So we'll keep a really close eye on it, and we've got some strong plans to make sure that, that doesn't happen. Operator: The next question is from the line of Brian Holland with D.A. Davidson. Brian Holland: Maybe sticking along the lines of the distribution dynamic at retail, obviously, the fridge island test. Maybe a little more context, if you could, about the conversations with that customer and how long that's been progressing, the logic behind the magnitude of that expansion just on a per store basis and maybe what you're looking for, what they're looking for to help determine what would be a successful test and maybe timing for a subsequent expansion on that? Nicola Baty: Great. Thanks, Brian. I'll take this one. So look, as you're no doubt aware, this retailer doesn't make decisions overnight, and there's a lot of discipline that goes into making sure that the operational effectiveness runs smoothly for something like these island units. The capacity of each of the island units is around 2.5x an individual chiller. So these island units allow not just fantastic retail visibility and brand visibility to lead the category, but they also allow more assortment and a breadth of assortment to be coming into each store. So what that's done, and I think as you know already, with this retailer, we typically don't have perhaps as many SKUs as we do to compete with some of the grocery retailers. So it's allowed us to actually launch some of our innovation in the more affordable price bracket. So that would include things like the multipacks, the entry-level bag, a number of items really that can bring in new households through. So as of this week, we installed 16 of these island units. We have another burst coming of island units as well. And there's some criteria that we're working with Walmart on to really be able to set exactly what the sales velocity needs to be for future rollout. Now one caveat I would say is making sure that the islands perform to our mutual criteria because these are also a bigger capital investment is important. And then there will be likely somewhere in the region of a 4-month lead time before we're able to execute at scale as well. Brian Holland: Appreciate the color. And then Billy, appreciating it's November 3, and you typically start to provide a little more color around how '26 is shaping up in early January. Just a sense about some of the building blocks here, right? Because obviously, we're in a very dynamic environment. But relative to maybe this time a year ago, you've got a better handle on what's happening with the consumer or at least we've been in this dynamic for longer now. You also have some of these distribution moving pieces here that are coming together. So really interested in 2 parts. One, just thinking about the building blocks for '26 on the top line at this juncture and also how that informs your media spend? Obviously, you've talked about a lot of plans in place. But how do you think about the magnitude of the investment you want to put behind media when there are clearly fewer incremental pet parents to go after in this environment? William Cyr: Yes. I'll give you a couple of thoughts on that. So first of all, as you know, we'll give our guidance when we get to the end of February. And in an environment as dynamic as this, I'm frankly very grateful to have the couple of extra months of an opportunity to observe what's happening. Recall, the world looked very different last year on the same day than it end up looking back when we got to the end of February and changed even further. As you know, we are very, very focused on trying to drive up household penetration, particularly looking at MVPs. So we're watching that data very, very carefully and seeing what the trends are, what directions it's going. And that will be a big driver of how we determine what our expectations are for revenue for next year. We're still going to be very much a media-driven business. We are very focused on using media to drive our business, but we're not going to be irrational about it. We're going to make sure that the media that we're spending is getting us a decent return. As Nicki has commented, we've done quite a bit to drive the efficiency of our media plan, and we need to make sure that we're really focusing on those things that are as most efficient as possible and give us the highest likelihood of a return. And so that's a big part of the planning process that we're in right now. And then the last part is obviously what are retailers going to be doing? And how does that influence the visibility and availability of the brand. As you know, we are not of the school that thinks that we are just creating demand via white space. We think it's really visibility, meaning amplifying the advertising and availability, meaning having a wider range of items available. But having good visibility on what that's going to look like will inform us quite a bit. As we mentioned previously, the island fridges is a big step change. It's probably not going to have much of an impact in the first half of next year. There's a chance to get have some impact in the second half of next year. But there are also a bunch of other retailers who are looking at doing some fairly sizable things, either new retailers, as we mentioned in the call, there's a rural lifestyle retailer who's now in test. We also have quite a bit of new distribution coming with existing customers in the forms of the second and third fridges. So we'll put all those things together, and we'll give you what our view is. But I think it's way too early to say right now. It's just going to be built on the same building blocks we talked about in the past. Operator: The next question is from the line of Tom Palmer with JPMorgan. Thomas Palmer: Maybe kicking off, I just wanted to ask on the CapEx next year, $140 million as kind of a starting point. What projects is most of this going to? I guess the commentary on the $1.5 billion in production capacity would seem like you've got a couple of years before you really run into constraints at least. And so just kind of wondering, are there -- is it because there are certain products that are facing constraints even if from a dollar standpoint, you're fine? Any color? William Cyr: Yes. I'll frame this, and then I'm going to hand it to Ivan. But always start with the understanding that we are a growing business. Even though we're not growing at the rate we were growing before, we are a growing business and adding capacity takes time. So we'll be investing in '26 for capacity that we won't need until probably '27 or '28. And you're right in your assumption that there is some form specific elements to this. So bags are different than rolls, our home style creations and our chicken bites require different technology, different capacity. And then don't forget that we have the new technology that we can always pull forward, which is what we were talking about before, but the new technology, investing in new technology is something we can do. But let me turn it to Ivan, and he can characterize for you sort of how you think about that $140 million being spent next year and the optionality that he described in his comments. Ivan Garcia: Yes. Thanks, Billy. Tom, so another thing to also keep in mind with our CapEx spend is we currently have $1.5 billion of capacity in front of us currently on the business. So any spend that we're doing is for the out years. When we look at the $140 million, that is -- that includes our current spend, what we're currently looking at as far as the projects. And we're also looking at wrapping up some of the technology that we are currently going to go live with next year. That being said, there -- if we have any new distribution such as the island chillers that we want to lean into, we're willing and able to go ahead and make those investments, and that will be above and beyond the $140 million. Also, if we want to lean into technology, if we start to see that play out, we're also willing and able to go ahead and lean into that, and that will also be above and beyond the $140 million. Thomas Palmer: Understood. On the EBITDA margin longer term, you gave some helpful color on kind of different levels you could hit at different growth rates. Just when we're bridging the high single-digit potential growth to that 20% EBITDA margin you noted, the 2% difference, where would we mainly see that? Is the gross margin target kind of holding at multiple levels and it's more about SG&A leverage or perhaps a bit different? Ivan Garcia: Yes, that's a great question. That's obviously something that we're currently looking at. And as you noted, high single digits, we're looking at 20%, low teens, we're looking at 22%. So let's just break apart the P&L for a second. On the gross margin level, we feel very confident that we will be able to hit our 48% at both high single digits and low teens. There might even be potential for us to be a little bit above that 48%, and that's excluding any new technology. I want to make sure everyone appreciates that. And then from there, it's just the leverage that you would get flowing through your SG&A. We currently believe that at single digits, we'd be at 20% and then double digits we would be at 22% at that point at scale. But we continue to be very confident with our ability to hit both the adjusted EBITDA as well as our gross margin. Operator: Next questions come from the line of Rupesh Parikh with Oppenheimer. Rupesh Parikh: So I just want to go to the -- I guess, the Q4 implied sales guidance. It does imply a moderation versus even maybe the 12% consumption you saw in Q3. So just curious the drivers there and maybe it also embeds conservatism. So yes, just curious on the drivers there. William Cyr: Yes, Rupesh, we're frankly just reflecting what we're seeing in the market today, what we're seeing in the consumption data that's coming through. We also have to be mindful that we've seen years past where retailers move up or down their inventory at the year-end around the holidays. We want to be cautious about that. And also just recognizing that we have a new competitive set, and we want to be mindful that there are things that could change in the dynamics in the coming months. But at this point, we're looking at the Nielsen every week, just like everybody else is. We feel good about the trends that we're seeing in delivering the guidance we talked about. And hopefully, that continues. Rupesh Parikh: Great. And then maybe my follow-up question, just on gross margins. So I know this year, there's pretty minimal gross margin expansion. But as you look towards getting to that 48%, what are the bigger buckets we should be thinking about? Ivan Garcia: Yes. Good question, Rupesh. So as we look at the gross margin for this quarter, I want to really maybe peel back the -- I mean, just one layer and look at the drivers that we're seeing during this quarter. So when we look at input costs, we're very happy with the progress we've made throughout the year. We continue to make slight progress on yield every quarter. When we look at quality, we continue to be in the low 2% throughout the year. And more importantly, we're having a lot of consistency with our quality, which is going to be very important as we look at gaining leverage on gross margin in the coming years. And then we have plant cost. So our conversion cost this quarter was actually really good. We were happy with that conversion cost. What occurred during the quarter is there was a timing issue between our inventory in Q2 versus Q3, we went ahead and decrease our inventory. That was a hurt of 130 basis points, which we should get back in Q4. That's what we're expecting in Q4 to have a gross margin handle of 47%. And that's where we believe we are currently. We're a 47% gross margin company. So as we look at getting to 48%, we will continue to leverage our plant costs. That's the main lever that we have in front of us currently. William Cyr: Yes. Let me just add to that. One of the things that we're very focused on is getting ourselves in a position where we have the right amount of inventory, very healthy inventory to deliver great customer service, good in-stock conditions, not have surplus inventory because that obviously doesn't serve us well. But we believe we're now in a position where we have the staffing that can carry us through next year. And to Ivan's point about conversion cost, that's the single biggest driver of our margin improvement. We'll be getting better leverage on the conversion cost, and it's basic leverage on the staffing, and that comes because we're driving the ROE. The team that we've got, the training, the stability in our manufacturing operations has delivered the capability to get more volume out of existing staffing, and that's a critical driver for us of building margin. Operator: Our next question comes from the line of Robert Moskow with TD Cowen. Robert Moskow: Billy, on Slide 17, you mentioned $1.5 billion of installed capacity today that is not fully staffed. And then in terms of priorities for next year, retrofitting existing bag lines with light versions. I guess 2 questions. The $1.5 billion, how quickly can you fully staff that much capacity? And then secondly, what's the -- is there a way to quantify what the benefit of this light version is? Like what does it provide to you from a gross margin perspective? William Cyr: Yes. So on the timing question, typically, if we have the line installed in an existing building, adding staffing can be done on, call it, 90- to 120-day kind of timetable. You wouldn't want to do 2 or 3 lines at the same time that way because you would be diluting the talent that you have at that site. But if we had an increase in demand and we had a line that had available capacity, meaning it was running only half time or it's partial schedule, then we could add staffing in, call it, 90, 120 days. And so we feel very comfortable about our ability to do that. The labor market supported. Our training and development teams are in a good position to do that. In terms of the value of this -- the new technology and how that might impact the capacity, that's one of the most important questions we want to get answered as we go through the testing and qualification phase. Every one of the test runs we do, we're tinkering with what the throughput rates will be. We're tinkering with the amount of time we can run the line continuously between stopping it and doing the maintenance and clean out. And all those variables will have a big impact on what the total increase in capacity will end up being. It's too early for me to commit to it. But when you think about the margin gain, what we've described is if we execute this new technology, the gap between our bags and our rolls could close considerably. It won't get all the way back to where our rolls are, but it will get pretty close once it's fully expanded across our entire lineup across all of our lines. So it's not something you have in '26 or '27. But by the time you get into '28, you could start seeing the gap between bags and rolls close considerably. Operator: Next question is from the line of Angeline Goh with Deutsche Bank. Voon Pang Goh: This is Angeline on for Steve. A quick question on how would you approach trade promotions going forward given that [indiscernible] is promoting heavily? William Cyr: Yes. Let me frame this, and then I'll turn it to Nicki. But first of all, welcome to the call. It's nice to meet you. I would just tell you; our position has been that we believe when you're in the perishable products business that trade promotion, which just creates spikes in demand, short-term stocking up and then troughs that follow behind it, it's not a very efficient way to run the business. And so we are going to avoid that practice as much as we possibly can. It's also good for the long-term profitability, and it also means that our advertising model is the primary driver of bringing consumers in the franchise. So people buy the product for the first time at full price. So that's the overall philosophy. I'll turn it to Nicki, and she can just comment on how we're thinking about it in the context of having new competitors in the market. Nicola Baty: Thanks. Nice to meet you, Angeline. So we've done a lot of work really reviewing both category dynamics in terms of promotions, price elasticity on our portfolio and also deeply assessing the media ROI. We come out in a place where we still believe what's right for our brand is media. It's the critical driver overall for growth. Trade promotions, as Billy indicated, don't seem to be doing anything other than driving what we would call occasional households into the brand. And as it stands, we're here to build long-term brand equity and also to build a loyal franchise of consumers in Freshpet. We haven't seen any strong results really in the competitive environment of brands succeeding with promotions in the dog food category. So our focus right now is very much to make sure that our media delivers both long-term equity and near-term ROI. And that's really the model that we're using. You will see us investing less in areas like linear TV, where we've seen a little bit of diminishing returns with the current consumer sentiment. But you're also going to see us investing more in digital touch points that drive that direct conversion, in particular, through e-commerce, which we believe is a very big opportunity for growth for Freshpet in the future. Operator: The next question comes from the line of Michael Lavery with Piper Sandler. Michael Lavery: Just want to touch on -- you announced a CFO transition in the quarter. And in the time that from when Todd was there until just now, there's been significant improvement, obviously, in a lot of different ways, most notably the margin momentum. But it was always our sense that he changed some of the sort of discipline and institutional things that could last beyond him quite well. So can you maybe just touch a little bit on some of how that comes to life and what to expect kind of being sticky from some of the changes or momentum that was in place for these last few years? And maybe then what you're looking for and who's next in terms of kind of taking it from there? William Cyr: Yes. I'll take a shot at this. I'll ask Ivan to chime in, in a minute with what he's observed that changed because he's been here for a very long time, and he's got a long view on it. But obviously, we love having Todd here. He added an enormous amount of value. He was a healthy skeptic on anything that the most optimistic members of our organization viewed as slam dunks, and it was a healthy balance that it created in our organization. Also brought a lot of practical discipline, and he had a relentless desire to keep things simple. And I think that, that's a calling card of his, and I think that's something that's been embraced as part of our organization. When I look forward, obviously, as I said in the scripted remarks, the reality is that this is viewed as a very attractive position being the CFO at Freshpet. We have a very robust amount of interest in the position. I am highly confident we're going to be able to attract really high-quality talent for this position. What's really going to be important for us, though, is -- and its sort of the root of your comment is how this person fits in with the team. We need somebody who is going to be complementary to what the team's skills are. And the skills that we have today are dramatically different than the skills that we had a couple of years ago when we hired Todd. We are much deeper. We have a much stronger capability across our broad leadership team within our finance team. And the requirements for the person stepping into this job are going to be probably much more strategic, much more conceptual leadership because we've built a lot of the technical capability inside the organization today. And so we're looking for somebody who can play at that level. But I'll turn it to Ivan to just give you any observations he has about what he observed in the pre-Todd days to Todd days and what he hopes to carry forward. Ivan Garcia: Yes. Thank you. Michael, I think you touched on something that's really important that Todd was able to drive, and that was culture, right? And culture permeates. And the great thing about culture is that when someone leaves, that culture stays behind. And there's a few things that he definitely brought healthy optimism, as Billy noted, practicality. And also when we look at planning, the thing that we also -- we always ensure is that there's various paths to get to the goal. And that's something that we continue to have when we look at our long-term guidance for 2027. There's more than one path there. And when -- we'll see where it all ends up, but we continue to feel very confident that we'll be able to deliver on the goals that Todd assisted us in building out. And Todd, if you're listening. Hello. I love you. Michael Lavery: That's all really helpful. And just a follow-up on 4Q. You pointed out that you're basically guiding that implied 4Q momentum right at around what it's selling through. But you've also got some of the new advertising. You've got a new competitive launch that's pushing into fresh. You've got the bag, the complete nutrition bag launch. Are your assumptions that all of those are sort of a push? Or would you say you expect a lift or a risk? Or I guess, how would you unpack some of those pieces and what to keep an eye on from our side in terms of how things might unfold for the rest of the year? William Cyr: Yes. Let me just balance it out and just tell you, obviously, the level of precision we had in this business 1.5 years ago doesn't exist today given the environment that we're operating in. But you described many of the things that I would characterize as sort of the initiatives that are going to drive growth and then some of the things that are headwinds to work against. Obviously, the new advertising is a big help. We've seen it on air. We are very optimistic about the performance is going to drive the retailer engagement and the actions the retailers are taking is helping us. The expansion that we described in the club channel is obviously helping us quite a bit. The complete nutrition product is helping us quite a bit. We have to put all that against the backdrop of the consumer sentiment remains weak. The consumer sentiment for October was in line with where it was in April and May, which is not a healthy place to be. The category is still in a tough place. So that's a fairly sizable headwind that we have to address. We believe that we are outperforming the category by a significant margin, call it, in the range of 10 points, and it's something we'd expect to be able to sustain, but it's just the category is having a tough time right now. In addition to that, there's the uncertainty created by the expanded number of competitors that we have. And again, so far, so good. We feel pretty good about the position that we're in and the relative outperformance that we have. But we're also going to be very mindful that things are still going to come down the pike, and we'll have to see how we play against those. So you balance them all out and kind of say, okay, what's in the market and what we're seeing in Nielsen today, it looks like is what we're going to see for the balance of the quarter. And that's sort of the way we're thinking about it. Operator: The next question comes from the line of Peter Galbo with Bank of America. Peter Galbo: Not to harp on the Q4 implied guidance, but I do have an additional question there. Look, I think if we're reading the math right, right, the implied actual dollars of revenue in Q4 is probably flat to down versus Q3. And I know you don't want to give guidance on '26 today, but maybe we could just pressure test the logic of if we run out kind of the current environment into the front half of next year before island bridges coming in the back half, it just -- to me, it seems like there's a possibility that sequentially, things kind of stay the same, at least through the first half, which I think would imply what you've seen in the past, some kind of flattish revenue quarters, at least sequentially. So again, I know you don't want to give an official '26, but maybe we can just kind of think about that logic as we think about the first half of next year and any thoughts there? William Cyr: Yes. Yes. Let me just recharacterize what we believe is happening sequentially, and you can then project it forward as you see fit. But remember that the Q3 number we described, we had 1 point of help of stuff that carried over from Q2 into Q3, and another point of help that came from the Sam's pipeline fill that happened in the quarter. So you're seeing is Q3 was probably a little bit bigger than it normally would be. When you go to Q4, while it hasn't happened every year, Q3 to Q4 has been probably the smallest sequential gain we have historically. There have been some years where it's basically been flat Q3 to Q4. Part of that is the way the trade manages their inventory. Part of that is it's our lowest advertising spend quarter. There's a whole lot of reasons for that to happen. So I wouldn't take a relatively flat sequential Q3 to Q4 to mean anything about what the trend will be going into Q1 because we've seen stuff like that before, and Q1 then bounces back and is a fairly significant increase. On top of that, the other part of it is, I would say that the biggest anomaly for us was Q2 of this year. Q2 obviously gave up some volume to Q3 and that shift that we saw. But Q2 was relatively flat compared to Q1, and that was the real anomaly. And that really matched up with all the concern around tariffs, all the change in the consumer sentiment was so dramatic. As you project going forward, I would expect that next year would have a more normal cadence that the market has adapted to this environment. And so you see sequential cadence that look more like it has historically rather than what it looked like in 2024 -- 2025. But under any set of circumstances, you should recognize we will be building market share. We will be outpacing the category. And so no matter what the sentiment is, no matter what's going on, we will be outperforming the category sequentially as well as on a year-on-year basis. So that's sort of how we're seeing it. Peter Galbo: Okay. That's very helpful. And Ivan, maybe just a slightly more technical one. Just the NOL tax benefit in the quarter, I mean, is there a changed assumption in the tax status now? Should we be actually modeling cash taxes going forward? Just anything on that, please? Ivan Garcia: Yes. And maybe I'll take a little bit of a step back and explain that entry a little bit more. It's not that common of an entry actually. So it's something that throughout our time here, our goal has always been to be a highly profitable company. And on that journey, every now and then, you hit certain milestones, and this is definitely one of the big milestones that we are hitting. What this is saying is all those NOLs that we incurred since the start of Freshpet, they have a tax benefit associated with it. Unfortunately, the auditors, the accounts don't allow you to take that benefit to your P&L until you're able to prove that you will be able to utilize them. And this is the first quarter where we've been able to utilize or to prove to our accountants that we will actually be able to utilize the NOLs. So we now have an asset -- a significant asset on our books, and we also see the offset flowing through the P&L. That's a onetime benefit that's flowing through. And yes, going back to your specific comment, we will now start to see a tax expense flow through our P&L in the coming quarters. That being said, we will not be a taxpayer. We will actually offset that with the asset that we have on the books. But it's something that we're really proud of for all the Freshpet team members that are listening in, please be very proud of this. This is a huge thing that we're all really excited about. William Cyr: Yes. And just comment on when you think we would become a cash taxpayer. Ivan Garcia: Yes. No, it's a good point. Right now, we're looking at -- depends on the growth algorithm, but around 2028 is when we think we'll start to be a taxpayer -- cash taxpayer. Peter Galbo: Ivan, just if I could sneak one in. Like what's the estimated book tax rate just book versus cash, but just the book tax rate we should put in the model going forward? Ivan Garcia: Yes. We're still -- I mean, we're still looking into that, but we're going to -- just the normal corporate tax rate and then the New Jersey tax rate on top of that. But we'll keep on sharpening the pencil on that. But once again, in the short term, we will not be paying tax, we'll be utilizing the NOLs against that. Operator: Our last and final question will be from the line of Jon Andersen with William Blair. Jon Andersen: I'll put 2 in here and then listen. Billy, you mentioned in the prepared comments that you expect the online business to have a more material impact in 2026. You've been underpenetrated historically. I assume that that's not -- you're not underpenetrated with respect to kind of your clicks and bricks part of that strategy, fulfillment from your fridges is strong, but more on the DTC side. Can you talk about some of the actions that you might take on that front, what to expect, how impactful that could be? And then second, just in light of all the discussion around competition lately, if you could just remind us where you are in terms of your moat. I think when I think about early days of Freshpet, it was about the fridge footprint. It seems like it's perhaps the manufacturing scale and maybe even now the technology that you're considering implementing that represent maybe the bigger parts of your moat, but I think it would be helpful if you have some thoughts on that as well. William Cyr: Yes. So I'll take the second part first, and then I'll turn it to Nicki to answer the first part about the e-commerce DTC part. Your characterization of the moats is fairly accurate. I think the moats evolve and develop over time. As you recall, we launched Feed the Growth in 2017, it was because we believe that Fresh was inherently a scale-driven business. And we also had a first mover, and we wanted to maximize the benefit of both the first move and also get scale before others entered the market. We've now gotten to the point where we've delivered on those, the advantages we've got, the head start we've got, the scale that we've created are delivering sizable advantages. In 2019, we made the decision to start investing in technology and manufacturing because we believe the manufacturing technology in the space was very premature or immature. And so we start investing. And that's sort of the long-term thinking that we brought to this business. And today, we're now about to realize the benefit of that long-term thinking and that investment that we've made, where it's not only going to be the manufacturing scale, it's going to be the manufacturing technology and the quality and the margins that, that produces that will be a big advantage. Along the way, we've been building a brand, a brand that stands for the virtues and benefits of this category. We've been broadening our product lineup. So now we have product assortments that meet a wider range of needs than any of the people who have come into the category after us. We've gotten the retail visibility and availability from the number of stores and the fridges we had, and we continue to invest in that by changing the way in which people shop this category with the fridge islands. So you should think about us as continually investing in those things that will create an even bigger and more sizable moat. And frankly, the struggles that everybody has had in competing with us would suggest that those investments have served us very, very well. So at this point, I think you should expect that we're probably working on some stuff behind the scenes that you aren't aware of yet that are going to build that moat further. But we're right now going to focus on driving the moats that we have created, the technology, manufacturing scale, the brand equity, the product assortment and driving get maximum leverage from those. So let me turn to Nicki to talk about the e-commerce side of this. Nicola Baty: Great. Thanks, Billy. Jon. So e-commerce, as you rightly point out, is a big opportunity for us here at Freshpet. It's only 14% share of our business. And we've had another quarter. This quarter was 45% growth, the previous 2 quarters around 40% growth. So it's also becoming a really important part of our growth algorithm going forward, too. The category is over 30% e-commerce penetration. And we know when we dig into our consumer that it is a preferred place to shop as well and also very important for that millennial and Gen Z consumer that we're a bit underpenetrated in. So this year, we've spent a lot of time building out our capabilities and focus to really start to win in e-commerce, and you'll see more of that as we go into next year, too. The fridge network, yes, you rightly point out, that's the biggest part of our e-commerce business serviced through click and collect and also last mile delivery. But we also think that there is an opportunity, obviously, with pure play. You've seen the news on AmazonFresh and Chewy clearly is opportunity space for us to drive into. But our D2C business is also going to be an important part of the mix. I would say that D2C for us won't be a primary channel that we will drive, but it absolutely plays a role in terms of incremental households to the brand. So we stood up a small D2C business earlier this year. We're seeing some really encouraging green shoots coming through. 70% of our households are incremental, first time trying the Freshpet brand with very, very high buy rates, typically more than double what our current MVP buy rate is, we're seeing coming through in that area. So all the metrics are looking like it has got some good headroom to be part of our growth for the future. Operator: At this time, we have reached the end of our question-and-answer session. I'd like to turn the floor back over to management for closing comments. William Cyr: Great. Thank you, everyone. Thank you for your interest. Let me leave you with this thought. It's from an unknown offer. Without my dog, my wallet would be full, my house will be clean, but my heart would be empty. To that, I would add, fill your dog summit with Freshpet every day and your heart will be forever full. Thank you very much for your interest. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.
Justin McCarthy: Good morning, and welcome to Westpac's Full Year 2025 Results Briefing. I'm Justin McCarthy, the General Manager of Investor Relations. Before we commence, I acknowledge the traditional custodians of the land in which we meet today. For us in Barangaroo, that's the Gadigal people of the Eora Nation. I pay my respects to elders past and present and extend that respect to all Aboriginal and Torres Strait Islander people. I'm pleased today to be joined by our CEO, Anthony Miller; and CFO, Nathan Goonan. After the presentation, we'll move to Q&A. [Operator Instructions] With that, over to you, Anthony. Anthony Miller: Thanks, Justin, and good morning, everyone. I'm pleased to present Westpac's full year results to outline the value we're creating for customers, shareholders and the communities we serve. We began the year with a robust balance sheet and capital position. This provided us the capacity and flexibility to pursue our growth and transformation agendas. We are driving operational and business momentum supported by 5 priorities. To ensure we are there for our customers at the time and place that suits them, we've adopted a whole of bank to customer approach. Our refreshed leadership team is guiding our 35,000 people who are energized, engaged and turning our priorities into outcomes. It's not just what we deliver, but how, and that is why our focus on execution is key for Westpac. Disciplined execution is how we will achieve our goals. As Australia's first bank, we recognize the vital role we play in supporting economic prosperity. We're proud of our contribution as Australia's sixth largest taxpayer, helping to fund essential services and improve people's lives. Our employees bring this to life by volunteering their time and making pretax donations to more than 500 charities. Through our Rugby League and Cricket partnerships, we promote sport participation from grassroot clubs, including programs for schools, women and First Nations talent through to elite competition. We also offer free financial literacy programs across Australia, New Zealand and the Pacific to help educate thousands of people and small business owners every year. We're improving banking access in regional areas and investing in ag scholarships and technology to drive innovation. These initiatives create more prosperous communities while fostering trust and brand advocacy. Turning to financial performance. The result reflects our strategy of balancing growth with returns, while making necessary investments in people, innovation and transformation to support our future. Net profit, excluding notables, decreased 2% to $7 billion. Statutory net profit fell 1% to $6.9 billion. This led to a slight contraction in our key return metric, return on tangible equity. The impact was cushioned by the reduction in share count through the buyback. As we execute our transformation agenda, expenses are higher, lifting our cost to income to 53%. We're addressing the cost structure through our Fit for Growth program, which will help offset expense growth in FY '26. Our performance reinforces the need for us to focus on execution while managing RoTE and CTI. The steady financial performance and strong capital position saw the Board declared a second half dividend of $0.77, equating to a full year dividend of $1.53 per share fully franked. This equates to a payout ratio of 75% of profit after tax, excluding notable items. This is the slide I use to track our progress against our FY '29 targets. We put customers at the center of everything we do. To be Australia's best bank, more work is needed to lift customer and brand advocacy. In the past 2 years, we've gradually improved consumer NPS. We're currently ranked equal second and the gap to first place has narrowed. In business, we have established clear leadership in SME and commercial. However, our overall position shows work is needed to lift small business. For institutional customers, we aim to be #1 in our target markets by investing in our people's expertise and building stronger customer relationships. We are now executing UNITE. We will be open and transparent as we drive to complete this program. On performance, our decisions and approach are guided by delivering improvements to cost to income and RoTE. Our strategy supports our ambition to be our customers' #1 bank and partner through life. For our customers, we aim to win the whole relationship by delivering the whole bank. To meet more customer needs, we're offering the full range of products and services we have in a more timely and personalized way. For our people, we are investing in their development and leader capability while driving a high-performance culture where employees can perform at their best. On risk, we have completed the final transition of the customer outcomes and risk excellence program known as CORE. In response, APRA released the remaining $500 million of operational risk capital overlay, marking 5 years of meaningful change. Our commitment to ongoing risk improvements will continue, and our priorities for risk management to be recognized is our differentiator. Our transformation agenda is focused on delivering UNITE and 2 flagship digital innovations, Biz Edge and Westpac One. Ultimately, our performance will be reflected in how we execute on these priorities. Our service proposition is foundational to earning trust and becoming the bank of choice for our customers. Despite economic uncertainty in recent years, our customers remain resilient. We supported customers with 46,000 hardship packages with 3/4 of them back on their feet. Service quality is improving. For example, our financial market clients time to trade in the Commercial division is down by 30%. Our new brand positioning, It Takes a Little Westpac, along with our award-winning banking app and rewards program is strengthening engagement and loyalty. For businesses, we doubled our women in business commitment to $1 billion. We are growing our regional presence through new service centers. Our first location in Moree was well received by the community. Our latest Australian-first innovations, Westpac SafeCall and SafeBlock, supported a further 21% decline in reported customer scam losses. This is just a snapshot of the ways we're improving our service proposition to become #1. With a refreshed executive leadership team, we're placing a stronger focus on how we lead and support our people to perform at their best. Professional development programs, including the Business Performance Academy as well as skills training in data and AI are just some of the ways we are investing in our people. We've strengthened our employee value proposition to attract, retain and develop top talent while expanding benefits. We're also building the presence of our bankers where it matters most for our customers. Employee engagement remains strong, and we continue to invest to improve. Pleasingly, our consumer deposits grew by 10%, including offsets. This is a testament to the quality of our business and our customer base. It also reflects the effectiveness of our award-winning banking app and the competitive product suite, which we have, which provide reliable everyday banking solutions. We have expanded our capability in migrate banking. Prospective customers from several key markets can now apply for a transaction account before arriving in Australia. Our recent sponsorship with Cricket Australia will also present new opportunities in this target segment. Transaction banking is at the heart of our business strategy. New account openings of 130,000, supported transaction account growth of 13% this year. We also launched a new online payment solution, OnlinePay. With simple onboarding, it has attracted 1,000 customers within 3 months of launch. In Institutional Banking, we continue to maintain our lead in public sector deposits with growth of 11%. Financial institutions is also a target area where we are now seeing real momentum. Our goal of deepening relationships and supporting more customer needs is reflected in loan growth across business and institutional, where existing customers make up approximately 3/4 of new lending. Business lending increased by 15% with even stronger growth across target sectors of health, professional services and agriculture. Institutional lending grew by 17%. The portfolio is diversified, and we remain the country's largest lender to renewables. Growth in both areas has been accretive to RoTE. I'm very pleased that the average risk grades across the business and institutional lending books have remained stable, while absorbing this attractive level of growth. Looking more closely at mortgages. Our focus has been on getting the service proposition right, making it consistent, attractive and most importantly, easy for our customers. We've made progress. Time to decision has improved with most proprietary home loans now processed in under 5 days. In a highly competitive environment, we must get the service proposition right and then balance growth with return. Overall, I think we've managed this well. Returns have improved, supported by operating efficiency and disciplined execution. We've been more efficient in how we deploy capital with balances up and RWA down. Today's announced sale of the RAMS portfolio will further improve the operating efficiency of our mortgage business. We've targeted high-returning segments, including investors, where flows increased by around 4 percentage points to just under 40%. This was a deliberate move with our pricing competitive. In contrast, we positioned ourselves above market in owner-occupied. Momentum in early FY '26 has picked up and is tracking slightly above system. Looking further out, we see a clear opportunity to improve proprietary lending, which currently makes up just under 1/3 of new flow. We know what to do. However, progress will take time. It will be measured in years, not months. To support this, we're adding more home finance managers. We're enhancing banker incentives, and we're investing in the brand. Additionally, we're capturing insights and generating leads and opportunities by leveraging data, analytics and AI across the company to drive proprietary lending. UNITE is up and running. We finalized the scope, we have a plan, and we are now into execution. Some initiatives are progressing faster than expected, which is encouraging, while others are proving more challenging. This is typical for a project of this scale. Moving to a single deposit ledger meant we had to revisit about 1/3 of the initiatives to make sure we addressed all impacts and all interdependencies. This additional planning delayed our time line. We expect completion where we are accruing all target benefits to extend from the end of FY '28 into FY '29. To drive execution, we formed a centralized delivery team of 1,600 people focused solely on UNITE. We've also grouped the initiatives into 10 work packages to ensure we manage interdependencies and challenges effectively. In FY '26, we expect to invest between $850 million and $950 million in UNITE as we go flat out on execution. The program is expected to account for approximately 40% of annual investment spend in FY '27 and '28 before reducing in FY '29. Our progress is starting to deliver improvements that are making banking simpler and more connected for our employees and our customers. We've put some of those outcomes in front of you. Two things I want to call out. Westpac home loan customers can now set up multiple offset accounts with no additional fee. This is a key feature requested by our customers. Since February, we've opened more than 35,000 additional accounts. We've also completed the migration of private bank customers to Westpac with minimal attrition. The validation that we've done this well is shown in recent positive brand NPS. We've completed 8 initiatives and 51 are now underway. Most initiatives are green, a few are red, and we're prioritizing getting those back on track. We will provide updates on progress and continue to refine our disclosure to improve transparency. We invested $660 million in UNITE during FY '25, and this was slightly above our guidance. This was because we saw an opportunity to get additional work done now, and so we prioritized the resources to make that happen. Alongside UNITE, we're also modernizing technology through capabilities like Westpac One and Biz Edge for better customer and employee experiences. Biz Edge is our new lending origination platform, accelerating digital capabilities for bankers with AI-powered tools that support faster, more confident decision-making. This is dramatically improving how we lend to businesses by guiding applicants and bankers through the best pathway. Since launching in March, Biz Edge has processed nearly $5 billion in business lending applications. So far, time to decision has improved by 45%. More benefits are on the way for customers and bankers. For Institutional clients, Westpac One will be the new platform that brings together real-time treasury management, FX, trade and lending with powerful data insights. In December, we'll pilot the first Westpac One initiative with real-time transaction banking and a new modern digital experience for corporate clients. Advanced transaction banking capabilities like liquidity management, including multicurrency and cross-border capabilities, will be progressively dropped over the next 36 months. Once complete, the platform will deliver end-to-end liquidity and cash management, helping clients run and fund their businesses more efficiently. This capability will be market-leading and a differentiator in supporting our corporate, large commercial and institutional clients. AI represents a significant opportunity to improve the way our people work as well as the quality of their work to help us provide better, more consistent service to our customers. We're embracing new gen and agentic AI capabilities while also continuing to use traditional AI tools, like machine learning and advanced analytics. These are helping us automate tasks and modernize our technology. It's also giving our people more time back and providing bankers with more insights to serve customers better. The key is making sure we scale proven solutions. Examples with tangible benefits include strengthening defenses against fraud and scams, supporting faster approvals for mortgages and business loans, helping employees quickly answer process and policy questions and automating coding and testing. However, to realize its full potential, we must approach AI with an enterprise-wide mindset. We've appointed a global leader reporting directly to me to drive this across the entire company. We're moving at pace and recently launched the Westpac Intelligence layer, which draws on the enormous data and insights across the company to drive faster, safer and more proactive decisions. We have prioritized using the layer in consumer to support our focus on growing proprietary lending. It is already giving our home finance managers better insights to deliver faster, more personalized service. I'm really excited about what we will achieve as we broaden this intelligence layer and roll it out across the bank in the next 12 months. Nathan will now take us through the performance in more detail. Nathan Goonan: Thanks, Anthony, and good morning, everyone. It's a privilege to present my first result for Westpac. I recently took over from Michael as CFO, and I want to begin by acknowledging Michael's contribution over the past 5 years and wish him all the best for the future. I'm excited to be joining Westpac at an important time in the company's history. I look forward to doing my best to help our people deliver consistently for our customers. As foreshadowed, we've adjusted our disclosures to make peer comparison easier, now reporting net profit, excluding notable items as an equivalent measure to cash earnings among peers. Starting with the financial performance over the year before talking in detail about the half year trends. Excluding notable items, which related solely to hedging items, net profit was down 2% with higher expenses more than offsetting growth in operating income and lower credit impairment charges. EPS was flat, reflecting reduced share count from the on-market share buyback. Revenue was up 3%, comprising a 3% increase in net interest income, driven by an increase in average interest-earning assets and a 1 basis point decline in net interest margin and a 5% increase in noninterest income. Operating expenses were 9% higher, including the restructuring charge of $273 million. Excluding the charge, expenses rose 6%. These revenue and expense outcomes resulted in a decline in pre-provision profit of 3%. Credit impairment charges remained low at 5 basis points of average gross loans compared with 7 basis points the prior year. Half-on-half, we saw improving underlying trends, offset by increased investment. Pleasingly, pre-provision profit increased in Institutional, New Zealand and Consumer, while business and wealth held flat. Net profit was up 2% in the half and comprised of the following: Net interest income rose $335 million. Core net interest income was up 3%, a 2 basis point increase in core net interest margin and a 1% growth in average interest-earning assets. Noninterest income was up $143 million, mainly reflecting an increase in markets income, a combination of both client activity and market conditions. Expenses were up 9% or $520 million, including the restructuring charge. Overall, pre-provision profit was down 1%. Excluding the restructuring charge, pre-provision profit increased 4%. Asset quality metrics continued to improve, resulting in lower credit impairment charges. The charge of 4 basis points to average loans was down from 6 basis points in the prior period. The effective tax rate was 30.6%, down from 31.3%. As Anthony outlined, sustainably growing customer deposits over time underpins our ambition to improve returns. The growth of 4% in the half was pleasing and highlights the inherent strength of our customer segments. Mix improved with the reliance on term deposit decreasing from 29% to 27% of the book, while savings and transaction balances grew. We expect strong deposit growth to continue in FY '26 with our economics team forecasting system growth of 7%, reflecting continued improvement in household conditions. Strong deposit growth has supported lending growth in chosen segments. Gross loans increased 3% with growth across all customer segments. Australian Mortgages, excluding RAMS, grew by 3%, slightly below system as we balance growth and return in a competitive market. Australian business lending continues to show good momentum, growing at 8%. The larger commercial subsegment performed well, and we also saw growth in both SME and small business, which grew 9% and 5%, respectively. Prior to this half, small business had contracted or been flat in the preceding 4 halves. Institutional lending grew by 10%. The portfolio is well diversified with infrastructure, renewable energy and industrials underpinning growth. Lending grew 3% in New Zealand, where demand for credit remains subdued in a more challenging economic environment. The RAMS portfolio continued to run off. The balance at 30 September was $22 billion. The sale announced today is expected to complete in the second half of 2026. Until completion, these balances will continue to run off. Please bear with me as I spend a bit of time talking to net interest margin given the importance and likely focus. Core net interest margin increased 2 basis points to 1.82%. This follows a decline of 3 basis points in the prior half. We've seen a reduction in the amplitude of the components of NIM with all drivers having a modest impact. The lending margin was stable with an improvement in New Zealand due to fixed rate repricing, offset by a decline from auto finance, which was sold in March. Lending margins in business contributed less than 1 basis point. In Mortgages, the market remains competitive, but relatively stable, and we saw several factors play out. The cumulative impact of these was less than 1 basis point. These include the benefits from the initial timing impact from rate cuts. Deposits were also stable as benefits from the replicating portfolio and the repricing of the behavioral savings product was offset by the initial impact of rate cuts, customers switching to higher-yielding accounts and more behavioral saving customers qualifying for the bonus rate as well as the compression in TD spreads from prior period. Liquid assets contributed 3 basis points, reflecting reductions in trading securities. Whilst a positive to NIM, this is neutral to earnings. Lower earnings on capital detracted 1 basis point. The benefit from the higher replicating portfolio rate was more than offset by the impact of lower rates on unhedged largely surplus capital and the averaging impact of the share buyback. The contribution from Treasury and Markets rose from 12 to 13 basis points. Looking to first half 2026, we've included some key trends we expect to impact margin. We expect lending margins, excluding the timing impacts from rate cuts, to edge lower. Pressure on deposit spreads from the average impact of rate cuts and prior period switching to saving products is likely to continue. The replicating portfolio is expected to be a net benefit of 1 basis point. This includes a 4 basis point benefit from the total replicating portfolio, offset by a 3 basis point reduction in unhedged deposits. This reflects the decision to increase the deposit hedge by $10 billion. This was executed in September and October to provide further earnings stability through the cycle. The benefit from improved term wholesale funding markets is expected to be a slight tailwind. While mortgage margins appear relatively stable, lending competition remains difficult to predict, along with short-term funding costs and RBA rate cuts. To this end, we've provided 2 sensitivities to help understand the potential impact. The next 25 basis point rate cut, RBA rate cut, leads to an approximate 1 basis point contraction over the first 12 months, reflecting the impact on unhedged deposits and capital. Based on September balances, a 5 basis point move in the 3 months BBSW OIS spread equates to approximately 1 basis point of NIM. Quickly touching on noninterest income, which increased 10% for the half. Fee income was up 5%. Higher card fees reflected increased spending and fee changes, which are being phased in. Business and institutional lending fees increased due to strong balance sheet growth. Wealth income was up 3% with higher funds under administration. Trading and other income increased 27% from higher sales and risk management income, including foreign rates and foreign exchange and favorable DVA. Moving to investment spend, which increased 9% over the year. UNITE investment was $660 million as the project continued to step up through the period. The proportion of investment spend that was expensed increased to 60%. UNITE was the main driver with this work expensed at 74%. Notwithstanding the acceleration of UNITE, spend on growth and productivity initiatives was in line with that of FY '24. This includes Biz Edge and Westpac One. Risk and regulatory spend declined substantially after the completion of several projects, including the CORE program. Into FY '26, investment spend is expected to be approximately $2 billion, with UNITE accounting for just under half the total spend at $850 million to $950 million. This is in line with the fourth quarter run rate where UNITE spend was $225 million. Both risk and regulatory and growth and productivity investment will decline to allow the UNITE investment to accelerate within the expected $2 billion total investment spend. Moving to expenses. This slide is changed in presentation to better reflect the underlying drivers. My comments relate to movements over the year, which we believe provides a better guide to key trends. Staff costs increased $397 million as the new EBA began, superannuation rates increased, and we invested in more bankers in business, wealth and consumer. Technology costs increased $146 million, reflecting vendor inflation, increased demand to support growth and more cyber protection. Volume and other rose $199 million. Drivers include the important investment in our brand and marketing and higher operations-related expenses to support customers and prevent fraud and scams. This was offset by $402 million of structural productivity savings. This included the benefit of a simpler operating model, more automation and reductions in branch space. The ramp-up in UNITE added $399 million over the year. Looking to FY '26, staff costs will rise as we continue to invest in bankers and eligible employees receive a 3% to 4% pay rise under the EBA. The averaging impact of bankers hired from this year and higher superannuation rates will also flow through. Technology expenses are expected to remain a headwind. The expense contribution from investments will be driven by the mix shift towards UNITE with the increased cash spend expensed at approximately 75%. Assuming the midpoint of our guidance, this will translate to $190 million increase in operating expenses. This will be partially offset by the decrease in other investment. Amortization expense will continue to be a headwind in FY '26, although to a much lower extent. We remain focused on closing the cost-to-income ratio gap to peers over the medium term, and we need to structurally lower our expense base. Total productivity is expected to be at least $500 million in FY '26. This revised view of productivity will give us a consistent way to demonstrate the benefits from both UNITE and Fit for Growth initiatives. Overall, credit quality remains sound and with consumers and business portfolios performing well. Stressed exposures to total committed exposures decreased 8 basis points. This reflects a decline in mortgage arrears and reduced stress across most of our business segments. This half, we've continued to see improvement in 90-day plus Australian mortgage arrears. These have reduced from a peak of 112 basis points in September last year to 73 basis points, reflecting a combination of customer resilience and an adjustment to the reporting of loans when customers complete their hardship period. In New Zealand, mortgage arrears fell by 8 basis points to 46 basis points as rate relief began to feed through to customers rolling off higher rate fixed mortgages. We have provided the chart by industry for our non-retail portfolio. As you can see, business customers are managing conditions well with stress reducing across most sectors. Our portfolio remains well diversified across sectors and geographies. Looking forward, the 2 key drivers of asset quality outcomes are likely to remain the unemployment rate and asset prices. Total credit provisions were 2% lower at almost $5 billion. This reflects a $72 million decrease in individually assessed provisions and a reduction in model collectively assessed provisions driven by improvements in underlying credit metrics and the economic outlook. Offsetting the model-driven outcomes were 2 main items of management judgment. The weighting to the downside scenario was increased by 2.5 percentage points to 47.5% at the third quarter. The base case reduced by the same amount. In addition, we increased overlays by $108 million with overlays as a percentage of total provisions increasing from 3% to 5% in the period. As a result, overall coverage reduced by 1 basis point with total provisions now $1.9 billion above our base case. An improvement in the composition and funding and liquidity adds to our competitive positioning and helps provide medium-term earnings stability. The deposit-to-loan ratio has reached an all-time high of just under 85%. A more stable source of funds from household and business transaction accounts has reduced the reliance on term funding with issuance in FY '25, the lowest in 10 years. Our liquidity and funding metrics are above our normal operating ranges, which we believe is appropriate given the market backdrop. The strength of the capital position is a key feature of this result and provides us with flexibility and opportunities over the medium term. The CET1 capital ratio ended the half at 12.5%. Net profit added 80 basis points, while the payment of the half year dividend reduced capital by 58 basis points. Risk-weighted assets detracted 7 basis points with higher lending balances more than offsetting data refinements, improvements in delinquencies and a reduction in IRRBB risk-weighted assets. Other movements added 16 basis points, largely reflecting lower capitalized software balances and movements in reserves. There are several adjustments to consider for first half '26. These include the removal of the $500 million operational risk overlay in October added 17 basis points of CET1 capital. The new IRRBB standard came into effect on 1 October, and the extension of our non-rate sensitive deposit hedge has now been allowed for regulatory purposes. These 2 items add 39 basis points of capital. Offsetting this, the remaining $1 billion of the previously announced share buyback will reduce CET1 by 23 basis points. Following these adjustments, the standardized capital floor was met in October. Importantly, there are opportunities for us to manage the standardized floor, and we expect the impact on the CET1 ratio at the half to be modest. We've implemented a new capital target of 11.25% following APRA's changes to AT1. We have approximately $3.1 billion of capital above the new target after the payment of the second half dividend. The payout ratio, excluding notable items, was 75%, which is at the top end of our target range of 65% to 75%. This balances our strong financial and capital position while maintaining capacity to both invest and support customers. We have $1 billion of the previously announced buyback outstanding. We see value in the flexibility provided by this form of capital management. With that, I'll hand back to Anthony. Anthony Miller: The Australian economy is showing signs of improvement following a sustained period of below-trend growth. Household purchasing power is rising as real disposable incomes grow. Businesses are emerging from a period of subdued activity, partially supported by lower rates, easing input costs and some productivity gains. Westpac DataX Insights highlights an improvement in card spend growth at 6.5%, the strongest we've seen since April 2023. For business, commercial customers are feeling better, but it's still challenging for our SME customers. However, we've just started to see an improvement in cash flows off the back of firmer household spending. Underlying inflation is at the top of the RBA's target range. This will put pressure on the RBA to hold rates tomorrow. We are starting to see more growth driven by private rather than public investment. However, this transition has been slower than anyone expected. A smarter balance calls for bold, coordinated action across government, regulators and the private sector. It has been pleasing to see the focus on the productivity agenda in the national debate. Targeted action is key to unlocking Australia's long-term prosperity and resilience. An area we are focused on is addressing the housing affordability challenge. We need to tackle the structural undersupply of housing and efficiently deliver more houses in the $500,000 price range. More broadly, the global outlook is not without risk, with ongoing trade and geopolitical tensions a constant threat. Our strong financial position helps us navigate that uncertainty while being there to support our customers. It's pleasing to see business credit is expected to grow 7%, driving private investment. We're building on the strong foundations, and it is all now about execution. We have 13 million customers. However, to realize the advantage of that scale, we must drive more efficiency. We must complete our transformation agenda, and we must enhance our service proposition. Each business has a clear direction, has the right leadership team in place and must now deliver. I'm pleased with our progress and energized by the opportunities ahead. With disciplined execution driving momentum, we're deepening customer relationships and investing in our businesses to support sustainable returns for shareholders. Thank you. Justin McCarthy: Thanks, Anthony. We'll move to Q&A now. Our first question comes from Tom Strong from Citi. Thomas Strong: Just first question around the productivity benefits into '26. I mean you took $400-odd million in this year, and you've guided to $500 million in '26, but you've got the benefit of, I guess, incrementally $270 million from the Fit for Growth, which you took the restructuring charge for. So is that $500 million conservative, you think, in terms of the FY '26 opportunity? Nathan Goonan: Yes, why don't I start. Thanks for that. I think you've sort of read it the right way. That's a line item in terms of just showing on a consistent basis where we think the benefits of the restructuring charge, and then in the future, as UNITE becomes a more material piece of it, we'll continue to show our productivity benefits on a like-for-like basis through that line. As it relates to the greater than $500 million, I think that's the guidance that we've given. The benefits from the $273 million, we actually had a little bit in this year. So there's probably about -- we had $402 million productivity for FY '25. There's about $40 million of that will be benefits from the restructuring charge this year. And I think when we made the pre-release, we just made comments that we thought the rest of that will be phased reasonably evenly during FY '25 -- FY '26, and then there will be a little bit of benefit to flow into FY '27. So yes, look, we're expecting to do $500 million. We've got to wake up every day and strive to do better than that, but our guidance today is in excess of $500 million. Thomas Strong: Okay. That's very clear. And just the second question around UNITE. It was 35% to 40% of the investment envelope and you've clarified that, say, at 40%. You have kept the $2 billion per annum consistent over the next few years. Just given the reallocation towards UNITE and I guess, the decline in purchasing power over that time, do you think that $2 billion per annum is still appropriate as a view out to FY '28, FY '29? Anthony Miller: Look, I mean, that's a very good question. And you're right, we'll continue to ask ourselves, have we got that right. I mean in framing up $2 billion per year, it's really anchored around what can we do effectively and deliver, if you will, cost effectively and substantially. So it's really about the capacity of the company to deliver the change we need to undertake. If it's the case that we can prove certainly in what we deliver over the next 12 months that we can do more, then we'll remain open-minded about that. But at the same time, it's about balancing the capacity of the company to execute the change of cost effectively and also balancing -- making sure we deliver return to shareholders. So it's a balance that we'll have to navigate over the next 36 months. Justin McCarthy: Next question comes from Andrew Lyons from Jefferies. Andrew Lyons: Maybe Nathan, a question for you. I just want to try and flesh out how everything you've mentioned on expenses will ultimately impact growth in FY '26. So perhaps just referencing the various FY '26 considerations that you have provided us, can you perhaps talk in a bit more detail as to how you expect this to translate to the various moving parts that you have in your expense waterfall slide on Slide 27, please? Nathan Goonan: Thanks, Andrew. Good to hear from you. I guess I'm just going to try and find the slide, just give me 2 seconds. It's up on the screen now. So I guess a deep walk through these and maybe just happy just to go through them again and try and give a little bit more flavor as we go. I think we've looked at it on a -- the first thing is just to sort of look at it on an annual basis, Andrew, and that's what we've tried to do. I think on people costs, we do continue to think that, that will be an increase in expenses next year. We probably expect if you break that down a little bit, we've got some pull-through of things like the investment in bankers that we had this year. There's a pull-through of the superannuation guarantee coming through. So there's a few of those things. We probably expect that we'll have lower absolute wage growth. The EBA is into its second year. So it's a lower number year-on-year. But we do expect to continue to invest in bankers. So I think that number will continue to be a big feature as we look at FY '26. On tech, I guess my comment was just similar that we continue to think that, that will be a headwind. And then on volume and other, maybe just to break that one down a little bit and try and give a little flavor. Probably the one thing that's a little bit of feature of FY '25 was a reasonably material investment in the brand, which we're really pleased about and is important in investing in the business. And that was about $60 million in the year, $45 million in the half. So we'll have some of that flow through into next year, but maybe not as much. We gave the disclosure on UNITE. Clearly, that investment bucket is just going to be determined by how much skews towards UNITE and then it's expensed at a higher ratio than the other. So we tried to give a bit of guidance there. And then amortization was about $100 million for the year, and we expect that to be a significantly lower number. And then we've had the conversation about productivity. So they're the moving parts, Andrew. Happy to try and sort of be helpful or answer a follow-up on any one of those. But hopefully, in sort of laying it out that way, you get a picture of the moving buckets. Andrew Lyons: No, that's great. I appreciate that detail. I might just move on to my second one, just around volumes. You mentioned that mortgage growth ex RAMS was 0.8x system over the year, and you put that down to being a function of just focusing more on returns. But like to be honest, when we continue to speak to mortgage brokers and the like, we do still hear that even though the gap between the 2 bookends have closed, Westpac is still pretty aggressive on front book discounting. So I'm just keen to sort of understand how you recognize those or reconcile those two opposing views around pricing for growth versus still being pretty competitive from the perspective of brokers. Anthony Miller: Andrew, it's Anthony here. Definitely, we have to be competitive. And this product that is a mortgage today is a highly commoditized and very price-sensitive offering. So we just need to acknowledge that. The second thing is, yes, in certain areas where we felt it made real sense for us and the returns were right and reflected the customer base we have and want to get more of, such as investor loans, we were sharp on price. And we deliberately were because we saw the return and we felt it aligned with what we wanted to achieve. In terms of other parts of the portfolio, we were above market. And I know there's always lots of observations and commentary from participants outside the bank. Those were the two disciplines we set ourselves, which is we wanted to be sharp, we wanted to be very price-competitive in investor and then a couple of other segments that we're keen. And we were very happy to be above market on owner-occupied just given the shape of our book and the returns that we're going after. Justin McCarthy: Thanks, Andrew. Our next question comes from Ed Henning from CLSA. Ed Henning: I just want to go back to project UNITE and just dig into that a little bit more. You've told us today that you're investing more in '26 than you've previously announced and also the program is going to go longer. So the investment you're spending is more than you've previously flagged. Can you just give us a little bit more on what it's going to deliver in terms of financial outcomes and the timing of that? How much is actually during the program? And then how much is beyond the program? Or are you planning to give that at a later date? Anthony Miller: Well, certainly, what we'll be doing each year in March is giving you a comprehensive update on UNITE and giving you an opportunity to work and go through the detailed work streams with our team. So we'll definitely continue to provide that detail and that access to you. I mean in terms of the investment next year or this financial year of $850 million to $950 million, it's a deliberate range because it will be -- if we can invest that and deliver the outcomes we need to deliver, then we'll take that opportunity, point number one. The second is, in the construct of doing all of the planning that we've done and landing on the decision to go with one ledger, that necessitated us changing some of the investment profile of the program. And so therefore, we had to bring a bit more investment forward, which is why next year is a bit lumpier than we might otherwise have planned because with the decision to go to one ledger, we had to do more work upfront to be able to facilitate that migration in 24 months' time. And so that's the reason why it's a little bit lumpy thereafter. The second is that, we are keeping that investment envelope in a disciplined way at $2 billion because as I described earlier to the previous question, it's about the capacity of the company to execute and can we -- if we can deliver value and if we can, in fact, do more, then we will be open-minded to doing more. The other thing I would say is that in terms of the project itself being longer, I just sort of want to put some context in that for you. When we spoke to the market 6 months ago, we were completing and finalizing the investment and plan for a one ledger. We landed at the one ledger decision, and we had to replan accordingly. Previously, we had -- we had 30 September 2028 as the finish date, and that was just arbitrary that we wanted to have this program completed by the end of financial year '28. Now as a result of that replanning, reflecting the decision to go to one ledger, it's just worked out that we won't have all of the benefits accruing by 30 September 2028. It's likely to be a few months into financial year '29. So that's why there's a bit of an extension. There's just more accuracy that we can provide as a result of the planning we've undertaken. And the last thing I'd sort of say to the spot-on question you've raised, which is, yes, the nature of the program is that much more of the benefits do accrue later in the program. But there's nevertheless still, if you will, benefits being realized now, whether it be, for example, the small movement and consolidation into one private bank, that's already delivering us some cost savings. There's a number of other initiatives where we're already seeing benefits accrue. But the nature of this program is that what we're doing is we're taking all of these customers on two other tech systems and platforms and migrating them onto one tech platform. And only when you switch those two off and you eliminate all the products and processes that, if you will, have to be executed on those two platforms, do you start to fully realize the benefits, the cost to run that follows from that, the cost to change that follows from that. So it is tapered to the back end in terms of the benefits that will be realized. And the premise that we have with UNITE, its key feature is that it helps set us up in a way that we have structurally lowered our cost base so we can really start to achieve our aspiration, which is a cost-to-income ratio that's better than the average of our peers. Ed Henning: And just following on from that, you know, in March coming up next year, are we going to be able to get at that point what you think the savings will be through the period and at the end of the period? Or are you not ready to tell us that? Anthony Miller: Look, we have absolutely clear in our mind as to what we want to achieve as a result of the investment we're undertaking, which represents UNITE. But what I'd rather do is make sure we're delivering and we're executing before we start talking about outcomes. But rest assured, the whole focus here about UNITE is if we can consolidate the new-to-bank processes and systems onto one bank process on one system, then we would expect that, that sets us up to be able to drive to a cost-to-income ratio that's very competitive as compared to our peer. Nathan Goonan: And maybe I'd just add one thing, Ed. I think it may be different than some other programs, but I don't think it's necessarily a program where you take total spend and total benefit sort of narrowed in on just the UNITE benefits and sort of try and make sense of it that way. This is sort of large structural opportunity for us to then get our cost-to-income ratio much better than where it is today. And so I think in some ways, it's a critical enabler of what we've got to do on productivity, but it cannot be the only thing. And so what we're committing to do is just try in a transparent way, as we go through the program, highlight the benefits that we've got from our spend as we go. And then you'll also hear us continuing to talk about that productivity bar that I've already had one question on because we want to be held accountable for making the organization more efficient as we go, significantly enabled by UNITE. So it's going to be more than just the UNITE productivity that you'll hear from us. Justin McCarthy: Our next question comes from Matthew Wilson from Jarden. Matthew Wilson: Two questions, if I may. Firstly, we've seen a nice pickup in your business banking volumes. You're winning share there, which has been really good. However, it's taken 50 basis points or so off the net interest margin. Obviously, there's some reclasses in there. How should we think about how you'll manage the volume margin trade-off in that business right now? Are we at a base that we can grow within without impacting the margin too much? Or should we expect further? Anthony Miller: Why don't I invite Nathan to take first swing at that, and then I'll add some comments on top. Nathan Goonan: Thanks, Matt. And I think it is a good question. And clearly, when you get into the divisional disclosures, it is a number that stands out. I think it's just important, I think, when we're thinking about margins just to make sure we sort of go back up to the top of the house, if you like, and just think about what are the movements in the margin that are happening at the group level. And then the divisional is really a proportional impact of those. So we've made the comment that when you look at business lending margin at a group level, it contributed less than a basis point. I appreciate some of that is just the math of materiality relative to the mortgage book. But more importantly, when you look at the business lending -- business margin at a division, you've got pretty significant impacts from the deposit side of the book. So I think the right way to look at that is sort of just the business lending, which is where your comment was going. Business lending revenue was actually up 7%. So the margin point around the lending is not as material as the overall divisional thing, just given the impact of the deposits. I'd probably say just a couple more points, and then I'll let Anthony come in. I think the lending margin was more stable in business lending in the second half than it was in the first. And I sort of continue to sort of expect trends into the first half are going to be a little bit more like they were in the second half than what they were in the first. So we don't see that accelerating. I think that's really driven front book, back book in our business lending books are much closer together now. One of the features, I think, of this book maybe relative to peers is when you've been out of the market for a little while and then you do reenter the market and accelerate, you can have a bit more of a pronounced cycling from back book margins on the front book margins. And so we might have seen in any given period a little bit more here than others. But I think we're now at that spot where that's much more in equilibrium, and we should move more in line with peers. And then I'd just say sort of two more points. Looking forward, I think mix of this book will be almost more important than pricing. So there is a significant difference in margins between the subsegments, whether it be the size, so corporate versus SME versus small, there's a significant difference between sort of working capital solutions and term lending. So getting that mix right will probably be a bigger determinant than pricing itself. And then just last point on pricing, Matt, not to labor the point. But I guess I've come in and met with the team and spent a lot of time with them on this particular point. And there's probably nothing that I'm seeing in the pricing here that is that different to what I would have expected or seen elsewhere. I think the team are putting their firepower around retaining their existing customers. And so you see pretty good levels or high levels of retention of existing customers when they go to market, and that's good business, and we continue to encourage that. And then where they're trying to be a little bit more disciplined on price is just on the new-to-bank. And so we're probably seeing new-to-bank win ratios drift down a little bit in the last 6 months, but the business is still growing well, and we expect it to continue to take share next year, so a long answer. Anthony Miller: No, no, you hit all the points, and thanks for doing that. I mean I would just say that the growth that we've seen over the last 12 months, Matt, was in, call it, the higher grade part of the book. And so margins there, as you would expect, slightly tighter, but the return on tangible equity was very attractive. The other thing that we were pleased about was that, that growth with existing customers and those sort of retention rates in the sort of high 90s. And then win rates in the context of new to bank were in sort of much, much, much lower than that. So we're really, really thoughtful about where we deployed and where we grew. And we knew that there would be, if you will, some consequence to margin, but it was the right way to go after the opportunity in front of us. The only other sort of additional point to make about business bank, with that growth in the loan book being sort of 3/4 existing customers, only 1/4 new customers, what was really pleasing is that we saw a 13% growth in the transactional account, which we think is a really important sort of opportunity and capability we have at the bank. That 13% growth, what was very pleasing was that sort of about 53%, 54% of that growth was with new-to-bank. So we're bringing new customers in on a product suite that's a really attractive, a, return; but b, also a risk profile for us as a company. So we quite like the way Paul and the team are driving the shape of that growth in that division. Justin McCarthy: Matt, hopefully, your second question doesn't require such a comprehensive answer. Matthew Wilson: Hopefully not. Just with respect to your targets, so 6 months or so ago, you decided to set relative cost to income and ROE targets. In the interim, one of your key peers has sort of changed that line in the sand by producing some absolute targets. How have you responded to that? Because it makes your task a lot harder at the current scenario? Anthony Miller: Look, I expected this question. And in fact, I think I expected it from you, Matt. So thanks for playing consistently. Look, I respect Nuno immensely and what ANZ has done and he's put a marker down, and I wish him well, and we'll watch that process develop from here. We've spent a lot of time and effort to get a plan together, and we have that plan in front of us. And so I think our ambition, which is to be very focused on how do I structurally reset this company with UNITE, how do we then go after the productivity equation year-in, year-out over the next 36 months, bringing those together, we can see where we can get our cost-to-income ratio at a point which is better than our peer average. And so that's -- we've got clear goals, clear targets that we need to deliver, Matt. I'd just much rather, if you will, deliver and be dropping outcomes along the way rather than sort of putting some bold number in front of you. I think it's fair to say, as a company, we probably haven't the right to do that. We put a number in front of you 4, 5 years ago, and we didn't get to it. And so frankly, what we need to do is deliver and then talk about bold numbers and outcomes. Justin McCarthy: The next question comes from John Storey from UBS. John Storey: Firstly, obviously, on the Consumer division, you've seen quite a big improvement half-on-half. And just looking at some of the diagnostics on the actual Consumer division, reported customer surveys, NPS scores are pretty stable, Anthony, as you called out. But one thing that is pretty evident is your MFI number has dropped quite a bit. Maybe if you could give a little bit more details around that? And then just secondly, on the Consumer division, maybe just around the start of the financial year, if you could provide a little bit more color on how the division has been performing, particularly with regards to new business volumes and then also just channels in terms of where mortgages are coming through. Anthony Miller: Look, thanks for that question, John. And so Nathan, you're welcome to jump in as you see fit. Look, you're absolutely spot on. We have an aspiration to lift our MFI ranking from where it is. And if there was one aspect of the performance in Consumer, which has done some great work over the last 12 months, there's one area where we're disappointed and we're actively engaging on is the MFI outcome in Consumer. The irony is that the MFI score has come down a little bit, yet deposits have grown at a very attractive level of 10%. And we've done more work. And as we've unpacked that, we've noticed that actually it's much more in the context of what we call the regional brands, St. George, BankSA, Bank of Melbourne. And part of that is connected to the fact that we were less aggressive in how we were pricing our mortgage book in that area. And as a result, we saw some attrition in the transactional account, the MFI accounts that we really want. And so that was a really humble reminder to us that about not just looking at products like mortgages in a stand-alone only return setting, but to really think about the whole of customer and are we getting the balance right. And we've recognized that in that area, in particular, we weren't getting the balance right, and we've addressed that accordingly and are much more focused on how we grow and support those customers and obviously graduate the MFI. Pleasingly, as it relates to the Westpac offering, the MFI there has started to improve, and we're certainly pleased with the outlook and the momentum that we've got in that. I would say that the others -- if I think about also MFI in the space of 12 months in business banking, they've been able to lift it by well over 1 percentage point. So it does highlight that we do have the offering. We do have the product. We just simply got to get -- make sure it's a priority across the organization, which it now is. Nathan Goonan: Maybe I could just add a little bit on the current flows, John, just to take your second question. I would say that we've -- and Anthony mentioned this in his preprepared remarks, we've probably seen, well, one, I think the market is, in particular, your question goes to home lending, then I think that mortgage market has been accelerating. And I think that's been sort of well covered in the market, and you can see it in the system stats. We're certainly feeling that or seeing that. So we've had increases in pretty much every channel, and we're seeing increased applications. And so front-of-funnel activity, as Anthony said in his preprepared, is probably a little bit higher than where we've been trending on a market share basis over the second half. So we're probably at or around system wouldn't surprise us if our front-of-funnel actually meant that we had a couple of months here where we're a little bit above system. That has been growth in all channels. I think pleasingly, we think October, we're going to see a little bit of volume growth in proprietary. I think the team are very cautious when we talk about green shoots there, and Anthony said it's sort of years, not months. But I think as we've seen proportional increases in applications, the proprietary channel has been performing better than it was in prior periods in that period on a proportional basis. So that continues to be good. And maybe the other thing just to add that may be of interest, John, I think the first homebuyers guarantee scheme has certainly stimulated some interest, whether it was some pent-up demand there, but we saw sort of applications in the first couple of weeks when the changes were made almost went to 2.5x what they were for the first homebuyers guaranteed. It's moderated a little bit. I think last week, it was about 2x what they were. So it's still double. How much of that pulls through? So we're seeing a lot of that volume. I think how much of that actually fulfills is a bit of a wait and see, but it's certainly still a small portion of the bank, but it certainly stimulated some demand. Justin McCarthy: Our next question comes from Brian Johnson from MST. Brian Johnson: Welcome, Nathan. I had 2 questions, if I may. The first one is, I'd just like to understand, you've got a bucket load of surplus capital. You're trading at, I don't know, about 1.8x book. I just want to understand the strategic rationale behind selling RAMS when a buyback, for example, is not as accretive. And also if we could understand any kind of litigation risk or warranties that you've made to the buyers in respect of this business? And then I had another question, if I may. Nathan Goonan: Okay. I'll just start on a couple of specifics, and then Anthony can jump in. I think one of the important features of the transaction, Brian, is that it's an asset sale. So just by virtue of that structure means that we're retaining the entities. And then the assets, it's a loan sale. So effectively, the asset is transferred to the buyer. As part of that, we've given sort of customary reps and warrants and other protections for the buyer so that they know that the asset they're buying is effectively going to perform in a way that it says on the tin. So that's things like title and the enforceability of title and things like that. So all customary things. In particular, as it relates to things like indemnities, you just don't need to given the structure of the sale, that will just stays with the existing entity that we retain. Maybe just to give a little bit of a picture as to the financial impact of it, Brian, because I think prima facie, I would agree, it does -- you sort of -- every day, we wake up and compete really hard on household mortgages. And so it's a core product of the bank. And so prime facie, you've got to scratch your head a little bit when you're then willing to sell a portfolio of home lending. But there's a couple of important points here. It is on a completely stand-alone set of technology. So it's a business that runs almost independently from the rest of the business. And so you've got a cost base here that by the time that we get to completion will be almost equal its revenue base. And it doesn't necessarily give you the type of scale that you might intuitively think in your mortgage business, is sort of one of the key features of this relative to, say, just ceding a little bit of share. And maybe, Anthony, you can touch on it. The other key point is we've made quite a few statements today just about the inherent strength of the deposit franchise, the ability for us to go after transaction accounts in terms of being a strategic advantage for us as we think about our balance sheet structure. And this is a business that has, if not 0, very close to 0 crossover in terms of deposits into the mothership. Anthony Miller: I probably just develop a little bit more on one point, which is, our current mortgage book, Brian, is, let's call it, 21% market share. But essentially, we've got 3 different systems upon which it's spread. So in effect, I've got 3 small banks, 3 small bank cost challenges, 3 small bank compliance, 3 small bank risk challenges in managing the mortgage book. And so UNITE was about moving all of those onto one way of doing things on one target tech stack. And so we were always going to have to spend quite a lot of money, and we're going to have to spend a lot of effort and consume a lot of resource to move the RAMS mortgages onto the target tech stack. And so therefore, if there was an opportunity to do that much faster and more efficiently, which this asset sale represents, then we were open-minded to it because essentially, I have 1 percentage point less market share. But now instead of it being spread across 3 regional bank cost basis, it's spread across 2, and we're on our way to getting one. And importantly, if we complete this, as we target, in 2026, I'm accruing that run cost saving, operational complexity reduction, risk reduction 2 years earlier than was otherwise planned. And so therefore, that's an attractive outcome for the bank. And as I say, 21% or 20%, my scale is wasted on 3 systems. And so I've got to get to the one system to really enjoy the benefits of that scale. So that's why this opportunity made sense. And that's why when we found the right parties, who would be the right owners of these assets, it just made a lot of sense for us to get after it. Brian Johnson: Anthony, just as a subset of that, can I just clarify, there was a story in one of the media reports talking about ASIC and AUSTRAC talking about this. I think subsequently, we've seen a very, very small ASIC fine. Can I just confirm that as far as you're aware, within the RAMS business that you're effectively retaining the risk? Anthony Miller: Correct. So to the extent that we've engaged with the regulators, and it's well documented on a whole range of issues and concerns they had with the way the RAMS businesses were led, managed and prosecuted, we've now -- obviously, we retained that. We've just simply sold the assets. And more importantly, it allows us, as I say, to switch off or get off one of those bank systems. So nothing has changed in terms of the risk profile we had as a result of the ownership of that business. It's just simply much cheaper to run from here. Brian Johnson: So can you address the question, though. There is no AUSTRAC issue? Anthony Miller: Nothing that has been brought to my attention, Brian. Nothing has been brought to my attention. So I don't -- you'll have to send me the article or reference and sort of what context in which it sits. But in the context of AUSTRAC matters vis-a-vis RAMS, I don't have anything in front of me on that front. And I'm looking across at my General Counsel and my Chief Risk Officer, and they equally are acknowledging that we have no such issues at this point. Justin McCarthy: Thanks, Brian. Our next question comes from Jonathan Mott from Barrenjoey. Jonathan Mott: Just a question on UNITE, back to the topic that we talked a bit before. You give us a kind of a traffic light scheme on how the business is going, but there's been a bit of a change in the disclosure. At the first half, you had sort of the green amber red. And now you've got in scope. I'm just looking at Slide 16 here, you've got another classification in scope. And then you've had an increase in the number of amber and a small change in red. Can you give us an update on what that means? Why you're now saying this is scope confirmed? And if you're looking at 18 of the 38 are actually already in the amber and red. Anthony Miller: So thanks for the question, Jonathan. And just sort of let me break it down for you. As a result of all of the planning undertaken, we now have a plan in front of us, and we know what we need to do, in what sequence we have to do it. Those 13 scopes confirmed are essentially 13 initiatives that we now have a plan for. And at some point, over the course of the next 36 months, those, if you will, initiatives will have to be worked on. And so at the moment, not all of those 13 have commenced. And so therefore, to characterize it as green, red or amber is slightly redundant. And so therefore, the others, which we're now moving on because it's a real program of sequence. It's about what we do and how we follow up on each particular completion of work. And so these 13 initiatives will be done. And to the extent, once they start work on them, we'll then obviously recognize whether they're meeting the standards we set, meeting the time line we set, meeting the cost we set, and that will then determine whether they're characterized as green, amber or red. And when we were talking back in May results, 7 of the initiatives at that point were red, and it's now down to 5. What's happened is 4 of those 7 have now moved into Amber Green. One, in fact, has been completed or effectively exited. And so that's behind us. But we've also had 2 new -- or 2 initiatives being recharacterized as red. So that's why there's that change from 7 to 5 over the course of the last 6 months. What we'll keep doing, Jonathan, is to the extent that there's some confusion there, we will get sharper in how we set it out for you because I do want everyone at all times to see that this is a large -- this is a challenging complex program of work. We're absolutely committed to it and most importantly, committed to making sure that there is no surprises as we go through it. And so if we can do better in sharing with you where we're at, we will look to tidy that up as we go forward. Jonathan Mott: And second question, if I could. If you're looking -- I'm looking at Slide 22, 23, I think it is, which just shows the growth in deposits and consumer pretty strong at $15 billion and then $12 billion in mortgages if you exclude RAMS. But including in that number is very strong growth again in offset accounts. I think it was up another $5 billion. You've now got $73 billion in offset accounts. So two things about that. Firstly, are you comfortable with the growth in net of offset accounts because it really is lagging the system? And I know you said you want to get your service proposition right, but are you comfortable with that? And also, given the offset accounts are nearly all against owner-occupied property, it actually means your investor book, as a percentage of the total, excluding offsets, which is just sort of a deposit sitting there, is a lot larger. So can you ask us sort of that considering this net of the offset accounts? Anthony Miller: I'll make a couple of comments and invite Nathan to jump in. I mean, certainly, you're right to call out that the deposit agenda, the idea that we grow deposits and more importantly, get the shape of that right, John, is absolutely not where we want it to be, albeit we're really pleased with the progress we've made, but we would like a lot more in terms of the shape of deposits. And we were disappointed and acknowledge that, that we didn't catch what was happening in the regional brands as fast as we perhaps should have, and that's on myself. We're very much focused on now addressing that. And I think we've got that properly, if you will, tackled, and it's just about how we get after that over the next 12 months. I'm just really pleased though that the Westpac side of the portfolio is continuing to improve and is, obviously, a really critical part of our portfolio there on transactional and savings accounts. I suppose there's definitely -- there's things that if I think about our service proposition, one of the areas that I reflect on is making sure that transactional accounts, deposit services and servicing on that front is front and center for every banker in the company. And we've done a lot of work to recalibrate, for example, scorecards and incentives to make sure that all of our bankers in consumer and business bank understand the priority we attach to that. And pleasingly, we've got a good enough product suite, which means we can be very competitive. And I do feel like we're after that in the right way. I missed the second part of the question? Nathan Goonan: No, I think you've covered it well. Maybe, John, just to add 2 points. I think that you're right to call it out. There's about, as you said, 7% growth in offsets in the half, but importantly, 6% in savings as well. So we have seen strong growth in both those items. I think -- and you're right to call it out in the way you did. The growth in savings accounts is about attracting customers on the liability side and the offset is much more about the business that you do on the asset side. And there is a strong customer preference towards those. They've been growing, as you know, quite strongly as you move from a fixed rate portfolio into a variable rate portfolio, and we're pretty much exclusively there now. As we grow that side of the book, we'll continue to see growth in the offsets. Whether you're trying to target a certain amount of offsets or whether you're happy with it or not, I think it's a key feature of the mortgage product, and there is a strong customer appetite for it. Anthony Miller: Probably the other point you did raise was about investor loans. And we're very keen to continue to be competitive in the investor loan segment. That demographic, that audience is an attractive customer base for us. And we see a real value in being very supportive there on investor loans and more importantly, then converting and making sure it's a whole of bank, whole of customer relationship that follows from that. Justin McCarthy: Our next question comes from Carlos Cacho from Macquarie. Carlos? Carlos Cacho: First, I just want to ask about on your margins, your replicating portfolio benefit is expected to diminish from 3 bps to 1 bp. I was just wondering if there's any other potential tailwinds that are worth calling out as you head into FY '26 because it's mostly negatives that you mentioned as you walk through the waterfall, Nathan. Nathan Goonan: Carlos, Justin has given me the signal for one word answer. So maybe I'll jump straight into it. I think we did just try and lay out as helpfully as we can, Carlos, and happy to sort of pick it up later in the afternoon to the extent helpful. But I guess the other point that we made, if you narrow in on things where we could get a tailwind, I think term wholesale funding markets have been better. So we do expect a tailwind there. We do expect to continue to get some replicating portfolio benefits. We called out a basis point there, which is sort of net across the replicating portfolio and then the unhedged deposits. So there's a little bit of support there. And then I think maybe the other one is just to say on liquids. I think that has been a bit of a volatile item for us quarter-on-quarter. We did expect a sort of increase in investment securities at the third quarter that maybe didn't flow through to the same extent we thought. I do suspect as we go forward into the first half, just where the customer balance sheets are up to and how growth is going, we probably expect liquids to be down a little bit in the first half. And so while neutral to earnings, there might be a little bit of a benefit that flows through there. Carlos Cacho: And then just secondly, you've spoken about wanting to do better in proprietary mortgages. And obviously, it's a long-term strategy. But where are you expecting to win? Or where are you seeing wins come from? I presumably, it's either got to be a new customer who's a first home buyer or they're coming from other banks where they're proprietary or they're coming from brokers? Like do you track that? Is there particular targets you're hoping to do better in? Anthony Miller: Look, I mean, good question. I mean what we've got to do is just get the basics right in terms of how we go after proprietary. So we've got to get the service proposition right. We've made real progress. We've got to get the product right, and we've seen improvement in product NPS, time to decision down inside 5 days. We're operating and executing mortgages more efficiently than we have in the past. Our hygiene and data is in a much better place. So the returns are much more, if you will, better reflected in that. And then I think the things for us, though, is we just got to get, for example, more bankers. We lost too many home finance managers. So we're catching up on that. That takes 6 to 12 months for a good home finance manager to really get into their straps. And so we've started to get that resource allocation right. We certainly got to get a better compensation and incentive arrangement around for our home finance managers, and we've now got that right. We've got the scorecards right. We're also, at last, really taking the full power of the company in terms of the range of data and if you will, insights that come from all of what we have across the entire company to help get behind the home finance managers and give them real leads, which represent real insights and allow us to be much more proactive. And then you heard Nathan talk about investing in the brand. We spend a lot more money to get the brand profile up. So we're just putting in place all of the basics to really get after this area. And I'll be very candid with you. There's nothing more dramatic than just getting all those basics in place to allow us to get after it. It took us a number of years to get to this point. It's going to take a little bit of time to get out of this particular position. But I think we've got what we need to execute. And I was really pleased with some of the actions we took in private wealth last year, which we've already seen a really improved turnaround in first-party in private wealth, which tells us that if we get after this as we have in private wealth and consumer, we can deliver that same turnaround. It will just be, I think, a reasonable period of time of effort to get there. Justin McCarthy: Our next question comes from Andrew Triggs from JPMorgan. Andrew Triggs: I might just ask one question. Deposit mix shift, should we expect that to slow significantly next year? And maybe, Nathan, if you could break that down, please, between the percentage of deposits in behavioral savings versus the percentage of those products themselves where the customers are qualifying for the bonus rate? Nathan Goonan: Yes, I think on the deposit mix spreads, you've probably rightfully called it out. It's probably just really a story for us around the growth that we've seen in that consumer savings product. I think at an overall book level, we've had decreases in proportion to term lending. So I think the bigger determinant of going forward margins, which is really where you're going, is going to be on the savings product. And I would say a couple of things here. I think certainly, this is one of the areas where fourth quarter was a little bit -- showed a few different signs in the third quarter. So we saw, I think savings -- the savings balances in the fourth quarter grew $5 billion. They grew $2 billion in the third quarter. We've said there that we've got about 84%. I think we've given you an annual number there that are the people that are qualifying or achieving the bonus rate, that was actually probably a little bit lower through a couple of months in the middle of the year and then picked up a little bit in the fourth quarter. So I think those 2 main things are things that I'm expecting will flow through into the second half. It's probably -- into the first half. It's probably not so much a mix shift into these products, Andrew. It's much more that's where we're seeing the growth. Justin McCarthy: Our next question comes from Richard Wiles from Morgan Stanley. Richard? Richard Wiles: I'll just ask one question, too. It's following on from Matt Wilson's question around the business bank margin. In your business and wealth update a few months ago, Slide 17 showed the composition of the underlying margin decline. It was 22 basis points, and it was split across portfolio mix, deposits and lending. The decline in this half, Nathan, was 18 basis points. So actually pretty similar to the first half in terms of underlying trends. Could you give us some commentary around the mix between portfolio deposits and lending? Were the trends pretty similar? Or did they start to skew? Nathan Goonan: Yes. Thanks, Richard. Yes, I think my comments earlier to Matt, sorry if that was confusing was just really around the business lending part of that equation. So I think in the second half or in the more current period, we've seen a more moderation of the impact on the lending side. And you would have seen -- for all the reasons we've been speaking about on the deposit side, you would have seen a bigger -- a proportionately higher impact in the more recent period from deposits. Richard Wiles: Okay. So lending was 7% in the first half and deposits was 9%. Lending went down, deposits went up as a headwind for margins? Nathan Goonan: As headwinds, yes. Justin McCarthy: Our next question comes from Brendan Sproules from Goldman. Brendan Sproules: I just have a couple of questions. Firstly, on the Markets and Treasury contribution for this half, it looks like it's running at a run rate of sort of about $2.2 billion. Can you maybe talk about some of the benefits that were achieved this half? And will those sort of repeat into 2026? And how does the $2.2 billion relate to what you would think is a normalized level of earnings from these 2 divisions? Nathan Goonan: Yes. Maybe we can break it down a little bit, Brendan, and then Anthony knows that business well. I think it is very challenging in these business to grab 1 quarter and annualize that and sort of expect that that's where you're run rating -- like -- well, sorry, it is where you're run rating, but to expect that, that sustains over 4 quarters. So I think with these -- certainly, the markets business is a pretty mature business now. It's got a really strong FX, fixed income capability, and it's a pretty mature business now that would be -- should all market conditions being equal, just growing more in line with the underlying activity of our clients and the loan book growth. And then, Nell and the team have got ambition and are doing things to grow out a few more strategies that can build income sustainably in that franchise over time. But I think I would just think about that as more -- it should be producing pretty stable performance on the FX and the fixed income, and it will be more determined by underlying activity. In treasury, I think similar, we've got good disclosure on that over a long period of time. I think that number in and around $1 billion for the treasury has been a pretty consistent number. I think a couple of years ago, we might have had a $600 million, but I think in and around that area is about right. We're probably issuing a bit less wholesale funding, which gives them a few less opportunities. And even with the RAM sale, we expect to do a little bit less in that space. So maybe it comes off a little bit. But there's a few comments, Anthony. Anthony Miller: Yes. Look, I mean, definitely, the financial markets business, it's, I think, the leading franchise in the market now. A couple of just extra comments. I think there's real upside for us in the FX product suite and the penetration into consumer and business bank at Westpac is less than what it should be,, given the quality of the FX franchise we have. So there's real upside there in servicing our existing customers in consumer and business bank. Likewise, I think we're underweight in a few aspects like commodities and aspects of that business, which we see as a real positive for us. Perhaps the real sort of interesting jewel in the crown in there is just the credit business, the credit trading, the credit market making. Now that Australia with its savings bill is actually a genuine capital exporter, and we have a lot of Kangaroo bond issuance into this market, the franchise that we have there in terms of credit market making, origination and, if you will, distribution into this capital market is pretty impressive. It's the best in the street. So we're quite excited about how much more we will see in that business as Australia's position with the superannuation funds makes it a real destination for people to raise capital. Brendan Sproules: That's very helpful. My second question is just on Slide 29 around the impairment provisions. I mean, in this presentation, you've talked, Anthony, about the improving operating environment for the bank. You've also showed some lead indicators on asset quality where you're seeing impaired assets, for example, fall. I was just wondering what the thought process was around increasing the overlays and specifically the downside scenario weight and actually growing your excess provisions above base case in this period. Anthony Miller: I'll just let Nathan make a comment, but it was a robust process. And because clearly, the settings and outlook has continues to be surprisingly benign, but we need to be constantly vigilant and, if you will, balanced about what is going on and what may come our way. And so that's been a very congested and well-developed discussion inside the company with Nathan and I about what's the right outcome here. But Nathan... Nathan Goonan: Probably just to add, I think, Brendan, I think just take it as an indicator that we put a high value on medium-term earnings stability. And so I think when we think about this, it's similar to increases in hedge balances and then the management judgments around that. We've tried to just err on the side of a little bit more stability over time. Justin McCarthy: Our next question comes from Samantha Kontrobarsky from HESTA. Sam? Samantha Kontrobarsky: I'll just keep it to one. So you've recently appointed a Chief Data, Digital and AI Officer, which is a new step for the business. As you bring these areas together, how do you see this changing how Westpac competes? Is it mainly about efficiency and cost? Or could it fundamentally reshape the customer experience and growth? Anthony Miller: Thanks for the question, and that is what I work on every day in terms of how do we get that right. There's no doubt that there's a lot of hype and a lot of, if you will, excitement around the AI revolution or evolution, depending on who you speak to. We certainly think that its capacity to help us be more efficient, help our employees get their job done better, safer, more consistent is a really big and important opportunity that comes from having the right AI program. And so that was one of the key sort of drivers was to get a global thought leader working for and with me in terms of how do we look at the way we do things in the company and how can we do things better. It's a wonderful tool in the hands of employees, but you need to, therefore, invest in your employees and make sure they understand how to use this tool and how they can make it or can help them be more efficient. So that's definitely one emphasis. And there is definitely really interesting ways in which it will help us serve customers and provide a more attractive service proposition to our customers. And we're sort of already taking some of the model capability with this Westpac Intelligence layer, taking all of the data and all the signals that are coming into this company and using that to make better, faster decisions, which allow us to get back in front of our customer more proactively. So we're seeing it, Samantha, also help us in terms of being really good with our customers with a view that, that obviously drives engagement, connection and revenue ultimately. Justin McCarthy: Thanks, Sam. We'll move to some questions now from the media. So our first question comes from Luca Ittimani from The Guardian. Luca Ittimani: Can you hear me right? Justin McCarthy: We got you perfectly. Luca Ittimani: I just wanted to check. So in the wake of the Fair Work Commission decision, do you intend to change your work-from-home policies at all? Have you seen more applications or requests from staff for new or more flexible work from home request? Anthony Miller: Well, we have one of the most flexible work-from-home policies positions in the marketplace. So I think what we are going after, which is finding that balance for our people, I think we've got that right. So no, I don't need or feel a need to change that particular setting. We're also just reflecting on what we might do in response to that recent work-from-home decision by the Fair Work Commission, and we'll land on a decision as to what we will do later this week or the next. What I would also say is that we've got a tremendous level of engagement from our people. And if I look at some of the OHI scores and other engagement measures, just highlighting people are really engaged and really excited about what we're trying to go after and what we're trying to achieve as a company in terms of for our customers and in terms of how we work together as a team. So I feel really encouraged by just where we're at and motivated to go further with what we've got. Justin McCarthy: Thanks. Our next question comes from James Eyers from the AFR. James Eyers: Anthony, you've spoken about this deliberate pricing to attract investors in the residential property market. And you can see on Slide 66, your investor loans and interest-only loans, sort of the second half flow that is tracking well above the averages of the book. The sort of house price data out today showing house prices sort of growing at the fastest pace in a couple of years. And we saw that APRA data on Friday showing investor lending is pretty strong, like sort of 7% annualized, I think. You just said in response to John Mott's question, it was an attractive customer base. But could you just talk a little bit more about that? Like why are you targeting more investors? Are they sort of a better credit risk than owner occupiers? Is there a cross-sell opportunity for you? And do you foresee a little bit of a squeeze on the first homeowner buyers as a result of this investor growth that we're seeing come through? Anthony Miller: Well, I think we're seeing a squeeze on the entire market because of the demand, whether it's first-time buyer investor, there's just a lot of demand. And the key challenge of the day is we've got to get more houses built at the right price point, James. So every aspect of demand is being supported and is going fast, which is only driving the challenge and making it harder. In terms of the investor segment, I mean, yes, it's an attractive segment in terms of from a credit risk perspective. And yes, you're right in terms of, I don't like the term, cross-sell, but the idea that these are people who are investing in property who, therefore, may need an incremental services and support and how do we, therefore, bring this entire bank to them is something that I'm really drawn to, and we see it as a real opportunity for us. And we just got to, I suppose, go about it thoughtfully and be careful about the outlook and the risks that come from sort of going too far, too fast in a particular segment. But we think we've got the balance right. And it's interesting that we're forecasting a sort of 9%, almost 10% increase in residential house prices over the next 12 months. So it's certainly a positive outlook for people who can access the property market. James Eyers: Just a really quick supplementary on that risk -- go on, sorry. Justin McCarthy: No, you're right, James. Keep going, sorry. James Eyers: Just a really quick supplementary on that risk point, Anthony, we saw Lone Star make some comments in July that they begin sort of engaging with banks on implementation aspects around macro prudential tools just to make sure that could be activated in a timely manner if needed. And like back in 2015, I think you sort of had the investor loan growth sort of going above 10% and brought back to that number. And then there was an interest-only element in 2017, where they were sort of looking at that being about 30%. You're at 20% now, I think. So it's well under that. But how much sort of hotter do you think this investor lending growth trend sort of would need to get before you're in that territory again? Anthony Miller: Look, I don't have that answer, James, but we are very much or very cognizant of the balance we need to find. And we engage with the regulator. APRA is a terrific partner to us, and we engage actively often deeply with them about all of these particular issues. And so we'll be making sure there is no risk or issue there vis-a-vis the regulator. Equally, it's an opportunity that we've been pursuing over the course of the last 6 months, and we will continue to pursue it, but it will be balanced around the return. It will be balanced around the risk and it will be balanced around is it that we're converting these opportunities into broader, more substantive customer relationships and not just simply a lender loan. Justin McCarthy: Our last question comes from Steven Johnson from Seven West Media. Steven Johnson: Steven Johnson here from The Nightly news website. Anthony, earlier in your presentation, you said that you want to see more housing around the -- available for the $500,000 mark. Would you be able to explain why you want more housing available for $500,000? And what your typical debt-to-income ratio limit would be now considering the cash trades at 3.6%? Anthony Miller: So the thesis around just sort of promoting the idea that $500,000 is the right price point is really sort of predicated on the following: Median income in Australia is approximately $90,000. When we finance someone in the acquisition of a house, we will lend in the order of 5 to 6x their income subject to expense verification and the like. And so therefore, you've got something anywhere between sort of $450,000 and $550,000 of mortgage capacity. And then, of course, just assume, say, a 10% deposit. And so all of a sudden, you can see median $500,000 as a house, $500,000, $600,000 is just really critical if we're going to solve for, call it, average Australia or the median position in Australia. And the challenge is that properties are being built in major capital cities and the median house price of houses in capital cities in Australia is over $1 million. I am drawn to the fact that median house prices in regional Australia are closer to sort of $500,000, $550,000. And so I feel like Regional Australia is part of the solution potentially here. But I would say that the key is let's build more properties at the right price point to allow people to get access to the market. And so when we talk about building more properties, it just can't be building more properties that doesn't solve the actual challenge. How do we ensure the average Australian gets a chance to buy a property and live in their home of their dream. Steven Johnson: So basically, it's also a social issue that there's too many houses are at $1 million, the average full-time worker can't afford that. Are there going to be some societal challenges, some aspects that would hurt Westpac lending. Anthony Miller: Well, look, I think our success as a company is inextricably linked to the success of this country. And one of the challenges for this country is to get more housing, have more Australians being able to own their own property. And so therefore, I think it's really important. The challenge is that when you think about the cost to construct, you think about the time and cost and process for approval, all of those features contribute to it being very hard to be able to build a house at that price point. And so therefore, I think it's not sort of dependent upon developers and contractors, but it's really important that the entire community, government, regulators and all of us work out how can we create an environment where it's cost effective, it's rational and it's reasonable to expect you build house for $500,000 to $600,000 in Australia. Justin McCarthy: Thank you, Steven, and thanks, everyone, for dialing in. We'll be available over the course of the day. Thank you very much.
Operator: Welcome to Knorr-Bremse's conference call for the Financial Results of the Third Quarter 2025. [Operator Instructions] Let me now turn the floor over to your host, Andreas Spitzauer, Head of Investor Relations. Andreas Spitzauer: Thank you, operator. Good afternoon as well as good morning, ladies and gentlemen. I hope all of you are very fine. My name is Andreas Spitzauer, Head of Investor Relations. I want to welcome you to Knorr-Bremse's presentation for the third quarter results of 2025. Today, Marc Llistosella, our CEO; and Frank Weber, our CFO, will present the results of Knorr-Bremse, followed by a Q&A session. Once again, the conference call will be recorded and is available on our homepage, www.knorr-bremse.com in the Investor Relations section. It is now my pleasure to hand over to Marc Llistosella. Please go ahead. Marc Llistosella Y Bischoff: Thank you, Andreas. Ladies and gentlemen, welcome to our Capital Market call for the third quarter '25. Let's start with the key takeaways for today on Page 2. We are reporting a strong quarter today. In uncertain times, we continue to focus on our earnings by using our financial flexibility, keeping strict cost control, plus staying close to customers and driving our service business. Knorr-Bremse benefits from dominant market position in both divisions, a diversified revenue generation and ongoing stringent execution. RVS is in strong shape. It posted strong organic growth and continuously increased its profitability quarter-over-quarter by the implementation of BOOST. In addition, RVS performance underlines the great potential of the rail industry in total. As a consequence, we are expanding this successful division with the acquisition of duagon. Coming to CVS, one thing is clear. The development of profitability is the most important indicator of our success and our truck colleagues delivered. Despite an extremely challenging North American truck market, CVS managed a slight margin expansion, an extraordinary achievement, which is based on the benefits of our cost and efficiency measures, well supported by a more resilient aftermarket business. The BOOST program overall remains the centerpiece of our strategy and is fully on track. Regarding our BROWNFIELD measures, we are well on track of the sale of the last assets we have in the SELL-IT program. These assets within rail generates roughly EUR 300 million in revenues and is clearly dilutive. Looking at Greenfield, our clear path of additional growth and accretive business expansion for Knorr-Bremse. In the field of subscription-based and data-driven services, we recently acquired Travis Road Services. Together with Cojali’s highly attractive services, we want to strengthen the less cyclical activities in the Truck segment, striving for a leading position in Europe and later beyond. Last but least, we confirm our operating guidance for 2025. Let's now have a closer look at our Duagon acquisition on Chart 3. Duagon itself, a Swiss-based company, is a leading supplier of electronics and software solutions for safety-related applications in rail being active in Europe, North America, China and India. We are convinced that Duagon is an excellent strategic fit for Knorr-Bremse's existing portfolio. Beyond strengthening the RVS segment, the acquisition also unlocks substantial synergies in electronics. For example, in braking and door systems where we are already global experts. Furthermore, the products will enhance the global operations of 2 key KB business units, Selectron and KB Signaling. As trains and rail world networks become increasingly digitalized, the acquisition enables both the Railway Electronics and Signaling technology units to fully capitalize on the rapidly growing market. For KB Signaling, which is expanding its North American business globally, Duagon offers additional opportunities for international growth. The accretive transaction reinforces KB2's Boost strategy and marks another milestone on its transformation journey. By integrating Duagon, Knorr-Bremse strengthened its position in high-growth digital markets and increases the revenue share of the RVS segment overall currently from 55% to even beyond, driving sustainable value creation. The acquisition fulfills all of the M&A guardrails, which were given by ourselves, which we set more than 2 years ago and follow for the time being. We welcome all new colleagues to the team and look forward to a successful future. Let's now have a look at the market situation for trail and rail and truck. Overall, the demand in rail is our least problem within the KB Group. Underlying demand remains robust across all regions as evidenced by a strong order intake and record order books for RVS and its customers. We expect this momentum to continue in the coming quarters, resulting in a full year book-to-bill ratio well above 1. The only exception in this is the freight market, which continues to face some challenges. Also here, we see a low concentration on the North American market. The market development in China itself remains pleasing on a high level this year, which is quite supportive for our profitability as well. Truck markets show a mixed picture. As you're all aware of and as you have already heard from our customers and peers, truck production rate in Europe moved higher in the past quarter, but currently, we are observing a slight softening in market momentum, including some postponement into next year, which also corresponds to the perceptions of our truck OEMs. The North American market is in a very challenging time. Truck production rates declined significantly in the third quarter and a near time recovery appears unlikely. Therefore, we lowered our expectations regarding truck production rate for the second half of this year as the usual autumn recovery has also been significantly weaker this year compared to the previous years. Our North American customers are still taking single days off and slowing down production lines in their factories so far. They are acting rationally and only adjusting their workforce as they know that markets can catch up quickly, especially in North America once a recovery starts. As a result, we have reduced our North American workforce by around 15-plus percent in the recent months, help yourself, then helps you got. At the same time, we are using the current situation to consistently implement our structural measures. The better than originally expected development in Europe cannot compensate fully the weaker-than-expected development in North America. Nevertheless, every crisis presents opportunities. We should benefit via operating leverage from a lower fixed cost base when the crisis in North America comes to an end, which it will happen. With that, I will hand over to Frank, who will give you -- walk through the financials in detail. Frank Weber: Yes. Thanks, Mark, and hello, everybody. Thanks for joining us today. Please turn to Slide 5, and let's have a look at the good financials of the third quarter. Order intake achieved a strong result at almost EUR 2 billion. The market-driven decline in truck was overcompensated by the strong rail order intake and led to a more than 5% organic growth. Knorr-Bremse generated revenues of EUR 1.9 billion organically with nearly 3%, a slightly higher figure year-over-year. Our operating EBIT margin was positively impacted by both divisions, driven in particular by our portfolio adjustment, the strong aftermarket performance, our operating leverage and the respective cost measures and of course, by KB Signaling. As a result, the operating EBIT margin improved by 100 basis points year-over-year. With a 13.3% operating EBIT margin, we delivered the best profitability within the last 16 quarters for Knorr-Bremse. Our free cash flow in quarter 3 amounted to EUR 159 million and converted once again into more than 100%. We are proud of our global teams maneuvering KB so successfully through a rather challenging '25. Let's move to Slide 6. CapEx amounted to EUR 78 million, which represents in relation to revenues 4.2%. Spending in absolute numbers decreased by EUR 2 million. This development is fully in line with our strategy to optimize CapEx spending following our lowered target range of CapEx to revenues of 4% to 5%. We expect some higher CapEx spending in the running quarter as usual. A pleasing development saw once again our net working capital, which decreased significantly year-over-year, respectively, by 7 days versus prior year. Including KB Signaling, we are at the level of EUR 1.6 billion and 72 days of efficiency. The continuous improvement in net working capital is based on the ongoing success of our Collect program, including improvement basically in all major net working capital ingredients, especially the lower level of inventory supported the improvement of working capital by more than EUR 160 million year-over-year. Free cash flow amounted to EUR 159 million. This is only a slightly lower figure compared to the prior year, driven by the unfavorable development of FX. On a 9-month view, free cash flow even increased by more than EUR 70 million. Quarter 4 will be the strongest quarter, as always, following our usual seasonal pattern. Cash conversion rate in the third quarter amounted to a strong 104%. Despite the acquisition-driven higher capital employed, our ROCE nicely increased from 18.6% to 21%, which is an increase of 240 basis points. ROCE remains a high key priority for us, and we expect to further grow it in the future, primarily driven by a higher profitability. Let's take a closer look at the RVS performance on Slide 7. RVS once again delivered a very strong quarter in terms of order intake, reaching nearly EUR 1.2 billion. This corresponds to an organic growth of 6%, driven by solid operations and contributions from KB Signaling. Global Rain demand overall remains strong. For the current quarter, we expect that RVS should be able to post an order intake between EUR 1 billion to EUR 1.1 billion. Our book-to-bill ratio stood at 1.12, which means RVS book-to-bill ratio at or above 1 for 16 quarters in a row. As a consequence, order backlog increased by around 8% and 12% even organically, reaching again a new record level with almost EUR 5.7 billion. The high order backlog and the good quality of it provides a strong basis for the rest of the year as well as beyond. Let's move to Slide 8. Revenues in quarter 3 amounted to EUR 1.05 billion, an increase of almost 6% year-over-year following a bit of a weaker organic growth in quarter 1 and quarter 2 and even despite significant FX headwinds. Our aftermarket business developed also very nicely in Europe, North America and APAC. From a regional point of view, revenue growth was fueled by Europe and North America. In Europe, both OE and aftermarket business grew nicely. In North America, it increased aftermarket and OE business despite FX headwinds. The APAC region saw a very stable aftermarket development, while OE slightly declined. China only slightly decreased year-over-year in both OE and aftermarket. We are pleased about that stable development in China, especially in high-speed local business and the aftermarket. There are still no signs of a better metro market. We improved our operating EBIT margin by 100 basis points to 17.0%, which is already beyond our midterm guidance for next year. This superb improvement is driven by the positive aftermarket development, operating leverage, our BOOST measures as well as the positive contribution of the Signaling business. In the current quarter, we expect a book-to-bill ratio of around 1. The EBIT margin of RVS should be flat quarter-over-quarter. On a full year level, the operating margin is expected to be at around 16.5%. Let's continue with the Truck division on Chart 9. Order intake in CVS amounted to EUR 783 million below our initial expectations at the beginning of the quarter due to the missing pickup in the North American truck market after the summer break. On the other side, organically, orders increased by 4%. On a year-over-year organic level, this growth was driven by Europe and the APAC region, which recorded slight organic growth, while North America was significantly down, hit by the sharp downturn in the U.S. market. Order intake in the current quarter should be rather flat quarter-over-quarter, supported by Europe and the APAC region. The North American market remains very difficult to fully assess at this point in time, but we expect no improvement of the market dynamics until year-end. Book-to-bill reached 0.94 in the past quarter. Our order book of more than EUR 1.7 billion at the end of September is 7% below the previous year's level, but at the same time, it is only 2% organically lower. Let's move on to our CVS division on Chart 10. Revenues declined to EUR 833 million, which represents minus 9% year-over-year. This development is solely driven by the divestments of GT and Sheppard as well as the negative translationary FX impact from the U.S. dollar and the renminbi, especially. In organic terms, the development was stable, which represents a solid performance in such a challenging environment. OE business in CVS decreased as expected in North America and South America, predominantly driven by lower truck production rates and FX. Europe recorded good and the APAC region even significant growth. Our aftermarket business performed much better than OE in the past quarter. The OE business grew in Europe and China, but the strong market decrease in North America could not be compensated by aftermarket growth. In addition to the sale of Sheppard and the strong euro exchange rate compared to the U.S. dollar, the low truck production rate had a particular negative impact on our performance, especially in the U.S. In the current quarter, we expect that CVS total revenues should be flat to very slightly increasing compared to the third quarter. Coming to the bottom line. Operating EBIT of CVS amounted to EUR 87 million in the past quarter, down around 4% year-over-year. Given the massive market headwinds and unfavorable FX, a very resilient number. The profitability was impacted by lower OE volumes and an unfavorable regional mix, which could be more than compensated by benefits from our Boost measures, a higher aftermarket revenue share, solid contributions from our portfolio adjustments as well as a recovery from tariff burdens. As a result, we were able to increase our operating EBIT margin by 50 basis points year-over-year to 10.5% in such a tough environment. For quarter 4, profitability should slightly improve quarter-over-quarter, well supported by cost measures and a good aftermarket development with a foundation of stable markets in Europe and North America. Overall, we are confident to further fight ongoing market challenges with our long-term BOOST program as well as our short-term measures in North America, our robust pricing and our resilient aftermarket business. On a full year basis, CVS should be able to reach an operating EBIT margin around the same level as last year. With that, I hand over to Marc again. Marc Llistosella Y Bischoff: Thank you, Frank. So let's have a look on our guidance for 2025 on Slide 11. To make it very short and crisp, basically confirm all KPIs of our guidance shown on the chart, just another 3 months to go. Please bear in mind, however, that due to the stronger euro and the weaker truck market in North America, the lower end of our revenue guidance is more likely to be achieved. Our countermeasures are having a positive effect on the other side on the EBIT margin outlook, meaning that the midpoint represents a very, very realistic expectation. Free cash flow is also being affected by the stronger euro, but we are also comfortable to reach the midpoint at least of the guidance. Having said so, we are ready for the next year to go. We had a very, very busy year 2025. And we are very confident that with our self-healing activities, which had impact -- an impact of a reduction of workforce, for example, only in trucks from 15,000 over the last 18 months to now 12,000 people, we are ready for the lift of next year. And the 10% to 10.5%, which we are aiming for the year 2025 compared to the results of the years in '23 and '24 have a much higher value because we are ready to go for the next year based on a much better fixed cost base. Thank you very much. Operator: [Operator Instructions] And the first question comes from Sven Weier, UBS. Sven Weier: It's Sven from UBS. The first question is around -- in the past couple of years, you've always given kind of indications for the year ahead. You didn't do this time. Is the reason because you feel quite happy with where consensus sits? Or do you refer that simply to lack of visibility that you have, especially on the truck side? That's the first question. Frank Weber: Thank you very much, Sven. So in the past years, there have been mixed feedbacks to us giving an outlook already in October for the next year. Some were saying, why are they doing this? And others have been highly appreciating it. So this time around, we decided not to do it. Why? Because as you rightfully said, we are totally fine with where the consensus currently sits for next year, I would say. This is it. And of course, markets are also a bit of less predictable these days, especially when it comes to the truck market, I would say, and especially the region of North America. But that's the answer to it, Sven. Sven Weier: Yes. And it's fair to say that when I look at current consensus, probably the risk is more on the downside on truck, but maybe on the upside on rail. So that could be a bit of a wash from today's point of view at least Andreas Spitzauer: Yes. Nothing to add, Sven. Sven Weier: The follow-up, if I may, is just on truck margins, right? I mean you will be around 10.5%. And I guess it's probably fair to say that reaching the 13.5% next year is really tough to say the least, but we know that, of course. I just wonder, I mean, how prepared and how far are you ready to go to reach that target within the foreseeable future, let's say, in terms of additional measures that you take? I mean, you talked about this in the past, right, where I think there are still some very obvious areas such as R&D, but still seems extremely high for the truck business and the way it performs at the moment. But at the same time, it also seems a bit of a no-go zone for me. So are there any sacred cows in terms of your willingness to achieve the target? Frank Weber: Yeah, thanks, Sven. Let me put this a bit into a broader perspective. When we gave the midterm guidance some 3 years ago, obviously the market assumptions, even though we were not at all anyhow aggressive looking at the market, because we always wanted to make it kind of a self-help story at all, were significantly different, especially when it comes to the U.S., but also when it comes to Europe. The market expectations back then were based on 22 levels. And so that was the starting point to it. We feel totally fine with a long-term view on truck that the margin of 13.5% is definitely not out of reach and is a targeted number that we have on the plate if the market turns out to be more favorable than it is today. Given the current situation, look at the quarter 3 alone, U.S. is minus 28% in truck production rate. We only declined 13% in revenues. I think a great sign of resilience. And with all those measures that also Marc mentioned With our adjustment of the current fixed cost structure that we are doing under BOOST plus the footprint reallocation going into the strategic future, where we are also touching quite a lot of global footprint facilities, we are right on track, I think, with a weaker market to achieve around 12% of return. So as a first step, I would see us moving up from this 10.5% levels with a disastrous market, with better fixed cost structure into a world of the 12-ish, and then strategically into above 13% return level. I also mentioned to you many times, Sven, that maybe the 15% that we had in the all-time high, one or two years at CVS is maybe not achievable anymore, but the 13.5% is strategically a perfect fit for the profitability target of this company. And R&D, let me remind us all, is not a no-touch area for us. We had a certain range of products that hit the market recently and are still going to hit the market, so we have a certain time where we have high R&D spendings, but we have also told you that going into the future we see our 6% to 7% range of R&D for the group, rather to go down to the lower end of that range towards the 6-ish number over time. So we're heavily working on prioritizing our R&D, but we will not be penny-wise pound-foolish, and spoil our future by cutting some of the R&D costs in innovation and customization for our customers. Sven Weier: And did I understand this correctly, Frank, that with the measures that you have put in place now and even without the market really recovering, you could go from 10.5% to 12% and then the rest will come from a market recovery? That's the fair summary? Frank Weber: This is, in a nutshell, a fair summary. Operator: The next question is from Akash Gupta, JPMorgan. Akash Gupta: Thanks for your time. I have a couple of questions on M&A that you announced in the last couple of quarters. The first one is on this Travis Road Services, which is quite an exciting area to expand into. The question I have is that can you talk about the synergies with the rest of the portfolio, and can this allow you to accelerate your aftermarket spare parts revenue or directionally to acquire this company was purely based on an ecosystem that you have within you with expertise that may help growing this business? So that's the first one. Marc Llistosella Y Bischoff: Going into the services in a stagnating market, as the truck industry is, is also following the digitalization of the industry. And the more we are setting up now a platform, which is now fulfilling most of the end customers' requirements, is for us a massive access point to future and current profit sources. This market is completely different in their business ecologic and also in the logic. Here, managing mobility as a service is more and more in the up run to do. So the insurance of making assets working and the truck is an asset nothing more, nothing less. That is something where we are more investigating in the future. With our first step in 2022 with Cojali, we stepped into this business. Why did we do that? It was one part of that was, of course, to ensure that our parts will be then delivered to the customer. But this is a multi-brand. In fact, the brand is not relevant. It's a service to end customers. And that makes us a much, much wider scope and gives us a wider access to profit sources, which currently were not reachable. So to make it very short, whether this is going to break path from Knorr-Bremse or not, for this kind of businesses and services, it's not that relevant. It's a side effect. The more effect is, as you know, in platforms, the more you can cover with a platform, especially if it is directed to the customer, the more you have a control, the more you have access to profit sources, which so far were not reachable for us. What I mean with that, we are now currently having, with this acquisition, a real decisive part in our chain of pearls. The chain of pearls is 12 to 14 buckets. And now we are covering, with this acquisition, 12 of the 14 buckets. There's one more to come, and that's exactly what we are now targeting in the next 2 months to come. And then we would be the only one in the market who is covering it from A to Z, from number #1 to number #14, which is extremely exciting because that gives us a completely different picture on the Truck business. Akash Gupta: And my follow-up is on acquisition of Duagon's electronics business. I think one thing which caught my eye was that you are giving 2026 revenues and margin. Normally, either we get this year's expectation or previous year reported. So maybe if you can talk about what sort of growth we are expecting in this business, and if the business doesn't reach to EUR 175 million revenues next year, would there be an implication on selling prices? And the background of this question is that in Knorr, we have seen in the past that the company bought assets with some projection that didn't materialize. So just what sort of safety net do you have this time around? Marc Llistosella Y Bischoff: I would ask you for one thing in terms of fairness, Mr. Gupta. You take the acquisitions before 2022 and you take the acquisitions after 2022. So when you give me any evidence of failing on our predictions in any form of acquisition which we have done after 2022, I'm very happy to discuss it with you. For the acquisitions before 2022, I cannot take any form of responsibility. Of course, I can explain to you endlessly that a lot of these investments were not leading anywhere but to, I would say, dilutive business. In Cojali, we bought a company which is completely exceeding. We bought it to a company value of roughly EUR 400 million. Now we have an estimate of over EUR 1 billion. That is a fact, and then we can give you the numbers for that. The next acquisition, which we did one KB Signaling in the rail business, and this business was coming out so far extremely positive. It came out extremely positive in EBIT margin, and it came out also extremely positive in terms of revenue. So all our predictions were even overrun. Now the last acquisition was Duagon and also the Travis. And in the Duagon, we are very, very comfortable that we are not -- we are targeting the 16% because this business is also very, how you say, taking into place what we are already having with Selectron and also KB Signaling, it's a perfect fit. It's additional. It's not a new adventure. In fact, it's like a mosaic that we are parting now putting the -- all the pieces together to a one picture. So having said so, we are very, very absolutely convinced that with Duagon, we have another asset in the class of KB signaling, what we did last year. And we are very confident that the numbers which we have foreseen are absolutely realistic. I would even say they are conservative. You can see the business is already generating a very, very reasonable, very healthy profit line. And then coming to your question, which was a little bit provocative, when you compare it with all the acquisitions done before 2022, none of these businesses had a real profitability proven in the past. In Duagon, we have a profitability record, and we have also a return record, which is proven. Now it is on us to make it and to lift it. And a growth record... Frank Weber: And they also have a growth record, which we expect to be close to double digit. Marc Llistosella Y Bischoff: I think for Akash, it's more important the profitability than only the growth. Growth without profit is meaning this. And that, I think, is the main difference. The past was very, very much driven by growth, growth, growth. And the question of profitability was like it will come. This is completely different to 2022. We are first ensuring that every form of acquisition has to be accretive, either immediately like KB signaling or very short-term minded. That means within 12 to 24 months. Anything else is not touched. Operator: And the next question is from Vivek Midha of Citi. Vivek Midha: Hope you can hear me well. My first question is on CVS. It's in a similar vein to Sven's question, but just looking to better understand the mechanics. You mentioned 15% reduction in the North American CVS workforce and also broadly lowering the fixed cost base in that division. So should we think about these layoffs as permanent layoffs? I'm interested in understanding how much impact there's been from structural cost savings versus more temporary measures such as furloughs. In order to understand how the margins can improve when the volumes come back. Frank Weber: Yes. Of course, there's always a flexibility that we keep in the plants, looking at the normal market times of around, I would say, around 10% in some countries, even more kind of flex workers, temp workers, what have you, basically in the field of blue collar, not so much on the white collar side, but on the blue collar side, of course, in order to breathe through certain market conditions, that's clear. So the 15% that also Marc mentioned does include, to some extent, also the blue collars, of course, directly affected and indirect workers in the plant areas. But the thing is that also on the white collar side, we did more than 10% of cost reductions, and that's directly impacting the fixed cost, and that's why this is sustainable and is lowering the breakeven point quite significantly for that business going into the future. So it's a mixture of both, but it has a sustainable effect because the white collar had -- white collar reduction had a similar dimension like the blue collar reductions. Marc Llistosella Y Bischoff: I would like to add to Frank's comments. The company is always quoted to have 32,500 people employed. This is not the case. We have currently 30,520 people employed. The target is very clear. Whatever happens to the revenues, whatever happens to anything else, this number has to go down because what -- for the last 22 years, the revenue per employee was not moving up. I have never seen this in my life, and this is exactly why we're addressing it. It has to move up in terms of truck above EUR 300,000, and it has to move up to EUR 250,000 to EUR 260,000 for RVS. There is a difference in the structure. This is explaining why there is a difference. So far, we are below these numbers. And that means as long as we have not reached these numbers, there will be no longer substantial buildup of workforce, whatever the revenue is bringing or not. So we have a very clear target and very clear line. We want to reduce, number one, the breakeven. This is very clear. This is not for discussion, whether the market is up or down, the breakeven has to be target, number one. In the last years, we had a breakeven in derailment, I would say, for the last 24 months, we are really pressurizing down this kind of breakeven. What is the most part of this breakeven by 60% to 70% is the personnel expenses. The personnel expenses were highest in 2024. Even the numbers were fine, but this was not even noticed by others. We have noticed it. So we have to bring down the personnel expenses significantly in truck. We had reached a number which was close to 22%. Now by the last month, we're in the reach of 19%. And the target is to be below 20%. In terms of RVS, we have reached a number of exceeding 27.5% personnel expenses cost, and that has to be brought down to 25%. With that, we will improve significantly our breakeven. And with that, we will be more and more independent from the ups and downs of the market. And as you rightly described it, the self-healing has to be done and has to be proceeded. So to your question, do we have to then expect when the market is going up to see significant upscaling of workforce? The answer is a clear no way. Number two on this is we are now starting an AI campaign and initiative where exactly the white collars are addressed yes, and we want to do repetitive work more and more by digital AI agents. And that's exactly what we started with our initiative where we have now settled the first start in Chennai, where we are focusing AI experts to bring us substantial and also long-term lasting solutions to make sure that for repetitive work, we are not hiring people. So in short words, no, we are not estimating to have higher people. Second, we are breaking down absolutely our breakeven, and we have very clear targets and very clear KPIs how to lead that. Vivek Midha: Fully understood. My second question is a bit of a mid to long-term question around RVS. So you've done a 17% margin in the third quarter and guiding for a similar margin in the fourth quarter. That's above your midterm target for the division. So my question very broad is where next do you see for the division over the midterm and long term? I appreciate you maybe want to give a fuller answer to this at some point in the future, but interested in some early thoughts. Frank Weber: Yes. Thanks, Vivek. I mean I refer a bit, of course, to the question or the answer to the question of Sven. We are totally fine with the consensus as it stands for next year. There, the margin is on that level or even slightly above the 17%. This is, I think, a number that's totally fine for the Rail division. This is, as we also said quite a few times, not the end. We have plenty of measures in place, some already started to implement with also strategic, as I said before, footprint reorganizations so that margin beyond the 17% -- 17%, 18% is reachable for the Rail division, we are aiming strategically to go towards 19%. Somehow, this is the idea of the business, and that should post a very great profitable growth for this business. Now it's out. You also said so before, I think, last year. Operator: The next question comes from William Mackie from Kepler Cheuvreux. William Mackie: So my first question, Marc, to you really is to go back to the M&A that you've undertaken around service and the efforts to expand specifically in CVS. I just wonder if you can talk a little to how the development of competitive tension evolves as you push into the aftermarket in the heavy truck industry, that's somewhere, I guess, many of the OEMs, as you well know from your past lives, are also looking to expand and capture value. So how does that balance evolve in your mind between the existing installed base, supporting it, capturing the data and leveraging that for your benefit rather than -- and avoiding too much competition with your OEMs? And then the more simple question is that you have an exceptionally strong balance sheet and great cash performance. Looking forward, you've talked to capital allocation and guardrails, but just a little bit more flavor on how you see the pipeline evolving and where you can enhance your string of pearls to strengthen the business? Marc Llistosella Y Bischoff: Okay. I'll come with number 2 first. because it's not limited to CVS when I speak about potential acquisition candidates in the near future. As you can imagine, we started with Brownfields, yes, Boost was mainly Brownfield, help yourself, then you will be helped. That's what we have done. We are on our way. By the way, Boost is not finished by next year. Boost is a continuous improvement process and program now, which will last for years to come. And this is why I made so much emphasize on the breakeven on the personnel expenses on the ratios. This has to go through now with everybody. So coming to the Pearls, the platform business itself has one very important criteria. It has to be brand independent. The more you are captive, the more you limit your brand, you limit also your platform and your reach. And what we do now together with Cojali and Travis and also with the other things to come, by the way, all of them will not exceed the range what you have seen so far. So there will be midsized to small size cap, but there it is more to capture and to occupy the place than to say, "Oh, I have already the biggest in this area. And here, the problem or the competition for the captives like our customers, they are very, very centered about and around their brand. For them, it is nearly impossible to have a multi-brand approach. The multi-brand approach makes us independent. And this is why I said it's not important only to sell our pets and our brake disks via this channel. For us, it's more important to see the movement of everything what is going in this domain. And here, we have an access now where we are, especially for the second life cycle of trucks. After 3 years, the warranty is over. And then 70% to 75% of our customers are leaving the captive service facilities. And this is not only in Europe, this is also in America. So they are going to independent dealerships. And these independent dealerships have one big strength. Their strength is they are flexible, they are agile and especially they're not brand dependent. And this is where we are stepping in. So we are not really going into competition with our customers and clients in the first 3 years, we are going more for the last 7 years, which the trucks normally last in Europe or in America, it's 8 years more. So together, it's between 11 and 12 years before it will be getting to markets which eventually are a little bit different. So this kind of span we are then addressing -- this kind of span we are addressing. And there we know by ourselves that the use take, the take quota for original parts, spare parts is getting significantly lower than in the first 3 years. And this market is highly interesting, highly competitive. But what we're aiming here is to be like a spider in the net. Whatever you move, we notice and hopefully, we will participate. And I must say it's a very good -- I'm very proud of the team because they came up with that over the last 2.5 years, and they have now formed something like ally a platform strategy, which could make us very, very, very profitable in this regard because in this kind of services and platform, you have completely different propositions on profitability. William Mackie: My follow-up relates to the CVS business. Congratulations on the continual evidence of the strong muscle memory and cutting costs at Knorr-Bremse in CVS in the face of weaker markets. I noticed the gross margins were relatively flat year-on-year actually. My question goes to the general pricing environment for CVS, perhaps specifically in North America. In a market where you've seen falling volumes, how effective have the teams been in passing through prices to mitigate cost-related headwinds from tariffs or other factors or just to be able to maintain the underlying gross profitability? Marc Llistosella Y Bischoff: So the American team is very close to the market. The American team is, by the way, even more agile when it comes to swing so to lay off people is much, much faster. It's much more efficient than we see it in Europe, especially in Germany. They are closer to the customer, much closer. And in America, we have a customer which is also very, very much involved into aftersales business and that is in this regard specifically per car. So what we see is that we are very close in cooperation with our customers here. They understand when we have to increase the prices, and they understand also the pressure we are running through and going through. One thing is for sure, the American, North American truck market is by far the most profitable market in the world. Yes. The American market is a protected market that has to be very clearly mentioned. You don't see there a lot of Asians really coming in. And the market itself is very settled, saturated and also allocated. So you have players, you don't have new players. So here, it's very clear that it is a very mature market with extremely interesting margins. The European market is more competitive with much lower margins to have, yes. The margins here are roughly in average below 400 basis points below, not only for the OES, but also for the OEMs. The truck market in Asia is completely different, highly competitive, very low margin and very difficult to have a leading position to be defended because there's always a new player who is attacking you. So our focus in terms of profitability is very, very clear in the North American market. It's very, very clear also the European market. And for expansion in terms of growth and also in technology and trying out, that is the Asian market itself. You know it also by the content per vehicle, which is a fraction in China to North America, it's a fraction. So everything what in America and Europe is coming up with digitalization and any form of redundant systems, safety systems, that is the market where we are in. So it is playing in our favor because here, we can't be replaced quite easily. Here, we are not just a commodity. Here, we are a differentiating factor. So that is what plays in our cards in these 2 markets and which makes us very, very learning in the Asian market. So long story short, the team is very ready to go with that. They're very qualified. We are very technical, instrumented and technical-based salespeople. So that means they're not just salespeople on the commercial side, but mainly also on the technical side. We have a good differentiation to our competitors, and we are seen also as a leading force here when it comes to marketable market innovations. Operator: And the next question is from Ben Uglow of Oxcap. Benedict Uglow: I had a couple. First of all, on the RVS margin improvement, the 1 percentage point. I mean, historically, that is a very big number, a big gain. And I guess my question is, Frank, maybe could you give us a bit more detail of what's in that 1 percentage point? How much of this is simply just due to OE and aftermarket type mix? And is there any significant regional variation in there, i.e., have we seen one region doing better? And the reason, obviously, why I mentioned this is in the past, your China margins were higher, et cetera. So I just wanted to understand the basis of that improvement. Frank Weber: Good to hear you again, Ben. Thank you. I missed the beginning, maybe 100 basis points you talk about rail, right? The quality of... Benedict Uglow: Yes. Frank Weber: Clear, I mean, I would say regional difference is China is stable as expected, rather a bit of operating leverage, so to say, with a bit of headwinds on the FX side. So it's not China driving it. Europe has gained growth and operating leverage and North America supported by signaling. So this is from a regional view it. So all that in Europe and North America basically being a bit of a weakness on the rail freight side in North America, which goes hand-in-hand with what we see in the truck market in North America. So that's it, I would -- how I see it from a regional point of view. Of course, aftermarket share, which is the big when it comes to the sales channel mix has supported us in that improvement of profitability. We are now running at a level of around 55% of aftermarket share globally, which is an improvement compared to last year. So that is a good driver. And the third element is the continuous boost measures that we are implementing more and more. Those 3 drivers are basically the bit of positive America, Europe, aftermarket and the cost measures. Benedict Uglow: Understood. That's helpful. And then -- and I guess a question for Marc. Trying to sort of understand what's going on in the North American truck market at the moment is extremely difficult. And a lot of companies are making all kinds of different statements, I would say. In terms of your customer conversations, in terms of your kind of day-to-day dialogue with truck OEMs, how would you characterize those conversations over the last sort of couple of months? Is it just getting better -- sorry, is it just getting worse? Or are things even changing at the margin? The reason why I ask this is different companies are talking about a better line of sight on tariffs. Some companies even talking about EPA 2027. So I wanted to know from your point of view, how are those conversations? Marc Llistosella Y Bischoff: What we see is a normalization. Most of our customers are very conservative, as you can imagine. They supported the current government massively. Some of them even paid. And there -- then after the enthusiastic in the first 4 months of this year, there came a certain form of irritation for another 4 months till August. And now we are in a phase of frustration and frustration in the sense of standby. Nobody wants to move, nobody wants to make a mistake. For example, this morning, we have been informed that Mr. Xi Jinping and Mr. Trump came to conclusion when it comes to rare earth. This came for all of us a little bit by surprise. The markets developed already this week based on that. On Saturday, we had the first signals that they come. Exactly 10 days before, we had in the press and also the Capital Markets was predicting a massive friction between the superpowers. And this kind of erratic or nonpredictable movements lead in truck industry to stand by. They won't cut, they won't increase. They will just wait. The consumer confidence will be for them eventually more important. The container traffic will be -- freight movement will be more important. Currently, we see not only the trucks hammered by that, but also the freight trains. We see that it is -- this is an impact on both industries, not only on the one industry. And we would say the worst is behind us because uncertainty is even worse than bad news. You know this better than me. The uncertainty is now, I would say, the fork is clearing up. And with that, we could imagine, but we are not paying on that. Don't get me wrong. We are prepared for it, but we're not paying on that, that we can eventually see in the next quarters to come a massive release and a massive improvement on the sentiment. And we are very confident to see this message because someone wants to be in the midterms. We know the midterms next year in November, and we know it's -- the economy is stupid, and we know this has to run and everybody will do everything to make it run in America. And now we are a little bit more confident than we have been eventually in August. Frank Weber: Just a minor addition from my side, Ben, also looking at the interest rates, I think the light signals currently being set, talking to the fleet customers directly, our sales guys, of course, on a daily basis. They are also saying, okay, whatever the kind of fleet age might be, and whatever the right theoretical point towards a new buy of a truck would be, if I don't have the money, it's too costly for me to borrow money. And I think this is also the right signals that the Fed is maybe currently sending towards any recovery. Operator: The next question is from Gael de-Bray, Deutsche Bank. Gael de-Bray: I have two questions, please, two of them relating to RVS. The first one is on the share of aftermarket, which apparently dropped in Q3 pretty substantially compared to H1, 50% or so in Q3 versus 57% in the first half. So it appears that there's been a big sequential decrease in aftermarket revenues for RVS in Q3. So I guess my question is what's been driving this? And then the second question is around the growth dynamics in broader terms for RVS. I mean RVS has enjoyed very strong commercial dynamics with orders continuously surprising on the upside over the past few quarters, even over the past couple of years now. However, at the same time, RVS revenue growth has come a bit short of expectations this year with Q3 -- I mean, this was again the case this quarter. So could you elaborate on the lead times and whether one could expect to see finally some acceleration in organic revenue growth next year? Frank Weber: Yes, you're welcome. So first, let me start with the aftermarket. I mean the bigger chunk was there in the first and second quarter, driven by also some signaling replacements and aftermarket growth momentum that we have seen. And if I'm not mistaken, it was you, Gael, who asked me the questions at the quarter 2 call, why the signaling business is so strong in profitability. So it was rather a bit of exceptionally high in quarter 1 and quarter 2, that aftermarket share driven by the signaling business and where I said already in July, it will come down quite naturally, not sustainably, but naturally come down in the second half of the year '25. That is the reason. So number one question, KB Signaling, major driver to it with exceptional situation quarter 1, quarter 2. Second question, rail demand going forward, as Marc also said right in the beginning, is the least issue that we are currently seeing. We have in plenty of jurisdictions support programs out there, fueling the demand quite sustainably. EUR 1 trillion package in the U.S. the bipartisan infrastructure law. We have the German stimulus program. We have Brazil investing EUR 15 billion; Italy, EUR 25 billion over the years to come, Egypt, Turkey, what have you. So all these, so to say, programs leading to a fueling of the market growth that we kind of see between 2% to 3% as a basis should be going up with all those programs above those numbers. And we are totally fine, so to say, to reach our 5% to 7%, let me put it this way, CAGR of organic growth for the rail business over the years to come. And by the way, this is not a different number from what we said some 3 years ago as the situation in rail is noncyclical. We said back then it's 6% to 7% over several years. One year, it's 10%. The next, it's maybe 4%, then it's 7%. So something around that is what we see the lead time. Second element of your second question is very different. I mean, it depends on the product itself that we are selling ultimately a brake system, you would have at least when the design phase is finalized, you have a lead time of 12 to 18 months for more sophisticated product like a brake system, brake control unit. When it comes to a door system, it's after the design phase kind of 6 to 9, maybe 12 months, 6 to 12, let's put it this way. And towards a more simple product, HVAC system, it's 3 to 6 months. So it takes always the design phase of the train, then add these additional lead times, this is what we are looking at on a regular basis. Sometimes you have also project pushouts from one of the other customers. This is then a bit of irregularity in the market. But in a normal market, I would say those are the lead times. And with that order book that we are having, we're so pleased, so to say that we couldn't even afford much more order intake in order to get them all, so to say, produced within the next 12 months. We are, I would say, fully booked basically. Operator: And the last question is from Tore Fangmann from Bank of America. Tore Fangmann: Just one last from my side. When we look into the truck market, I think a few of the OEMs have now opened the books for '26 from September onwards. Could you just give us any indication on how your discussions with the truck OEMs are going right now? And any first idea of how this could mean into like the start of Q1 and the Q2 of '26? Frank Weber: Thanks, Tore. Nothing spectacular, I would say, sometimes it's what I recall since quite some time that after summer break, internal news in big corporations flow a bit hesitant at first and then towards October, November, basically, the sales guys come up with a good or with a rather bad news, so to say, towards their supervisors. This is what we usually say. That's why we also said a bit, we see a bit of a softening in Europe because some orders in the EDI system, then you just -- if you only have 2 more months to go, you rather shift into the new year into January and February, you realize you can't get them done in December anymore. So Christmas is coming like a surprise kind of and then you shift a bit orders into January, February, but that's the usual thing that happens basically each and every year. We don't see anything special this time around. I think we have to, in North America, see what -- how many days around Thanksgiving, the plants on the customer side will be closed down and what they do with the Christmas break. But as we also said, we expect a rather flattish market quarter 4 compared to quarter 3, maybe tiny little bit less truck production rate there. But nothing spectacular in the discussions with our customers. And what we see is what Paccar and Volvo announced, I think, is pretty straightforward. Nothing more to add on our side. Marc Llistosella Y Bischoff: Yes. Just to add from my -- for the Capital Markets, relevant whether we perform or not. And we are performing exactly to what we predicted. We performed in '24 to our predictions and announcements. We perform now to our predictions and announcement in '25. And now give me a reason why should you not believe that we are performing exactly as we planned it for 2026 with 14-plus percent EBIT margin. I wouldn't see it because the pattern certainly gives my words more gravity than anything else. So I don't see the doubt. Whether the truck is with currently 44% of revenue share, whether this is now coming up or not, as I said at the beginning, I don't believe independence of market. I believe in your own abilities to play with the market. So that it's more important whether your costs are under control than whether the market is going up by 2% or going down by 3%. It is our absolute obligation that for next year, the 14% has to be achieved. And we are doing everything on the cost situation and our -- what we can address. What we can't address, we can't address, we can hope. For markets, you can only hope. For costs, you can do. And what we do is we do what we do. And for the last, whatever it was, 16 months, we did it and we did it as predicted. We did it as announced and now you can say, yes, what makes us think that in the next 11 quarters or 12 quarters, you will do what you announced. Sorry to say, I can only offer you the past. For the last 12 quarters, we did always and overfulfilled what we announced. And I can give you absolutely our understanding and our obligation is to do the same in the next year and the same is in the fourth quarter. Whether the market is bad or good, sorry to say, with this, we will not have an excuse, then we have to overcompensate. If left is going wrong and right is going right, we have to overcompensate it because overall, the result is 13% we wanted to reach in 2025. This is what to go for, 14% plus. That is the target for '26. That's what to go for. Whether the market is good or bad, no excuse, we have to reach it. Thank you. Andreas Spitzauer: Okay. Thank you very much for your time. If you have further questions, please reach out. And yes, we wish you a great afternoon. Thanks a lot. Marc Llistosella Y Bischoff: Thank you colleagues.
Operator: Ladies and gentlemen, thank you for standing by. My name is Rob, and I'm your event operator today. I'd like to welcome everyone to today's conference, Public Service Enterprise Group's Third Quarter 2025 Earnings Conference Call webcast. [Operator Instructions] As a reminder, this conference is being record today, November 3, 2025, and will be available for replay as an audio webcast on PSEG's Investor Relations website https://investor.pseg.com. I would now like to turn the conference call over to Carlotta Chan. Please go ahead. Carlotta Chan: Good morning, and we welcome to PSEG's Third Quarter Earnings Presentation. On today's call are Ralph LaRossa, Chair, President and CEO; and Dan Cregg, Executive Vice President and CFO. The press release, attachments and slides for today's discussion are posted on our IR website at investor.pseg.com, and our 10-Q will be filed later today. PSEG's earnings release and other matters discussed during today's call contain forward-looking statements and estimate that are subject to various risks and uncertainties. We will also discuss on non-GAAP operating earnings, which differs from net income as reported in accordance with generally accepted accounting principles, or GAAP, in the United States. We include reconciliations of our non-GAAP financial measures and a disclaimer regarding forward-looking statements on our IR website and in today's materials. Following our prepared remarks, we will conduct a 30-minute question-and-answer session. I will now turn the call over to Ralph LaRossa. Ralph LaRossa: Thank you, Carlotta, and thank you all of you for joining us to review the results we announced this morning and to discuss our outlook for the business over the remainder of the year. PSEG reported solid third quarter and year-to-date operating and financial results, reflecting the expected positive impact of new rates from the October 2024 distribution rate case settlement that benefited the full third quarter. Our results through the first 9 months enabled us to narrow our 2025 non-GAAP operating earnings guidance to the upper half of the range at $4 to $4.06 per share from prior guidance of $3.94 to $4.06 per share. At PSE&G, we invested approximately $1 billion in the quarter and $2.7 billion over the first 9 months of 2025, all part of our planned full year $3.8 billion regulated capital spending program. This program is focused on replacing and modernizing New Jersey's energy infrastructure, meeting load growth and expanding energy efficiency programs that lower energy demand and customer bills. During the quarter, PSEG Nuclear supplied the grid with 7.9 terawatt hours of reliable, carbon-free baseload energy, while providing PSEG with the financial flexibility to fund our regulated investments. Our 100%-owned Hope Creek unit completed a 499-day continuous run since its last refueling outage, and we recently completed work to extend its fuel cycle from 18 to 24 months, positioning the unit to produce more megawatt hours going forward. Also during the past quarter, the Board of Trustees of the Long Island Power Authority approved a 5-year contract extension for us to continue as the operations service provider for the electric service on Long Island and in the Rockaways through 2030. We are executing on PSEG's growth plan with a focus on operational excellence and rigorous cost discipline to maintain reliability and provide value for our customers. The need for our investment in leadership has never been more evident than now with the significant and growing supply-demand imbalance in New Jersey and the entire PJM region. To address this resource adequacy imbalance, which will adversely impact both reliability and affordability for customers in the future if it's not addressed, we are actively collaborating with current and potential future policymakers to develop real solutions in New Jersey and ensure we can affordably meet our customers' energy needs. The next governor of New Jersey will be faced with addressing a broad set of rising costs and implementing practical solutions to get to the root cause of these cost pressures will be a focus. These cost pressures have many sources. For example, the latest Rutgers-Eagleton Poll showed that 36% of likely voters cited taxes as the top problem facing New Jersey, while 21% said it was affordability. Other topics trail these 2 leading concerns with 6% pointed specifically to housing affordability and 5% saw utility costs as the top problem in the state. We stand ready to work with the incoming administration to do our part to keep rates as low as possible in the short term and work on longer-term solutions to add supply. While the supply-demand imbalance remains a significant and growing problem, we expect the capacity market impact on customer bills next June will be limited by 2 factors. First, the FERC-approved price collar that will extend to at least the upcoming capacity auction in December; and two, the gradualism of the basic generation supply mechanism that feathers in changes over a 3-year period here in New Jersey. This assumes other supply-related costs remain the same, preserving the reduction from other charges expected to come off the bill. One energy topic where there is broad common ground is that New Jersey needs to add generation supply to reduce its over reliance on the PJM capacity market and ensuring continuing reliability and affordability for customers with imports having grown to over 40% of our generation consumption. Legislation has been introduced that allows electric distribution companies to compete to participate in offering supply solutions. We are supportive of legislation that would increase competition for generation of supply should New Jersey decide to pursue new in-state generation. In addition, we have sites with grid connection capability and pipeline supplies as well as the in-house expertise to build new supply here in New Jersey with prevailing wage labor. Now turning to PSEG Nuclear. We continue to implement projects designed to optimize our plants and increase megawatt production. In addition to the Hope Creek fuel cycle extension I mentioned earlier, our Salem uprate project will bring an incremental 200 megawatts to the grid during the 2027 to 2029 time frame as this kind of baseload carbon-free dispatchable power continues to increase in scarcity value. We also note the potential significance of the recent Department of Energy notice, which has now become a FERC rulemaking, seeking to accelerate interconnection of large loads in a way that is timely, fair and affordable for customers. The notice is requesting that FERC take final action by April 30, 2026. There are many positive elements to this proposal, but it will take a while before we see the ultimate impact of the rulemaking. So to summarize, we delivered a solid operating quarter for our customers, and our financial results through the first 9 months enable us to narrow our full year 2025 non-GAAP operating earnings guidance to the upper half of the range at $4 to $4.06 per share from our prior guidance of $3.94 to $4.06 per share. We are also reaffirming PSEG's 5-year non-GAAP operating earnings growth outlook of 5% to 7% through 2029 as we continue to pursue incremental opportunities to our long-term forecast, including the potential to contract our nuclear output under multiyear agreements and potential utility investments to address near-term need for additional supply due to the growing customer demand. Notably, our balance sheet continues to enable us to fund PSEG's 5-year capital investment program of $22.5 billion to $26 billion without the need to issue new equity or sell assets and provides the opportunity for consistent and sustainable dividend growth. Before I conclude, I would like to recognize the outstanding performance of both our transmission and distribution system as well as our nuclear business over the last quarter. Both demonstrated exceptional reliability and resiliency for our customers. This collective achievement reflects the hard work, dedication and technical expertise of everyone at PSEG. Now as you know, tomorrow is election day in New Jersey. Let me say this clearly, PSEG has been around for over a century, and we have worked successfully with every New Jersey administration on both sides of the aisle with aligned objectives for the state's advancement. Based on our meetings with both candidates for governor, I have every confidence that we will do so again with the new incoming administration. I'll now turn the call over to Dan, who will walk you through our financial results and the outlook for the remainder of 2025 and then rejoin the call for Q&A. Daniel Cregg: Thanks, Ralph, and good morning to everybody. For the third quarter, PSEG reported net income of $1.24 per share in 2025 compared with $1.04 per share in 2024 and non-GAAP operating earnings were $1.13 per share in 2025 compared with $0.90 per share in 2024. We've provided you with information on Slide 7 and 9 regarding the contribution to net income and non-GAAP operating earnings by business for the third quarter and 9 months ended September 30, 2025. Slides 8 and 10 contain waterfall charts that take you through the net changes for the quarter and year-to-date periods over the prior year and non-GAAP operating earnings per share also by major business. Let's start with PSE&G, which reported third quarter net income and non-GAAP operating earnings of $515 million for 2025 compared to $379 million in 2024. Utilities results were driven by the implementation of new electric and gas base distribution rates that took effect in October 2024 to recover a return of and on previous capital investments totaling more than $3 billion and higher working capital recovery. Beginning on Slide 8 with the PSE&G column. Our distribution margin increased by $0.30 per share compared to the year ago period, largely reflecting the impact of the rate case plus recovery of and return on PSE&G's capital investments. On the expense side, distribution O&M costs were $0.02 per share higher compared to the third quarter of 2024. And depreciation and interest expense rose by $0.01 per share and $0.02 per share, respectively, compared to the third quarter of 2024, reflecting higher levels of depreciable plant investment and long-term debt at higher interest rates. Lastly, the timing of taxes recorded through an annual effective tax rate, which nets to zero over a full year, had a net favorable impact of $0.02 per share in the third quarter compared to the prior year period. Following severe heat storms in June when PSE&G hit its electric system peak for the year, weather conditions during the third quarter, as measured by the temperature-humidity index, were 3% cooler than normal and 7% cooler than the third quarter of 2024. As a reminder, the Conservation Incentive Program, or CIP program mechanism, decouples weather and other economic sales variances from a significant portion of our distribution margin, while helping PSE&G promote the widespread adoption of energy conservation, including energy efficiency and solar programs. Under the CIP, the number of electric and gas customers is the primary driver of distribution margin, and each segment grew by approximately 1% over the past year. On the capital front, as Ralph mentioned earlier, PSE&G invested approximately $1 billion during the third quarter, totaling $2.7 billion for the first 9 months. Our plan for the full year of 2025 regulated capital investment remains approximately $3.8 billion, and our 5-year regulated capital investment plan of $21 billion to $24 billion through 2029 is unchanged. In the first quarter of 2025, PSE&G began deploying the new energy efficiency programs. We anticipate investing up to $2.9 billion over a 6-year period under that program. This program total includes approximately $1 billion of on-bill repayment options to help our customers finance their energy efficiency equipment and appliances and provides customers with energy information and options to manage their energy use and lower their bills. Now moving on to PSEG Power & Other. For the third quarter, PSEG Power & Other reported net income of $107 million in 2025 compared to $141 million in 2024 and non-GAAP operating earnings were $50 million in 2025 compared to $69 million in 2024. Referring again to the third quarter waterfall on Slide 8, net energy margin rose by $0.01 per share compared to the prior year quarter. While generation was down in the quarter due to the Hope Creek refueling outage, overall power pricing and market revenues were higher than in the third quarter of 2024. O&M was $0.05 per share unfavorable compared to the third quarter of 2024, mostly driven by the scheduled refueling of our 100%-owned Hope Creek nuclear unit. As Ralph mentioned, our Hope Creek unit has successfully transitioned from an 18- to 24-month refueling cycle going forward, which is expected to yield additional megawatt hours as well as O&M savings over the long term. Depreciation expense was $0.01 per share favorable and interest expense rose by $0.02 per share, reflecting incremental debt at higher interest rates. And taxes and other were $0.01 per share favorable compared to the third quarter of 2024. On the operating side, the nuclear fleet produced approximately 7.9 terawatt hours during the third quarter compared to approximately 8.1 terawatt hours in the third quarter of 2024. For the 9 months ended September 30, 2025, nuclear generation was approximately 23.8 terawatt hours, up slightly from 23.3 terawatt hours for the same period of 2024. Capacity factors for the nuclear fleet were 92.4% and 93.7% for the quarter and 9-month period ended September 30, 2025, respectively. In July, PSEG Nuclear declared approximately 3,500 megawatts of its eligible nuclear capacity in PJM's base residual auction at the market clearing price of $329 per megawatt day for the energy year June 1, 2026, through May 31, 2027. Touching on some recent financing activity. As of the end of September, PSEG had total available liquidity of $3.6 billion, including approximately $330 million of cash on hand. And on the financing front, in August, PSE&G issued $450 million of 4.9% secured medium-term notes due August 2035. And later in August, PSEG redeemed at maturity $550 million of notes that carried a coupon of 0.8%. Overall, PSEG had significant liquidity at the end of the third quarter, which remained relatively unchanged from the end of the second quarter. PSEG's variable rate debt at the end of September consisted of a 364-day term loan at PSEG Power for $400 million, which matures in December of 2025, and commercial paper. As of September 30, our level of variable rate that represents approximately 4% of our total debt. And in October, Moody's published updated credit opinions on PSEG and PSE&G with no change to either credit ratings or outlook. Looking ahead, our solid balance sheet supports the execution of PSEG's 5-year capital spending plan dominated by regulated CapEx without the need to sell new equity or assets and provides for the opportunity for consistent and sustainable dividend growth. In closing, we are narrowing PSEG's full year 2025 non-GAAP operating earnings guidance to 4$ to $4.06 per share from $3.94 to $4.06 per share. This updates PSEG's solid results through the first 9 months of 2025. And we are also reaffirming our long-term 5% to 7% compound annual growth and non-GAAP operating earnings through 2029, supported by our capital investment programs and the nuclear PTC threshold. We expect to introduce PSEG's 2026 non-GAAP operating earnings guidance, roll forward our capital investment plans, update our rate base on long-term earnings CAGRs and discuss this outlook call during our year-end call in February of 2026. This concludes our formal remarks. And operator, we are now ready to begin the question-and-answer session. Operator: [Operator Instructions] First question is from Shar Pourreza with Wells Fargo. Ralph LaRossa: Who's that? Welcome back, Shar. And just like we did with many of your peers over the last 12 months, welcome back to hear you. Shahriar Pourreza: I appreciate. You almost had me tongue tied and that never happened. So I appreciate that. So Ralph, just obviously, the elections could be kind of this key threshold for data center deals in the state. We've seen data center customers walk away from local politics issues in kind of both the regulated and even deregulated markets. Artificial Island is obviously -- it's a great asset. So kind of curious if there's any pressure points forming there? And then, obviously, one of your favorite questions is any updates on potential time lines? Ralph LaRossa: Yes. Thanks, Shar. I'll let Dan, as we have been doing over the last couple of calls here, answer the time line conversation. But look, I would say this, and it's more of a generic answer to you on the election and what we can expect post Tuesday. And that is, we will see. But as I said in my -- kind of my closing comments, we fully expect to be able to work with both sides of the aisle. We've done it in the past. It's a proven track record by this company, and we feel really, really confident that, that's going to continue as we move forward here in 2026. Specific to data center opportunities in New Jersey, they really haven't slowed down. We have some information in the deck about how that has continued, and we expect it to continue. A few of those jobs have moved a little bit further along in the queue, depending upon whether you look at our queue or PJM's queue as an example. And I'll just point you to one that showed up today, it's public information. There's a TEAC meeting that's taking place tomorrow at PJM, and there is some additional load that's been identified for a job in Kenilworth that is our supplement -- one of our supplemental projects. So they continue to arrive here in New Jersey. We haven't seen it at the hyperscale level. And we have talked about that for many times, and we expect these to be smaller, not ones that we're making big announcements about, and we don't expect those smaller, less in size announcements to be something that we're talking about, whether it's at the utility or at Power. Dan, do you want to talk more about the time line? Daniel Cregg: No, I mean, I think Ralph covered it. I think we'll get a little bit more color from both of the candidates. There's been a whole bunch of stuff they've talked about during the campaign. This hasn't been the highest topic with respect to data centers as much as with respect to affordability generally on things that have touched us. But we'll get more color as the election ends and we find out where they're going to go. But in the meantime, I think it's everything that Ralph said, and we're continuing to move forward. Shahriar Pourreza: Okay. Great. And then just lastly -- that's helpful. And then just on the 11 gigawatts, the large load pipeline that's obviously growing. Just -- I know I don't want to front run the CapEx update on the roll forward, but let me attempt anyway. But just on the grid capacity, just Dan, talk about -- Ralph, just the grid capacity that's there to convert into signed agreements versus how much transmission and distribution needs you're going to have as you start to convert? Ralph LaRossa: Well, again, I think a little bit of that is front-running some policy that will exist here in New Jersey, right? So the first -- and I talk a lot about the fact that the new governor will need to make some policy decisions that will help us plan the grid for the long term. Right now, we have capacity on our grid. That's based upon the current topology. If we see new generation come in, large-scale 1,000-megawatt plants that are showing up, that may change the grid topology a little bit. If we see more solar and more batteries, that may change the topology a little bit. So I'd be front-running to say that I could tell you that, which is why we're going to give you that full -- roll forward in February. Operator: Our next question is from the line of Jeremy Tonet with JPMorgan. Jeremy Tonet: Just wanted to pick up on the conversation with regard to potential data center contracting here. And wondering if you might be able to comment, I guess, on the flavor of conversations between your New Jersey versus Pennsylvania assets. Is there any discernible difference, I guess, in the tone of those conversations? Daniel Cregg: I wouldn't say difference in the tone of conversations, Jeremy, but I think that you're seeing different types of entities being involved between the 2 states. I think you have more of a forward-leaning appetite in Pennsylvania, which is enabling more to happen and more to happen on a bigger scale. And I think in New Jersey, I have not seen that as much with respect to the incentives. And so what you're seeing is still some interest in the state and some sizable interest in the state, but at a smaller scale. So I think that's probably the biggest differentiation between the 2 locations. Jeremy Tonet: Got it. That's helpful. And as it relates to, I guess, supply additions and working with stakeholders in the state, just wondering if you might be able to expand a little bit more beyond that, I guess, as far as what type of constructs Pega be interest in, be it regulated generation, unregulated generation or just any other color in general on this topic? Ralph LaRossa: Yes. So Jeremy, it's a great question. Look, we have said for many months, and we have indicated in public settings that we are more than willing to help the state achieve its goals in a regulated capacity, right? We absolutely think that we could provide some solutions for gas generation that's in a regulated manner. We also think we can continue. We've done large-scale solar on some brownfield sites, some landfill sites in the past. So we could do more on the solar front. We think there's an appetite now for some regulated storage and we're looking forward to taking part in that, see how that plays out over the next few months. And we know that many -- both candidates have been talking a lot about new nuclear. Now on new nuclear, we have also been very, very pointed in our responses in saying that we're not looking to put our own capital to work, but we want to enable solutions for the state. And that's where our site comes in. And we think that long term, that will provide us with some revenue opportunities, whether it be for our operating and maintenance activities or security activities, spent fuel storage. There's many, many things that we can do on that front without putting our own capital to work. And so that's the way we've been approaching it, and that's the way we'd like to see things play out. More opportunities for us in baseload generation from a gas standpoint that would be regulated. And certainly, more we can do on a solar and the battery fronts as well. And I think if you look at both candidates and their platforms, you really see one -- they all -- they're both talking about everything, right, that they're looking at all these options that are out there. The real question is to what degree. And I think you will see one -- with one candidate that might be leaning a little more towards the gas-fired units and another candidate that leans a little more towards solar and batteries. But both candidates are talking about all of the above strategies, which we support and we will be part of. Operator: The next question is from the line of Nick Campanella with Barclays. Nicholas Campanella: So look, just the contracting discussion, we did see the multistate kind of proposal advocating for Bring Your Own Generation and the need to kind of fast track and permit -- fast track the permitting for some of these data centers, but there just seems to be an overall stress on Bring Your Own Generation across the states in PJM. And how is that causing the conversation around the nukes to evolve? And is it fair to say that any deal at this point would now have to come with additionality commitments, whether that's upgrades, new gas, batteries or otherwise? Just maybe you can kind of talk to that a little bit if that's the right take? Ralph LaRossa: Yes. Are you talking about the DOE, Nick, in that the DOE -- the letter from DOE? Nicholas Campanella: I'm just -- I think there's been various calls by whether it's been Pennsylvania, New Jersey or Maryland on just the need to -- for data centers to bring their own generation now. And I'm just wondering how that impacts incumbent generators that were interested in potentially signing front-of-the-meter deals. Daniel Cregg: Yes. Nick, I would say that, if I'm capturing your question right, that there has been more dialogue around it. There has not been anything from the standpoint of requirements related to what must happen. And so I think from that perspective, I think it almost does tie in a little bit to what Ralph is talking about with respect to the DOE letter, which is trying to set some standards and trying to, I'm going to say, fast-track things, but get things moving where there is a little bit of a logjam. There's been a discussion about a whole host of topics. BYOG is one of them. But there's nothing that's mandatory from that perspective. And there's nothing about additionality that's mandatory from that perspective and different counterparties have different environmental profiles that are important to them, but not against the backdrop of anything that is required either. And so I think what you're seeing is continued dialogue around some topics that are of interest, but are not precluding anything from happen one way or another. Nicholas Campanella: Okay. All right. I appreciate that. And then there's been a lot of EPS CAGR updates this quarter. And I guess maybe you can kind of help position to the Street, you're doing 9.5% year-over-year growth, '25 through -- off of '24. I see that on Slide 5. I noticed the [past] 5% to 7% CAGR, that's not linear. But just from our perspective, we know where the capacity auctions have cleared at, we know where prices have gone. Just what are some of the negatives that we should be thinking about that kind of put you back within the 5% to 7% range as we kind of think through what you can deliver on in '26? Daniel Cregg: Yes. Nick, what I would tell you is our update is coming in February, and we're not going to piecemeal elements of it before we get there. So we'll give you a fulsome update when we give you the update. Operator: The next question is from the line of David Arcaro with Morgan Stanley. David Arcaro: One quick clarification or maybe an additional piece of data. I was just wondering what the level of mature applications would be in that data center activity that you've quoted in the past. Ralph LaRossa: Yes. So I think we moved that from 2,600 to 2,800. I think that's the information that is in the deck. But that's the right number, 2,600 to 2,800. David Arcaro: Great. Okay. Perfect. And then as you sketch out the utility growth outlook and roll forward, I was just curious if you could give your perspective now on how do you manage the affordability concerns maybe outside of just the generation front as you're planning the next iterations of your utility CapEx programs and looking at the T&D rate outlook. How are you weaving in just considerations around affordability? Ralph LaRossa: Well, look, we always think about affordability, no matter what we do here from a company standpoint, whether it's -- I could point you to our O&M slides that are in the deck and how we held O&M relatively flat over a longer period of time. I could talk to you about the way we're implementing our AMI system right now and how we've done that, not only from a standpoint of cost and keeping rates down, but also from the impact on employees and the just transition of those folks into different positions. So affordability is not something new to us. I appreciate it's a hotter topic in different circles, but it's the way we've operated. And you've heard us many times talk about the fact that we're not making any big announcements about expense savings. We normally just operate in that manner, and we'll continue to do that. That said, we've also, in the past, worked through different mechanisms with the regulator to spread costs out differently, and I'll go back 20 years when the decision was made to change the depreciable life of our gas assets. And those -- that cost was recovered in a different way from customers. So there are things that we can do working with the regulator to come up with solutions to keep T&D rates flat. We've done that recently. We'll continue to look at options for that. But this is not just an affordability issue, right? This is quickly becoming a reliability issue and the resource adequacy is going to drive us to solutions that are going to increase supply as the demand comes online. We have to find supply. David, I don't know any other way to say it. And I think both of the candidates for governor in New Jersey recognize that. They've both said that. Again, their solutions might be a little bit different, but how we get there is the only question. It's not if we're going to get there. We need more supply in the state. Operator: The next question is from the line of Bill Appicelli with UBS. William Appicelli: Just following up on some of those comments you just made about finding supply. I mean there would be a sense of urgency I think, behind that, right? So is there an opportunity here in the veto session to push for some legislation that could support this? Or do you think this is more likely something has to be dealt with under a new administration? Ralph LaRossa: Look, there's been a lot of things that have happened in the state in the past, not just from an energy standpoint, but other topics that have been handled in lame duck. And so I'm not sure whether or not that will be the approach that's taken here or it will be one that's taken in '26. But I do know it's going to be a hot topic one way or the other. And so I personally would like to see us move faster from a state standpoint. I think it would help us both from an affordability standpoint, but also from an economic development standpoint. We -- as I mentioned earlier, we've been -- we've got some headroom in the system today, and we've been using that up. But if we're going to continue to grow the state and again, both candidates would like to see us continue to grow the state, then one of the fundamental things we'll need is enough supply. And that's where I put my economic development hat on, and I say, "Let's get moving sooner than later. And boy, if we could have those discussions starting on Wednesday, it couldn't be soon enough." William Appicelli: Right. And then just along those same lines, I mean, how do you evaluate the framework for that, right? Would this be in terms of evaluating how much generation you potentially would need from a regulated basis? Would there be sort of an RFP approach that you could then bid on? I mean I'm not sure if you guys could sort of describe how you would envision such a mechanism coming out? Ralph LaRossa: Yes. Look, I think that the BPU could hold some sort of an auction. I think we could go to some sort of an FRR. I think, again, I don't want to front-run anybody. I think it would be rude to do that, so I won't. But I will tell you, what it all starts with the same four questions that we've been banging the table about, right? One, we've got to figure out what load we're going to supply, right? Two, we got to figure out what the reliability targets are going to be. Three, it's going to be emissions, right? And what are the emissions profiles we're willing to accept both if we're in a -- build our own generation or import it from our neighbors. Both of those have different impacts and how that plays out. And then the last thing is the definition of affordability. We talk about affordability, but we rarely define it, whether it's at the state level or at the federal level, to be honest. Is it going to be CPI? Is it going to be regional CPIs? Is it going to be state CPI? What is it going to be? And I think as we move forward, answering those four questions is fundamental to putting together an integrated resource plan. William Appicelli: And then just lastly on the outlook for the forward curves. I mean can you maybe just speak to where you see those relative to maybe your fundamental view or at least relative to where the PTC floor is that's embedded in your outlook? Ralph LaRossa: Yes. I'm going to let Dan answer that one. He sees that a little bit more, but I mean -- we look out 4 years the way others do. So I'll give it to you, Dan. Daniel Cregg: Yes, Bill, I think you've seen some recent strength within the market, and we've been saying for some time that if you just think about all the fundamentals that are going on and the discussions that everybody is having, it's been pretty tough to try to land the plane on exactly what's going to happen from a load perspective, but the numbers are a little bit staggering. And so even a lower end of the range would imply a need for incremental supply. And then if you think about the supply discussions, those have always moved towards the concept of we need to move quickly because at the end of the day, it generally isn't going to come out all that fast. You just think about time for turbines and everything else. And so all of that leads you to a little bit of a more bullish place. And if you look at the forward curve, you haven't seen quite as much bullishness. So we've seen some of that come up. And so I think that feels a little bit more like a fundamental move than just some interim period of time, although we do end up having some of those, too. It seems like every time we go into winter and we get a cold day, you see a little bit of movement out the curve. But I do think fundamentals should support a stronger price as we go forward, but the forwards are the forwards. Operator: The next question is from the line of Nick Amicucci with Evercore ISI. Ralph LaRossa: I think you'll get a welcome as well. I think this is our first quarterly call with you asking a question. Nicholas Amicucci: I appreciate that. I just wanted to dig in to a little bit on Hope Creek, just kind of the extension of the fuel cycle there. Kind of what undertakings were done? I mean, was that kind of an enhanced fuel offering? Or how should we kind of think about that? Is there opportunities to kind of extend that even further? Ralph LaRossa: Yes. No, Nick, it really is a lot simpler than people might make it out to be. It's just shuffling of the fuel, some different changes in the fuel design. But we didn't change to a new fuel supplier as a result, right? So this is something that's been done in the industry quite a bit. And we joked a lot about it. We had a CFO that always gave us a hard time about doing upgrades at a plant that we only had a visibility for 3 years of a life for, but he did the right thing and held us accountable a little longer-term life before we make long-term investments. So while Dan did that, we were getting smart about the changes that we could make there, and we're following what the rest of the industry has done. I will tell you, though, we also, at the same time, did a lot of other things at that plant to continue to reinforce both the asset itself, but also some efficiencies. And I talk about things that you might not pay attention to, but we changed out some of the insulation in the cooling tower, which just changes the efficiency of that -- of the cooling tower, and it just allows us the draft that the cooling tower is going to increase, which allows you to keep the megawatts up in the middle of the summer when at other times, the heat and humidity might reduce the draft flow through that stack. So we were looking all the time for it. And in that case, no big announcements, but I know we're running more efficiently in the summer months, which, by the way, is at the same time that we have the higher prices, right? So lots of different things that we're doing down there and the team is doing a nice job for us in identifying those opportunities. But specific to your question, on the fuel, not a big change compared to what others have done in the industry and no real opportunity at Hope Creek to make an additional change. But maybe at Salem, and I know there are some operators that are looking at moving from a 12- to 18-year cycle at PWRs. The PWR -- I'm sorry, 18 to 24 months. The BWR is what we just did at Hope Creek. Operator: The next question is from the line of Paul Zimbardo with Jefferies. Paul Zimbardo: Dan, just to follow up on the conversation on the forward curve. Obviously, there's been a pretty big move even as of late. Could you share some light on kind of what the hedging profile looks like at Power for the next few years? And just if there's been any changes? I know we had the nuclear PTC a little bit ago. Just any overall thoughts you could give on the positioning would be great. Daniel Cregg: Yes. And Paul, it isn't much and it's not very different from the characterization that we've provided in the past. I mean we said we were historically -- this goes back pre-PTC to fairly ratable 3-year hedging cycle. The PTC changed that because if you're taking a look at an overall hedging portfolio that you're trying to manage risk with, you have a risk protection from the PTC. So we said we varied from that a little bit because of the PTC. But the way we've described it is just not radically different from that ratable method. And I think if you think about it generally in those terms, you'll be in the ballpark of where we are. And that's how we've been describing it, and I think that's still a good way to describe it for you. Paul Zimbardo: Okay. That makes sense. And then on the capital refresh, just to make sure I understood correctly, it sounds like you will have kind of a bigger capital refresh when we do that fourth quarter roll forward. Is that a fair interpretation? Or do you need some of that political and regulatory clarity and just it's not a fourth quarter event, but sometime later in 2026? Daniel Cregg: No. We will be doing a normal roll forward of everything on our fourth quarter call. I think that's the simple way to think about the messaging. Operator: The next question is from the line of Carly Davenport with Goldman Sachs. Carly Davenport: Just one quick one for me on the utility side. Just as you get towards kind of the end of the GSMP II extension period, can you just share sort of the latest there in discussions about refreshing that program as we near 2026? Ralph LaRossa: Yes. We're continuing to have those discussions, Carly. And I wouldn't -- again, I wouldn't want to front run any of that, that's taking place right now. But we're in continuous negotiations that are ongoing with the BPU. Operator: The next question is from the line of Anthony Crowdell with Mizuho. Anthony Crowdell: Thanks for squeezing me in with all the welcome greetings. Ralph LaRossa: Anthony, my only question was, am I welcoming you to the Devil's bandwagon? It's a big question. But we'll talk about it... Anthony Crowdell: I'm on it. I agree. I'm on it. Much better than my Rangers. I guess two questions. One is, I'm sure you guys have met with both candidates. When they talk about affordability, do you think they're focused on the supplier generation side or the wire side? Do they understand the differences in the PJM impact versus just investing in the grid infrastructure? And then I have a follow-up. Ralph LaRossa: Yes. No, Anthony, great question. They absolutely understand the difference. They also understand that the customer gets one bill. And so what we need to work together with whoever is successful is working on that one bill. And so that's why we keep talking about supply. It's not our traditional lane. We're here to help on that. But we are really pounding the table about the integrated resource plan no matter what happens going forward because without that, we'll just continue to flounder. We lived on the backs of some excess capacity in the area for quite some time. And now we have this challenge here. But I don't want to at all give anybody an indication that either candidate doesn't understand the issue. They absolutely understand the issue, and they know where it is. Anthony Crowdell: And then the follow-up, kind of the same topic. Your company is the only company with both PJM wires exposure, but also merchant generation PJM. And as we're all looking for, whether it's a data center contract or a large load customer contract, is it possible that both segments of your business, the wires company and the generation, given the backdrop of affordability and everything else, that they actually both could win or outperform at the same time? The worry is when you see this election going on and a very high attractive price on a generation if something came about on the data center or any type of large contract would actually hurt the wires business or vice versa. I'll just leave it there. Ralph LaRossa: No, it's a very fair question, Anthony, but it's one that we think about every day because we're -- at the end of the day, we're hired by the shareholders, and that's where our head's at. And we do think that there continues to be an opportunity to benefit from having both of the assets. I'll say it in that term from a generation standpoint and from a utility standpoint. I think it showed up in the way we've been able to finance the utility. That was the reason we originally talked about holding on to nuclear. It helps us in the state in conversations. It helps us with our unions, having a common union there. So just to remind everybody of that is key. But we are laser-focused on adding value for the shareholder, and we're trying to look at that balance every day to get that optimization. So I think there is a win-win. And how it plays out will be based upon a lot of different factors over the next couple of years here. Operator: Our last question is from the line of Andrew Weisel with Scotiabank. Andrew Weisel: First question is on the balance sheet. You've obviously long touted the strength of that and the lack of need for external equity. But I am expecting in a few months, we'll see a pretty sizable increase to the capital plan. Maybe how are you thinking about that at this point? I don't expect specifics, but are you thinking that you'll be able to continue to stay no equity? Ralph LaRossa: Look, I think I'm going to start off and give it to Dan. The way I've talked about this quite a bit, both Dan and his predecessors have handled our balance sheet extremely well, and I don't think any of that's going to change as we have more opportunities in front of us. But Dan can give you any more he wants to there. Daniel Cregg: And there's not a lot without going into what we would be saying in the fourth quarter. I think we've been able to manage the business pretty well and manage the needs that we've had pretty well. And I think we're going to continue to be able to do that. We'll provide the fulsome roll forward in the fourth quarter, which will include capital rate base and overall earnings growth. Andrew Weisel: Okay. Great. Next, on affordability. Obviously, it's been talked a lot about today, and I can't watch a World Series or football game without being reminded about it. But one different approach I want to maybe think about is, obviously, no one likes seeing their bills go up, and it's been a real hard slog to get new supply added. But New Jersey is a pretty wealthy state overall. How are you thinking about it in terms of not only overall affordability, but focusing on low and lower customers? There's a lot of existing programs and talk about expanding or adding new programs. Is that maybe a different strategy that maybe could be pursued both by you and the state overall? Ralph LaRossa: Yes. No, it's -- again, a very good question. It is absolutely something I think it will depend upon who is successful and how this plays out. But both candidates talk about how they have to look at things a little bit differently dependent upon the customer or in their case, the taxpayer that they've -- that they're taking care of. So we have done that in the past, Andrew, and I'm going to give you one example here where Kim Hanemann and her team at the utility reaches that all the time. And we are doing analysis over the past week, just to try to see where things might play out from a SNAP standpoint and the impact on our customer base. And we identified about 500,000 customers that could be impacted in how we could think about those customers and making sure that we take that into account as we are in a shut-off period now for collections and how that's all handled. So our team looks at that level of detail on a regular basis and very proud of them for doing that. And I think that, that, at the end of the day, brings us a lot of goodwill in the state, not only from our customer base, but also from our policymakers. Do you want to add anything, Dan? Daniel Cregg: Andrew, the only other thing I would add is we show a percent of wallet slide in our deck that we have for a long time. And if you take a look at that slide, there's actually 2 lines on that. One of them is for the average customer. One of them is for a lower income customer. And given the lower income and given the share of wallet, you would think that it would be a higher percent of their income given the fact that the denominator is lower. And in fact, it's not. And that, I think, is a credit to the programs that are in place and the things that are done throughout the state and that we do ourselves to help some of those that are most in need. So that is always a focus and will continue to be as we go forward. Andrew Weisel: Great. Yes. I appreciate how much you guys have been proactive on that front. One last one, if I could, just on the large load inquiries, a pretty significant pickup there to 11.5 gigawatt. Can you detail how much of that is data centers versus manufacturers? And then just very roughly the timing of the ramp-up schedules? How much of that is kind of '26, '27 versus the outer years like '29, '30 or beyond? Ralph LaRossa: Yes. No, I don't have the level of detail on each of the years for you. So I wouldn't have that. It is mostly data centers. I would say, almost exclusively data centers in that number. There were some electric vehicle loads that were coming on. It has not stayed up at the same level. So everything -- but it's also edge computing more than it is hyperscalers, again, just to reinforce that point. And I think the other thing that's really telling about the load and the interest that's coming in, it's all sticking to around that 20% number that's actually coming to fruition, which we had talked about 3 or 4 calls ago. We thought that was going to be the way this would play out and it's shown itself in the numbers as the total inquiries come in, those that are actually moving to new business are staying around 20%. So again, proud of the team and the forecast that has been done there and give you a little bit of more flavor than maybe just looking at the due numbers. Operator: Ladies and gentlemen, I'd like to turn the floor back over to Mr. LaRossa for closing comments. Ralph LaRossa: Well, thanks. I got -- I have a planned comment. I'm going to add another one. I was told by Carlotta today that this Dan's tenth year as CFO, and so your 40th call, Dan. So congratulations on getting there. Daniel Cregg: I must be exhausted. Ralph LaRossa: You must be. But listen, all joking aside, we said a lot of thank yous and good luck to people moving into new roles and no place is that more important in Trenton as we go through the next week. It's been a heck of a campaign. All the polls are saying it's close. We'll see how this plays out. But what will not be close is our ability to work with whoever is successful. We stand ready, talk about rolling up our sleeves. We'll roll up our sleeves, our trousers, whatever else we need to do to make sure that we are here to help out and we're ready to work. So good luck to both candidates as they enter the last 24 hours of the campaign. And I look forward to seeing you all in Hollywood, Florida in the next 7 days or so. Take care. Operator: Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.
Operator: Good day, everyone, and welcome to the Pinnacle West Capital Corporation Third Quarter 2025 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Amanda Ho. Ma'am, the floor is yours. Amanda Ho: Thank you, Matthew. I would like to thank everyone for participating in this conference call and webcast to review our third quarter earnings, recent developments and operating performance. Our speakers today will be our Chairman, President and CEO, Ted Geisler; and our CFO, Andrew Cooper. Jacob Tetlow, COO; and Jose Esparza, SVP of Public Policy, are also here with us. First, I need to cover a few details on the slides. The slides that we will be using are available on our Investor Relations website, along with our earnings release and related information. Today's comments and our slides contain forward-looking statements based on current expectations, and actual results may differ materially from expectations. Our third quarter 2025 Form 10-Q was filed this morning. Please refer to that document for forward-looking statements, cautionary language as well as the risk factors and MD&A sections which identify risks and uncertainties that could cause actual results to differ materially from those contained in our disclosures. A replay of this call will be available shortly on our website for the next 30 days. It will also be available by telephone through November 10, 2025. I will now turn the call over to Ted. Theodore Geisler: Thank you, Amanda, and thank you all for joining us today. In the third quarter, we delivered strong operational and financial performance, underscoring the discipline and focus that define our strategy. Today, I'll share how we plan to continue to meet rising customer demand and how we successfully navigated a dynamic summer season. I'll also highlight our long-term planning efforts and strategic investments that position us for sustainable growth. Then Andrew will walk through how increased sales and transmission revenue have led us to revise our 2025 earnings guidance, along with our forward-looking financial expectations. Importantly, our long-term planning and resource procurement paid off as we reliably serve customers over multiple record peak days this quarter. I'm proud of our entire team for stepping up during the summer season to support our customers and communities with industry-leading reliability, a hallmark of our company. Our crews battled storms, flooding and extreme heat, yet we are prepared to ensure customers were taking care of with rapid response and operational excellence. Additionally, Palo Verde Generating Station operated at 100% capacity factor the entire summer, delivering a solid performance for our customers and the entire Desert Southwest region. Our peak demand record reflects the strong underlying economic growth in our service territory with weather-normalized sales growth of 5.4% and residential sales growth of 4.3% in the third quarter alone. Arizona's population growth remains robust, fueled by major employers, expanding their operations and driving demand for skilled labor. The state's ability to attract and retain high-quality talent is truly a key differentiator and a powerful signal of the long-term economic vitality we're helping support. SEMICON West, recognized as North America's largest Microelectronic Exhibition and Conference was held outside California for the first time in more than 50 years with Phoenix being selected as the host city. Our region's economic momentum continues to accelerate. Site Selection Magazine recently named Maricopa County, the top county in the nation for economic development in 2025, citing its success in attracting high-growth industries like semiconductors, data centers and logistics. Taiwan Semiconductor reaffirmed its commitment to Arizona, accelerating production of 2-nanometer wafers and advanced technologies. They also announced plans to acquire a second location in Phoenix to support their vision for a stand-alone giga-fab cluster. Meanwhile, Amkor Technology broke ground on a $7 billion advanced semiconductor packaging and testing facility, which is an increased investment of $5 billion over their original plans. The first phase is expected to be completed by mid-2027 with production beginning in early 2028. To support this growth, we're executing our plan for long-term investments in both transmission and baseload generation, which are essential to secure a reliable grid for the long term. In Q2, we announced our role as the anchor shipper on the Desert Southwest expansion project. And just days ago, we announced our plans to develop a new generation site near Gila Bend just southwest of Phoenix, which could add up to 2,000 megawatts of reliable and affordable natural gas generation to our customers. The Desert Sun Power Plant is a 2-phase project designed to serve both existing customers and the rising demand from extra-large energy users like data centers and manufacturers. Phase 1 is expected to begin serving committed customers by late 2030. Phase 2 is expected to support new demand from our queue of high load factor customers. Importantly, we're working with customers now to contract for the Phase 2 capacity using our subscription model, a commercial construct designed to ensure growth pays for growth while protecting affordability for all customers. Investment in generation alone will not be enough to support the growth in customer demand. We're making significant investments in transmission as well with multiple projects underway and more in development. These projects are expected to enhance reliability, resiliency and integration of new resources. They also expand our access to out-of-state generation and regional markets. Transmission investment benefit from constructive and timely recovery through our FERC formula rate and creates opportunities for additional wheeling revenues that support affordability for our retail customers. Turning to our pending rate case. We remain actively engaged with intervenors in responding to data requests and remain on track for a hearing in Q2 of next year. As we approach the end of 2025, our priorities remain clear: executing our mission to deliver reliable and affordable service to our customers, investing in baseload generation and transmission to serve growth, and achieving a constructive regulatory outcome that protects customer affordability while reducing regulatory lag. Thank you for your time today. I'll now turn it over to Andrew. Andrew Cooper: Thank you, Ted, and thanks again to everyone for joining us today. This morning, we released our third quarter 2025 financial results. I'll walk through the key drivers behind our performance, provide context on our updated 2025 guidance and share our outlook for 2026 and beyond. We reported earnings of $3.39 per share for the quarter, a modest increase of $0.02 year-over-year. This result was primarily attributable to higher transmission revenues and higher sales driven by robust sales growth across customer classes. These gains were partially offset by lower weather-driven sales compared to last year's Q3, higher interest expense, reduced pension and OPEB benefits and an increase in our outstanding share count. Based on strong sales growth along with above normal weather, an increase in transmission revenues and contributions from El Dorado, we are raising our 2025 EPS guidance from a range of $4.40 to $4.60 per share, up to $4.90 to $5.10 per share. With the ability to derisk future operating expenses, our updated guidance reflects an increase to our forecasted O&M for the year to a range of $1.025 billion to $1.045 billion. Sales growth across all customer classes continues to be strong. We experienced 5.4% weather-normalized sales growth for the quarter, including 6.6% C&I growth, supported by the continued ramp-up of our large load customers and 4.3% residential growth. Year-to-date residential sales growth stands at 2%, exceeding our expectations and fueled by continued customer growth to the top end of our range. We are, therefore, narrowing our customer growth guidance range to the high end of 2% to 2.5% for the year. As we look ahead to 2026, we anticipate earnings per share of $4.55 to $4.75 per share. The expected year-over-year decrease compared to our revised 2025 earnings guidance is due to the projection of normal weather and higher financing and D&A costs as we work through the rate case process. We continue to expect robust customer and sales growth increased transmission revenues, focused O&M management and some positive contributions from our El Dorado subsidiary. Customer growth next year is expected at 1.5% to 2.5%, supported by Arizona's ongoing population and business expansion. Last year, we set a post-recession record with nearly 35,000 new meter sets. We're on track to match that figure again in 2025, and our forecast for 2026 customer additions remained strong. For overall sales growth, we expect weather normalized sales to continue to grow at 4% to 6% in 2026. And with the strong residential sales growth trends and continued ramping and acceleration plans by our extra high load factor customers, including in the advanced manufacturing space, we are increasingly confident in our forecasted long-term sales growth range and are raising it up from 4% to 6% to 5% to 7% and extending it through 2030. Our capital and financing strategy remain focused on enabling growth while maintaining affordability and financial discipline. We've updated our capital plan through 2028 to include critical strategic investments in transmission and generation that support reliability and the demands of our rapidly growing service territory. As highlighted by Ted, we look forward to developing these new resources for the benefit of our customers. These investments are expected to drive rate base growth of 7% to 9% through 2028, an increase from our prior guidance of 6% to 8% through 2027. To support this plan, we've updated our financing strategy for '26 through '28, maintaining a balanced mix of debt and equity aligned with our balance sheet targets. For 2026, approximately 85% of our equity need has already been priced with an additional $1 billion to $1.2 billion of Pinnacle West equity forecasted through 2028. On the O&M front, our 2026 outlook reflects our commitment to cost efficiency. We expect a slight year-over-year decrease despite continued customer growth, and we remain focused on reducing O&M per megawatt hour over the long term. Finally, we are affirming our long-term EPS growth guidance range of 5% to 7% based on the midpoint of our original 2024 guidance range. We recognize that regulatory lag will continue to be a factor in 2026. However, we remain confident in our long-term financial strategy. Our service territory offers unique advantages, including strong growth across all customer classes and a diversified economic base that includes advanced manufacturing, data centers and continued population growth. Working closely with the Arizona Corporation Commission and stakeholders, we're committed to addressing regulatory lag, improving recovery timing and ensuring affordability as we continue serving new and existing customers. This concludes our prepared remarks. I will now turn the call back over to the operator for questions. Operator: [Operator Instructions] Your first question is coming from Julien Dumoulin-Smith from Jefferies. Julien Dumoulin-Smith: Nicely done, I got to say again. Look, let me -- if I can kick it off here, obviously, the gas build is front and center here for you guys, good progress. How are you thinking about just eventually giving visibility on '29 and '30, especially what you've seen up here? Can you speak a little bit to the extent possible of what that trajectory as you rolled it forward here would potentially look like in that context? And maybe speak a little bit more to the sequencing of getting this pipeline built in time and in service to align with what seems like a fairly tight time frame altogether to build out this generation. Theodore Geisler: Yes, Julien, thanks very much. And I'll start and then Andrew can talk about the capital plan. The pipeline is expected to be in service in 2029. We're staying very close to that project and remain confident in the milestones between here and there. And so as you know, that was the first key step. Second step then is starting to announce some of the generation capacity projects that we've been working on, Desert Sun being the first major announcement and project that we would expect. And so as we've said, we think about this in really 2 phases. The first phase is going to be necessary to support committed customers. That's a part of the 4.5 gigawatts that we've already committed to and are building out to serve. And we'd expect to be able to have that phase in service in 2030. So still a healthy margin past when the pipeline is in service, but a schedule that we're comfortable with meeting. Importantly, we've got all the key equipment secured, land interconnection is in place. So I think we're in a good spot to be able to deliver on that time line. And then the second phase of that project, we've identified the opportunity to be able to serve our subscription customers with. We've rolled out an opportunity to subscription customers for 1.2 gigawatts and we're actively working with those counterparties on their desired timing and ramp rate to be able to take advantage of that second phase. And that's one of the benefits of the subscription model is we can ensure that the delivery time line of that second phase corresponds with the counterparties ramp rate, and we make sure that reliability is protected by keeping those 2 in sync. Both will, of course, take service from the new pipeline, but we're comfortable with the timing and how that coincides with the pipelines in service. And we'll continue to monitor pipeline progress along the way. And be prepared to adjust if needed. But we're comfortable with the time line we've laid out. Andrew, do you want to speak to the capital plan? Andrew Cooper: Sure. Yes. Julien, as specifically relates to the Desert Sun project. There is some of the capital related to that project, both on the generation side as well as a small amounts on the transmission side in the current plan. You've got long lead equipment and land and things like that, that are in the plan. And certainly, given the in-service date that Ted is talking about for Phase 1, you would see that CapEx ramp up as we get closer to the end of the decade. Certainly around the broader capital plan as we work through the rate case and understand the dynamics of the formula grade and continue to develop our subscription model with our customers that will provide us the opportunity to give more visibility as we certainly want to make sure that, that growth pays for growth. But the plan that we've put forward through '28 reflects the beginnings of some of those really big longer lead time investments we're making on the generation and the transmission side. You could see it in the 2028 kind of new run rate for transmission investments and some of the additional information we provided about our ability to start to look at that additional $6 billion backlog of FERC-regulated transmission assets and start to begin to develop those in parallel with a project like Desert Sun. So that's the plan. We feel good about the plan through '28. And as we are able to certainly provide more information about the time line through the end of the decade, and we've tried to start to do that with some of the construction work in progress disclosure that we've been providing over the last few quarters. Julien Dumoulin-Smith: Got it. And excellent. Just you kind of teed up the next piece. How is that progress going on the subscription part? You talked about this 1.2 gigawatt opportunity. Where are you in sort of "filling that bucket" or that opportunity? Theodore Geisler: Yes, we've got active dialogue. This was Tranche 1 of our subscription and recognize that the timing of Tranche 1 coincides with developing that Phase 2 of Desert Sun as well as the in-service of the new pipeline. So we're working with counterparties now to match that up with their desired in-service timing. But conversations are active, and we remain optimistic in being able to deploy subscription model to both continue to serve part of the 20-gigawatt queue that is ready to begin service in our service territory while also designing it in a way that helps with financing and protects customer affordability. So I think the key elements of the model has been well received by the market. We're actively working with counterparties and it's going to be a good way to be able to serve that queue both now and going forward. Julien Dumoulin-Smith: Yes. Fair enough. One little detail here on '26, you've got this $0.55 bump here on transmission. That's a sustainable level, right? That's a pretty big bump. Andrew Cooper: Yes. Julien, we'll provide guidance as we go forward, obviously, on that. But I think it's reflective of the trend. We've been very committed to investing in our FERC-regulated transmission business, and that's some of the capital that I was talking about. So it's because of that need to access resources from further field and to serve our growth. And given the FERC construct, the formula rate, and the amount of capital that we've stepped into there, this is just a natural reflection of the plan that we've put forward and converting it now into annual earnings opportunity. Operator: Your next question is coming from Nicholas Campanella from Barclays. Fei She: This is Fei for Nick today. So quickly, just one clarification on equity dilution, if I could. So since 2026 equity need is 85% taken care of, which is the $550 million already priced as you put in the slide. What's the true incremental equity needs for '26 through '28, especially when we look at the $1 billion to $1.2 billion total equity used for the 3-year guidance period? And also, I guess, how should we think about the cadence of issuing through '26 and '27? And how should we think about any equity mitigation given the strong sales growth backdrop that you just provided in the update? Andrew Cooper: Thanks Fei. So yes, on the equity, as you pointed out, we have substantially derisked the need in '26 through all the equity that we've priced both through the block issuance we did in 2024 and our use of our ATM over the last 2 years. So it would feel like we're in a good position. If we look over the incremental need over the 3 years, that '26 to '28 period, that's what that $1 billion to $1.2 billion represents. And so certainly, these projects are lumpy. So the cadence of issuance need kind of goes with that. That's where an ATM has worked well for us to date to be able to time our drawdowns and our issuance with the CapEx as we go through some of these larger projects. But your last question around mitigation is really the key one. When you think about that range and our ability to meet our long-term aspirations around a balanced capital structure and to minimize the amount of equity dilution within that balanced capital structure, it really comes back to all the work we're doing both around reducing regulatory lag through the rate case process, to improve retained earnings and our ability to fund that capital from internally generated funds. And then to look to our large load customers in the subscription discussion to make sure that to the extent that we could secure cash upfront to fund those investments that it reduces the need for us to go out to the market for equity. So while that's the range today of forecasted need, we're going to continue to work through the rate case process and the engagement on the large load side to try to mitigate that as much as possible. Fei She: Got it. That's very helpful. And secondly, just on the transmission capital investment slide you laid out, if I could. I appreciate the clarity on the $2.6 billion cumulative transmission CapEx through '28, and also the $6 billion plus through 2034. Could you just comment on your assumption on annual transmission CapEx post 2028? And how should we interpret the $6 billion plus, especially on what's contributing and driving the upside? Andrew Cooper: Yes. So we haven't laid out the specifics of the plan post 2028 because these are really the projects that are reflected in the 10-year strategic transmission plan that we file with the commission every other year. There are a host of projects in their, 500 or 600 miles of high-voltage lines that we're developing to meet different needs. And there's some fungibility in terms of do you develop this line with or that line? So we're doing a lot of that work today. The way I would think about it overall is that we went from under $200 million a year of run rate CapEx 5 years ago in transmission for just sort of the local area projects, the things that we do that are 69-kV plus. That number is increasing to the $300 million to $400 million range of just the blocking and tackling CapEx we do on the transmission side. And so the increments above that, that you see almost in the potential for that $850-plus million number to be a run rate. There is a baseline $300 million to $400 million in there. And then the increment above that is reflective of the beginning of investing in the strategic transmission projects. But it's a really long runway, and the number will vary from year-to-year. But I think if you look at 2028, that is a reflection of the opportunity on an ongoing basis through the combination of core transmission and that increment from strategic transmission. Fei She: Got it. That's super helpful. If I could, just another quick clarification. On the robust sales growth guidance you refreshed. I guess seeing a really elevated level of 5% to 7% through 2030, while looking at a 7% to 9% rate base growth is through 2028. I guess can you comment on your confidence level to possibly extend the 7% to 9% rate base growth further into the horizon? And I guess, what could be the key drivers contributing to that? Andrew Cooper: Yes. So we've laid out through 2028 on the rate base side. And one of the reasons stepped up is that you're beginning to see some of those long lead projects come into service in '28. The best example being Redhawk, the expansion of our natural gas facility there. As you get into 2029 and 2030 and beyond, more of these larger projects come in, in service of, to your point, the higher sales growth we're seeing, especially from the large load type customers. And so as we continue to kind of move forward and develop the CapEx plan around Desert Sun, around those strategic -- that $6 billion strategic transmission that we were just talking about, we'll continue to look at that rate base growth rate. Our confidence is that, that runway is quite long. What the level is, is what we'll be able to kind of continue to work through. That CWIP disclosure that I mentioned earlier, it's also a good way to think about some of the projects that we know are already in the hopper that take us into '29 and '30 and a good way to extrapolate if you do some of that math. Operator: Your next question is coming from Shar Pourreza from Wells Fargo. Unknown Analyst: This is actually Alex on for Shar. So just on the growth rate outlook, just you guys are still targeting that 5% to 7% of the '24 midpoint. Just in the context of today's new '26 guidance, can you just help frame what you might use as your new base? And will you roll forward the plan as soon as the rate case is concluded? Andrew Cooper: Sure. Yes. So really, the rate case becomes precipitant for us to look at all that. And if you think about base years, we really try to set as high a bar for ourselves as we can to make sure that we're consistently meeting or exceeding expectations and doing so in the right way. And so we want to get to the point where the -- that 5%, 7% becomes evergreen. Right now, we're in a situation where earnings are lumpy. We go and we have a rate case and we get a rate increase, and then there's regulatory lag through a lengthy rate case process. The formula rate is really an important element here to be able to convert that earnings growth rate from being kind of a long term look at '24 and then look at '28 to something that can be more evergreen. And so I think, as we work through the rate case process and the structure of the formula rate, we'll be much better positioned to talk about what all that looks like. And ultimately, that's the goal is to be able to deliver year in, year out, produce more modest increases year-over-year for customers as well. That's a really important part of it. And ultimately, that creates the better stability for us around our earnings growth. Unknown Analyst: Got it. Okay. That's helpful. And then just switching gears here, just give you a sense -- more of a sense on the megawatt pipeline you have around the hyperscaler side and just sort of how you think about capacity first generation needs? Theodore Geisler: Yes, sure, Alex. So we continue to see just a robust pipeline of demand. As we've articulated in the slides, we've got 4.5 gigawatts of incremental demand that we've already committed to. That's in part what Desert Sun is going to be serving as well as future generation and transmission investments that are included in our guidance period and will have to be developed even beyond. But in addition to that, we want to start making progress on committing and serving part of the 20 gigawatts of uncommitted load that is in our current queue. And so that's also a part of what Desert Sun will begin to be able to allow us to serve. But of course, we anticipate wanting to be able to offer much more than just that initial tranche of 1.2 gigawatts. So the intent is contract that first tranche, and then we'll continue to identify generation and transmission capacity expansion opportunities as we get to a certain point in the predevelopment of those projects to where we are confident in the timing and level of capacity available for us to be able to offer, we'll go to the market and offer another tranche service to that uncommitted queue. And that's the model that we anticipate being able to deploy going forward. Bottom line is we anticipate being able to continuously offer capacity to eat into that 20 gigawatts, and we think the 1.2 gigs that we've offered recently is just the first step into that trajectory. Operator: Your next question is coming from Travis Miller from Morningstar. Travis Miller: I just want to confirm on the guidance for '26. There's no contribution from the rate case. Is that correct? And then if that's correct, any ideas or guidance you could give on what maybe a dollar increase, so to speak, would be in the back end of the year? Any thoughts there? Theodore Geisler: Yes, Travis, you're correct. We have not made any assumptions for rate case conclusion that's informed 2026 guidance. As we said, we do anticipate the case resolving in the last quarter of the year. And given that such a small quarter for us anyhow and the timing just didn't seem prudent for us to be able to make any assumptions at this point. But certainly, once the case concludes, that will allow us to step back and reevaluate the constructive nature of the outcome and what that means in terms of forward-looking guidance. So we'd look to do that at that time as well as the details around how the formula rate would work both timing and level on a go-forward basis. So look for further updates once the case concludes on all those aspects. Travis Miller: Okay. Makes sense. And then separately, that 4.5 gigawatts of committed customers, can you kind of elaborate on who those customers are? And maybe is any of that going to kind of your system wide base with residential or small commercial? How do you -- how would you break up that 4.5 gigawatts? Theodore Geisler: Yes. The 4.5 gigawatts is a nice balance and blend between incremental industrial growth, such as chip manufacturing, TSMC and Amkor being examples of that as well as their supply basis, as well as, of course, data centers that are already in development or even in service, but we expect to ramp through this period. And then importantly, we continue to see just steady and robust residential and small business growth. So I'd say that's one of the hallmarks of our growth story is a very diversified story, not too dependent on one industry or customer base or another. Maricopa County just recently ranked top County for economic development in 2025, and it's the third fastest in the U.S., Phoenix just rank #1 of the top 15 growth markets for manufacturing. And all of that is separate from a data center story. It just shows the true underlying growth. We're also pleased to see that affordability still is a hallmark of our service territory, favorable cost of living. Phoenix inflation is growing at about 1.4% versus national average at 2.9%. So I think there's a lot of drivers behind why we're seeing diversified growth in that 4.5 gigawatts represents all sectors, which gives us confidence in the growth rate, but also means that we've got a lot of infrastructure to deploy to continue to keep up with the various sectors that are demanding it. Travis Miller: Okay. Yes. No, that sounds good. And then -- so would most of that 4.5 gigawatts go into rate base? Or some of that the subscription model that you were talking about that might be outside of rate base? Theodore Geisler: Well, let's be clear, all of our investment goes in the rate base. The subscription model still goes into rate base. We are just contracting with those customers. Think about it as more of a special rate agreement rather than out of rate base, and that special rate agreement just ensures that growth pays for growth and that the timing of their ramp coincides with the timing of the ramp of the infrastructure to be built to serve them as well as potentially getting their help to finance some of that infrastructure so that we maintain a healthy balance sheet as we grow these rate base investments, specifically for data centers. So it's all going in the rate base. It's just a matter of how you recover the dollars is really the difference in the subscription model. Operator: Your next question is coming from Steve D’Ambrisi from RBC Capital Markets. Stephen D’Ambrisi: I just was hoping for a little bit more color on the year-over-year change in sales growth as an EPS driver. I know for '25 guidance, you had embedded $0.58. And for '26 guidance, it looks like you're embedding $0.39. I guess I would just step back and say it doesn't seem like the magnitude or mix is really that different given both years were 4% to 6% total, of which 3% to 5% was from large C&I. So can you just give a little color there? Is it mix within the C&I classes? Or what's driving the difference in EPS magnitude uplift from sales growth? Andrew Cooper: Steve, it's Andrew. Sure. Yes, so you're right, '26 does have a bit of a smaller contribution there. And that's really the fact that we're talking about a pretty big group of customers that has puts and takes in their ramp rate from year to year. And some of those -- as we've been an early data center market, we've been able to develop more sophisticated forecasting on a customer-by-customer basis, who's testing equipment, who's actually ramping. And so you do see some variation within the customer class. So the residential small business number is relatively stable. And as we've seen this quarter and our guidance for this year, the expectation of continued pretty large new customer additions and an actual positive contribution from residential sales despite the fact that we've continued to have energy efficiency and distributed generation pressed up against that. So it really is the year-to-year variability in some of our large load customers. I think where we really want to focus is the fact that this is a long-term set of customers with the trajectory now that we feel confident about through [indiscernible], including raising that sales growth guidance by 100 basis points over that period. And the fact that, that means that the extra load factor contribution to that steps up by 100 basis points as well. So over the long term, feeling really good. There is some intra-year variability. But once you pair that with continued customer growth, residential growth and then the continued conversion of our transmission investments into revenue through our FERC formula, we're feeling pretty confident about the ultimate outcome. Stephen D’Ambrisi: That's really helpful. And I guess like that would be like the put and take versus what kind of we were assuming is just the sales growth versus transmission. I know Julien asked about it, but can you talk a little bit more about that? Clearly throughout the rest of the plan, transmission growth steps up materially into '28? And so does that $0.55 benefit scale linearly with the increase in transmission spending? Or is there something that's causing super normal growth in recoveries... Andrew Cooper: Yes. No. Over time, it should be proportionate to the investment. We earn pretty quickly, right, when we're putting assets into service. I think the thing that will happen is we'll get a little bit lumpier because in the near term, that $300 million to $400 million of run rate projects, those are smaller projects that get done within a given year, maybe over 2 years at max. And we're moving forward into lines that may take longer to build. Some of the things that we're looking at are, can you energize them on a sectionalized basis so that we can reduce the regulatory lag if we're building a 100-mile line, can you do it in segments? That's the type of thing that we're thinking about to make sure that we continue to translate that opportunity into earnings. The other thing that's been nice about the transmission opportunity is that it's part of the broader wholesale market. And so the opportunity to offset some of the impact to our retail customer base through willing -- others rolling over our system has been a big part of our customer affordability story as well. So there's multiple benefits to doing it. We are doing some larger projects. So the scaling will ultimately get there over the long term. But intra-year, there could be some lumpiness just given you're talking about that increment above the core $300 million to $400 million being longer lead time projects that can take a few years to get into service. Operator: Thank you. That completes our Q&A session. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.
Operator: Good morning. My name is Ludy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Karyopharm Therapeutics Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please be advised that this call is being recorded at the company's request. I would now like to turn the call over to Brendan Strong, Senior Vice President, Investor Relations and Corporate Communications. Please go ahead. Brendan Strong: Good morning, and thank you all for joining us on today's conference call to discuss Karyopharm's third quarter 2025 financial results and recent company progress. We issued a press release this morning detailing our financial results for the third quarter of 2025. This release, along with a slide presentation that we will reference during our call today, is available on our website. For today's call, as seen on Slide 2, I'm joined by Richard, Reshma, Sohanya, and Lori, who will provide an update on our results for the third quarter of 2025 and discuss recent clinical developments. Before we begin our formal comments, I'll remind you that various remarks we will make today constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995, as outlined on Slide 3. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our most recent Form 10-Q or 10-K on file with the SEC and in other filings that we may make with the SEC in the future. Any forward-looking statements represent our views as of today only. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views change. Therefore, you should not rely on these forward-looking statements as representing our views as of any later date. I'll now turn the call over to Richard. Please turn to Slide 4. Richard Paulson: Thank you, Brendan, and thank you all for joining us today for Karyopharm's Q3 2025 Earnings Call. As we turn to Slide 5, I'm pleased to share that this has been a very productive quarter for Karyopharm, one defined by meaningful clinical progress and strengthened financial flexibility that together set the stage for our next chapter of growth. In Q3, we completed enrollment in our Phase III SENTRY trial in frontline myelofibrosis, marking a pivotal moment for Karyopharm. SENTRY represents a significant opportunity to redefine the standard of care for patients with myelofibrosis through the combination of selinexor plus ruxolitinib as a potential all-oral treatment option. With top-line results expected in March, we believe this trial could establish a new paradigm for how myelofibrosis is treated and further validate the relevance of XPO1 inhibition in hematological malignancies. The power of XPO1 inhibition is multidimensional. It simultaneously targets multiple pathways that enable malignant cell growth and proliferation. Targeting these relevant pathways concurrently overcomes the limitations of targeted therapies, such as ruxolitinib, a JAK inhibitor that mostly delivers symptomatic benefits that many consider palliative. This unique and potentially foundational mechanism could establish XPO1 inhibition as a key mechanism in myelofibrosis with further potential across the broader MPN landscape. In October, we made significant progress in strengthening our financial foundation. Through comprehensive refinancing and capital restructuring, we secured approximately $100 million of financial flexibility and additional capital, extending our cash runway into the second quarter of 2026. Turning to our financial performance. Our profitable multi myeloma commercial organization provides a solid foundation on which to build. In the third quarter, we delivered total revenue of $44 million, an increase of 13% year-over-year, and U.S. net product revenue grew 8.5%, reaching $32 million. This growth reflects the continued strength of XPOVIO in multiple myeloma and the disciplined execution of our commercial and operational teams. Importantly, we delivered this level of growth while continuing to reduce expenses. As we look ahead, our recent financing enables us to continue with focus and conviction around 3 core priorities. First, advancing our late-stage clinical programs, SENTRY and EC-042, which we believe have the potential to be truly transformative for patients and the company. Second, driving continued growth across our XPOVIO franchise; and third, maintaining financial discipline as we execute on our strategy and position Karyopharm for sustained success. Taken together, these underscore the momentum and transformation underway at Karyopharm. We are executing with clarity and purpose as we advance our mission to pioneer innovative cancer therapies that can meaningfully improve the lives of patients and deliver long-term value for all our stakeholders. As our next major milestone is the top-line myelofibrosis data from SENTRY, we will focus much of today's discussion on the science supporting this program and the significant commercial opportunity ahead. Now I'd like to turn the call over to Reshma to review our science. Reshma Rangwala: Thank you, Richard. There is a substantial need to develop new treatment options for patients with myelofibrosis. As shown on Slide 7, this disease is heterogeneous and is defined by 4 hallmarks or defining features. These hallmarks include an enlarged spleen, abnormal blood cell production, bone marrow fibrosis, and constitutional symptoms. Furthermore, the median overall survival for intermediate to high-risk myelofibrosis patients is only 4 to 5 years. Lastly, JAK inhibitors are the only approved therapy for myelofibrosis. And while they may decrease symptom burden and lead to very modest spleen reduction, relevant JAK inhibitors, including ruxolitinib, the standard of care in frontline myelofibrosis, do not target all of the relevant pathways implicated in myelofibrosis, including NF-kappa beta, p53, and fibrosis-inducing pathways. As a result, treatment of frontline myelofibrosis patients with monotherapy JAK inhibitors do not adequately address the relevant drivers of pathogenesis in myelofibrosis. On Slide 8, our confidence in selinexor's potential in myelofibrosis is based upon a growing body of preclinical, nonclinical, translational and clinical efficacy and safety data sets. These data suggest XPO1 inhibition is a key mechanism that may facilitate potential synergy with ruxolitinib and other drugs relevant in myelofibrosis. This multi-targeted approach enables treatment of the underlying mechanisms that lead to myelofibrosis, and we believe may lead to meaningful efficacy across the key treatment drivers as well as a generally safe and manageable side effect profile. This is supported by our blinded safety data, which I will take you through in a few slides as well as our substantial safety database with selinexor, where approximately 30,000 patients have been treated in clinical trials and in the post-market setting. This underscores our confidence in the ongoing Phase III SENTRY trial. As seen on Slide 9, while JAK inhibitors directly inhibit the JAK-STAT pathways, multiple other pathways downstream of JAK-STAT support malignant clone proliferation and survival, bone marrow fibrosis, cytokine storms and proliferation of abnormal megakaryocytes. These pathways include NF-kappa beta, PI3-kinase, AKT/mTOR, and TGF-β, a multifaceted approach with dual XPO1 and JAK inhibition simultaneously target upstream and downstream effectors of the JAK-STAT pathway, ultimately enabling apoptosis or cell death of the malignant clones. Let's now focus on the key treatment drivers in myelofibrosis as seen on Slide 10, spleen reduction, symptom improvement and lower rates of Grade 3+ anemia. First, spleen volume reduction. As a reminder, note that only approximately 1/3 of patients achieved a spleen volume reduction of greater than 35% with ruxolitinib alone. In contrast, our Phase I data suggests that the combination could more than double the SVR35 rate at 79%. A substantial proportion of patients achieving an SVR35 is coupled with very encouraging durability, specifically a 100% duration of response as of the data cutoff. Second is symptom improvement. Data from this trial also showed an average 18.5-point improvement in absolute TSS at week 24, which suggests this combination could provide a meaningful improvement over the 11 to 14 points achieved by patients on ruxolitinib as observed in the Phase III MANIFEST-2 and TRANSFOR-1 trials. Third is lower rates of Grade 3+ anemia. The data that we presented in June at EHA from our Phase II 035 monotherapy trial showed lower rates of all grade and Grade 3+ anemia in myelofibrosis patients previously treated with JAK inhibitor therapies. Blinded safety data from the ongoing Phase III SENTRY study suggests a similar trend. Meaningful improvement of these treatment drivers requires disease modification or the elimination of the underlying mechanisms leading to development of an enlarged spleen constitutional symptoms and worsening cytopenias. Data observed from selinexor monotherapy studies in a pretreated myelofibrosis population as well as our Phase I combination data in JAK inhibitor-naive myelofibrosis suggest meaningful reductions in key cytokines that are critical to myelofibrosis pathogenesis, symptom development and anemia as well as improvements in bone marrow fibrosis, increases in erythroid progenitors and mutational burden. Turning to Slide 11. We are super excited that our Phase III SENTRY trial has completed enrollment with top line data expected in March 2026. The co-primary endpoints in SENTRY are SVR35 and absolute TSS, which are tested sequentially. As we have discussed before, it is important to reemphasize based upon learnings from other myelofibrosis trials that we believe we have optimized SENTRY for success. In alignment with the FDA, we changed the co-primary endpoint of TSS50 to absolute TSS and exclude the fatigue domain in the primary analysis of absolute TSS due to the ambiguity of patients' assessment of their fatigue. We are certainly not the first to exclude fatigue. In fact, both the pivotal trials that led to ruxolitinib and fedratinib approvals also excluded fatigue in their TSS50 analyses. Encouragingly, amongst approximately 350 patients enrolled in SENTRY, the mean baseline TSS, excluding fatigue is approximately 22.5. Note that the 21.9 that you will see in our ASH abstract today was preliminary data and before enrollment was completed. Our mean baseline of approximately 22.5 compares favorably to other comparable trials. Importantly, as you compare our number to other trials, please remember other Phase III trials may include fatigue in their baseline scores. How does the fatigue domain affect the score? Given that in the Phase III MANIFEST-2 trial, the average fatigue score at baseline was approximately 5 points. Our baseline score, if we included fatigue, would be approximately 5 points higher, which gives us confidence in the patient population that we have enrolled. Shifting back to our trial design, absolute TSS in the Phase III SENTRY trial will be analyzed using the mixed models repeated measure approach, or MMRM, which is viewed as a more sensitive and potentially more robust method by which to analyze absolute TSS. Now let's review the encouraging preliminary blinded aggregate safety data from this trial. As these are preliminary and blinded data, please keep in mind that this data may not be reflective of the trial's actual top line results. The data on Slide 12 are from the first 61 patients that enrolled in the Phase III portion of SENTRY that have now been followed for a median of over 12 months. These patients were included in the successfully passed futility analysis conducted in the beginning of the year. We have continued to track the safety events over time and took a snapshot of the blinded safety data from these 61 patients on July 1, 2025, which continue to look favorable. The most common TEAEs are provided for the first 61 patients randomized to the trial and include patients randomized to both the combination of selinexor plus ruxolitinib or ruxolitinib arms in a 2:1 ratio. Because these are blinded data, we do not know the rates by each arm. In an effort to improve comparability, we then took our analysis one step further. Knowing that the 61 patients were randomized 2:1, we used the historical data on ruxolitinib to extrapolate the preliminary safety data for the approximately 40 patients that received the combination, which is shown in the orange boxes in the middle of the slide. The number that I am most optimistic by is the extrapolated rate of Grade 3/4 anemia. At approximately 26%, the extrapolated rate of Grade 3/4 anemia for the combination is meaningfully lower than the 37% historically reported for ruxolitinib. Grade 3/4 thrombocytopenia rates are relatively similar, with 9% suggested for the combination treated patients compared with the approximately 6% reported for ruxolitinib alone. Finally, the extrapolated rate of treatment-emergent adverse events leading to discontinuation is only approximately 5% to 7% for the combination, lower than the 6% to 11% range that has been historically reported from ruxolitinib, which we view as an encouraging observation. We are very encouraged about these data and what it could mean for patients if we see something similar in the top-line results in the Phase III SENTRY trial. Specifically, it could suggest a combination therapy that has a safety profile similar, if not potentially better than standard of care ruxolitinib, given that both Grade 3 plus anemia and thrombocytopenia are similar, if not better, than ruxolitinib alone, could suggest decreased blood draws for the patient and reduced monitoring burdens for physicians and health care staff. As we await our Phase III data, it is informative to review a case study on Slide 13 that shows meaningful efficacy, overall tolerability, and the potential for disease modification. This patient is enrolled in the Phase I combination study of selinexor and ruxolitinib and has been on the study treatment for over 3.5 years. This 81-year-old female was diagnosed with myelofibrosis secondary to polycythemia vera. She initiated treatment with selinexor 60 milligrams in combination with ruxolitinib in March 2022. Her baseline spleen volume was 2,058 cubic centimeters for TSS without fatigue at baseline was 7, and variant allele frequency burden or VAF was 83%, meaning that 83% of her cells had a cancer-driving mutation. She achieved an SVR35 and TSS50 at week 24 and complete resolution of her symptoms by approximately week 52. Furthermore, her VAF levels decreased to 0, signifying eradication of the cancer-driving mutation. To this day, she still continues on therapy with minimal side effects, with more than 3.5 years on therapy. This patient exemplifies the potential a multi-pathway approach can deliver in a disease as complex as myelofibrosis. XPO1 inhibitors' unique ability to simultaneously target multiple relevant pathways suggest their foundational potential in all patients with MS as well as other myeloproliferative neoplasms. I will now turn the call to Sohanya. Sohanya Cheng: Thank you, Reshma. As shown on Slide 15, our commercial organization executed well this quarter within the highly competitive multiple myeloma market. XPOVIO net product revenue in Q3 grew 8.5% year-over-year to $32 million. Demand for XPOVIO was consistent year-over-year, with the community setting continuing to drive approximately 60% of total U.S. sales. XPOVIO is positioned in both the community and academic settings as a flexible therapy with a differentiated mechanism of action, oral convenient option, and increasingly used in the third line in patients before a T cell therapy or in patients who cannot access these complex therapies. Additionally, it is used in the fourth line plus setting once patients progress on a T cell therapy. Based on our results year-to-date, we are confident in our ability to deliver within our full year guidance range of $110 million to $120 million. Now turning to myelofibrosis outlined on Slide 17. We are excited to be working towards a potentially transformative commercial launch that we expect will redefine the way that frontline myelofibrosis patients are treated. Our conviction is driven by the high unmet need in myelofibrosis, combined with the fact that there has been no real innovation in the market beyond JAK inhibitors over the past 14 years. Ruxolitinib has been the standard of care for more than a decade and is being used in the vast majority of intermediate to high-risk patients, even though fewer than 35% of these patients achieve an SVR35. Physicians and patients want to see deep and durable reduction in spleen volume. And as Reshma discussed, the data from our Phase I trial highlights our potential in this area, with selinexor plus ruxolitinib helping more than twice as many patients achieving a spleen volume reduction of 35% or more. In addition, many patients experience constitutional symptoms and anemia, both of which negatively affect patient quality of life. And these are areas where we believe the selinexor plus ruxolitinib combination may make a meaningful difference. So, this presents us with a significant opportunity to improve upon the standard of care in combination with the market leader. Slide 18 provides an overview of our potential commercial opportunity. We have the opportunity to redefine the standard of care, expand the market, and lead with a new frontline combination therapy that may offer very differentiated results for patients. This isn't an incremental change in the treatment landscape. It is a potentially transformational change for patients. Here are some figures that help inform our view that selinexor's peak revenue opportunity could be up to approximately $1 billion annually in the U.S. If you look at the overall prevalent market, there are 20,000 patients living with myelofibrosis in the U.S., which represents a multibillion-dollar marketplace. As we look at the opportunity for patients that can benefit from selinexor plus ruxolitinib, there are approximately 4,000 newly diagnosed patients each year in the U.S. with intermediate to high-risk myelofibrosis that have a platelet count above 100,000. This is our target market. Most of these patients receive ruxolitinib today. 75% of U.S. physicians showed an intent to treat with combination therapy based on third-party market research. There is a clear appetite among physicians to evolve from a monotherapy to a combination treatment approach. Finally, the real-world duration of therapy for ruxolitinib is approximately 13 months. Our assumption is that the combination of selinexor plus ruxolitinib would be used for at least 13 months. Looking at all of this together, you will see that our peak revenue opportunity may approach $1 billion annually in the U.S. alone. As we prepare for potential commercialization, we have spent the past year speaking with leading KOLs at academic medical centers as well as community-based physicians and have received overwhelming support for the need to improve upon the current standard of care. Our position in the market, if approved, will be very clear and focused. If you're going to prescribe ruxolitinib to a patient with newly diagnosed myelofibrosis, prescribe selinexor plus ruxolitinib instead. Finally, our existing commercial capabilities are highly synergistic in myelofibrosis and prepare us for a rapid and successful launch, as shown on Slide 19. We have market access, a patient support hub, scientific and medical affairs, marketing, and a sales team with deep relationships with potential prescribers. In the academic setting, we already call on all the key institutions. In the community setting where a majority of newly diagnosed myelofibrosis patients are treated, there's approximately 80% overlap with our existing customer base. Pending positive data and subsequent regulatory approval, our commercial team will be ready to drive rapid and strong uptake as we bring this transformative therapy to patients. Now I'll turn the call over to Lori. Lori Macomber: Good morning, everyone, and thank you, Sohanya. Turning to our financials. Since we issued a press release earlier today with the full financial results, I will focus on the highlights and reviewing our guidance for 2025 on Slide 21. Total revenue for the third quarter of 2025 was $44 million, an increase of 13.4% compared to $38.8 million in the third quarter of 2024. U.S. XPOVIO net product revenue for the third quarter of 2025 was $32 million, an increase of 8.5% compared to $29.5 million in the third quarter of 2024. Gross to net provisions for XPOVIO were 27% in the third quarter, consistent with the second quarter of 2025 and down from 31% in the third quarter of 2024. We expect gross to net provisions to remain relatively consistent with the third quarter levels in the fourth quarter of 2025. License and other revenue was $12 million in the third quarter, up nearly 30% from third quarter of 2024, primarily driven by higher milestone revenue from our partner, Menarini. This included the final amount of revenue that we will record from Menarini related to the $15 million of annual R&D reimbursement. In the fourth quarter, our license and other revenue will primarily be royalty revenue since we do not expect to achieve any significant additional milestones in Q4 2025. Turning to expenses. We continue to be very disciplined in managing our operating expenses and prioritizing our pipeline investments, including additional cost reduction initiatives that we implemented in the third quarter. Research and development expenses for the third quarter of 2025 were $30.5 million, down 16% compared to $36.1 million in the third quarter of 2024. The decrease was primarily driven by lower clinical trial and related costs for selinexor in multiple myeloma, reflecting the reduced scope of our Phase III trial, as well as lower personnel and stock-based compensation expenses resulting from previously implemented cost reduction initiatives. Selling, general, and administrative expenses were $26.6 million for the quarter, down 4% compared to $27.6 million in the third quarter of 2024. The decrease was primarily attributable to the continued realization of our cost reduction initiatives. Taken together, our loss from operations improved by approximately 42% in the third quarter of 2025 compared to the third quarter of 2024. Interest expense was $11 million in the third quarter of 2025 compared to $11.4 million in the third quarter of 2024. Other expense was $7.4 million in the third quarter of 2025 compared to $3.8 million of other income in the third quarter 2024. This nonoperational item is primarily driven by reoccurring noncash fair value remeasurements of embedded derivatives and liability classified common stock warrants related to the refinancing transactions completed in the second quarter of 2024. We reported a net loss of $33.1 million or $3.82 per share on a GAAP basis. More than half of this loss is driven by below-the-line items, including interest expense, which is almost entirely noncash at this point and the $7.4 million of noncash mark-to-market adjustments that I just mentioned. Excluding these items, our underlying operating performance continues to show meaningful improvement. Finally, prior to the receipt of approximately $36 million of gross proceeds from the financing transactions that we announced in October, we ended the third quarter with $46.2 million in cash, cash equivalents, restricted cash and investments compared to $109.1 million as of December 31, 2024. On a pro forma basis, after deducting transaction-related expenses, we would have had approximately $78 million in cash. Importantly, from a cash perspective, our interest payments do not start again until June 2026, and our royalty payments do not begin again until the third quarter of 2026. Based on our current operating plans, our guidance for the full year 2025 is as follows: total revenue of $140 million to $155 million, consisting of U.S. XPOVIO net product revenue and license, royalty and milestone revenue expected to be earned from our partners, primarily Menarini and Antengene; U.S. XPOVIO net product revenue to be in the range of $110 million to $120 million. We are lowering our range of R&D and SG&A expenses to $235 million to $245 million, down from $240 million to $250 million. With the financing that we announced last month, we expect our existing liquidity, including the revenue we expect to generate from XPOVIO net product sales as well as revenue generated from our license agreements will be sufficient to fund our planned operations into the second quarter of 2026. I will now turn the call back to Richard for some final thoughts. Richard Paulson: Thank you, Lori. Before we close on Slide 23, I want to emphasize how far Karyopharm has come and where we're heading. This quarter reflects clear execution against our priorities and the progress we've made has positioned us to enter 2026 with confidence. With SENTRY enrollment complete, a strong commercial foundation and a reinforced balance sheet, we are focused squarely on what matters most, delivering 2 potentially transformative Phase III readouts that could reshape the future for patients with myelofibrosis and endometrial cancer. Our team's dedication, scientific rigor and focus on patients continue to drive everything we do. We believe the opportunities ahead are significant, and we are executing with purpose and discipline to realize them. Thank you for your continued support and confidence in Karyopharm. We look forward to updating you as we advance towards these important milestones. I would now like to ask the operator to open the call up to the Q&A portion of today's call. Operator? Operator: [Operator Instructions] Our first question comes from the line of Peter Lawson with Barclays. Peter Lawson: I guess first is just around the MF data that we're seeing March '26. If you could just kind of walk through what we should see if it's like SVR PFS and OS trends if that's going to be staged across other medical meetings in 2026. And then a follow-up question would just be around the size of the sales force. I know you've kind of talked about 80% overlap, but interested to see how many you would add or dedicate to MF and also the kind of the ex-U.S. strategy. Richard Paulson: Thanks, Peter. So maybe the first part, Peter, are you asking about when we plan to share the data post March? It wasn't quite clear the question in the first part. Peter Lawson: Just the level of detail we'd see in -- for MF, whether it's SVR, TSS, OS trends and then -- or if it's kind of spread across the year kind of thing. Richard Paulson: Sure. Yes, I'll turn to Reshma for that first part, and then I'll turn to Sohanya for the second part with regards to our commercial capabilities. Reshma Rangwala: Yes. Thanks, Peter. This is Reshma. So, the top line results, you're correct, expected more to 2026. I anticipate at this point, really just providing again sort of those top line details. So, you're correct, the primary endpoints of SVR35 at week 24, absolute TSS, potentially, right, some other secondary endpoints, including hemoglobin and/or disease modification. And then, of course, we'll touch upon safety. But we'll get granular as we get closer to that milestone. Sohanya Cheng: Peter, as far as the sales force, as you mentioned, very strong overlap, particularly in the community setting, of course, with our current organization. And in the academic setting, we already call on those accounts. So, we expect really minimal additions to our commercial structure. Our capabilities are already highly synergistic. As far as ex-U.S., we'll continue to work with our ex-U.S. partners to drive launches in each of the countries and additional royalty and milestone revenues globally. Operator: And your next question comes from the line of Ted Tenthoff with Piper Sandler. Edward Tenthoff: Congrats on all the progress both on the clinical side and financial side. Can you remind us, are there any milestones associated with data or warrants or things like that for the recent financial restructuring that could extend that capital beyond the second quarter? And are there any geographies where you don't currently have distributors in place for myelofibrosis? Richard Paulson: Thanks, Ted. Maybe on the first part, are you just asking about milestones from a financing perspective with regards to positive data? Or maybe just clarify that part of the question. Edward Tenthoff: Yes. So, milestones were there any warrants or anything like that, that could trigger to extend the June or the 2Q deadline. I was trying to remember back. Richard Paulson: From a pure warrant or financing perspective, no specific triggers with regards to positive MF data. Obviously, pending positive data, we think that will be a very, very strong inflection and value point for us. And on the second part with regards to our partnerships globally, no, we have well-established partners for selinexor globally. And as Sohanya mentioned, I think they're very excited and engaged and looking forward to positive data and moving forward with a registration strategy and commercialization strategy globally, which we would be able to do. With the exception, one market we still don't have partnered is Japan. That would be the only additional market we would look to partner with in the future moving forward. Operator: And your next question comes from the line of Colleen Kusy with Baird. Colleen Hanley: Congrats on all the progress. Hopeful for the baseline TSS number, 22.5%, I think you said, Reshma, quite a lot higher than what you had enrolled in the Phase I, I believe. And based on the data that you had at AACR in 2023, it actually looks like fairly similar response for TSS above and below 20, which could just be due to the small end, but just curious how you would expect that might impact the read-through from Phase I to the pivotal Phase III? And then I'll have a follow-up after. Reshma Rangwala: Yes. It's a great question, Colleen. I think we're very encouraged by how the baseline TSS is evolving. As you mentioned, 22.5%, approximately 22.5 in almost the full ITT. I think you're right. Sort of the Phase I, it's small. So, we're very encouraged by those numbers. Clearly, it suggests that absolute TSS as well as TSS50 can be achieved with the combination relative to historical ruxolitinib data. I think what we were trying to accomplish in the Phase III was to drive that baseline TSS without fatigue as high as possible. And so again, very encouraged with that 22.5%, especially as I compare it to other contemporary trials in which that 22.5 likely is higher than even those. So, it really suggests that we could see a potentially meaningful improvement for absolute TSS with our combination versus ruxolitinib alone. Colleen Hanley: That's super helpful. And then in that same AACR update, it looks like there was some variability in response for platelet count above and below 200,000, which again could just be driven by small end. But curious if you have the baseline platelet count and what your kind of thoughts are on the activity based on platelet count. Reshma Rangwala: Yes. We're seeing more than half of the patients with baseline platelet counts above 200 which again is what I would expect. There's nothing biological or mechanistic that would suggest that platelet count is a key variable that would impact the overall SVR35 rate or even the absolute PSS. So again, it's a number we're watching. It's a baseline characteristic that I think is very consistent with other Phase III trials. In general, that variable as well as all of the other variables are in line with what we would expect and again, very encouraged with how this patient population is enrolled and who they represent across the frontline myelofibrosis population. Operator: And your next question comes from the line of Maurice Raycroft with Jefferies. Maurice Raycroft: Congrats on the progress. So, ASH abstracts are coming out pretty soon. Just confirming, it sounds like your Phase III baseline data is going to be at ASH. Can you talk more about what's in the abstract and then what is going to be at the conference? Reshma Rangwala: Yes. Thanks for the question, Maurice. So, the ASH, so it's going to be an abstract only. We're not going to present an additional poster. So, any additional data in the full ITT is going to be presented with the top line results in March of 2026. So, when the data come out in about 20 minutes, really, what you're going to see is just the baseline characteristics amongst 320 patients. So, this is a subset. These were the available patients at the time of the data cutoff. And as I mentioned on my prepared remarks as well as with some of the questions today, just very encouraged with how that patient population has evolved and again, very consistent with what we would expect. Maurice Raycroft: And maybe as a follow-up, for the slightly lower treatment-emergent adverse events leading to discontinuation for the 61 patients in the blinded safety review. Can you comment on whether that rate is mostly in line with what you're seeing for the full study? I guess, any additional perspective there that you could share? Reshma Rangwala: Yes, great question. So, one of the things that I'm very encouraged by is that we've followed these 61 patients and taken a snapshot across their AE summary, including their treatment discontinuation rates as well as the specific AEs as well as a couple of Grade 3 plus AEs. And what I'm encouraged by, again, is that despite whether we look at a 7-month median follow-up or even a 12-month median follow-up, rates, including treatment-emergent discontinuation rates are remarkably stable, right? So, it really suggests that a majority of the events, including discontinuations potentially are occurring early, and we don't continue to see this accumulation as the patients are followed over time. Now what the top line results are going to show, we'll see at the top of the -- at the time that we report the top line results, but again, very encouraged by how the 61 patients are evolving. Operator: Your next question comes from the line of Brian Abrahams with RBC Capital Markets. Brian Abrahams: Congrats on all the progress. I wanted to drill down a little bit more on some of the market research findings, in particular, the high 75% intent to treat with the combo in frontline MF. I'm curious if you could talk a little bit more about sort of the types of patients that you're hearing physicians would try on a combo. Ruxolitinib initially, whether or not some of the payer feedback maybe you've been getting the early payer feedback has been aligned with what you're hearing from physicians in terms of the degree of frontline use. And then with the space expected to evolve and more targeted treatments like mccarls and more targeted JAKs, what impact do you think that might have on the way selinexor is ultimately positioned should it be successful in Phase III? Richard Paulson: Yes. Thanks, Brian. Maybe I'll start kind of with the second part of your question, and I'll turn it over to Sohanya to talk to. I think broadly, in myelofibrosis, as you know and as Sohanya talked about, there's been really no new innovation in the front line, only JAK inhibition in myelofibrosis. So, there's significant opportunity across the whole space to improve outcomes for patients and to bring new innovation to patients, which is exactly what we're focused on. We're bringing a novel MOA such as selinexor and XPO1 inhibition, which we think can have a really meaningful benefit to patients. And when we look across the space again, I think the data we've shown, as we've talked about, we've been working on myelofibrosis for over 7-plus years. Reshma talked about the breadth of our data and showing impact as a monotherapy and obviously, as a combination. And I think what we're excited about, obviously, is to work to deliver that positive Phase III trial and then to continue expanding in MPNs as well as with selinexor, with eltanexor, our novel second-generation XPO1 inhibitor and a whole suite of XPO1 inhibitors that we have, which we think may be able to have an impact across a broad range of MPNs. With regards to the CALR, we need to wait. We haven't seen any data in myelofibrosis. So again, I think there's a lot of opportunity for innovation and improvement. And what we're excited about again is in the very near-term to read out a potentially positive trial in a combination with such an impact for patients. And I'll let Sohanya talk to that because that's really what our market research indicates when we talk about the 75% intent to prescribe that combination therapy upfront for treatment-naive patients. Sohanya Cheng: Thanks, Richard. Just to kind of add a little bit more to that. The target patient in the market research would be the newly diagnosed intermediate to high-risk patient with greater than 100,000 platelets. And the market research kind of just a little bit of background was comprised of both community and academic physicians. The proportions were in line with what we've seen in real world, the majority community physicians that are treating newly diagnosed myelofibrosis patients. So, the value proposition for selinexor is very simple, clear and focused. If a prescriber is already prescribing or planning to prescribe rux alone for a newly diagnosed myelofibrosis patient upon approval, they will then just do a seli plus rux combination. So, we are not competing with ruxolitinib, which is the standard of care go-to treatment for our target patient population. We're simply an addition with ruxolitinib, the current market leader. As we look at the sort of payer environment, we don't anticipate any kind of pushback with the payers. And generally, as Richard pointed out, there really has been little innovation beyond the JAK inhibitors. So, there's a tremendous appetite to move these physicians from a monotherapy to a combination treatment approach. Operator: And our last question will come from Jonathan Chang with Leerink. Jonathan Chang: Just regarding the commercial potential launch in myelofibrosis, can you discuss any relevant learnings from the multi myeloma experience? Richard Paulson: Yes. I think broadly, Jonathan, the learnings from our multi myeloma experience really have been built in into the trial design, where in multi myeloma came to the marketplace, as you know, at a much higher dose at 80 milligrams twice weekly or 160 milligrams. And what we've learned over the past number of years is the importance and the ability to use selinexor at a lower dose. And we've obviously built that in with our trial now being at 60 milligrams once weekly. And we've also learned the importance of the dual antiemetics to use for the first couple of cycles as patients initiate therapy on XPO1 inhibition. We know that the nausea is transient and gets better over time. So, we've seen both those learnings over our multiple myeloma experience. We've built that in already to the design of the trial. And so, I think moving forward and what we've seen already and what Reshma has shared in the blinded safety data is really the benefit to patients, the benefit overall to the tolerability profile. And as we saw from the very low TAE discontinuations, the benefit for patients. And I think the case study Reshma talked to with the patient on the combination for over 3.5 years and so benefiting really talks to the outcomes for patients from those learnings we've built in. So, we feel very positive about the learnings we've built in and the potential to transform outcomes for myelofibrosis patients in the front line. Reshma Rangwala: Yes. I would add that the kind of biggest differentiating point between the 2 landscapes is the degree of competition. Myeloma, highly competitive with overlapping competitors across classes, very different situation in myelofibrosis, really little to no innovation beyond the JAK inhibitors. Also, I would say the myelofibrosis space is primed to be what the myeloma space was over a decade ago. Over a decade ago in myeloma, they were using monotherapies and then evolving to doublets. That is the level of transformation, I think we're about to see in myelofibrosis. The second point is given that we have established a commercial organization that has worked very closely with community physicians who will be the majority of prescribers for the newly diagnosed patients, there's a high degree of synergy, and we expect to launch rapidly with myelofibrosis. Operator: And that concludes today's question-and-answer session. I would like to turn it back to Richard Paulson for closing remarks. Richard Paulson: Thank you, operator, and thank you to everyone again for joining us on today's call. As you can tell, we are very excited about our prospects to redefine the current standard of care for the majority of frontline myelofibrosis patients. We look forward to sharing top line data with you in March and pending future regulatory approvals, our organization is well prepared to rapidly deliver on the commercial opportunity. Once again, thanks for joining today. Operator: Thank you. And ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.
Operator: " John Kasel: " William Thalman: " Lisa Durante: " Julio Romero: " Sidoti & Company, LLC Liam Burke: " B. Riley Securities, Inc., Research Division Unknown Analyst: " Operator: Good day, and welcome to L.B. Foster's Third Quarter 2025 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Ms. Lisa Durante, Director of Financial Reporting and Investor Relations. Please go ahead. Lisa Durante: Thank you, operator. Good morning, everyone, and welcome to L.B. Foster's Third Quarter of 2025 Earnings Call. My name is Lisa Durante, the company's Director of Financial Reporting and Investor Relations. Our President and CEO, John Kasel; and our Chief Financial Officer, Will Thalman, will be presenting our third quarter operating results, market outlook and business developments this morning. We'll start the call with John providing his perspective on the company's third quarter performance. Will then review the company's third quarter financial results. John will provide perspective on market developments and company outlook in his closing comments. We will then open up the session for questions. Today's slide presentation, along with our earnings release and financial disclosures were posted on our website this morning and can be accessed on our Investor Relations page at lbfoster.com. Our comments this morning will follow the slides in the earnings presentation. Some statements we are making are forward-looking and represent our current view of our markets and business today. These forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation to revise or publicly release the results of any revisions to these statements in light of new information, except as required by securities laws. For more detailed risks, uncertainties and assumptions relating to our forward-looking statements, please see the disclosures in our earnings release and presentation. We will also discuss non-GAAP financial metrics and encourage you to carefully read our disclosures and reconciliation tables provided within today's earnings release and presentation as you consider these metrics. So with that, let me turn the call over to John. John Kasel: Thanks, Lisa, and hello, everyone. Thanks for joining us today for our third quarter earnings call. I'll begin with Slide 5, covering the key drivers of our results for the quarter. We continued a favorable trend in the third quarter, posting modest sales growth for the second consecutive quarter with sales up 0.6% over last year. Like the second quarter, the growth was achieved in the Infrastructure segment, with sales up 4.4%, led by 12.7% increase in steel products. Rail revenues, on the other hand, remained soft, declining 2.2% from last year due to continued planned downsizing of our U.K. business and timing of rail distribution sales. But it's important to note that these results included positive revenue gain in our rail growth areas, starting with a 9% increase in friction management and approximately 135% increase in total track monitoring. Turning to profitability for the quarter. Adjusted EBITDA was down $1 million with lower margins in both rail and infrastructure, partially offset by lower SG&A expenses. Speaking of SG&A, we remain focused on our strategic execution to leverage our cost base with containment measures reducing the SG&A percentage of sales to 16% for the quarter. Net income also declined year-over-year to $4.4 million compared to $35.9 million last year. As a reminder, improving profitability allow us to release a $30 million tax valuation allowance in last year's third quarter. The major highlight of the quarter was our exceptionally strong cash generation with cash provided by operations totaling $29.2 million. These funds were used primarily to lower our net debt to $55.3 million at quarter end, with gross leverage improving to 1.6x compared to 1.9x last year. In line with our capital allocation priorities, we also repurchased approximately 184,000 shares of our stock, representing about 1.7% of outstanding shares. Finally, the increased level of orders and backlog in the quarter sets us up for a strong finish to the year in Q4. The trailing 12-month book-to-bill ratio remained positive 1.08:1, and the backlog at quarter end stood at $247.4 million, up $38.4 million or 18.4% over last year. The elevated backlog is expected to translate into Q4 sales growth of approximately 25%, with both segments expected to make gains. I'll revisit our financial guidance to cover the market outlook after Will runs through the financial details for the quarter. Over to you, Will. William Thalman: Thanks, John, and good morning, everyone. I'll begin my comments on Slide 7, covering the consolidated results for the quarter. Reconciliations for non-GAAP information and other financial details are included in the appendix of the presentation. Net sales grew 0.6% year-over-year, driven by 4.4% growth in infrastructure, with steel products up 12.7%. Rail segment sales remained softer, down 2.2% versus last year. Gross profit was down $1.7 million with the decline due to the lower rail sales volumes, coupled with unfavorable sales mix and higher manufacturing costs within infrastructure. The gross margin was 22.5%, down 130 basis points compared to last year's high point in the third quarter. We remain focused on what we can control in the short term with containment measures reducing SG&A costs $2.2 million compared to last year. The SG&A percentage of sales improved 170 basis points to 16%. Adjusted EBITDA was $11.4 million, down 7.9% versus last year, with the decline driven by lower margins, partially offset by lower SG&A, both adjusted for restructuring and legal costs incurred last year. Cash provided by operating activities in the quarter was $29.2 million, favorable $4.4 million versus last year due to lower working capital needs in the Rail segment. Third quarter orders were up 19.6% year-over-year, with a favorable trailing 12-month book-to-bill ratio of 1.08:1. The backlog improved 18.4% year-over-year with the increase realized in the Rail segment, which was up 58.2%. I'll cover segment-specific performance for the quarter and the favorable developments in orders and backlog later in the presentation. Slide 8 provides a reminder of our typical business seasonality and the related financial profile by quarter. Normally, sales and profitability are strongest in the second and third quarters. However, 2025 phasing is skewed a bit due primarily to timing of rail distribution orders with deliveries deferred to the fourth quarter. As a result, combined Q2 and Q3 sales and profitability as a percentage of the full year are lower than we would typically see with the expected sales shift through the fourth quarter. We're in the cash generation period of our year and as evidenced by the exceptional operating cash flow in Q3. We expect this favorable trend to continue in Q4. Over the next couple of slides, I'll cover our segment-specific performance in the quarter, starting with Rail on Slide 9. Third quarter revenues were $77.8 million, down 2.2% due to order delivery timing, primarily in Rail distribution, coupled with lower demand and revenues in the U.K. Rail product sales were down 5.9% due to softer rail distribution and transit product demand in the quarter. Technology Services & Solutions sales were also down 5.3%, including the decline in the U.K. business. Within TS&S, our total track monitoring sales were up 135.1%. Also, global Friction Management sales were up 9% as this growth platform continues to perform well. Rail margins of 22.8% were down 40 basis points, driven primarily by softer sales volumes as well as the weakness in the U.K. Rail orders increased 63.9% versus last year with all business units improving. Most notably, rail products orders were up $9.6 million, while TS&S orders were up $25 million with a large multiyear order awarded in our U.K. business. Rail backlog levels increased $51.6 million versus last year, led by Rail Products up $34.5 million or 59.9%, which supports our growth expectations for Rail in Q4. Turning to Infrastructure Solutions on Slide 10. Net sales increased $2.5 million or 4.4%. The improvement was realized in steel products with sales up $1.9 million on improved protective coating and threaded volumes. Precast sales were also up 1.4% over last year. Despite the sales growth, gross profit declined $1 million with margins down 260 basis points to 22% -- the decline was due to unfavorable sales mix and higher production costs in the precast business, including $0.6 million of higher start-up costs at our new Florida facility. Infrastructure net orders declined $14.9 million due primarily to the cancellation of the $19 million Summit Protective coating order in Steel products. Solid gains in Precast Concrete partially offset the impact. Infrastructure backlog totaling $107.2 million is down $13.2 million from last year due to order cancellations. Shippable backlog for infrastructure is up approximately $6 million over last year's comparable level adjusting for the order cancellation. Next, I'll cover some of the key takeaways from our year-to-date results on Slide 11. Net sales for the year-to-date period were down 5.7% due to lower sales volumes in rail, which were down 16.1% driven by timing of demand for rail products, coupled with the reductions in the U.K. Infrastructure sales were up 11% on stronger precast concrete volumes. Year-to-date gross profit reflects the impact of lower rail sales volumes with the results down $7.3 million and margins of 21.6%, down 60 basis points. Selling, general and administrative costs decreased $6.6 million from the prior year with lower personnel, professional service and legal costs as the primary drivers. Adjusted EBITDA was $25.4 million for the year-to-date period, down $0.9 million or 3.5% from the prior year despite the more pronounced decline in sales. I'll mention here that the effective tax rate continues to be elevated due to our not recognizing a tax benefit on U.K. pretax losses. We made some progress reducing this impact in the quarter, and we expect a lesser impact in future quarters with an improved outlook for the U.K., coupled with overall improving profitability. Of course, the higher rate is not reflective of our cash tax requirements, which remain low at approximately $2 million for 2025 due to available NOLs. Cash flow provided by operations was $13.4 million, favorable $15.1 million compared to last year on lower working capital needs within rail with the growth deferred to the fourth quarter. And orders were up 10.1% with both segments realizing increases on improving demand. I'll next cover liquidity and leverage metrics on Slide 12. The chart reflects net debt levels of $55.3 million, down $10.1 million compared to last year and down $22.9 million during the quarter. The gross leverage ratio improved to 1.6x at quarter end. We've demonstrated our ability to manage our leverage levels through choppy conditions and remain prudent in our overall capital allocation approach. Our capital-light business model translates into significant cash generation, and we continue to deploy these funds along our priorities, which I'll now cover on Slide 13. Maintaining our financial flexibility with reasonable debt and leverage levels remains our top priority. Depending on working capital cycles, leverage typically cycles up to a high point around 2.5x before declining toward our longer-term goal of 1.0 to 1.5x. We manage our leverage while also returning capital to shareholders through our stock buyback program, which is also a high priority. We've repurchased approximately 461,000 shares thus far this year, representing approximately 4.3% of outstanding shares. We have $32 million remaining on our authorization through February of 2028. Since the inception of our repurchase program back in early 2023, we've repurchased approximately 896,000 shares, representing just over 8% of the outstanding shares. We also continue to invest CapEx at a rate of approximately 2% of sales to maintain our facilities, drive operating efficiency and bolster our growth platforms. And lastly, as part of our continuous strategic planning and portfolio management process, we routinely evaluate potential tuck-in acquisitions that would complement our current portfolio, primarily in the precast concrete space. In summary, we have multiple levers available to drive shareholder value, and we remain prudent in our approach. My closing comments will refer to Slides 14 and 15 covering orders, revenues and backlog trends by segment. The consolidated book-to-bill ratio for the trailing 12 months improved sequentially to a favorable 1.08:1, led by growth in orders in Rail. The Rail segment ratio improved to 1.18:1 compared to 1.06:1 at the end of the second quarter, driven by the increase in order rates over the last year. The infrastructure ratio declined to 0.94:1 due primarily to the Summit order cancellation in Steel products in Q3. And finally, on Slide 15, it's clear that the greatest improvement in our backlog was achieved in our Rail segment with a 58.2% increase year-over-year. I'll again highlight that the gains were realized across the segment with Rail Products up 59.9%, friction management up 28.7% and TS&S up 77.7%, including the multiyear order secured in the U.K. business. And while the infrastructure backlog was down 10.9% due to the longer-term order cancellations, current demand levels remain improved for both precast products and steel products business units. This positions us well for a strong finish to 2025. Thanks for the time this morning. I'll now hand it back to John for his closing remarks. John? John Kasel: Thanks, Will. I'll begin my closing remarks covering current market developments on Slide 17. First, I'll address a couple of macro headline topics, tariffs and the federal government shutdown. As previously mentioned, our supply chains are primarily sourced from within the United States with some minor exceptions from certain electronics and other components sourced outside the U.S. As a result, tariffs have not had a significant impact on product costs or our ability to secure the materials needed to serve our customers. With respect to the recent U.S. federal government shutdown, at the moment, we're not seeing significant adverse impacts on business activity. Of course, federal funding programs support several of our business lines. we're monitoring project and delivery time lines for potential delays, which could have an adverse impact on Q4. As Will mentioned during his review of orders and backlog, we've seen improved demand levels broadly across the rail business. The federal funding support began to release back in the second quarter, translating into improved rail order rates and backlog levels. The timing of orders and deliveries primarily in the rail products pushed the expected growth in rail to Q4, but we have the backlog in place to deliver the expected growth. More to come on this topic in a minute. Rail friction management sales are up 12.3% year-to-date, and backlog is up 28.7%, reflecting the increased demand for these solutions that improve safety and operating ratios for our customers. And outside North America, the multiyear order secured for our U.K. business is a positive sign that prospects for improvement in our demand in this market are trending in a favorable direction, albeit at depressed levels currently. Turning to the Infrastructure segment. Our precast backlog remains solid at nearly $86 million, up 4.9% over last year. Precast has also benefited from government funding programs and highway and civil construction projects are supporting demand levels in our key regional markets. We previously mentioned the commissioning of our precast facility in Central Florida. While demand levels is soft in this market now, we remain bullish in the long-term prospects for Birocast wall system solution. Turning to Steel Products. Third quarter sales were up 13% overall, but the overall business mix improved substantially with the recovery of our pipeline coatings business, which was up 77% over last year. With the renewed interest in energy investment in the U.S., we believe we are a favorable recovery trend for this product line, and we expect growth rates to expand further in the fourth quarter. In summary, drivers of improving demand in our key end markets remain intact as evidenced by our backlog, which we expect to deliver a strong finish to 2025, which I'll now cover starting on Slide 18. Our updated guidance for 2025 anticipates extraordinary fourth quarter of growth and profitability expansion. At the midpoint, fourth quarter adjusted EBITDA is expected to be up 115% on 25% sales growth. We have 2 major areas that support this position. First, in the third quarter, sales only grew modestly despite a $20 million higher backlog at the start of the quarter. This was due primarily to order delivery timing for the rail distribution product line. Second, the backlog at the start of Q4 is up $38 million versus last year compared to $32 million sales increase expected at our midpoint of our guidance. Simply said, we have the backlog available and manufacturing capacity to deliver the expected sales growth contemplated in our guidance. Of course, adverse weather conditions and unforeseen customer delays can always impact deliveries and the federal government shutdown and turmoil in Washington raises the risk of unforeseen disruptions, including those caused by funding delays. But we remain optimistic about a strong fourth quarter for both segments. The 2025 financial guidance reflected on Slide 19 represents a solid sales growth with substantial profitability and cash flow expansion compared to where we were in 2021 when we kicked off our strategic reset. While we're falling short of the 2025 sales goals we set for ourselves, we are striking distance of the EBITDA margins despite the weak rail demand at the start of 2025. In fact, the revised guidance implies that adjusted EBITDA margin would be well above the 8% target for the last 3 quarters of 2025. And while the free cash flow outlook is slightly lower than our previous guidance due to the deferral of rail deliveries to the fourth quarter, the $17.5 million midpoint represents a 6% yield at today's stock price. So in conclusion, I'm very proud of the L.B. Foster team and what we have accomplished in a short period of time. Let me assure you, we are all focused on delivering a strong finish to 2025 and carrying positive momentum into next year. Thank you for your time and continuing interest in L.B. Foster. I'll turn it back to the operator for the Q&A session. Operator: [Operator Instructions] And our first question will come from the line of Julio Romero with Sidoti. Julio Romero: Wanted to start on the guidance. Can you maybe talk about your guidance and hitting the implied fourth quarter sales and EBITDA guide? And does that embed any assumptions with regards to the ongoing government shutdown ending by a certain time or any other assumptions about funding impacts to your customers? John Kasel: Thanks, Julio. Thanks for the question. As I mentioned in the script in the presentation, the actual government shutdown, which is going on today, it's going on now for, I guess, over 30 days. We are not seeing any immediate impact, significant impacts from that at all. Much of the funding that is out there is ready to roll. The good news is it's flowing. Now if this continues into end of the fourth quarter into next year, it's a different story. But the good news for us is we've got plenty of work. If you look at our book-to-bill ratio of 1.8:1, where we're standing, the orders that we picked up moving into Q4 we're very, very -- we're in really good shape related to having activity. More importantly, we have our supply chain that's locked in with us. Our partners, CIPCO, SDI to name a few, are also ready to drive what needs to happen and get this product out in the marketplace moving into Q4. So it's going to be a big quarter, Julio. In fact, it will be the largest quarter we've seen since pre-COVID. But we're excited about it. And we feel that we're blessed to be in a position like that today. So we would like to have seen more things happen in Q3, but that's not the way the role -- the year has rolled together. As I have shared with you in the market, it was really about H1 versus H2. And the second half of the year was going to be strong for us, and it will be strong before the year is over. So we're sitting in good shape here first week of November to hit these guidance as we laid out in the presentation today. Julio Romero: Excellent. And good news to hear that some of that funding is flowing already. I guess maybe just asking another way, worst-case scenario, it does go on through '26. I mean, do you still confident in hitting the sales and EBITDA guide even in that scenario with respect to the impact to your customers? John Kasel: Yes. As far as '26, I really can't talk about that. I don't know. I do know that we're sitting in really good shape right now, and the bidding activity is as strong as we've seen it for the entire year. So I really can't comment on 2026. I will tell you, I think the momentum that we have right now will continue into Q1 though. Julio Romero: Got you. Okay. It will take into Q1. Perfect. And then I wanted to turn to total track monitoring. It was really impressive to see the sales growth of 135% year-over-year, implies a pretty nice number there. Can you help us unpack the drivers of that sales growth and help us think about the sustainability of total track monitoring sales going forward? John Kasel: Yes. Well, it's all 3 of our strategic growth platforms, right? So you mentioned TTM, which is condition monitoring, the impact that we're having through moving our Wild product in the marketplace, the conversions between Mark II as well as the adoption of what we're doing related to the wilds and the acceptance by the customers has been fantastic. FM has had a fantastic quarter as well. In fact, they're pulling together they'll have the best year that we've seen. So another huge strategic growth initiative for us where the customer is really looking for that product. And then precast, our third leg of our growth and strategic focus, really had a strong quarter, building up backlog, and we're going to have a fantastic finish to the year. Our buildings part of that is going to have an exception year, probably the best year we've seen since we've owned that business line. So all three of them are performing very well. This is really the tale of rail products and movement from Q1 to really Q4 as it relates to the deferral and starting the year with Doge and moving the projects, the government-type projects and the funding type of transit authorities and the other freight lines into Q4. So the good news is it's here and it's happening this year, and we feel very good about where we're sitting right now. We're very blessed, as I mentioned earlier. Yes, absolutely. It's been a dynamic year for sure. Julio Romero: Absolutely. And last one for me would just be on the free cash flow guidance. Does the push out in the rail side imply you may see a more heavily weighted first half '26 free cash flow than usually do from a seasonal perspective? John Kasel: Yes, for sure. And well, first of all, thanks for mentioning because we're pretty pleased with the cash generation in the quarter. The $29.2 million is really indicative of what L.B. Foster has done. If you look at the past few years, this is what we do, and we generate cash. So I know the shareholders are excited about that. More importantly, we're excited about it. This is something we really focus on. But with the rail deferrals and rail distribution specifically moving to the fourth quarter, we will see some movements in working capital and payables moving to next year. So we'll have some impact on that. Operator: And that will come from the line of Liam Burke with B. Riley. Liam Burke: Good morning John Will, you saw nice growth in total track management and friction management. You talked about that on the earlier discussion. Your margins got hit by unprofitable product mix with contribution from U.K. and volume, which is what it is. But how much offset in profit margin did you get from total track management and friction management? Is it measurable? John Kasel: So yes, I think it was. But I mean, there's -- but not measurable. I mean, there's a piece of it that I think Bill can bring you into the details with. But I mean, overall, Will, do you want to add a little color on... William Thalman: Liam, yes, the overall profitability in the quarter for the Rail segment, the margins in Rail Products, even though the sales were down, margins were up a tick in Rail Products because of the sales mix and some of the overall pricing initiatives and things that we have within Rail Products. Friction Management volume was up, but the profitability was flat year-over-year at a margin level. That's due to sales mix again. We feel really good about the progress that was made, especially in the first half for friction management. But for this particular quarter, it was flat on a year-over-year basis. And then on a combined basis, TS&S, there was a deterioration in the margins because of the U.K., but we did get a bit of an offset within the total track monitoring portion because we had solid sales growth in total track monitoring. That's a product line that contributes on the overall favorable mix for margins within rail. So we got some lift there. So I would say that overall, it was a bit of an offset, but not a significant offset. As we mentioned, the big impact was the decline that we realized within the U.K. business because of their challenges over there. Liam Burke: Great. Thank you, Will. And your acquisition emphasis is on precast concrete. How has that potential or opportunity pipeline looked on precast -- potential precast acquisitions? John Kasel: We have a process. We have an actual group of people that are looking at those things. We're specifically looking at precast, as you mentioned. We're specifically looking in the south part of the U.S., but we're also very focused on getting our Tennessee wrapped up to the volumes we want to see in our Florida, as I mentioned in the script. We're done commissioning. We're building product, and we're starting to see a nice flow of production orders rolling through there now. So -- but we are keeping in mind what's going on related to precast, maybe opportunities for us into '26 and beyond related to maybe some acquisitive growth. But our organic opportunities, Liam, as I mentioned to you in the past, are something that we're feeling very good about for a period of time here, and we want to make sure we perform on those as well. Operator: [Operator Instructions] And our next question will come from the line of Justin Bergner with GAMCO. Unknown Analyst: So a lot of moving pieces this quarter. I guess maybe to start, I understand the pushback, particularly in Rail Products from the second and third quarter to the fourth quarter. But given that your sales guide and corresponding EBITDA guide is kind of tweaked to the lower end of the prior range, is that because some of the rail products is pushing beyond '25 into '26? Or are there certain parts of the business that are tracking a little bit lower for the full year '25 than you expected? Quarter? John Kasel: I think it's more about what we have or capacity, and we're just being realistic to what we feel we will get out in the marketplace and in terms of revenue for us by the end of the year. Our activity -- if you look across the board, Justin, sorry, we are -- we've got plenty of work. I mean all of our operating centers are at capacity right now. So I think we're just trying to be realistic to what we can do and hit the expectations. Unknown Analyst: Okay. Got you. So if you can't get back to your initial sales guide level at the midpoint because you're kind of trying to get product out the door capacity, what will sort of come through in the early part of '26 that might not have come through in '25? John Kasel: Well, first of all, on the revenue side, keep in mind, we're really getting after SG&A, too, right? So we may not necessarily get to the guidance that we had originally on the revenue side, but we're managing our cost and managing our costs very effectively because with more rail distribution, that will have some pressure on margins. So we're being very mindful of what we have right now, and we feel we're going to have some very nice leverage with that additional sales that we're seeing going into Q4 with the 25% sales growth. And as far as what's going to happen in '26, I'm looking for a much better start to next year than what we saw this year with all the turmoil that we had in Washington. So like I said earlier, Julio, we're busy quoting. There's a lot of projects that are on the radar right now. And even though we have a government shutdown, everybody is pretty excited about, I think, the opportunities that's in front of us. Unknown Analyst: Okay. Maybe just a couple of questions on the order book. So the multiyear order in the U.K., how does that contrast with the business that you're deemphasizing? A little more color there. John Kasel: Good question. So first of all, U.K., we keep talking about that. We've got a good group that's really focused on simplifying the business, being able to perform in the market conditions that are presented to us today, which are very challenging. But we're continuing to just right size the business. They're really focused on what it is that we do and how we can add value and make sure that we get paid. So we have a good, very good operating team that's really focused on that today. So we're very selective in the orders that we're accepting, and we're going after. And this is one of the orders that has been a good business for us in the past. It's been where we're treated a little different. We're looking at a little different. We're higher in the pecking order, if you will, as far as performing and getting paid. And it's a 6-year deal. So it brings some stability to our business over there. Because at the end of the day, that business is very important to us. It's our technology for our rail side. With the acquisition of 2 and 2 plus that we made back in 2015, that is where we bring our condition monitoring and a big piece of our TTM is through that business over there as well as our expansion plans that we have in Western Europe. It's very exciting for us, taking friction management and other products that we have into that part of the geography. So order like this just helps give us some stability not just next year, but for many years to come for us to be able to continue to perform and also take that technology innovation and keep bringing that into North America. Unknown Analyst: Okay. Last question. The cancellation, how longer term was that? Kind of what were the circumstances around that? John Kasel: You're talking about the Summit order? Unknown Analyst: Yes, the Summit order. John Kasel: Yes. So we didn't cancel it. Our customer canceled it. So we're an in-line coater of AIPCO, right? So I was just out there meeting with the people that run that operation. It's pretty exciting what's going on there right now. In fact, our entire coating business, when you look at what's going on there as well as our operation in Texas. So that's been on the books for multiple years. It's been on the backlog for SICO as well for multiple years. And it came to a point in time where that thing probably has to be completely rebid because it's been sitting on their books. So AICO basically has gone back to the people at the Summit and said they're taking off their books and they notified us. And then when they notified us, we took it off at the quarter. So it still may be out there. It may be resurrected. It may come back to AIPCO. Keep in mind, we're not the sales arm, right? We get the orders AsIos the arm orders, and we're a tolling in-line quarter for them. So as they move the orders in and out, we have to move accordingly, and that's what happened with that order. Unknown Analyst: Okay. But prior to it being canceled, how far back were you kind of budgeting it to be? John Kasel: Back or Forward. When was it going to be delivered? Unknown Analyst: Yes. John Kasel: Well, we were hopeful it would continue at some point this year or into next year, but we have plenty of work and plenty of work for the SICO. So we just keep it out there in front of us. Operator: I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. John Kasel for any closing remarks. John Kasel: Thank you, Sheri. Thank you, everybody, for joining us today. Thanks for your I think the balance of the year is really something that we're looking at as an opportunity as well as excitement here as our company. And hopefully, you have appreciation of that. A lot of times when we head into Q4, it's about winding down the year and you kind of -- the year ends basically in November, you don't have a lot going on. This is different. It's exciting for us. It's one of the things that we're really trying to transform the company is moving from just a construction materials company to innovation technology company. And we believe by continuing to drive that strategy, our quarters will start filling up and look different and the seasonality will continue to change. And we're hopeful that Q4 is representative of that. So it's something that will continue into next year, and we won't have those big tailoffs at the end of the year. So I find this to be encouraging what we're doing, what our strategy is working. We're going to have pulled together, if you look at our guidance, a very good year year-over-year. And more importantly, our team here at L.B. Foster, all the way up to our Board of Directors is laser-focused on making this happen, and we're doing it safely. Give you an example, the rail business had no recordable injuries in quarter 3. And I think that's just tremendous that we're really focused on getting work out, but we're doing it the right way and really driving the right culture that's sustainable for all shareholders because it's not about just profits today, it's about the journey to profitability to the future. And I think we do that extremely well. So thanks again for your time today, and we look forward to catching up with you next year. Happy holiday season to you and your families. Take care. Be safe. Operator: This concludes today's program. Thank you all for participating. You may now disconnect.
Operator: Good morning, and welcome, everyone, to the Information Services Group's Third Quarter 2025 Conference Call. This call is being recorded, and a replay will be available on ISG's website within 24 hours. Now, I'd like to turn the call over to Mr. Barry Holt for his opening remarks and introduction. Mr. Holt, please go ahead. Barry Holt: Thank you, operator. Hello, and good morning. My name is Barry Holt. I'm the Senior Communications Executive at ISG. I'd like to welcome everyone to ISG's Third Quarter Conference Call. I'm joined today by Michael Connors, Chairman and Chief Executive Officer; and Michael Sherrick, Executive Vice President and Chief Financial Officer. Before we begin, I'd like to read a forward-looking statement. It is important to note that this communication may contain forward-looking statements, which represent the current expectations and beliefs of the management of ISG concerning future events and their potential effects. These statements are not guarantees of future results, and are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated. For a more detailed listing of the risks and other factors that could affect future results, please refer to the forward-looking statement contained in our Form 8-K that was furnished this morning to the SEC, and the Risk Factors sections of our most recent Form 10-K and 10-Q filings. You should also read ISG's annual report on Form 10-K and any other relevant documents, including any amendments or supplements to these documents filed with the SEC. You'll be able to obtain free copies of any of the ISG SEC filings on either ISG's website at www.isg-one.com or the SEC's website at www.sec.gov. ISG undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. During this call, we will discuss certain non-GAAP financial measures, which ISG believes improves the comparability of the company's financial results between periods and provides for greater transparency of key measures used to evaluate the company's performance. The non-GAAP measures, which we will touch on today, include adjusted EBITDA, adjusted net earnings and the presentation of selected financial data on a constant currency basis. Non-GAAP measures are provided as additional information and should not be considered in isolation or as a substitute for financial results prepared in accordance with GAAP. For the reconciliation of all non-GAAP measures presented to the most closely applicable GAAP measure, please refer to our current report on Form 8-K, which was filed this morning with the SEC. And now I'd like to turn the call over to Michael Connors, who will be followed by Michael Sherrick. Mike? Michael P. Connors: Thank you, Barry, and good morning, everyone. Today, we will review our outstanding Q3 results driven by strong AI demand, our view of the current market, and our outlook for Q4. ISG delivered an excellent third quarter, continuing our AI-powered momentum with clients and underscoring our solid operating fundamentals. Our powerful combination of strategic, operational and research capabilities allow ISG not just to comment on AI trends, but to shape them as we work with clients to achieve measurable business value from AI. This is the power of having both a technology research and an advisory model. Our Q3 revenues were $62 million, up 8%, excluding results from our previously divested automation unit. Growth was broad-based and led by our largest revenue region, the Americas, up 11%. We also saw a return to growth in Europe with revenues up 7% and continued global growth in our recurring revenues, which were up 9%. From a profitability standpoint, our adjusted EBITDA was up 19% to $8.4 million, and our adjusted EBITDA margin was up 200 basis points to 13.5%. Our profit growth was driven by our improved mix of higher-margin platforms, research and services revenues, combined with our disciplined operating approach. We also had another strong cash quarter, producing $11 million of cash from operations. Over the last 2 quarters, we delivered $23 million of cash, demonstrating the strong cash-generating power of our business. Recurring revenues continue to be an important component of our success, representing 45% of our overall revenue. In Q3, recurring revenues were $28 million, up 9%, led by double-digit growth in our platforms business, including GovernX, ISG Tango and our research business. Our AI-centered approach continues to drive exceptional growth and differentiation for ISG. AI offers so much promise, but also brings new complexity and challenges. Our clients are leaning heavily on us for the independent AI expertise they need to navigate a vast number of critical choices, from partners to pricing to governance. In the third quarter, our AI-related revenue was $20 million, 4 times what it was 1 year ago. Year-to-date we have supported 350 clients with AI-related advisory and research services. That's up more than 200% from the same period last year. We are seeing demand for AI strategy, data transformation and agentic AI adoption accelerate across multiple industries. Client interest in AI continues to rise. Our sold-out AI Impact Summit in London was the largest client event in ISG's history, demonstrating the market's appetite for practical AI insight. And we published our third annual state of the enterprise AI adoption report, which quickly became the most downloaded report we've ever produced. Together, these achievements highlight that ISG's AI strategy is not just resonating, it's scaling. We are expanding client relationships, broadening our AI offerings and strengthening our position as the AI-centered technology research and advisory firm. Within ISG, we are leveraging AI to improve the efficiency of client delivery. Most notably, our AI-powered ISG Tango sourcing platform continues to expand. More than $15 billion of total contract value now flows through the platform, and that's up more than 30% from Q2. As expected, ISG Tango is helping improve our margins and opening up the mid-market to us, increasing our total addressable market. In 2024, ISG began embedding AI into the core of our research and advisory services. The goal was not just to improve productivity, but to redefine how we deliver value. Now, nearly 2 years later, AI is the organizing principle for how enterprises operate and invest in technology. In this environment, ISG is well positioned to support our clients in building AI-enabled organizations that generate innovation and results. From a macro perspective, AI is driving the technology research and services market worldwide. We see growth continuing as clients invest in the infrastructure and data needed to power their AI ambitions. Our recent state of enterprise AI adoption report shows the number of AI use cases moving into full-scale deployment has doubled versus 1 year ago. The report also shows use cases that broaden beyond cost efficiency to focus even more on competitive advantage and growth. Now let me turn to our regions. The year-over-year comparisons I cite here exclude revenues of about $3.5 million from our divested automation unit in last year's third quarter. Our Americas region delivered another excellent quarter with revenues up 11% to $42 million, driven by double-digit growth in our research, software and GovernX businesses and in our consumer, health sciences and public sector industry verticals. Key client engagements during the third quarter include Lockheed Martin, Carnival Cruise Lines and Baxter International. During the quarter, ISG continued to expand its work with a large U.S.-based healthcare company, generating revenues of more than $1 million. We are currently helping the client negotiate new software, network and technology services contracts. We're also working with one of the world's top consumer products companies to help them create a next-generation AI-driven technology operating environment. This $1 million-plus engagement is expected to help the client realize cost savings of about 40% and should lead to future opportunities for ISG. Turning to Europe. This market returned to growth for the first time in 2 years since the start of the tech recession. Revenues were up 7% to $16 million, driven by double-digit growth in our advisory business and in our banking, financial services, consumer and health sciences industry verticals. Key client engagements in Europe in the third quarter included Fresenius, Diageo and Evonik, a German chemicals company. ISG is currently working on 2 of the largest technology transformations this year in Europe. First, ISG is partnering with a global leader in business travel services to advise them on $1 billion of spend on an enterprise-wide sourcing program. The program covers AI-driven finance, accounting, technology services and product development. We expect this engagement will open up even more doors to follow-on opportunities. Second, we are also working with a global leader in workforce services and solutions to support their $1.2 billion AI-powered initiative. We are helping the client transform their operations through agentic AI, leveraging new AI pricing models to drive down costs. Now turning to Asia Pacific. Our Q3 revenues of $4.2 million were down 15% compared with the prior year. We did see double-digit growth in our banking, energy and utilities industry verticals. We will need the public sector to reignite spending for this region. Key clients in the quarter included IEMO, Standard Chartered Asia and the Reserve Bank of Australia. ISG is working with a large Australian telecommunications provider to negotiate more than $1 billion of tech applications and infrastructure spend. We are helping the client achieve significant savings through the use of AIOps to manage its technology environment. Now a few comments about the market. As I mentioned earlier, AI is the propellant that is driving overall demand for technology services. In the near term, we are seeing modest improvement in the macroenvironment, with some lingering caution as companies take time to adapt to the new normal. We're seeing that play out, especially in the managed services sector, while demand for cloud computing services needed to support AI continues to soar. Growth is not the same in all geographies with the U.S. leading the way and Europe catching up. Looking ahead, we see an improving interest rate environment, stimulating further tech spending as we move through 2026, with AI remaining the dominant long-term growth driver for the industry. So with that, let me turn to guidance. For the fourth quarter, including the slower year-end holiday period, we are targeting revenues of between $60.5 million and $61.5 million and adjusted EBITDA to increase year-over-year by 15% to 20%, or between $7.5 million and $8.5 million, which will continue our year-over-year growth and margin expansion. Now let me turn the call over to Michael Sherrick, who will summarize our financial results. Michael? Michael Sherrick: Thank you, Mike, and good morning, everyone. As Mike stated earlier, our revenue comparison with the third quarter of 2024 excludes our divested automation unit, which contributed about $3.5 million a year ago. This provides a more accurate view of our go-forward business. Revenue for the third quarter was $62.4 million, up a strong 8% versus the prior year. For the quarter, currency had a $700,000 positive impact on revenue. Americas revenue was $42.2 million, up 11%. Europe revenue was $16 million, up 7% and Asia Pacific revenue was $4.2 million, down 15% from the prior year. Third quarter adjusted EBITDA was $8.4 million, up 19% from the year ago period and resulting in an EBITDA margin of 13.5%, which was up nearly 200 basis points year-on-year. For the quarter, ISG delivered operating income of $4.6 million, up 7% from the prior year's $4.3 million. Reported net income for the quarter was $3.1 million, or $0.06 per fully diluted share as compared with net income of $1.1 million, or $0.02 per fully diluted share in the prior year. Third quarter adjusted net income was $4.7 million, or $0.09 per fully diluted share compared with adjusted net income of $2.5 million, or $0.05 per fully diluted share in the prior year's third quarter. Our headcount as of September 30, 2025, was 1,316, essentially flat with Q2. For the quarter, consulting utilization was a solid 72%, in line with our average third quarter utilization. Year-to-date, utilization of 75% is in line with our long-term target. We ended the quarter with cash of $28.7 million, up $3.5 million from $25.2 million at the end of the second quarter. A key driver of the increase was strong operating cash flow. For the quarter, net cash provided by operations was $11.1 million, fueled by our robust operating results. During the quarter, we paid dividends of $2.4 million and repurchased $2.8 million of stock. Our next quarterly dividend will be paid December 19th to shareholders of record as of December 5th. Fully diluted shares outstanding for the quarter were 50.4 million, down 201,000 from year-end 2024. At quarter's end, we had approximately $8.2 million remaining on our share repurchase authorization. Our quarter end gross debt-to-EBITDA ratio was 1.95x, down from 2.4x at December 31, 2024, and just below our 2 to 2.5x range. At quarter's end, our debt was unchanged. And for the quarter, our average borrowing rate was 6.2%, down 110 basis points year-over-year. Overall, our balance sheet is solid and continues to improve, providing us with a strong foundation to both operate and invest in the business. Mike will now share concluding remarks before we go to Q&A. Mike? Michael P. Connors: Thank you, Michael. And, to summarize, ISG delivered another excellent quarter, continuing our AI-powered momentum. Our revenues of $62 million were led by another double-digit growth quarter in the Americas, a return to growth in Europe and continuing strength in recurring revenues. We grew our adjusted EBITDA by 19% and our margins by 200 basis points. And we had another very strong cash quarter, generating $11 million in cash from operations. Looking to the future, our AI-centered capabilities and relentless drive for operational excellence positions us well for continued year-over-year growth and margin expansion. As always, we are focused on creating shareholder value for the long-term, and we are steadfast in our mission to deliver operational excellence to our clients. So thank you very much for calling in this morning. And now let me turn the session over to the operator for your questions. Operator: [Operator Instructions] Your first question comes from the line of David Storms with Stonegate Capital. David Storms: Just wanted to start maybe with the EBITDA margin expansion. It was mentioned that you had a nice improvement in mix, which I'm assuming is the divestiture of the automation portion of the business and then also some nice efficiency in OpEx. How would you characterize the stickiness or stability of the efficiency improvement? Should we expect this margin to kind of continue? Michael P. Connors: Thanks, Dave. Yes, so look, our -- we've got a number of kind of margin expansion avenues. One is our own efficiencies using AI. And one of the best metrics of that is ISG Tango, which we are using for all of our sourcing transactions. It's now got about $15 billion going through it. But importantly, what it does is it accelerates time to value for the enterprises, and frankly, for the technology providers who may be bidding on that business with our enterprise client. So it creates efficiency. It creates speed, it creates productivity. And then, when we launched it just a little over 1 year, maybe almost 1.5 years ago, I think we said that it would be one of our drivers to expand margins. And the reason for that is that we can do it faster, more efficiently, and we can do it with a higher level of margin because of it. So that's one area. The second area is the mix of what we are actually able to provide with our clients and areas around our recurring revenue streams, which continue to expand. And of course, when you're able to build it once and sell it many times, it helps a lot. But importantly, all of the AI work that we are doing, it is premium work. Therefore, we have good pricing, if you will, power around the work that we're doing in AI. But it's only going to expand because it's still in the very early innings. So you couple both our internal efficiencies along with a mix that is in high demand at the client level and you add in the growth that we're getting in recurring, we're pretty confident we're going to be able to continue our expansion in our margins. I hope that helps, Dave. David Storms: No, that's very helpful. I appreciate that color. My second question here and kind of a follow-up to that, maybe dialing in a little more on Europe. It's great to see growth kind of returning to that market. I was hoping you could spend maybe a little more time talking about the pipeline you're seeing there? Are you -- do you feel like you're still working with customers that are maybe on the cutting-edge first movers? Or are you starting to get into maybe the meat and potatoes of that client base? Michael P. Connors: Again, good question, Dave. We are -- the pipeline is growing, and it's never been really a big issue as much on the pipeline as it has been on the speed and pace that the European clients are wanting to move. We saw that accelerate a bit, primarily in the cost optimization areas. The transformation areas are slower to adapt over in Europe. And frankly, in the U.S., it's a little slower on transformation than it is on optimization. But I think what you'll see is we're -- that our pipeline is strong, that we see a continued growth level for our European business. We're cautious because of the overall macroenvironment. But right now, there is an appetite that has increased in Europe, especially around optimization, using AI to assist. And if you heard a couple of the points I was making in the remarks, we are operating with 2 of probably the largest transformations going on in Europe by any enterprises right now. And both of them will generate very significant cost savings for those 2 businesses. And when you can start to see real dollars flow through, and in one case we think it will be around 40% savings, that's significant and material. But clients have to be able to be ready to move. These 2 large clients were ready. So that's what we're seeing in Europe, Dave. Operator: Your next question comes from the line of Marc Riddick with Sidoti. Marc Riddick: Maybe we could talk a little bit about -- in your prepared remarks, you made mention of some of the potential drivers. You also touched on the potential for interest rate cuts being a benefit. Maybe, I mean, obviously, it's pretty early, but are you beginning to see that already? And as far as loosening of purse strings, are you getting the sense that, that's still a large enterprise-driven issue? Or are we beginning to see some of the smaller movers tend to act on AI? Michael P. Connors: Yes. Good. Thank you. Look, I think, first of all, the -- to me, the interest rate environment, based on my discussions with a lot of operators and our clients, it's all about the sentiment. And I think that the interest rate environment loosening up gives some a little more strength to move forward with some of their work efforts that they're feeling a little more confident of. And because of that, then that frees up the opportunity to move a little faster on our part with our clients. So to me, the interest rates really add a level of sentiment and confidence that things are going to be a bit better. Yes, we hear a little more higher unemployment, some of these other things. But the reality is, with an interest rate environment that may change a little bit, that may open up things like housing in the United States next year. These things are all positive signs versus a negative sign. So from our perspective, it may free up additional spending. And I would add, Mark, I think the use cases that are being marketed or being stated out in the market that there is really a huge opportunity if you utilize AI at scale, that you can change your business model over time, that -- that's beginning to, I would say, kind of -- is beginning to get resonated with a number of clients. So you couple the 2 together, a little bit more confidence and a little bit more that you're now seeing that there's real returns that could happen. These are not just, in some cases, just kind of little projects, they're becoming much more scalable projects like the 2 that I mentioned in Europe. Marc Riddick: Great. Thanks for the color there. And then, you always -- you're sort of broad-based as far as your client exposure and industry vertical exposure. Are there any kind of callouts or standouts either during the third quarter or what you're seeing early in the fourth that you think are worth mentioning? Michael P. Connors: Yes. I'd say the hot industries, let me start with that maybe, Mark. When I say hot, I mean, the ones that are moving for different reasons, but it's consumer, health sciences, energy, utilities and the public sector. Those kind of 4 or 5 areas are moving each industry segment for different reasons. Consumer, in some cases, because of the tariffs, because that if you're a consumer and you start off with a 4% or 5% margin business and you slap tariffs on, it makes some of your products very unprofitable in a hurry. So what do I do about that? So we're working with a number of consumer companies because of that. Flip it to the other side where you have the energy industry, which is literally on fire, if I may say it that way. And because of that, they are looking for money to help grow their businesses. And so they look at areas around AI that can help them. So it varies a little bit by industry, but those 5 industries, in particular, I think, are quite strong as we go through the balance of this year and probably the turn of '26. Marc Riddick: Great. And then just last one for me, I guess, the balance sheet having improved as much as it has over the last few years, now just below 2 times. Maybe you could talk a little bit about maybe the potential for acquisition pipeline out there, maybe what the pipeline looks like, valuations are looking like and maybe if there are any areas or any things that you have your eye out on at the moment? Michael P. Connors: So good question, Mark. Yes, we are in the market. We continually have conversations. We're focused on everything around increasing our AI capabilities and our recurring revenue streams. And I would say at the end of the day, the market is still what we always believe, and that is you have to provide fair value for a great asset. So we'll continue to have these discussions, and we'll see where they evolve as we go into 2026. But we certainly have our targets in mind, and we'll see if we can do something in '26. Operator: Your next question comes from the line of Vincent Colicchio with Barrington Research. Vincent Colicchio: Nice quarter. I'm just -- I'd like to talk a little bit about the labor market. So your labor was flat. Is that by plan? Or is it getting increasingly difficult to hire people? Michael P. Connors: No, that's by plan. We've been using -- we eat our own dog food, as they say. We've been putting a lot of automation capabilities into our work efforts, and that has enabled us to, I would say, just have some surgical hires at the moment. So that was a -- that's a planned event. And we might have a few extra between now and the end of the year, but it should be in or around that number at the end of '26. Vincent Colicchio: And then, I don't recall your exposure to the federal market. Remind me of that? And are you being meaningfully impacted by the shutdown? Michael P. Connors: Yes. We have 0 federal business. Our focus in the U.S. is all on state, local and higher education. So we have no exposure at all to DOGE or any other kind of related federal issue. Vincent Colicchio: And then, on the government -- on the other side of the world, what's going on in the public sector in APAC? And just some color on when we might see that turn? Michael P. Connors: Yes. So the public sector outside the U.S., we do, do work in the federal area. So we do it in the U.K. We do it in Italy. We do it in Germany. We do it in Australia. And so, the European public sector business is actually quite good. Australia is still not come back. We anticipate it second quarter next year at the moment based on what we can see in terms of pipeline. But that particular region, I think, flips to growth once the public sector, which is a large piece of the spending, comes back, and we anticipate that being kind of roughly second quarter next year. Vincent Colicchio: And then last one for me. Are you seeing a meaningful traction with Tango in the mid-market? Michael P. Connors: Yes, very good question. So Tango, when we launched it, was intended to do 2 things. One was to help create -- kind of accelerating time to value for both our clients and for the ecosystem providers, which would make it more efficient, more productive, higher margin. So that's the one hand. On the other hand, it gave us an entry into the mid-market. And for us, we call the mid-market kind of $1 billion to $10 billion. So it's a bit of a spread. But it's a market that we never really -- in the U.S. never really went after. Now with Tango, it's been a great success. Over 25% of the platform is now mid-market clients running through there. That could not have been possible without that platform, we don't think. We use it as kind of our entry point in. So we expect the mid-market to be a growth driver for us over the next few years. And AI is helping that because AI clearly adds complexity and opportunity. But I would say most mid-market companies do not have the level of expertise internally to help execute on their AI initiatives, and that plays right into our strength. Operator: Your next question comes from the line of Joe Gomes with NOBLE Capital Markets. Joseph Gomes: So I just want to go back to the APAC for a second here, a follow-up on Vince's question. I think earlier in the year you were talking about, you expected to see some improvement there after some elections had gone through. And just trying to get a better handle on what is kind of pushing out a return to growth in that market, especially on the federal spending? Michael P. Connors: Yes. Look, the elections were over, I think it was May, June, so end of second quarter. We expected it may take a little time to gen up, but it's taking longer. We see the pipeline beginning to build, but the pace in which they are moving in the new regime is not quite at the pace we had expected early on. So, again, I don't want to overplay this one because it's really the difference between having about $1 million more of revenue in a quarter down there than anything. So on the scope of things, it's a small piece, but that is what will be necessary to turn that because the commercial side is not big enough to drive the growth without public. Joseph Gomes: Okay. Thanks for that. And then I understand there's very limited, I'll call it, if any at all, exposure to the federal government here. But are you seeing any secondary impacts from like the government shutdown on any of the areas, whether it would be state and local or the education market? Michael P. Connors: No, 0. In fact, I think our public sector was up in the U.S. almost 30% in the quarter, just to give you kind of a flavor and primarily because they are moving on -- they have a lot of -- they have a large older workforce. The technology is still pretty old. So using AI to assist them to move at more of an accelerated pace defined in the public sector as accelerated, has been a good thing. So nothing from the shutdown has impacted and it's reflected in our growth for the quarter of about 30%. Joseph Gomes: Okay. And then on the recurring revenues, I was just looking -- it looks like they were basically flat with what occurred in the second quarter, the same $28 million of revenue and about 45% of the overall. And just wondering, what do you think needs to happen to start seeing some of the faster growth on the recurring revenue side of the business? Michael P. Connors: Well, first, we think 9% is pretty good. So year-over-year is how we look at it mostly. So we were around [ $20 million ] -- Michael, $28 million, I think, for the quarter, and that was up 9%, Joe, from a year ago. So look, we feel very good, and we think that recurring revenue stream will -- we're probably sitting at about $100 million. And this year, we'll sit at about $110 million, I think, roughly when the year is out. That's just a quick estimate. And we expect that to be $120 million plus next year, to give you an indicator on where we're going. Joseph Gomes: Okay. Great. And just real quick, if I may, maybe can you give us a little update on the Martino acquisition and how that is progressing? Michael P. Connors: It's now almost fully integrated. It will be by the end of the year. We had a kickoff meeting the first week of September, taking our Italian business and theirs together, and we're very, very pleased with the leadership, Andreas Martino, who is the CEO now of our overall Italian business coming out of Martino. So that's pacing nicely. And we have some good, nice little recurring revenue stream there, and it's a nice little strategic add-on for us. So it's moving well. Operator: Your next question comes from the line of Gowshi Sri with Singular Research. Gowshihan Sriharan: Can you hear me? Michael P. Connors: Yes, sir. Gowshihan Sriharan: Finally, with so much boardroom focus on AI, are you sensing any increased effort from the traditional IT consultants or the hyperscalers to encroach on your advisory relationships? Michael P. Connors: I'm sorry, I didn't catch the last part, Gowshi? Gowshihan Sriharan: Are you sensing any increased competition from the traditional IT consultants or the hyperscalers on your advisory relationships? Michael P. Connors: No. From our standpoint, no. They are excellent relationship partners with us. I mean, most all of them, AWS and others, are clients of ours, but we do not run into them in a competitive standpoint for the work that we do. Gowshihan Sriharan: And in terms of AI business, how are the clients quantifying the ROI? And how much of that savings are you able to directly link back to a follow-on project? Michael P. Connors: Okay. Good question. I mean, I think a couple of things. I think most of the larger enterprises are prioritizing -- if I can say it this way, they're prioritizing profits a little bit over more aggressive growth. And because of that, they are looking at kind of how can they utilize AI and their delivery models to help with cost and risk. And in some cases they're focusing on data acquisition and engineering and governance of kind of the underlying systems that drive some of their business. So from our standpoint, I think we're seeing them wanting to try to scale and do it in a cost-effective way, utilizing a road map to start with, an AI road map, which we help them with and develop, and then begin to execute it at the pace that they're comfortable in doing so. So I think overall, optimization and using AI inside the large enterprises is still paramount. Of course, they want to use it to drive growth. But if they can get the cost from the -- if they can get the dollars from the optimization side, they either will take that to earnings per share or they move it over to their growth initiatives. And it's some combination of both depending on the industry, typically, on which they're operating in at the moment. Gowshihan Sriharan: Got you. And on the uncertainty around H-1B visa policies under the current administration, any impact of positive or negative on your competitive space or delays either from your side or on the client side? Michael Sherrick: Gowshi, it's Michael, and good question. Look, I think like anything, change in uncertainty creates opportunity for us, right? The changes that are taking place will no doubt require enterprises to rethink the staffing model and how they've negotiated with providers. And that just creates an opportunity for us for advisory, right? Obviously, we sit here with all the benchmarking and data to be able to share what can and can't be done from on-site versus offshore, et cetera. So I think it creates opportunity for us. It's still yet to be seen, because obviously, this is going to impact the incoming class, if you will, that's applied for this year, which wouldn't be until October that any of them would have landed in the U.S. But I think it can create opportunity for us as people have to rethink their models, and we'll be a part of that process. Operator: As I'm showing no further questions, I'll turn the call back to Mike Connors for his closing remarks. Michael P. Connors: Well, let me close by saying thank you to all our professionals worldwide for our continuing progress and for their collaboration and unwavering dedication to our clients and driving our long-term success. Our people have a passion for delivering the best advice and support and research to our clients as they continue their AI-powered transformations, and I could not be prouder of them. And thanks to all of you on the call for your continued support and confidence in our firm. Have a great rest of the day. Operator: This concludes today's teleconference. You may disconnect at any time.
Operator: Greetings, and welcome to the Kontoor Brands Q3 2025 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Michael Karapetian, Vice President, Corporate Development, Strategy and Investor Relations. Michael, please go ahead. Michael Karapetian: Thank you, operator, and welcome to Kontoor Brands Third Quarter 2025 Earnings Conference Call. Participants on today's call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to materially differ. These uncertainties are detailed in documents filed with the SEC. We urge you to read our risk factors, cautionary language and other disclosures contained in those reports. Amounts referred to on today's call will often be on an adjusted dollar basis, which we clearly defined in the news release that was issued earlier this morning and is available on our website at kontoorbrands.com. Reconciliations of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in today's news release. These tables identify and quantify excluded items and provide management's view of why this information is useful to investors. Unless otherwise noted, amounts referred to on this call will be in constant currency, which exclude the translation impact of changes in foreign currency exchange rates. Joining me on today's call are Kontoor Brands President, Chief Executive Officer and Chairman, Scott Baxter; and Chief Financial Officer and Global Head of Operations, Joe Alkire. Following our prepared remarks, we will open the call for questions. Scott? Scott Baxter: Thanks, Mike, and thank you all for joining us today. Our third quarter results highlight the power of our expanded brand portfolio. Helly Hansen grew double digits. Wrangler gained market share for the 14th consecutive quarter, and we launched Lee's first equity campaign in years, while taking proactive steps to improve the health of the marketplace. While the timing shift impacted growth in the quarter, stronger gross margin expansion and disciplined expense management drove better-than-expected earnings. Based on our year-to-date performance and improving profitability, we are raising our full year outlook while the environment remains dynamic, we are well positioned to finish the year strong and enter '26 with momentum. Now let's review highlights from Q3, starting with Helly Hansen. Third quarter results exceeded expectations with revenue growth of 11% and $0.03 of earnings accretion. Growth was broad-based across both Sport and Workwear in all regions. The business is performing at a high level, the integration is progressing well, and we continue to uncover new opportunities to create significant value together. To build on this momentum, we are focused on our strategic pillars. First, accelerate growth. It starts with product. Our iconic platforms, including Crew, Alpha, Legendary and LIFA Merino continue to differentiate Helly in the marketplace and generate strong demand from our consumers. And our latest product launches have made '25 a record year. We won 6 Red Dot Design awards, our most ever in a single year. Award-winning products include the Odin Ultimate Infinity jacket, Arctic Patrol Down Parka and within Workwear, the Magne Evolution Jacket. These are scalable platforms that we will drive global growth and nowhere is that opportunity greater than in the U.S. We see significant room to grow through a combination of new distribution D2C growth and investments in demand creation to increase brand awareness. Currently, awareness in the U.S. is only 29%. This has grown by 6 points since 2019, while revenue has more than doubled. Starting next year, we will be making investments in top funnel demand creation to increase awareness and fuel accelerated growth. Within Workwear, there are considerable market share opportunities, leveraging Helly's unique dual brand position. The connection to technical outdoor products worn by professionals on the mountain or water has made Helly a leader in pro-grade workwear in Europe. In the U.S., we are leading with footwear in regions where Helly Sport penetration is greatest. Over time, this will expand to include the broader apparel assortment, supported by further development of our lightweight and cooling platforms to drive growth in warmer climates. Outside the U.S., we see opportunities entering new markets in Asia and increasing penetration in key markets within Europe, including Germany, Austria and Switzerland. In addition, we will continue to support our business in China, which we operate through a joint venture. China is on track for over 70% growth this year. And second, double operating margin. We expect to increase operating margin from high single digits today to mid-teens through a combination of gross margin expansion and SG&A benefits. We are leveraging our global operating model, supply chain and technology platforms as well as Project Jeanius. This will create greater back-end efficiency and increased investment capacity to support our growth initiatives. Helly is headed into the fourth quarter with incredible momentum, and I could not be more confident in the opportunities ahead. Turning to Wrangler. Global revenue increased 1%, including 12% growth in digital. Wholesale growth was impacted by a timing shift into the fourth quarter. Excluding this shift, global revenue increased at a mid-single-digit rate. The third quarter marked Wrangler's 14th consecutive quarter of share gains according to Circana. In our core men's and women's bottoms business, we gained 80 basis points of market share. Our female business had another strong quarter with growth of 20%. Our collaboration with Lainey Wilson continues to exceed expectations. Her latest collection is performing very well while supporting more premium AURs and increase penetration with younger consumers, and Bespoke is now the #1 female style at select specialty retailers. This has been a banner year for our female business, and we expect double-digit growth for the year. Western grew high single digits in the quarter as the #1 Western apparel brand, we have never been stronger. At the upcoming Wrangler National Finals Rodeo in Las Vegas, we will be represented by some of the top athletes in the world as well as host events at the annual Cowboy Christmas where the Western world converges to showcase the best of Western apparel. In addition, Wrangler Country Music Star's Lainey Wilson and Cody Johnson will perform sold-out shows. Western is on track for double-digit growth this year. To support this momentum, we will continue to invest behind our demand creation platforms, including live sports, streaming and social media. In particular, our highly successful, Good Mornings Make for Better Days campaign will continue through the balance of the year as we build momentum for the holidays and '26. Turning to Lee. Revenue declined 9% as we took proactive steps to improve the health of the marketplace in China. Excluding these actions, revenue declined 4%. We are encouraged by the progress we are making against our brand realignment. Digital is leading the way with growth of 15% in the U.S. As we previewed last quarter, we launched our Built Like Lee equity campaign in September, the first of this scale in years. While early days, we are encouraged by the reaction in the marketplace and have seen improvements in both brand equity and perception. We are also making progress in aligning products to our refreshed brand position. In addition to activating our iconic platforms, we are seeing success with new introductions such as Velocity Pant and collaborations with Crayola and Buck Mason. Crayola will be Lee's strongest collaboration ever and our second collaboration with Buck Mason is outperforming the initial launch. Importantly, our 2025 collabs are attracting 3x more millennial purchasers. While the lead turnaround will not be linear, we will do this the right way. We expect sequential improvement in the fourth quarter. Finally, we announced this morning, we made an additional $25 million voluntary debt repayment in the third quarter, and we expect to further reduce debt by $185 million in Q4. We are tracking ahead of our deleverage plan and expect to return to approximately 2x by year-end while consolidating a significant increase in earnings and cash flow. Deleverage is our near-term priority, but we will take an offensive posture to deploy our cash generation to support our capital allocation framework, including our dividend and share repurchase programs. Before turning it over to Joe, let me reiterate the confidence we have in achieving our '25 plan, our expanded brand portfolio provides significant opportunities to create value through strong fundamentals and increasing capital allocation optionality and while the environment remains uncertain, we are being proactive with initiatives such as Project Jeanius to offset headwinds in the marketplace. We are executing at a high level, and I am confident we are on a path to drive strong value for shareholders. Joe? Joseph Alkire: Thanks, Scott, and thank you all for joining us today. Our third quarter results reflect the strength of our operating model and the benefits from our expanded brand portfolio. In what remains a highly dynamic environment, our fundamentals are strong, and we are operating from a position of strength. While a timing shift impacted revenue growth in the quarter, better-than-expected revenue and profitability from Helly Hansen stronger gross margin expansion and further improvement in operating efficiency drove earnings upside relative to our outlook. Based on our year-to-date performance and increased visibility into the fourth quarter, we are raising our full year revenue, gross margin, earnings and cash flow outlook. We are well positioned to finish off a record year with good momentum as we enter 2026. Let's review our third quarter results. Global revenue increased 27%, including the contribution from Helly Hansen. By brand, Wrangler Global revenue increased 1%. Revenue growth was impacted by a shift in the timing of wholesale shipments from the third to the fourth quarter. Excluding the shift, global revenue increased at a mid-single-digit rate as a result of strong demand for the brand around the globe. In the U.S., revenue increased 1%, driven by 11% growth in DTC. Wholesale was flat to prior year. However, excluding the previously mentioned timing shift, U.S. wholesale revenue increased at a mid-single-digit rate. Growth was broad-based, driven by strong increases in female, Western as well as continued market share gains. Denim grew at a low single-digit rate. Following a strong July and August, POS moderated to a low single-digit increase in September, consistent with the year-to-date average. October POS was flat compared to prior year, with POS increasing at a mid-single-digit rate over the past 2 weeks. Wrangler international revenue increased 2%, driven by 19% growth in digital and 1% growth in wholesale. Turning to Lee. Global revenue decreased 9%. During the quarter, revenue was impacted by proactive actions in China to address challenges in the marketplace. We discussed our intent to execute these actions on our second quarter call. Excluding the actions taken in China, global Lee revenue decreased 4%, reflecting sequential improvement in the revenue comparison from the second quarter, and we expect further improvement in the fourth quarter. U.S. revenue decreased 9% as we work to address challenges within certain segments of our distribution footprint and drive more consistency with the brand's realignment and go-forward strategy. Digital revenue increased 15%. We remain encouraged by the momentum in our digital business, which has continued into the fourth quarter. Lee international revenue decreased 9%, with declines in wholesale offsetting mid-single-digit growth in our brick-and-mortar stores. Excluding the actions taken in China, Lee international revenue increased approximately 3%. Now turning to Helly Hansen. Global revenue of $193 million increased 11% compared to prior year reported results. Growth was broad-based across both Sport and Workwear and in all geographic regions. We are encouraged by the stronger-than-expected results. The integration is progressing well, and we are confident Helly will be a significant contributor to both revenue and earnings growth in the coming years. We now have line of sight to greater than $25 million of run rate synergies, which will begin to meaningfully impact profitability in 2026. These synergies will help fund investments in business, including geographic and category expansion, demand creation, DTC, supply chain capabilities and our technology platform. As we look forward to 2026, we expect Helly's momentum to continue to build. The spring/summer order book has accelerated from fall/winter 2025 and Workwear preorders are up at a double-digit rate. We recently kicked off the fall/winter 2026 selling season, and the feedback from the marketplace has been strong, reflecting the robust product and innovation pipeline of the brand. Moving to the remainder of the P&L. Adjusted gross margin expanded 80 basis points to 45.8%. Excluding Helly Hansen, adjusted gross margin expanded 140 basis points, driven by the benefits of Project Jeanius, channel and product mix as well as targeted pricing actions. This was partially offset by increased product costs and the impact from recently enacted increases in tariffs. Helly Hansen was diluted adjusted gross margin by approximately 60 basis points. During the quarter, we took actions to improve inventory turnover, increase cash generation and accelerate debt repayment. There is a significant opportunity at Helly Hansen to improve both gross margin and net working capital by leveraging our supply chain capabilities in the areas of planning, procurement and inventory management. Adjusted SG&A expense was $269 million. Excluding Helly Hansen, adjusted SG&A was flat compared to prior year, supported by lower distribution and freight expenses and the benefits of Project Jeanius. We remain focused on driving further improvements in operating efficiency in light of the environment. And adjusted earnings per share was $1.44, increasing 5% compared to prior year. Adjusted EPS was $0.09 above our prior outlook. Helly Hansen contributed $0.03 per share compared to our prior outlook of breakeven earnings. Turning to the balance sheet. Inventory at the end of the third quarter was $765 million. Excluding Helly Hansen, inventory increased 21% to $560 million, driven by a temporary increase in inventory to support our supply chain transformation, earlier-than-expected inventory receipts as a result of improved sourcing lead times as well as the impact of tariffs. We expect inventory to normalize in the fourth quarter and decreased approximately $120 million from the third quarter to approximately $645 million. We finished the quarter with net debt of $1.3 billion and $82 million of cash on hand. Our $500 million revolver remains undrawn. On a pro forma basis, our net leverage ratio was 2.5x. During the quarter, we made a voluntary $25 million debt repayment. We are tracking ahead of our deleverage plan and expect to make an additional $185 million voluntary payment in the fourth quarter. We anticipate returning to approximately 2x net leverage by year-end. Share repurchase activity remains on pause near term as we focus on paying down acquisition-related debt and reducing leverage. We have $215 million remaining under our current share repurchase authorization. And as previously announced, our Board declared a regular quarterly cash dividend of $0.53 per share, a 2% increase. And finally, on a trailing 12-month basis, adjusted return on invested capital was 23%, improving from 22% in the second quarter. Now let's review our updated outlook. Full year revenue is now expected to be at the upper end of our prior outlook range of $3.09 billion to $3.12 billion, representing growth of approximately 19% to 20%. Helly Hansen is now expected to contribute $460 million to full year revenue compared to our prior outlook of $455 million. Excluding Helly Hansen, we expect revenue growth of approximately 2% and compared to our prior outlook of 1% to 2% growth. For the fourth quarter, we expect revenue to be in the range of $970 million to $980 million, representing growth of 39% to 40%, including the expected contribution from Helly Hansen. Our outlook includes the impact of a 53rd week, which is expected to benefit the fourth quarter by approximately 4 points of revenue growth. We continue to plan the business conservatively. For Wrangler and Lee, our updated outlook assumes no meaningful change in POS trends or inventory positions at retail for the balance of the year. This is consistent with our prior outlook. Excluding Helly Hansen, October revenue growth was approximately 6%, tracking slightly ahead of our anticipated organic revenue growth for the fourth quarter, excluding the 53rd week. For Helly Hansen, our revenue outlook is supported by current demand trends and the fall/winter 2025 order book, which accounts for the majority of support revenue. Moving to gross margin. Adjusted gross margin is now expected to be approximately 46.4% compared to our prior outlook of approximately 46.1%. Our outlook represents an increase of approximately 130 basis points compared to prior year. We expect fourth quarter adjusted gross margin of approximately 45.8%, representing an increase of approximately 110 basis points compared to prior year. Adjusted SG&A expense is expected to increase approximately 24%, reflecting the contribution from Helly Hansen as well as increased investments, primarily in the areas of demand creation, technology and direct-to-consumer. Excluding Helly, we expect SG&A to increase at a low single-digit rate, consistent with our prior outlook. We continue to anticipate Project Jeanius savings to mature to a full run rate in excess of $100 million of annual savings over the course of 2026. Adjusted EPS is now expected to be approximately $5.50, representing an increase of 12%. This compares to our prior outlook of approximately $5.45. Helly Hansen is expected to benefit full year 2025 adjusted EPS by approximately $0.20, consistent with our prior outlook. We have not included any benefit from synergies in our outlook. We expect fourth quarter adjusted EPS of approximately $1.64, reflecting growth of about 19%. Finally, we continue to expect another year of strong cash generation. Cash from operations is expected to approximate $400 million, including the contribution from Helly Hansen. This compares to our prior outlook for cash from operations to exceed $375 million. Starting in the fourth quarter, we will begin to leverage and expand our supply chain and AR financing programs to include Helly Hansen. These programs and capabilities will be a significant unlock for the business while supporting accelerated cash generation and deleverage. Before opening it up for questions, let me reiterate the confidence we have in achieving our 2025 objectives. While the environment remains dynamic, we are operating from a position of strength. The integration of Helly Hansen is progressing well. We are ahead of our planned deleverage path and Wrangler and Lee are on track to deliver a strong fourth quarter. Our operational execution and discipline continues to drive further improvements in our business fundamentals, supporting higher returns on capital and significant capital allocation optionality moving forward. This concludes our prepared remarks. I will now turn the call back to the operator. Operator: [Operator Instructions] Our first question is coming from Ike Boruchow from Wells Fargo. Irwin Boruchow: A couple from me. I guess, Joe, could you just clarify Wrangler U.S. wholesale, it seems like it was probably up mid- to high single digits in the third quarter ex the shift. Can you confirm that? And then on the 4Q, can you kind of work with us on what's embedded in your -- in the Wrangler wholesale number there, both with the ship and then also organic? And I know you said POS flattened out in October, but then it sounds like it's accelerated the last couple of weeks. So kind of curious what's in the plan. Joseph Alkire: Yes. So on the timing shift, so the timing shift impacted Q3 revenue by about 2 points, with the primary impact being on the Wrangler brand. Excluding the shift, total revenue would have been above our prior outlook driven by Helly with Wrangler increasing at a mid-single-digit rate. So we had our largest September ever as a company. However, order flow, shipment flow was more back half weighted than what we anticipated in our prior outlook. So the demand was solid. We just had a shift in shipment timing focused on a couple of the key accounts. We did see that pull through in October. I think I said in the prepared remarks; October was up 6% organically compared to the prior year. That's a little ahead of what we have contemplated in 4Q. In terms of growth, excluding the 53rd week. So nothing we see from a demand standpoint. In fact, we've moved to the high end of the revenue range based on our year-to-date performance and our visibility into Q4 and Wrangler is probably the biggest part of that. Irwin Boruchow: Got it. So no red flags on the consumer thus far in terms of what you're seeing. Scott Baxter: And Ike, I would tell you, with our broad distribution and the campaigns that we're running right now with both of our denim brands right now that are out in the marketplace. In addition to the product and the design and just the demand, 14 consecutive quarters now. I mean you've seen that of market share gains with Wrangler, we've put ourselves in a really good position, really like where we sit now for the foreseeable future, and we'll continue to really work that through design great product, tell great stories, broad distribution. It's been a really nice formula of success for us going forward. Irwin Boruchow: Okay. Great. Moving to Helly. So up 11% pro forma growth. I think your first half, you were kind of trending more 1% to 2%, so a nice acceleration. What's driving the near-term inflection in Helly's brand revenue already? And then I guess based on the order book commentary, which is accelerating into next year, could we see Helly growth rates actually continue to accelerate over the next 12 months? Scott Baxter: So I'll go ahead and start. What you're seeing is you're seeing a company that's thriving inside of another apparel company. They haven't had that ecosystem before relative to where they've sat the last decade or so, and now they're inside our ecosystem. We're thriving as far as partners working together. They're accelerating in all fronts, the European business, the China business, the U.S. business is really starting to take off. But obviously, we're feeding that. So we're investing in that and we're seeing really good results. And I think the thing it starts with is they're really building great product. And I think they're having a lot of fun being part of our organization. I think the 2 companies are working really well together. And I think we see a bright future. And I think one of the things that's been really important because we talked about it and it's important that we talk about it again, is we see a big opportunity in North America in addition to what we already have. And that is starting to come to fruition, just having the capability, having our resources in North America to lean on and then now going ahead and making it a priority because we have made that a priority, we're starting to see those results early. So we're really, really excited about what's happening there in the future. Joe, anything to add? Joseph Alkire: Yes, I'd say on the order book, I mean spring/summer '26, that order book for sport reflects an acceleration compared to fall/winter '25, fall/winter '25 accelerated versus spring/summer '25 and even fall/winter '24. So that business is performing really well. Workwear preorders have been strong, up at a low double-digit rate, and we just kicked off the fall/winter '26 selling season, and it's off to a really good start. The feedback from the marketplace has been really good. We also will put more investment behind the business in '26, which should help further accelerate growth. So just a tremendous opportunity for the brand globally across both sport and work. Scott Baxter: And I think one of the things that's really been beneficial is management and the team is intact from the acquisition. So they were already a strong team, and we're only making it stronger by adding and helping, but we've got a good core team that we kept through the merger and the acquisition, and it's really played out really well for us. Irwin Boruchow: That's great. And then just a quick one, lastly. On the inventory, Joe, can you help us get comfortable with that number? I think you said up 21% organic Q3, $645 million for the end of the year, which implies mid-teens organic. Just -- it doesn't sound like there's any issues at all but can you kind of hold our hand a little bit because it is a decent growth rate above where the core growth rate is for the business. So any more color there would be helpful. Joseph Alkire: Sure, Ike. So we ended the quarter, excluding Helly Hansen, up about 21%, about $98 million versus the prior year. So roughly $25 million of that increase related to inventory investments we made to support our supply chain transformation. So we closed our Torreón manufacturing facility in Mexico during the third quarter as part of Project Jeanius, and we carried excess inventory to support the operational transition. So that excess inventory will wind down over the course of the fourth quarter and into the first quarter, and that transition has gone really, really well. About $25 million of the increase relates to higher tariffs. So the cost of that is now embedded in our inventory and about $20 million related to earlier-than-expected receipts of sourced product as a result of lead times improving. So the remaining increase is really in support of the growth plans that we have for the business. We said in our prepared remarks, we expect about $120 million reduction in Q4, and we remain pleased with the overall quality and composition of our inventory. Operator: Our next question is coming from Bob Drbul from BTIG. Robert Drbul: Just a question on pricing. When you look at your business and you look at sort of the plans into next year, what's happening with pricing with your own product? And I guess, I'd be curious to just see what you're seeing competitively on pricing as well. Joseph Alkire: Yes. Bob, I would say for us, pricing has been part of a holistic strategy to combat the impact of the tariffs, right? Pricing for us went into effect mid-June in our own DTC and in July at Wholesale. So something we're watching very closely with our retail partners and look, these plans were put together in collaboration with them and all of the elasticity assumptions are reflected in the outlook. We were very surgical, as you would expect, in terms of where we took price just as we have been in the past. And these price increases were not just a U.S.-focused effort. I think that's part of the power of a global multi-brand portfolio. So overall, the price elasticity equation has been largely consistent with our expectation. It varies a bit by brand and category and channel, certainly, certain parts of the market are more sensitive, other more premium areas less so. But overall, the pricing elasticity equation has been in line with what we expected. Scott Baxter: And Bob, one of the things that we pay particular attention to as an organization is that if you look at all of our brands globally and in the marketplaces where each operates, we really like from a hierarchy standpoint, where we sit. So we're really comfortable with where our brands are positioned and how they're priced than compared to our competitors within those marketplaces. So we've been very thoughtful for a long time about how we price in the product that we have. So I'm comfortable with where we sit right now. Robert Drbul: Got it. And just 2 questions on Helly, if I could. I guess the first one, Scott, I think you mentioned you're seeing new opportunities. Just wondering if you could elaborate on that. And within the U.S. business, growing it from the $150 million level, is it like new distribution targets? I just -- if you could expand a bit on the plan in the U.S., that would be helpful. Scott Baxter: Absolutely, Bob. Actually, it's everywhere and everything. So it's ski shops, it's independents. It's definitely U.S. wholesale. It's across the board. It's digital, it's owned and operated retail. So we've got multiple plans that come into different stages. As you can imagine, we've thought it out from a capital standpoint on how we're going to embrace each one. And it's really interesting, Bob, we sat back, and we said to ourselves, it's even better than we thought at acquisition time. We think there's more than we thought about. It's more robust than we thought. And people are really reacting and responding very positively to our brand because they've seen it around the world before and they just haven't seen it enough here in the United States and its new and it's fresh and it's creating some excitement, but they haven't had the distribution to go ahead and purchase it for themselves. But now we're going to give them that, and that is starting. And then just so you know, because we'll talk about this in the future, we are adding some really key personnel here over the next 12 to 18 months in some significant leadership positions to help support that going forward. So like we said before, it was a big opportunity, one of the strategic reasons we bought it. But as we sat back and now [indiscernible] gotten ourselves involved in this business; we think the opportunity is even bigger than we thought across the board. Operator: Next question is coming from Jonathan Komp from Baird. Jonathan Komp: I want to follow up and ask the raise to the high end of the organic revenue growth to 2% for the year. Can you just maybe talk a little bit more directly what's driving that confidence? And then Joe, it sounds like from your inventory buildup, you may be planning healthy organic growth into 2026. Just any color there would be helpful. Scott Baxter: Yes, Jon, it's Scott. I'll go ahead and start. Really, Jon, we're looking at our business and we're just seeing real strength across the board. Let me start with Helly. I mean we've talked about the fact that Helly is really coming online very quickly, faster than we thought. The companies are working really well together, and we're seeing opportunity across the board. And more importantly than anything we're seeing our consumer want to take out our business. So our POS is strong. We watch really closely our digital business because it's an opportunity for our consumer to purchase immediately, and it's been very strong across our brands and strong with Lee too, which gives us confidence in our turnaround because it's the first opportunity that people can interact with us after we put our turnaround in play. But across the board, really strong from a digital standpoint. So that gave us confidence. The strength of our business here in the third quarter as we reached towards the end of the third quarter and saw this really strong uptick in POS gave us a lot of confidence. And then I would tell you that October gave us a lot of confidence. October came in on plan, no issue at all. So really feeling good about that as we come through the first month of the fourth quarter, feel confident there. And then more than anything, our team is designing really good product and we're telling. We've got 2, right now, 2 national campaigns going on with Wrangler and Lee, which has got us in the marketplace in a fairly significant way, which is really important. And weather is really cooperating. I'll give you a great example. Helly is a rainwear and outdoor and ski and active and pro-business. And we've had more rain across this world, Europe, Asia and the United States. And now we've got early snow across Europe and also here, which we didn't have last year at this stage. So that gives us a really, really good push forward as we enter into that really critical period. So lots to be thankful for right now, but mostly for our great folks here that have got their heads down and working hard. Joe? Joseph Alkire: Yes, Jon. And on inventory, I know it's a little noisy here with the addition of Helly and some of the transitory impacts that I highlighted. But we're comfortable with the composition of the inventory, the sequential progression we have planned, how that's positioned in support of the growth plans and Helly as well. We've talked on prior calls about the net working capital opportunity. At Helly, you'll begin to see the impact of that starting in the fourth quarter and into the first half of next year, which will help contribute to some strong cash generation as we move into next year. Jonathan Komp: Okay. Great. That's helpful. And maybe as a follow-up, as we look to 2026, could you help to frame up as we think about the contribution from Jeanius where you stand and the incremental benefit that you may achieve? And then also the Helly Hansen operating contribution, I think you reiterated $0.20 for this year. But what are some of the factors that might impact how that can grow into next year? Joseph Alkire: Yes, I'll take that, Jon. So on '26, certainly not giving an outlook today, but I'll give you a high-level framework just given all of the moving parts. So we expect the organic business to continue to grow. We are performing well. That's going to be mainly driven by the Wrangler brand. '26 will be a transition year for Lee. The Helly business is performing really well. As you've seen, we will delever quickly, which will create an earnings tailwind as well as additional capital allocation optionality as we consolidate and grow that cash flow and that earnings stream, you'll have synergies that will scale more meaningfully across 2026, and you've got Project Jeanius savings that will be maturing to more of a full run rate. We will have a bigger impact of tariffs next year. For 2026, the full year unmitigated impact is about $135 million, which we're clearly working to mitigate a significant portion of that. But those are the biggest factors influencing '26. We like where we are. We like our model, and we've got a lot of optionality to continue to drive the growth and returns that we expect. Operator: Next question is coming from Mauricio Serna from UBS. Mauricio Serna Vega: First, maybe could you tell us or confirm like what's kind of like the Q4 organic revenue growth that you're expecting in your guide? I mean, you talked about October being 6%. I just wanted to get a sense of what's the expectation for the fourth quarter. And then on Helly Hansen, you raised revenue contribution a little bit for the year, but there was no really change in the EPS revision of $0.20. So just wondering what were the puts and takes on that. Joseph Alkire: Mauricio, I'll take those. So for the full year outlook, we raised the outlook, right? Part of that was the Q3 outperformance that we had. Part of that is the increased visibility into the fourth quarter. So we now expect to be at the high end of the prior outlook range on revenue organically. We've got a stronger contribution from Helly Hansen, and we increased our gross margin, earnings and cash flow. For the fourth quarter, our outlook implies about 6% growth on an organic basis. That includes the 53rd week, which is contributing about 4 points to the growth. You also have the benefit of the timing shift that impacted us in the third quarter. So when you put all that together, we have modest growth contemplated for the business in the fourth quarter. Helly Hansen is expected to contribute close to $240 million of revenue as well in the fourth quarter, growing nicely compared to the prior year. So the assumptions underlying the organic revenue, we've assumed POS trends that are modestly positive, which is what we've seen for the majority of the year. Things have been a little stronger over the last couple of weeks as weather has been more cooperative. And then inventory levels at retail, we really haven't assumed any meaningful change. Our retail partners remain in a fairly conservative posture as they have all year, and we don't expect that to change. Mauricio Serna Vega: Got it. Very helpful. And then maybe just very quickly on Lee, you sound very positive about the feedback that you're getting from the equity campaign. Maybe could you talk a little bit more about more green shoots on the brand? And you've mentioned like sequential improvement for fourth quarter. Is that sequential improvement versus the 9% decline or versus like the 4%, excluding the China proactive actions? Joseph Alkire: Yes. Mauricio, I'll take the latter part, and then Scott can take the first part. So the sequential improvement that we referenced is excluding the impact of the China actions in the third quarter. So I would think about sequential improvement relative to the 4% decline that we saw in the third quarter. Scott Baxter: So Mauricio, I would tell you, similar to some of the comments that I've already made, we're seeing that our investment is paying off. And what I mean by that is we've invested dramatically in both our product engine and also our advertising and marketing. And so creating the right product for the marketplace, specifically in the channels that we sell the product in at the right price, as I mentioned earlier, and then telling a really great story behind that takes a little bit of time because, as you know, this business, you order out over a period of time. So to see your results, it takes 6, 9 months, sometimes a year, except for in the digital component. And what we've seen here early on is a very strong response in the digital component from both male and female, which is really important to us. Our female business is doing exceptionally well. So our conversations with our wholesale partners across the globe and also our own retail stores across the globe have been very positive. I've been pleased. We've been at this, as you know, for about 18 months now and still have a little ways to go. We're never going to be satisfied obviously, going forward. But those are some of the key components as to how we look at the business and how we measure and monitor how it's doing. And the sequential improvement has been really important because it's also a shot from a morale standpoint to the team, too, as you can imagine, when they're making product that's really working and the marketplace is talking about it, they feel really good about it. So we've got that type of momentum, too. So more to come over time because I think we've been very transparent in sharing the story as we've gone along, and we'll continue to do that. But right now, the way I would describe it is that everything is on track to how we planned it from the very beginning. Operator: Next question is coming from Paul Kearney from Barclays. Paul Kearney: My first is clarifying on the October organic growth of 6%. Is that including the shift of timing from Q3 into Q4? And then on the Q4 guidance, I'm just curious on -- is it assumed in the Q4 guidance a continuation of the POS at mid-single digit that you saw in the last 2 weeks? And then a follow-up. Joseph Alkire: Paul, it's Joe. On October, yes, it does include the impact of the timing shift that we talked about. And for POS, the POS assumptions for Q4 does not assume that the mid-single-digit increases that we've seen over the past several weeks continue for the balance of the quarter. Our POS assumptions for Q4 are modestly positive. Paul Kearney: Okay. And then my next is on -- I think you pointed to $25 million of run rate synergies for Helly Hansen for 2026. I guess, can you speak to any clarity on timing on achieving some of those synergies? How should we think about flowing those through in our model versus reinvestment? And just when should we expect to achieve those and which ones. Scott Baxter: Yes, I'll take that, Paul. So we do have direct line of sight to pretty significant synergies across the business. That list of synergies is growing. The deeper we get into the business, as you can imagine. Part of that is just -- we are a more synergistic owner as a global brand operator and a lot of the pain points for the Helly business are -- there are strengths. So they'll benefit greatly. Helly will benefit greatly from being part of our platform as we more fully integrate the business. The $25 million that we talked about, we're starting to see it now. It's smaller for 2025. We're starting to see some of those benefits now. Those will scale more meaningfully across the course of '26, and we'll lay that out in the full context of our '26 outlook in February. Operator: Next question today is coming from Brooke Roach from Goldman Sachs. Brooke Roach: Scott, Joe, I'm hoping you could provide an update on where you stand on Project Jeanius savings realization. What proportion of the greater than $100 million savings have been realized to date? What's still on the horizon into 4Q and to 2026 as you mature into those savings? And how should we be thinking about the opportunity for flow-through to the bottom line as you contemplate continued investments into each of your core brands, including demand creation? Joseph Alkire: Yes. Brooke, so for 2025, we've got about $50 million of gross savings embedded in the outlook. That's above our previous expectations. So those savings compared to our initial outlook have allowed us to reinvest back into the business at a level beyond what we previously anticipated, and those investments are certainly part of the fuel for the growth and the momentum that we're seeing. The benefits of Jeanius and the investments we've made, like I said, they're fully reflected in the outlook. We do expect those benefits to scale materially in 2026 and reach the $100 million of annual savings run rate. We will reinvest a portion of those savings. But as we've said from the very beginning, a portion of these savings will be reinvested back into the business and a portion of these savings will drop to the bottom line and drive profitability and returns improvement. Brooke Roach: Great. And just a follow-up. I was hoping we could double-click on the Lee China business. Are you fully reset in that business today? And do you expect that business to begin to return to growth as we turn the corner into 2026? Where are we in the transition? Joseph Alkire: Yes, I'll start, Brooke. So there's no change to the significant opportunity we see in China longer term. We're more confident in our approach going forward than we've been over the past couple of years, we've got a strong team on the ground there. For the past 18 months or so, we've been working to reestablish our foundation in China for Lee as part of the brand's global approach to the turnaround. Our results have improved over the past year, but there's still more work to be done, and this market remains very dynamic, as you know. The actions we discussed in our prepared remarks reflect the next set of initiatives to really strengthen our presence in the market and build a stronger foundation going forward. So more specifically, we've been consolidating distribution partners. We've been partnering with larger, more sophisticated partners in the market that can invest with us to build and drive the brand going forward. We've taken actions to address inventory challenges in the market. We've elevated our own DTC presence. So there's a number of things that we've been working on behind the scenes. But I'd say the majority of the heavy lifting is behind us from here. Scott Baxter: And I would just add, if you step back a little bit, Brooke, some of the things that came out of COVID and what the world went through, there were some things that happened and some bad practices and what have you. And we've got ourselves now at a point where we've got a really impressive leadership team and a great leader over there. But in addition to that, probably the most important thing is we really have a real strategy there now that makes a lot of sense for what this marketplace is going to look like going forward. So over the last 9 to 12 months, I've become much, much more happy with kind of how we're thinking about it and kind of really like the thought process and the strategy that's gone into it. So we felt -- and this is the point, we felt really confident to make this investment, and that's what drove that. We like the strategy. We like where it's heading. We're happy to make an investment to put them in really good footing and then we move forward from there. So I think that from the standpoint of what's happened here in the last 5 or 6 years with the whole world that we're in a better place than we've been in China in a long time. And I think the future looks bright. Brooke Roach: Best of luck going forward. Operator: Next question is coming from Laurent Vasilescu from BNP Paribas. Laurent Vasilescu: Joe, I was hoping to get a little bit more color again around FY '26. I remember last year on the third quarter call, you provided preliminary thoughts, particularly on the top line. I think you mentioned 1H '25 should grow 4%. Just curious to know, is there any rationale why we're not getting any preliminary thoughts for 1H '26 top line on an organic basis? And then I think, Scott, you mentioned Lee is not going to be linear, but how do we think about when should Lee actually return to growth in all markets? Joseph Alkire: Yes. Laurent, I'll start. Yes, I'd say on '26, I gave the framework, if you will. I'd say, this year versus last year, there are a few more moving pieces, as you know, and we're right in the middle of our planning process now. So we'll be back in February and give the detailed outlook as we normally do. Scott Baxter: Laurent, as product flows and how we create and make product and go to market, I think our confidence is really building that late '26, fall/winter '26, you're going to see us even out and then start our growth algorithm right after that. So feeling really good entering this year, feeling really good about how the product is going to flow in and feeling really good about the product itself that will go ahead and resonate with some stabilization by the end of the year and then growth by the end of the year, beginning of the next year. Laurent Vasilescu: Okay. Great, helpful. And then, Joe, just one sticking point here. There's $0.78 of adjustments is actually larger than the actual GAAP EPS number. Curious to know what the adjustments we should contemplate so we can actually have our models buttoned up for 4Q. What kind of adjustment should we have for 4Q? And when longer term, I think you mentioned to Brooke, there's $50 million of gross savings from Project Jeanius, but when should we see the adjusted and GAAP EPS converge? And of the $100 million, how much of it actually flows through to the bottom line? Joseph Alkire: Yes, I'll take that, Laurent. So as we've discussed on prior calls, we will have onetime adjustments as we move through Project Jeanius as we move through the acquisition of Helly Hansen. I think those are pretty difficult given the transformational nature of those projects. I would say the cost to date have been in line with our expectations. The onetime adjustments that we saw in the third quarter, primarily related to the closure of our Torreón manufacturing facility as well as the integration of Helly Hansen on the SG&A side. But look, we don't pay our bills with adjusted earnings. We don't pay our shareholders with adjusted cash. So we're measuring the cash returns of Jeanius and the returns on Helly and our cash generation remains robust. We raised the cash flow outlook for '25, and we expect another year of strong cash generation in '26, and that includes the impact of the onetime adjustments. Operator: Next question is coming from Peter McGoldrick from Stifel. Peter McGoldrick: I am interested on the cash flow guidance following up on Laurent's question. The -- so the step-up is significantly higher than the adjusted earnings increase in the outlook. So I'm curious if you can bridge the gap on working capital adjustments or any other items influencing the outlook to $400 million operating cash flow. Joseph Alkire: It's really the working capital, Peter. It's the sequential reduction in the inventory in addition to the earnings growth for both the organic business as well as Helly. Peter McGoldrick: Okay. And then on the increased gross margin guidance for the year, can you work through the puts and takes here, whether it be by brand, Helly Hansen versus the denim brands, any fundamental drivers or if there's any influence from the tariff assumption and inventory timing flow-through? Joseph Alkire: Yes, I'll take that, Peter. So on Q3, we were up 80 basis points overall, 140 basis points, excluding Helly Hansen. For the organic piece, mix was about 170 basis point benefit, that's channel mix, product mix, business mix. Our Project Jeanius benefited gross margin by about 90 basis points. And then tariffs net of our mitigating actions as well as higher product costs hurt us by about 120 basis points. For the fourth quarter, we've got 110 basis points contemplated. The organic business will be up modestly with Jeanius, and mix being offset by tariffs, net of the mitigating actions as well as higher product costs. So the year-over-year increase in Q4 gross margin is primarily Helly related, which will be nicely accretive for us in the fourth quarter. Operator: We reached the end of our question-and-answer session. I'd like to turn the floor back over to Scott for any further closing comments. Scott Baxter: Thank you. I just wanted to say a big thanks for spending time with us today and all your thoughtful questions and -- as you can see, we're working really hard here and our consumers are trusting us because they're choosing us going forward, which is really important, and we certainly appreciate that. We've got a much broader story to tell as Helly Hansen unfolds, but I just wanted to mention that we couldn't be more pleased with our acquisition and how it's going and really enjoy working with the team there, a really good team, and it's been a really thoughtful merger of our 2 companies and just going really well, which we'll spend some more time talking about going forward. And because we won't spend any time together before the end of the year, I want to wish everybody a happy holiday season, and we'll look forward to seeing you after the first of the year. But again, thanks for your interest in our company. We really appreciate it. Operator: Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.
Operator: Good morning, ladies and gentlemen, and welcome to the NAPCO Security Technologies Fiscal First Quarter 2026 Earnings Conference Call. [Operator Instructions] This call is being recorded on Monday, November 3, 2025. I would now like to turn the conference over to Mr. Francis Okoniewski. Please go ahead. Francis J. Okoniewski: Thank you, Emma. Good morning, everyone. This is Fran Okoniewski, Vice President of Investor Relations for NAPCO Security Technologies. Thank you all for joining today's conference call to discuss financial results for our fiscal first quarter 2026. By now, all of you should have had the opportunity to review our earnings press release discussing our quarterly results. If you have not, a copy of the release is available in the Investor Relations section of our website, www.napcosecurity.com. On the call today are Dick Soloway, Chairman and CEO of NAPCO Security Technologies; Kevin Buchel, President and Chief Operating Officer; and Andrew Vuono, Chief Financial Officer. Before we begin, let me take a moment to read the forward-looking statement as this presentation contains forward-looking statements that are based on current expectations, estimates, forecasts and projections of future performance based on management's judgment, beliefs, current trends and anticipated product performance. These forward-looking statements include, without limitation, statements relating to growth drivers of the company's business such as school security products, reoccurring revenue services, potential market opportunities, the benefits of our reoccurring revenue products to customers and dealers, our ability to control expenses and costs, and expected annual run rate for reoccurring monthly revenue. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements. These factors include, but are not limited to, such risk factors described in our SEC filings, including our annual report on Form 10-K. Other unknown or predictable factors or underlying assumptions subsequently proving to be incorrect could cause actual results to differ materially from those in the forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. You should not place undue reliance on these forward-looking statements. All information provided in today's press release and this conference call are as of today's date, unless otherwise stated, and we undertake no duty to update such information, except as required under applicable law. I'll turn the call over to Dick in a moment. But before I do, I want to mention we will be attending the International Security Conference trade show, November 18 through the 20th, in New York City's Javits Center. We'll be showcasing an array of exciting new products. And if anyone is interested in attending, please contact me, and I will arrange to get you a guest pass. In addition, we're actively planning our Investor Relations calendar for non-deal roadshow and conference attendance in the near future. Investor outreach is important to NAPCO, and I'd like to thank all those who assist us in these type of events. In the coming weeks, we'll be attending the [ Robert Baird ] Global Industrial Conference in Chicago; the Stephens Annual Investment Conference in Nashville; the UBS Global Industrials & Transportation Conference in Palm Beach, Florida; the Melius Research Conference in New York City; and Needham's 28th Annual Growth Conference also in New York City. With that out of the way, let me turn the call over to Dick Soloway, Chairman and CEO of NAPCO Security Technologies. Dick, the floor is yours. Richard Soloway: Thank you, Fran. Good morning, everyone, and welcome to our conference call. We appreciate you joining us as we review our fiscal first quarter 2026 performance. Our first quarter results, which reflects record Q1 revenue, continues the momentum we reported from Q4 of fiscal 2025 and is a reflection of our continued focus on long-term growth and resiliency of our business. Our recurring revenue model has continued its steady growth, while maintaining its substantial profitability. We remain encouraged with our equipment revenue performance and our ability to weather the various microeconomic challenges we encountered in fiscal 2025 as we started to realize some of the benefits from our pricing strategies in response to tariff uncertainties. We have started fiscal 2026 with a positive momentum and confidence in our ability to continue to execute on our plan to provide enhanced shareholder value and growth through the balance of the fiscal year. Now, I'll turn the call over to our President and Chief Operating Officer, Kevin Buchel, who will comment on some of our operational and financial performance highlights. Following Kevin's remarks, our CFO, Andy Vuono, will go through the financials in more detail, and then I will return to delve deeper into our strategies and market outlook. Kevin, the floor is yours. Kevin Buchel: Thank you, Dick. Good morning, everyone. I'm pleased to share a few highlights from what was a very strong start to fiscal 2026. Total revenue for the quarter was $49.2 million, and that's a Q1 record and up 12% compared to the same period last year. Within those results, equipment sales reached $25.7 million, also up 12% year-over-year, demonstrating the continued strength of our relationships with our distributors and our dealers. And this increase was also supported in part by the early impact of 2 price adjustments: one related to tariffs, and that was implemented at the end of April; and our normal annual price increase, and that took effect in mid-July. We did not see the full impact of those price adjustments in Q1, but we expect to see a larger benefit in the upcoming quarters of fiscal 2026. Recurring revenue remained strong as well, growing 11% over last year's Q1 and maintaining an impressive gross margin of 90.3%, with StarLink commercial fire radios continuing to be the key driver within that mix. Our equipment gross margin improved as well to 26%, representing a 300 basis point sequential increase from fiscal 2025's Q4. From a profitability standpoint, operating income increased 15% year-over-year. Net income rose 9% to a Q1 record of $12.2 million, and that represents 25% of revenue. And our adjusted EBITDA was up 21%, and we now have an adjusted EBITDA margin of 30.4%. Finally, cash continues to grow. It reached $106 million as of September 30, 2025. Cash from operations was $11.6 million. And of course, we have no debt. As such, we are pleased to announce that we are continuing our dividend program, as our Board of Directors declared a quarterly dividend of $0.14 per share, payable on January 2, 2026 to shareholders of record on December 12, 2025. Overall, this was a strong start to fiscal 2026, and I'm very proud of the team's execution across the board. With that, I will turn the call over to our CFO, Andy Vuono, for a deeper look at the financials. Andy? Andrew Vuono: Thank you, Kevin, and good morning, everyone. Net revenue for the 3 months ended September 30, 2025 increased 11.7% to $49.2 million as compared to $44 million for the same period a year ago. Recurring monthly service revenue continued its strong growth, increasing 11.6% in Q1 to $23.5 million as compared to $21.1 million for the same period last year. Our recurring revenue service now has a prospective annual run rate of approximately $95 million based on our October 2025 recurring service revenues, and that compares to $94 million based on July 2025 recurring service revenues, which we reported back in August. These increases reflect the continued demand for our line of StarLink radios. Equipment revenue increased 11.8% to $25.6 million as compared to $22.9 million for Q1 of fiscal '25, which is a result of increased volume in our door locking product line and the impact of certain product pricing increases that went to effect in the quarter. Gross profit for the 3 months ended September 30, 2025 increased 13.1% to $27.8 million with a gross margin of 56.6% as compared to $24.6 million with a gross margin of 55.9% for the same period last year. Gross profit for recurring services revenue for the quarter increased 10.7% to $21.2 million with a gross margin of 90.3% as compared to $19.2 million with a gross margin of 91.1% last year. Gross profit for equipment revenues in Q1 increased 21.8% to $6.6 million with a gross margin of 25.7% as compared to $5.4 million with a gross margin of 23.6% last year. The increase in equipment gross profit was primarily a result of product mix as door locking products have a higher gross margin than intrusion. That, coupled with certain price increases and improved overhead absorption as a result of increased volume, contributed to the improvement in the equipment margins. R&D costs for the quarter increased 6% to $3.2 million or 6.6% of revenue as compared to $3.1 million or 6.9% of revenue for the same period a year ago. The increase for the 3 months primarily resulted from increased labor costs, which was partially offset by reduced consulting fees. Selling, general and administrative expenses for the quarter increased 13% to $11 million or 22.3% of net revenue as compared to $9.7 million or 22.1% of net revenue for the same period last year. The increase in SG&A for the 3 months were primarily due to increased legal fees and sales commissions, partially offset by decreased bonuses and compensation and benefits. Operating income for the quarter increased 15.1% to $13.6 million as compared to $11.9 million for the same period last year. Interest and other income for the 3 months decreased 13.5% to $1 million as compared to $1.1 million last year. The decrease for the 3 months ended September 25 was due to lower interest income from the company's cash and short-term investments as a result of lower interest rates. The provision for income taxes for the 3 months increased 36% or $655,000 to $2.5 million with an effective tax rate of 16.9% as compared to $1.8 million with an effective tax rate of 14% last year. The increase in the provision for 3 months was due to higher pretax income, as well as a larger portion of the company's taxable income being attributable to U.S. operations, and the remeasurement of certain deferred tax liabilities due to tax rate changes enacted in the One Big Beautiful Bill Act in the current period. Net income for the quarter increased 8.8% to $12.2 million or $0.34 per diluted share as compared to $11.2 million or $0.30 per diluted share for the same period last year and represented 25% of net revenue. Adjusted EBITDA for the quarter increased 21.1% to $14.9 million or $0.42 per diluted share as compared to $12.3 million or $0.33 per diluted share for the same period a year ago and equates to an adjusted EBITDA margin of 30.4%. As it relates to our balance sheet, as of September 30, the company had $105.8 million in cash and cash equivalents and marketable securities as compared to $99.1 million as of June 30, 2025, a 6.6% sequential increase. The company had no debt as of September 30. And cash provided by operating activities for the 3 months ended September 30, 2025 was $11.6 million as compared to $12 million for the same period last year, a 3% decrease. Working capital, which is defined as current assets less current liabilities, was $159.2 million as of September 30 as compared with working capital of $149.9 million on June 30, 2025. Our current ratio was 7.5:1 on September 30 as opposed to 7.3:1 on June 30, 2025. And our CapEx for the quarter was $193,000 as compared to $680,000 in the prior year period. That concludes my formal remarks, and I would like to return the call back to Dick. Richard Soloway: Thanks, Andy. Let me close with a few reflections on where we've been and where we're headed. This quarter, NAPCO once again demonstrated the strength and resilience of our business model. We remain focused on delivering lasting value to our customers, partners and shareholders, and the results speak for themselves. Recurring revenue now represents nearly half of our total sales, supported by a sustained 90%-plus gross margin. This steady high-margin income continues to drive consistent cash generation and reinvestment in innovation and growth. A key contributor remains our StarLink Fire radio platform, which has become the industry standard for commercial fire communications. Operationally, our team is executing exceptionally well. We manage inventory tightly, continue to invest in product development, compliance and infrastructure, and return capital through dividends, all while maintaining a debt-free balance sheet. Looking ahead, we remain optimistic. Market dynamics continue to evolve, but we're not standing still. We've implemented pricing actions, diversified our distribution base and invested in automation and enhancements to the StarLink platform, aimed at sustained growth and protecting margins. Our strong balance sheet provides flexibility for both organic investments and potential strategic acquisitions, while keeping us committed to shareholder returns. One area where NAPCO continues to make a real impact is school security, one of the most critical challenges of our time. We're proud to partner with school districts nationwide, providing integrated solutions that include our Trilogy and ArchiTech lock sets and enterprise-scale access control systems. These platforms are secure, scalable and aligned with the Partner Alliance for Safer Schools, or PASS, program standards, giving educators and administrators solutions they can trust. What truly differentiates NAPCO is our ability to integrate locking, access control and alarm technologies into a unified interoperable platform, protecting students and staff every day, while driving future growth. At the same time, we continue to expand recurring revenue opportunities through innovation. A great example is our MVP cloud-based access control platform, which integrates seamlessly with our locking hardware. MVP introduces a new subscription-based revenue stream for NAPCO and our dealers, and it's available in 2 configurations: MVP Access, an enterprise-grade solution supporting unlimited users; and MVP EZ, a mobile-first version for locksmiths and smaller facilities. We believe MVP has the potential to be a game changer, extending our leadership into hosted access control and reinforcing our strategy of pairing innovative hardware with cloud-based services to drive higher-margin recurring revenue. Beyond education, our Alarm Lock and Marks hardware lines continue to gain traction in health care, retail and multi-dwelling applications, as well as airport infrastructure upgrades. And as the transition away from legacy copper phone lines accelerates, our StarLink radios, which operate on both AT&T and Verizon networks and now also T-Mobile, are well positioned to capture additional market share across millions of commercial and residential buildings. Operationally, our Dominican Republic manufacturing facility continues to be a key competitive advantage, offering cost efficiency, stable logistics and low tariff exposure, a benefit versus many competitors manufacturing in higher-tariff regions. While external market and regulatory conditions remain fluid, we're focused on what we can control, driving innovation, executing with discipline and growing our base of recurring revenue. We're confident that our strong net income, adjusted EBITDA and cash flow trends will continue to strengthen. In summary, we have begun fiscal 2026 with a solid momentum, a clear focus, a stronger financial foundation than ever before. I'm incredibly proud of our team, what our team has accomplished and excited about the opportunities ahead. Thank you all for your continued support and confidence in NAPCO. Our formal remarks are now concluded. We'd like to open the call for the Q&A session. Operator, please proceed. Operator: [Operator Instructions] Your first question comes from Matt Summerville with D.A. Davidson. Matt Summerville: A couple of questions. First, on locking. Can you talk about what percent of your locking mix today is represented by that networked product? And then, can you also discuss how your MVP technology differs from other major locking players in the space today? And then, I have a follow-up. Kevin Buchel: I'll answer the first part, and then Dick could answer the second part. So the first part, most of our sales in locking are the traditional products. MVP is just starting out. It's gaining some traction. We're going to show it again at ISC East, which is in a couple of weeks. We're going to show upgrades to what we showed at ISC West back in April. The expectation is, once we show that and start shipping that, we'll start to gain more traction in the new stuff. But the old stuff, the traditional stuff is powerful stuff. Locking is 66% of equipment sales. And that includes all the categories we mentioned in our prepared remarks, including schools and lots of things. We don't announce all the school wins. The schools, sometimes they don't want us to talk about it. But believe me, they're there, and that's part and parcel of why locking was so strong. It was very strong in this quarter, and the expectation is it will continue to be strong. Now Dick, maybe you can comment on why our MVP is different than anybody's product out there. Richard Soloway: Sure. So the MVP product that we introduced is a new recurring revenue generator for locksmiths, as well as system integrators. And what's interesting about it is that we have a totally integrated system because we manufacture the locks. We've been gold standard lock manufacturers under the Trilogy brand for many, many years. It's considered the best locking product. Now, we've added the radio aspect to it, which communicates to our cloud and the cloud is owned by us. We built it. So we're a total integrated manufacturer, which allows us to add a lot of extra functionality to the concept of locking with a recurring revenue tail to it. So if you're an administrator in a hospital, you're in charge of the security division, you can get instantaneous information with all the equipment up in the cloud. No longer does it have to be on the site and where the dealer has to go back and make upgrades to the software. It can all be done in the cloud, and we do it all for the dealer. And we charge $3 a door for each door, and there are millions and millions of doors out there. While we're very successful with the fire alarms and the burglar alarm radio products, which generate recurring revenue, there's millions of those type of buildings where there's one radio per building usually. In this case, you could have 15, 20, 100 doors generating $3 per door with all these services. So it's a totally integrated hardware-software package, and we made it in 2 different ways. One is for basic smaller offices, doctors' offices. You have 6 doors. And that's the MVP EZ. And then, the full-blown access control cloud system is for system integrators to do larger jobs. So we can control our own destiny unlike a lot of our competitors, which have to get locks from one manufacturer, then they do the software themselves or vice versa. We do it all in-house. We have an engineering staff that develops everything from soup to nuts, from the hardware, all the way up to the middle and software of these systems. So it makes us very unique. It's going to be very powerful in the future. It's a way for dealers and locksmiths to build equity in their business now by getting recurring revenue from each door where they install the locks. Matt Summerville: And then, just as a follow-up, can you parse out a bit, in the fiscal first quarter, how much of the hardware revenue growth would have been price versus volume? I'm trying to get a feel for how much price has yet to be realized. And any high-level thoughts as to how the remainder of the fiscal year cadences out would be beneficial. Kevin Buchel: So that's -- it's a combination, Matt. As I said earlier, it's -- we didn't get the full benefit of the price, but we will as the year progresses. Andy could give us some color of kind of what it was in Q1, but we know that there's a lot more to come from the benefit of the pricing. Andy, do you want to comment on it? Andrew Vuono: Sure. Matt, so in response to that, so of the approximate 12% increase in equipment revenue for the period, our preliminary analysis has indicated approximately 60% of that is related to volume increases and 40% is tied to the pricing increases that went into effect in Q1. Operator: Your next question comes from Jim Ricchiuti with Needham & Co. James Ricchiuti: Maybe a follow-up to that, and I know this information is going to be in the Q later today, but can you give us a sense as to what the overall growth was in the door locking products business and whether, when you talk about the early pricing benefits, you saw some benefit in that part of the business as opposed to the radio business? Kevin Buchel: So locking -- and you'll see this in the Q that's going to be filed today, a little later today. Locking for Q1 was $17,083,000. Last year's Q1, it was $13,854,000. So that's a substantial increase. Locking was very strong. Some of it did come from orders that were placed by distributors trying to beat the price increases. We carried a backlog of several million into Q1 from Q4. But a lot of it was not that. So it was really some of it guys going ahead, trying to beat the rush, but a lot of it is locking being strong. This is one of the strongest locking quarters, maybe the strongest we've ever had. It was right up there. And the expectation is, it's going to continue. We don't have situations in the channel where guys are loaded up and presumably, they're not going to skip when we come to then this quarter, Q2. You never know with distributors. They behave funny sometimes, but the channel is good. The sell-through is strong. The expectations are all very good in the locking segment. James Ricchiuti: Helpful, Kevin. And I wonder, maybe just to the comment you just made, just the overall tone of demand, what you're hearing from some of your channel partners? You alluded to a good sell-through that you're seeing on the door locking side, maybe on both parts of the hardware business. Any color you could provide in terms of what you're seeing, hearing sell-through stats or otherwise? Kevin Buchel: Right. So sell-through stats -- this is as of Q1. I can't really comment on what's Q2, which is a month old. But for Q1, we saw very good sell-through stats for all of our locking partners. And we have 2 locking companies, and it was good on both. On the intrusion side, we saw tremendous improvement there, too. So as -- and I look at this very closely every month. So I was [indiscernible] what I'm seeing. I always caution because I never know what distributors are going to do. It's their year-end in December. Who knows what's going to happen. But if we're going to base it solely on what stats we're seeing, and that's their inventory levels and the sell-through, we should be in good shape in both areas, locking and intrusion. Operator: Your next question comes from Peter Costa with Mizuho. Peter Costa: I'd like to maybe dig a little bit further into the service margins. That 80 basis point year-over-year decline was a little bit more than expected. What's kind of causing that pressure? Is there anything on underlying radio margins, an acceleration in MVP? Anything there? Kevin Buchel: So Peter, there were really 2 factors that affected the margin for the recurring, which still is tremendous. 90.3% is still tremendous. It did go down from a little bit over 91%. So 2 factors. Factor number one, we now have a triple carrier radio. That introduces T-Mobile into the mix. We have to buy minutes to support that. We haven't really charged anybody for that. And even though it's not a lot of money, it did move the needle a little bit. The expectation is, we will increase our radio -- our recurring radio charge to cover that. It's not going to be a lot, but it might be enough to move the needle back to where it was. That's one factor. Another factor is, we are gaining a lot of business from some very large dealers. I don't want to mention any names, but there are large dealers out there. One in particular has been buying a lot of the smaller dealers. It seems like they do an acquisition every week. And as a result of that, we're picking up more radio business, and we will be picking up more in the future. This consolidation, if you want to call it that, from the big guys buying up some of the smaller guys, and the radio segment has all moved in our favor. But the big guy loves our fire radio. And when he buys a smaller dealer, he is going to make sure that the smaller dealer's customers get our StarLink Fire radio, if they weren't using it. Maybe they were using it. But if they weren't, opportunity for us to pick up even more share. The one negative of this, and it's mostly positive, is a big guy can command a little bit of a better price. Maybe the big guy pays $1 less than what the smaller guy is paying. We honor that. We're happy to get more business. So if a guy was paying $8 and we have to lower it to $7, just to use an example, we will do that. We'll do that all day long because we're picking up more radio recurring revenue business. So that, too, can move the needle a little bit. Absent of that, it's all the same powerful margins that you've been seeing. Peter Costa: Makes a lot of sense. Richard Soloway: Let me add something else to that. I network a lot with the dealers, and some of the dealers in certain parts of the country have told me that T-Mobile is more reliable on their cell phones than the other services. So evidently, the towers are different or the way the reception is for the radios on their towers is different. So by adding T-Mobile to our mix of AT&T and Verizon, now we have all the major carriers. And the areas where T-Mobile is the strongest in pickup and communications is now in our radios. So we're going to pick up market share -- additional market share with a more stable radio network with T-Mobile. So that's going to help us a lot. So overall, it should be a net positive having T-Mobile as part of our mix. Peter Costa: Awesome. Maybe just thinking about the price on the radio, I think that's kind of intended to be under the RSR, and that seems like a pretty big deal. How would you kind of approach that? Is that just the entire installed base would get a little bit of price, just incremental sales or just like the T-Mobile radios? How would you tackle that? Kevin Buchel: If it's a triple carrier, it's going to be in everybody's radio. So to cover it, everybody would probably get a little bit of an increase, not much. Believe me, we don't want to mess with a very good formula. But I -- like the shareholders, I want to keep that 91% margin as well. And if we have to raise it a little bit to keep it up there, we're going to do that. So we're looking at that now, Peter. Operator: [Operator Instructions] Now our next question comes from Jeremy Hamblin with Craig-Hallum Capital Group. Jeremy Hamblin: Congrats on the strong results. Just wanted to start a little bit with kind of the manufacturing facility, making sure that in terms of the hurricane that had some impact in the DR, just understanding what you've seen there. And then, just kind of related note, in terms of how the tariffs are being applied at this point and impact, as you look forward in calendar '26, do you feel like you're going to have kind of normal pricing increase on products? Or is there any incremental that you need to take to cover where tariffs stand today? Richard Soloway: This is Dick Soloway. I moved down there to the Dominican Republic after I searched around in China and Mexico and decided Dominican is great for a lot of advantages, closest to the U.S., stable government and being able to get the workers that we needed. And we built this custom building. After we were in individual smaller buildings, we built a custom building, which is Category 5 proof. It's all concrete building. So we don't have any issues. We had no problem with the hurricane that passed by. We generate our own power, make our own water. We're self-contained like city down there. And of course, we have our workers come from around the area. And it's actually a shelter for them in a hurricane because it's stronger than the houses. So it works out really, really well. So we had no issues with that, and we don't expect there's anything that's going to be able to cause us any grief in the future. And what was the second part of the question? Jeremy Hamblin: Just in terms of tariff impact and thinking about pricing in 2026 and whether or not you take kind of your more typical price increase or whether or not you would take slightly more, just given how kind of the tariffs are playing out here. I mean, we've seen some stabilization in kind of tariff mandates, but... Kevin Buchel: The tariffs for the DR, very stable. It's not like some of the other countries where it's going up, it's down, it's here, it's there. We know what it is, 10%. That's what it is. That's what it's been. We took an increase to cover that back in -- we announced it back in April. We don't need to do anything more on that front. We took a general price increase that we announced in July. We don't expect to do another one until we get to the end of this fiscal year that we're in. So pricing-wise, we're good. The only thing is, we haven't felt it all yet. We expect to feel good about it -- better. We feel good already. We expect to feel better about it as we get deeper into the year as the full effect is felt. We haven't felt it yet. Jeremy Hamblin: Great. And then, just coming back to the service revenues. You saw a nice little bit of sequential year-over-year improvement from what you had in the June quarter. And you just had a strong quarter with locking. I wanted to just get a sense with the evolution of that business and potentially getting some recurring revenue associated with that in combination with kind of the radio alarms and so forth. When do you think you might kind of see that show up here in recurring service revenue growth as FY '26 plays out? Kevin Buchel: When we released it, when we first talked -- started talking about it, showed it at ISC West in April, and we said at that time, give it 18 months to 2 years. That's how long this kind of thing takes. We hope it's sooner, but I would give it time. I think we'll feel a little bit more as this fiscal year progresses. I think fiscal '27 is when I think we'll really start to feel it. So you got to give it time. We're like 6 months removed basically from when we really had a coming out party for it. Now, we're going to have another coming out party in a couple of weeks to show the other versions of MVP. Give it another year after that, and I think it could be meaningful. Richard Soloway: I went through -- because I've been in the alarm business for a long time, I went through alarms without recurring revenue. Imagine, in the early years, it was just a hardware job that was put in by a dealer. There was no recurring revenue, and the dealer went on to another hardware job. And then, the intro of recurring revenue in the alarm business revolutionized that business. Every job that goes in, intrusion of fire, has a recurring revenue communicator in it, and it gives great service to the occupant of the building, the owner of the building. So, that change, it took a couple, 3 years for dealers to understand why you want to build equity in your business. You just don't want to do a job and do another job after that without having a recurring revenue tail. We're going through the same situation now in the locking business, 25 years later. The locking business is such that a dealer will put in a locking job, either a large building or smaller buildings, and then they go on to the next job, but there's no equity building, no recurring revenue. We are unique in the business, having the fact that we make the locks, we make the radios and that the locksmiths and the integrators don't get recurring revenue from this type of service. And we believe, like it happened in the alarm business, there's going to be a changeover that locksmiths are going to want to get recurring revenue tail to everything they do. And that's what we're doing now. Patterning ourselves after the original alarm business, now we're bringing it to the locking business, and we're unique in the fact that we're the company that can do that because we have all these different facets that we've knitted together to make an integrated manufactured locking product and a cloud product for these locksmiths and for the system integrators. So it's going to be an exciting ride going forward. Just piling on more recurring revenue is the name of the game for us. We've become a communications type of company, and it's going to grow ever larger. Jeremy Hamblin: Just as a quick follow-up on that point, so as we look to FY '27, do you have a sense for what portion of your total service revenues could be tied to the locking products as opposed to the alarm? Kevin Buchel: I think it's premature for us to throw out projections like that. I would just say, I think it would be meaningful and just leave it at that. Richard Soloway: Just think about how many doors are out there and how many commercial buildings. This is all commercial. This is not residential. And what information you can get from every door who comes in, in case of emergencies, what's going on in the hospital, in the drug area, where the drug cabinets are, and you get instant information and reports, doing time and attendance and all kinds of other great things, knowing everything that goes on in every door in the building that has an MVP system, locking system installed on it. I would say that if you don't have this type of system a couple of years from now, you're really in the blind as a management company or as a security department in an industrial building. You've got to have this information. You shouldn't be in the blind. And MVP will give it to everybody. And it's very, very economical, very reliable because it's all built using our StarLink communications program. Operator: Next up, we have Jaeson Schmidt with Lake Street. Jaeson Schmidt: Curious if you can give us an update on how ADI is progressing. Kevin Buchel: ADI relationship, excellent. They do a great job over there. They move a lot of intrusion equipment on our behalf. I couldn't be happier with the exception of one thing. I'd like more locking sales out of them, and we told them this. They're great with the alarm side. We think there's an opportunity for locking through them. They have over 100 branches. I think it's 115 branches, and it would be nice to move locking through those 115 branches. Absent of that, they're doing a very good job, very happy. Richard Soloway: Let me add something to that. There's lots -- there are many, many dealers, and a larger percentage of dealers are going to be doing locking jobs. These are the alarm dealers that do fire and burger alarm jobs, but they're not doing -- not a large percentage of doing locking. They're just staying into the alarm sector of the business. Now, with recurring revenue added on to the locking jobs, it's not just a hardware installation. It's a recurring revenue generator for them. It adds to their fire and burger alarm recurring revenue. And we're going to be training lots of these locking dealers to utilize it and lots of the alarm dealers to utilize it and vice versa. So we're going to be doing a lot of cross-training so that a dealer can be a total wraparound business. He gets recurring revenue from his alarms and he gets recurring revenue from his locking installations and vice versa. So ADI is a great vehicle because they're the largest distributor. They should -- they will, I'm sure, enter into the locking business all across the country, and it's going to be great for market share for us because we're the only alarm manufacturer that has a locking division, and we're the only locking manufacturer that has an alarm division designing and manufacturing all these things. So we're a natural play for the whole locking and alarm industry. We have 3 locking companies, Marks and Alarm Lock and Continental, and we have the NAPCO burglar and the fire alarm business. So we really have the widest range of products out there. Great partners with ADI, and they're a great company. They're really buttoned up. Jaeson Schmidt: Okay. That's helpful. And then, just as a follow-up, sorry if I missed it, but when will the price increase go into effect to account for the T-Mobile compatibility? Kevin Buchel: We're studying that now, Jaeson. We're very cautious with the pricing for the recurring. But it's very clear that we're adding a cost that we're not being compensated for. So we're looking at it. And I would say it's imminent, but we haven't decided it yet. Operator: [Operator Instructions] Our next question comes from Lance Vitanza with TD Cowen. Lance Vitanza: So I wanted to talk a little bit about the school security side. And I think it was about a year ago that you announced the Pasadena school contract. I'm wondering what the status is of that, how far along that is or how it went? Any sort of lessons to learn or just how that sort of leaves you feeling about the opportunity more broadly? Kevin Buchel: That project went well. It's been completed. The opportunities are still tremendous throughout the country. You see all the shootings that are still going on. You still see the announcement that barricade chairs in front of the doors. These are all things we all have been hearing for over 10 years. And unfortunately, a lot of the schools, school districts move very slowly. We do our best to go around the country and show the school districts if they have any issues with money, how to go about getting the money. There's lots of money available. A lot of funds have been allocated to school security. It's there. The universities have no issues. They have the money, and they have the needs as well. Despite the shooting has been going on for over 10 years, we're in the early innings, I would say, fourth or fifth inning of this. Still tremendous opportunity. We win a lot of business, and we don't -- we're not able to tell you about it unless the school grants it, grants us permission. And sometimes, we don't even know about it because the distributors just are doing a job for a school district and they buy a lot of our equipment. We know it's meaningful. We know there's a lot more to go. We know we have the solutions. We know we're the only company because we do locking and access and alarms. We're the one-stop shop that a lot of schools need. So we just keep going out there and getting that word out. Richard Soloway: Yes. We manufacture locks, which are inexpensive for K-12s, and then we manufacture versions of that lock with remote control to them, so you can lock doors remotely, do wide area campuses with our locks. And it's a very diversified line of wide-ranging locks. And as Kevin said, we manufacture the locking, the lock set. We make the parts. We assemble it. We do the radios. We have the cloud. We have all of that experience, and schools appreciate it, and we're doing very nice school work. And -- but still, even after hundreds of shootings a year in the U.S. -- it's a tragedy -- a lot of schools haven't installed it yet. So the fourth or fifth inning of the installation availability. So there's a lot more to do. So schools that make great choices will select the NAPCO system, and we can be flexible from the smallest to the largest campuses out there. So it's a great thing that we're manufacturing that. We want to protect the students and the faculty. And with NAPCO, you can. So our guys are beating the bushes and showing this to these facilities. And eventually, everybody will get armed up against intruders that come into schools and cause havoc. Lance Vitanza: If I could just get one more in on the balance sheet. Cash at $106 million, that's as high as it's been in my memory, recent memory. What do you plan to do with all that cash? I know you talked about possible M&A. The dividend, I mean, you're covering that out of your cash flow. So -- and I'm guessing that the amount of cash that you actually need to run the business is a small fraction of what you had -- what you have. So can we be thinking about any kind of accelerated return of capital to shareholders in 2026? Kevin Buchel: It's a good problem to have, Lance. We keep generating more and more cash. There's not a lot of M&A that's required to run the business. You heard in Andy's comments that CapEx was minimal. We need lots of labor, and we can get it in the Dominican Republic. So the needs for cash dividends, potential acquisition, we have lots of bankers talking to us. Every banker tells us they have the perfect deal for us, but we're pretty fussy. There's a lot of boxes it has to check. We don't want to be distracted. But if it's the right deal, we certainly would proceed. And there are -- I'm sure there are companies out there, and we go through -- as the bankers present them, we go through them all. And if one hits the right spot, we'll go after it. The last thing we want to do though is get distracted by something that's not accretive from day 1. We don't want to overpay, but it could be a good thing. And we're in a good position to do it much better than the position we were in when we did our last one 15 years ago when we had minimal cash, lots of debt and no recurring revenue. So we got a lot of cash, lots of recurring, no debt. We could do it. It's got to be right. Operator: There seems to be no further questions at this time. So I will now turn the call over back to Richard. Please continue. Richard Soloway: Thank you, everyone, for participating in today's conference call. As always, should you have any further questions, feel free to call Fran, Kevin, Andy or myself for further information. We thank you for your interest and support, and we look forward to speaking to you all again in a few months to discuss NAPCO's fiscal Q2 results. Have a wonderful day, everybody. Bye-bye. Operator: Thank you, Richard. Thank you, everyone. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, and welcome to the Vertex Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn the conference over to Joe Crivelli, Vice President, Investor Relations. Thank you, and over to you. Joseph Crivelli: Hello, and thanks for joining us to discuss Vertex's third quarter results. David DeStefano, our President and CEO; and John Schwab, our CFO, are also with us today. During this call, we may make forward-looking statements about expected future results. Actual results may differ due to risks and uncertainties. These risks and uncertainties are described in our filings with the Securities and Exchange Commission. Our remarks today will also include references to non-GAAP metrics. A reconciliation of these metrics to GAAP is also provided in today's press release. This call is being recorded and will be available for replay on our Investor Relations website. I'll now turn the call over to David. David DeStefano: Welcome, everyone, and thank you for joining us. Our third quarter performance demonstrated continued momentum in core strategic areas while managing specific market and customer headwinds. The strength of our strategy was evident in our strong cloud revenue growth, the increased margin leverage driven by automation initiatives and strong cash flow performance. We also saw accelerating traction in e-invoicing and improved SAP activity. However, offsetting this was the persistence of lower-than-typical growth from existing customer entitlements as previously discussed in our second quarter earnings call. In addition, the bankruptcy of 3 large enterprise customers as well as several accelerated migrations to our new cloud platform impacted customer retention metrics. I will highlight the specifics of all of this and their impact on certain metrics in a moment. Our revenue results for the third quarter were in line with our guidance, while adjusted EBITDA exceeded expectations. Revenue was $192.1 million, up 12.7% year-over-year. Subscription revenue grew 12.7% and cloud revenue growth was 29.6%. Adjusted EBITDA was a record $43.5 million, exceeding the high end of our guidance by $2.5 million and representing an EBITDA margin of 22.6%. And free cash flow was very strong at $30.2 million in the third quarter. In addition, annual recurring revenue, or ARR, grew 12.4% to $648.2 million. Average annual revenue per customer increased 12.4% year-over-year to $133,000. Scaled customer count grew 14%. Gross revenue retention or GRR, remained at 95% in the third quarter within our targeted best-in-class range of 94% to 96% and net revenue retention or NRR, decreased to 107%, down 1 point from the second quarter. First and foremost, I want to provide more specific details into the items that impacted customer retention metrics. As we have discussed each quarter, we experienced moderate customer turnover at the very low end of our customer base and discontinuation of legacy product usage by customers who have migrated to our new cloud solutions. In Q3, we experienced an unusual impact in these areas. Certain enterprise customers, including Big Lots, Party City and JOANN Fabrics, canceled licenses due to bankruptcy. This impacted retention metrics by approximately $2 million. Additionally, we had 3 large customers who had previously migrated to our new cloud platform, complete their own internal legacy ERP migrations faster than previously anticipated, which enabled them to downsize that portion of their subscription fees with us. This impacted NRR by another $2-plus million. Beyond these anomalies, management was encouraged by the progress achieved across several of our ongoing growth initiatives. On e-invoicing, ecosio had a strong quarter and contributed revenue of $4.1 million. This is an increase of approximately 30% from their run rate in last year's third quarter when we acquired the company. We have landed over 100 customers since declaring general availability in late March, all fit nicely into our expected land and expand experience. Additionally, we are seeing success with our integrated product strategy, which includes both e-invoicing and value-added tax compliance in one platform with full end-to-end documentation and audit support. In the third quarter, we continue to see an influx of new customers driven by upcoming e-invoice mandates, including Belgium, France and Germany, which we expect to accelerate as those actual deadlines approach. Ongoing cloud migrations with ERP vendors, including our partners, SAP and Oracle remain solid with pipeline build improvements appearing. And the expense control initiatives we discussed last quarter are driving improving earnings leverage as demonstrated by our strong adjusted EBITDA and free cash flow results this quarter. This quarter's progress on our long-term growth initiatives validates we still have significant greenfield opportunity with enterprise customers that are currently using legacy homegrown or manual solutions for indirect tax compliance and are migrating to the cloud. We continue to believe we have approximately 3x opportunity with our existing installed base, which we will penetrate by expanding usage throughout their organizations or by cross-selling additional products, and we have major tailwinds in front of us from the upcoming e-invoicing mandates in major countries like Belgium, France and Germany. Demonstrating our confidence in Vertex's long-term growth opportunity, today, we announced that the Board of Directors has authorized the repurchase of up to $150 million of Vertex shares in the open market. Coupled with our progress on several growth areas, I'm excited with the number of AI initiatives the team advanced in the quarter. We are executing on 3 fronts to commercialize AI, which are focused on enabling new logo wins and wallet expansion with existing customers, driving enhanced customer retention through targeted ecosystem interoperability and participating in new segments ripe for disruption. We are seeing ongoing traction with our smart categorization offering. And last week at our annual customer conference, we highlighted several new agentic capabilities on our cloud platform. These are focused on workflow capabilities and data management. The customer conference was our largest yet with strong attendance from alliance and tech partners highlighting the energy around our customer segment and market opportunity. And the AI sessions were clearly the most oversubscribed sessions by attendees. Additionally, at Exchange, we shared some of the transformational work we are doing, including our pioneering of the first-ever agent-to-agent tax configuration capability for Microsoft Dynamics 365 finance and supply chain. This is another step forward in creating a differentiated experience for Microsoft customers, bringing enterprise innovation to the mid-market. In October, we also launched Kintsugi powered by Vertex, which enables SMBs to automate key compliance functions while providing real-time dashboards for jurisdictional liability and exposure tracking. Powered by the Vertex tax engine, it delivers the same trusted accuracy and global content that enterprises rely on. In an AI-native experience built for agility and scale, this is just the first of many such new products and new initiatives that we expect to launch in partnership with Kintsugi. Exchange was also a clear reminder of the stark difference in tax compliance precision requirements between the enterprise customer and the SMB segment where good enough is sufficient. These complex global multinational enterprises remain very cautious about how AI is being considered in their departments due to inherent limitations. Several points were clear from our discussions there. Enterprise customers know that our solutions operate in speed and on a scale they must have to support their business embedded in the workflow of the critical order-to-cash process. Our implementations are complex. It's not uncommon for Vertex to be connected to multiple instances of SAP, an instance of Oracle in another division, a legacy ERP solution in still another as well as multiple billing and CRM solutions. And we are providing tax answers across that architecture with no latency and enterprise-level accuracy. These enterprise customers cannot afford for a single customer to experience transaction delays as an AI engine spins through scenarios to deliver a tax answer. They rely on the accuracy Vertex provides in every transaction. Enterprise customers are audited constantly by taxing authorities and cannot afford any risk that a probabilistic AI-driven outcome subject to hallucinations delivers an inaccurate tax answer, and they need accountable traceability for tax positions they take in their compliance. In addition, we estimate that as many as 70% of the tax rules in our content database are not easily mined by AI-driven web scraping. In the United States, below the level of state and county, tax rules for municipalities and tax overlay districts are hard to curate, sometimes embedded in meeting minutes that are not easily sourced on the Internet. And in some districts, finding the latest tax rules requires a person-to-person phone call, and all of this requires human judgment and professional curation to codify into the tax content database. In addition, these tax rules are constantly changing at a historic pace, and this is likely to get worse with reduction in federal funding to states as a result of the recently approved tax legislation. I'll now highlight a few business wins. We saw improved momentum in the SAP ecosystem this quarter, driven by ECC to S/4HANA conversions. These transitions created meaningful opportunities for Vertex to expand our footprint with existing customers and win new logos. In the third quarter, we partnered with an existing specialty retail customer on a major ECC to S/4HANA transformation. As part of this initiative, the customer advanced their plan to standardize on Vertex, transitioning additional tax functions from a competitor to our cloud platform. This expansion resulted in mid-6 figure of new revenue and reinforces our role as a strategic partner in their modernization journey. Another long-standing customer in the manufacturing industry launched a company-wide transformation project this year, including a migration from ECC to S/4HANA. As part of their transformation, the customer added VAT calculation across its operating regions and added several SAP tools, resulting in mid-6 figures of new revenue for Vertex. This is an example of how our business grows during migration. In addition to receiving a significant like-for-like increase, many customers use this as an opportunity to license additional capabilities. An existing customer that is a leading North American energy services company expanded with Vertex to cover 2 companies it recently acquired. This customer, which is currently operating on a legacy Oracle ERP solution, selected our private cloud solution and will eventually migrate its entire infrastructure to the cloud as part of an Oracle Cloud transformation. This customer expansion drove low 6 figures of new revenue. While our AI-based smart categorization product is still in limited availability, we added a major grocery store chain to our customer base for this new product. The customer staff was struggling with the labor-intensive nature of tax categorization in its delivery business and is excited about the ability to automate this process. This cross-sell resulted in 6 figures of new revenue for Vertex. This gives you an idea of the magnitude of sales opportunities with this AI-driven application. At present, we are focusing on the retail industry, hence, the new business win. But over time, we will expand our capabilities to cover other industries. A leading aerospace and defense contractor recently selected Vertex as its preferred indirect tax solution for one of its consumer-facing subsidiaries, fully displacing a competitor across its global operations, including Brazil and India. This competitive win underscores the strength of Vertex' tax content coverage in complex jurisdictions and is expected to generate mid-6-figure annual revenue. In addition, a global pharmaceutical company selected Vertex as its first external indirect tax provider to support its S/4HANA transformation. This new logo win was driven by Vertex' proven global tax coverage, deep expertise in the pharmaceutical industry and ability to manage complex requirements. This new business win, which was brought to us by our partner, EY, will also drive mid-6 figures of new revenue for Vertex. During a cloud transformation initiative, a global marketing services company replaced an incumbent competitor with Vertex, citing concerns about scalability and infrastructure flexibility. The customer valued Vertex's agnostic deployment model, which aligned with the CIO's preference for private cloud and option the competitor did not support. This strategic win sourced through our partner, Grant Thornton, represents a 6-figure new business opportunity. Finally, during the quarter, we won an e-invoicing opportunity with a global real estate investment trust, which is preparing for upcoming mandates in Belgium, France and Germany. We will also cover Italy and Spain for this customer. Of note, this customer was driving mid-6 figures of revenue for Vertex prior to this new business win, e-invoicing will drive high 5 figures of new revenue. Before I turn the call to John, let me address my succession that we announced in October. I approached the Board of Directors in early 2025 and told them of my plan to retire after 26 years at Vertex. However, I did not set a specific time line as we wanted to make sure we had the right candidate in place. We launched a comprehensive search process led by renowned management recruiting firm, Spencer Stuart, and considered both internal and external candidates. Ultimately, we found an exceptional new CEO in Chris Young, who will officially join the company next week. Our search surfaced outstanding candidates from top companies around the world, but Chris stood out as the clear choice. His strategic vision, experience in our ecosystem through his prior role as Executive Vice President of Business Development at Microsoft and deep familiarity with global enterprises all point to his ability to drive growth and value creation. What truly sets Chris apart, however, is his commitment to fostering a positive performance-driven culture, grounded in respect for people, a quality that aligns closely with our values and leadership philosophy. In addition, Chris was at the vanguard of Microsoft's push into AI and helped shape Microsoft's investment agenda in artificial intelligence and other frontier technologies. His forward-thinking perspective in that regard will be extremely valuable to Vertex and our shareholders. As for me, I'm not going anywhere. I'm merely transitioning. I will stay on as Nonexecutive Chairperson of the Board, where I will bring all my energy in the months ahead to support Chris and his transition. John will now take you through the financials. John Schwab: Thanks, David, and good morning, everyone. I'll now review our third quarter financial results and provide guidance for the fourth quarter and full year of 2025. In the third quarter, revenue was $192.1 million, up 12.7% year-over-year. Our subscription revenue increased 12.7% to $164.8 million. Services revenue grew at 12.8% to $27.3 million, and our cloud revenue was $92 million in the third quarter, up 29.6% Annual recurring revenue, or ARR, was $648.2 million at quarter end, up 12.4% year-over-year. Our net revenue retention, or NRR, was 107% compared to 108% in the second quarter. This was impacted in the third quarter by factors David noted in his prepared remarks. Gross revenue retention or GRR, remained at 95% at quarter end within our targeted range of 94% to 96%. Our average annual revenue per customer or AARPC, was $133,484, up 12.4%. For the remainder of the income statement discussion, I will be referring to non-GAAP metrics. These non-GAAP metrics are reconciled to GAAP in this morning's earnings press release. Gross profit for the third quarter was $142 million, and gross margin was 73.9%. This compares with a gross profit of $126.2 million and a 74% gross margin in the same period last year. Gross margin on subscription software revenue was 81.4% compared to 80.5% in last year's third quarter and 83.2% in the second quarter of 2025. And gross margin on services revenue was 28.8% compared to 35% in last year's third quarter and 33.1% in the second quarter of 2025. The lower margin was due to investments in automation that are expected to drive higher margins into the future. Turning to operating expenses. In the third quarter, research and development expense was $16.8 million compared to $12.9 million last year. With capitalized software spend included, R&D spend was $40.8 million for the quarter, which represents 21.2% of revenue. Selling and marketing expense was $43.4 million or 22.6% of total revenues, an increase of $5 million and approximately 12.9% from the prior year period. And general and administrative expense was $38.4 million, up $2.6 million from last year. Adjusted EBITDA was $43.5 million, up 12.7% compared to 38.6% for the same period last year and exceeding our quarterly guidance. This represents an adjusted EBITDA margin of 22.6%. As a reminder, adjusted EBITDA margins are being impacted in 2025 by accelerated investments to support the 2 acquisitions we made in 2024 related to e-invoicing and artificial intelligence. On the former, we are investing in ecosio, which we acquired in August 2024 to accelerate country coverage and broaden our go-to-market infrastructure. This represents an investment of approximately $16 million to $20 million in 2025. On the latter, we're investing $10 million to $12 million this year to productize our smart categorization product and adopt AI technologies in other areas of the business. In the third quarter, operating cash flow was $62.5 million and free cash flow was $30.2 million. We ended the third quarter with over $313.5 million in unrestricted cash and equivalents and $300 million of unused availability under our line of credit. As David mentioned, the Board has authorized a share repurchase of up to $150 million. Now turning to guidance. Reflecting the factors mentioned earlier, including customer bankruptcies and faster-than-expected legacy platform migrations, we now expect fourth quarter revenues of $192 million to $196 million. And for the fourth quarter, we expect adjusted EBITDA of $40 million to $42 million, reflecting an adjusted EBITDA margin of 21.1% at the midpoint. For the full year of 2025, we now expect revenues of $745.7 million to $749.7 million, Cloud revenue growth of 28% and adjusted EBITDA of $159 million to $161 million, reflecting a margin of 21.4% at the midpoint. David will now make some closing comments before we open up for Q&A. David? David DeStefano: Thanks, John. I have been in this industry for 26 years. I have seen it go through countless economic, regulatory and technological cycles. The enterprise segment customer has remained very consistent in their approach to solving their needs for effective tax compliance due to the mission-critical nature of their role. They don't buy on hype. They seek proof. They are focused on mitigating risk and delivering accuracy. They make purchase decisions for the long term based on value. So while we have noted some very specific headwinds to short-term performance in the past 2 quarters, we remain confident that the fundamental drivers for our long-term growth are strong and growing and that Vertex will benefit from them with improved performance as we move into 2026 and beyond. My recent experience at our customer conference reinforced my belief in the strength of our alliance partner relationships as we continue to lean into our partner-first strategy. Our leadership position in the enterprise segment certainly requires continued investment given the pace of accelerating regulatory and technological changes. And in doing so, we are positioned to reward our investors as a result. It is this confidence that is the primary driver for our Board's authorization of the $150 million stock buyback program announced today. I'm thrilled to now have Chris Young join our team and work side-by-side with him in our respective roles to ensure the company realizes the full potential of our opportunities and deliver strong financial performance for years to come. With that, we will take your questions. Operator: [Operator Instructions] We have the first question from the line of Joshua Reilly from Needham. Joshua Reilly: I wanted to get your latest thoughts on how you expect the SAP ERP cycle to kind of play out from here. Clearly, there's a lot of companies that still need to migrate to S/4HANA to hit the 2027 deadline. It seems like that's a bit of a stretch. Curious, what's your thoughts in terms of the capacity out there to manage these migrations in the industry? And what are you hearing maybe that improved the deal flow a bit this quarter versus the last couple of quarters? David DeStefano: Yes, Josh, thanks for the question. I think industry-wise, I should say, I think the industry has been preparing for this for several years. So I know in talking to a number of our partners, they have a -- they've been ramping up staff in anticipation of sort of a back-end process for the migrations that are ahead. So that's what I know. I can't speak to any more in terms of the likelihood of any deviation in the deadline. SAP keeps reinforcing it. So I don't fundamentally see there's a reason changing. I think the -- we've talked about this. The pipeline has remained solid. It's been more the efficiency getting through the pipeline as deals occasionally at the customer level have been slow due to their own migrations, slowing down. I think we saw a little bit of the break in that in the quarter, and that's why we had -- we were able to highlight a number of SAP wins in the quarter primarily. Joshua Reilly: Got it. That's helpful. And then maybe a bit more color on -- was it 2 customers migrating to their own homegrown solutions? And is that a portion of their business with you migrating to the homegrown system or a full system -- and was that built into your prior guidance? Or did you find out about that after you put up your prior guidance? David DeStefano: Yes. No, this came out -- these are customers that didn't go to their homegrown system. They migrated to the Vertex next-generation cloud platform. As you know, any companies that are going through a cloud -- leading a cloud migration like we are, there's always a moment where you're paying 2 mortgages where you're paying mortgage on the new -- you've already relicensed with Vertex. You've gotten the uplift from them, and they're shutting down their old system. And it usually lags on for a short period of time. These were 2 companies that were extremely large customers of ours that had already migrated to our cloud at a significant price increase that also were able to shut down their system faster than we had built into our guidance because they made some internal progress on their systems that we were -- that they had not forecast when we had our direct engagement with them. So yes, we do factor that into our guidance as we look at our numbers going forward. But it's just these 2 happen to get things done faster than they had previously guided to us. Operator: We have the next question from the line of Chris Quintero from Morgan Stanley. Christopher Quintero: And David, let me say, I know you're still going to be around, but it's been a pleasure working with you, and I wish you all the best in this next part of your life here. Maybe on the guidance, I think this is the second time in a row you guys have cut the guide, which I can't remember the last time Vertex has done that. And so just at a high level, has the guidance philosophy changed at all? And how are these kind of cuts informing your assumptions that you're putting into the Q4 guidance here? John Schwab: Yes, Chris, thanks for the call. No, we have not done this before. You're right. In terms of our philosophy around guidance, this hasn't changed our guidance philosophy one bit. We continue to be thoughtful as we think through guidance. And again, as David had mentioned, there was a couple of things, obviously, this quarter that impacted us a little bit. Some of this BK and migration activity certainly had an impact. We certainly had an impact from some of the timing of deals that closed in the third and what we're expecting to see in the fourth quarter. And again, we continue to focus on that services strategy where we're trying to lead partner -- where we're trying to go partner first and sort of deemphasize that. And so there were the 3 kind of bigger contributors to what happened -- why the change for guidance in the fourth quarter. But there hasn't been a change in philosophy from our standpoint. Christopher Quintero: Got it. And then it seems like the entitlement growth has been kind of one of the main headwinds on your net retention rate and growth from expanding customers. So I'm curious, like are there any lessons in terms of like -- or anything we should keep in mind as it relates to kind of renewal cohorts as some of these customers have been renewing over the past few years? David DeStefano: Yes, Chris, I think it's a fundamental of trying to assess where our company -- our customers' growth rates are going to be as they grow through our revenue bands. Obviously, we don't have great visibility into each of our customers' forecast growth rate in terms of whether they're going to continue to just expand usage due to their own growth or not. And I think that's been the headwind we've tried to highlight pretty clearly in the data we've determined from -- when we spoke to you in Q2. And so it is something we're trying to see if we can get closer to understanding our customers actually growth guidance that they're giving to the market to see how that will flip to what we expect for revenue bands. But obviously, it's a little bit of a fine line of how much information we have there and how that actually will show up in our revenue bands based on their own revenue -- their customers' revenue timing. Unfortunately, it's sort of like 2 separate move from us. Operator: We have the next question from the line of Alex Sklar from Raymond James. Alexander Sklar: David, I'll echo my congratulations on a fantastic career at Vertex here. Switching gears to -- I want to -- you hired a new Head of Sales in Europe as well. Can you just talk about that process? What was behind the change in leadership in Europe? And then how are you thinking about kind of Europe as an opportunity heading into 2026 versus maybe a couple of quarters ago? David DeStefano: Yes. Thanks for the kind words. I'm anxious to partner with Chris Young in the future of Vertex. And certainly, in my transition, I expect to be as Nonexecutive Chairperson of the Board. I will be quite active in helping continue to pursue the strategy of this company. I think Europe, it's timing of just a leadership change. We're continuing to expand the complexity of operations that we have over there with the acquisition of ecosio, and as we push further into the whole e-invoicing marketplace, we had a very good quarter in terms of continued growth there by the ecosio team and our team in general. And just the overall complexity of the opportunity increasing, felt like we wanted somebody who had been there and done that at a high level. And so it's just an up-level opportunity there. We really appreciate the gentleman that led that operation for years, but it was a great opportunity with someone we had good relationship connection to bring in, and so we capitalized on it. Alexander Sklar: Okay. Great. And then I don't know if you or John want to take this one. But just as we think about the Q4 growth outlook relative to the kind of the medium-term growth outlook that you spoke to earlier this year, how much of the headwinds like the true-ups, the bankruptcies, the early kind of shutting off of on-prem feel kind of 1x from your standpoint versus anything different about the market you're operating in today in terms of just the pace of technology changes or the pace of that SAP transition or e-invoicing adoption kind of broadly? John Schwab: Yes. Maybe I'll start. I think that from an overall guidance in the midterm, I think the BK migration stuff, again, is stuff that we typically -- it was somewhat anomalous to the quarter. I don't think that that's something that's going to be a continual thing there. We have those types of things happen every quarter. What we saw though was just a real confluence of a number of real big ones happening in the quarter that really drove that. So I would say from that standpoint, I think that's -- that to me is somewhat anomalous. In terms of kind of other things, when we look at the -- when we look at sort of how the quarter plays out and we look at sort of what next year looks like. Keep in mind, as you comp us out to some of our prior year numbers that we did have a very large -- some very large true-ups in the fourth quarter of last year. And again, we're anticipating very little in the fourth quarter of this year. So it really -- it drives certain revenue growth next. It mutes a little bit of what the impact truly of this quarter is. David DeStefano: Right. I mean the actual growth rate for the quarter would be close to 13% if you took out those entitlements. And so I think that is notable. And I do think as you look forward in e-invoicing, I mean, obviously, we're just getting into the whole land-and-expand motion we've talked about that we think is really setting us up well as those France and Germany deadlines come on in 2026. That's really what we've been pointing for. And I think the timing of those adoptions are pretty much falling where we thought it will accelerate as we move into '26 pretty significantly. Operator: We have the next question from the line of Adam Hotchkiss from Goldman Sachs. Adam Hotchkiss: David, echoing my best wishes to you. It's been great working with you. I wanted to touch on the comments you made on your customer conference in AI. What was it that customers from your perspective were most interested in from an AI perspective? And where are they from exploratory to actually starting to put some of these things into practice? And I know the Smartcat call on the retail side was interesting. How quickly can you get into other verticals and just get up and running with more customers on that side? David DeStefano: Yes. Yes, I think the approach we're taking with the -- thanks for the questions and the comments, certainly. The approach we're taking with AI with the human in the loop is an essential part of what the enterprise market is expecting because of the requirements for traceability when they get into audits and they have to justify the positions they took on a tax position and understanding the logic that's actually inside of the decision-making is really essential to their processes. So the fact that we're keeping the human in the loop, number one is critical. I think some of the agent-to-agent work we're doing, we highlighted the encouragement that we're actually directly working with the systems that they run their businesses on. So I highlighted on this quarter, the -- and in Microsoft, the first-ever agent-to-agent interaction between our platform and the Microsoft Dynamics 365 finance and supply chain platform is a really encouraging thing for our customers because it lets them know behind the scenes, there will be certain things that will be going on to support their ongoing time-to-value requirements. So I think that was a really well-received component of what we're doing in the market with -- as opposed to just pushing out AI in terms of direct -- like a ChatGPT type or Copilot, but actually taking it to a next level, we're able to drive efficiency and effectiveness in the market. I think Smartcat as an offering is a really exciting one, and we started to see some of the green shoots we thought were available to us because of the challenges our customers face in categorization of products. And so now we're going to start to focus beyond retail. We have that product ready. We're now moving that into trying to generate more in the retail space while we also start to ingest more data. And we'll look at that basically on a quarter-to-quarter basis, to be honest, in terms of how much we can ingest and make it viable for our customer base. Certainly, there's a lot of interest across the customer base for us to do that. Adam Hotchkiss: Okay. Great. That's really helpful color. And then on investments in e-invoicing and AI, just curious how those are tracking. I know that EBITDA did come in a little bit better this quarter. Are you still expecting that margin inflection? And I know that Chris isn't on the call, but just maybe reiterate your confidence level and when and sort of the magnitude of that margin inflection would be helpful. John Schwab: Yes. Great question. We continue to be on track with the investments that we talked about, the ecosio investments of $4 million to $5 million per quarter and then the AI investments largely focused around some of the Smartcat activities that David just talked through. They are tracking very well. So we feel good about that. We feel good about the progress that we've seen to date. Again, the plan is to largely have a lot of that behind us as we get into the middle of next year. And I think that's -- we feel like everything is pointed towards that, and it continues to be pointed towards that. And we expect to start to see some of that leverage and some of that realization start to show itself up. We did have a good quarter this quarter from an overall margin perspective, and I think we are pleased with the results that came through that, but a lot of that has more to do with some of the leverage we're seeing throughout the rest of our business and just being thoughtful about spend as we entered the back half based on some of the conversations we had at the end of the second quarter. So again, I think we feel very good about the investment programs that are in place. We expect to continue them. We haven't had any significant changes in our plans in terms of timing or in terms of -- or level of spend. And so I think everything continues to move along there nicely. Operator: We have the next question from the line of Jake Roberge from William Blair. Jacob Roberge: And David, I'll echo my congrats. It's been great working with you over the past few years. Just on the e-invoicing solution, could you talk about how that product compares to some of your competitors out there just from a country coverage perspective? And as we start seeing some of these larger countries like Germany and France go online next year, do you feel like that product is ready for prime time? David DeStefano: Yes, sure. Thank you for the kind words. Yes, number one, France and Germany, priority 1, the whole strategy from day 1 was always to make sure wherever there was a greenfield, meaning there was no competitive -- no competitor had already solved for a given country. That was our priority one in terms of where we've been investing. So we're ready for France, Belgium and Germany to compete on those and very comfortable as those regulations are going into effect with Belgium here in 2 months and the other 2 as we move into the middle to back half of '26. So yes, I feel very comfortable there, number 1. Number 2, we continue to expand our coverage. As you know, when we made the acquisition, we didn't buy a company that had coverage everywhere. We've been focused on the primary economies and continue to expand our coverage around the primary economies where e-invoicing is of the greatest import to our customers. Primary economies, meaning where large economies where our customers are doing a lot of business. Hence, the recent go-to-market partnership we announced with Brinta to accelerate our coverage in some key LatAm geographies like Mexico and Brazil, where a lot of our global multinationals have revenue, and we want to make sure we had coverage to be competitive in those regions. So yes, that continues to be a steady part of our build-out as we go forward. And that's the investment cycle that John was just highlighting that's going to run through the middle of next year. Jacob Roberge: Okay. That's helpful. And then there's obviously been some moving pieces over the past few quarters. But just thinking a bit longer term, could you double-click into the competitive landscape? And if you've seen any changes to win rates or competitors making more noise that might have been showing up at the edges this year? David DeStefano: It's funny. I literally just made sure, like I always do before these calls to check with my head of sales here in the U.S., in particular, where we have a lot of competitors. And no change whatsoever in the competitive dynamics in terms of win rate. Our strategy to continue to focus on the influencers that impact the market, our tight relationships with the Big 4 and other large accounting firms and the investment we're making to deemphasize our services revenue, which does impact short-term revenue. We've noted that, is also paying off by securing the win rates that we've enjoyed in the past and we continue to see. And certainly, some of the investments we're now making in areas like AI and Microsoft, I actually think are going to improve our opportunities in some of the new segments. Operator: We have the next question from the line of Brett Huff from Stephens Inc. Brett Huff: Two for me. I know you guys have been doing a lot of work given the entitlement changes on digging in and making sure you had more visibility into kind of those entitlement changes. How should we think about those as they roll forward? We've gotten some questions on -- we know the entitlements have slowed a little bit. Is there a continued a couple of quarter sort of period that we have to get through? Is there anything kind of bolus or timing-wise that we need to pay attention to that this may last a little longer? Or how do you guys sort of frame that up? John Schwab: Yes. Thanks for the question, Brett. Yes, in terms of entitlements and how that plays out, I don't think there's really any time frame for which this is going to change. There's nothing out there that's going to make -- turn this into a quicker rebound or even change the rebound too much. So I think it's going to just take a little bit of time for that to play out. And in the normal course of business through the normal renewal process, we'll see that work out. We try to -- we do our best to get in front of some of this visibility and do our best to try to make sure that we have that built into our forecast. But I think as we talked about the last time, some of this stuff comes up soon only just before the renewal base takes place. Overall, generally, this has, I think, a little bit more to do just with overall economic activity that's going on at customers. And then, again, to a lesser degree, some of their ability to migrate other systems they're using into the Vertex platform. So as they're doing other upgrades and other things, they're continually bringing and moving additional systems and additional entities that they have work going through onto our software. And so some -- if that slows because of other activities that they're doing, sometimes that can take a little longer. But I don't think there's really anything out there that's really going to drive or change this dramatically. It's just the passage of time. And again, as we said, we saw a little bit of that happen back around COVID. And again, as we got a little bit a couple of quarters through that, we started to see that snap back as activity picked up again, and I'm anticipating we'll see the same here. Brett Huff: Great. And the second question around SAP. Thanks for the comments earlier, both prepared and in the answers to questions. Can you maybe just a little bit more unpack that? Any anecdotal kind of conversations, change in tone around SAP migrations? It sounds like they were a little bit better this quarter. What is kind of the anecdotal feedback that you've gotten? I'm sure you had a lot of conversations at your user conference. Can you give us any more insight into how those decisions are being made or delayed? David DeStefano: Yes. I think the exchange was a really good -- it was just -- Exchange at our customer conference, it was just 2 weeks ago, 1.5 weeks ago. And I would say that it was very supportive of what we would expect as we move into '26 between our conversations with the large accounting firms that are all there, the many accounting firms that are there, as well as SAP directly. I definitely think that the activity in '26 is going to accelerate as we look forward based on what customers are telling us and what influencers are seeing in their growing backlog that they're going to be processing. Operator: We have the next question from the line of Steve Enders from Citi. Steven Enders: David, congrats as well on prior statements on the call. I guess just to start, I want to ask or clarify, I think, a prior comment you made about seeing some -- there's some timing of deals that closed in the quarter that impacted things a bit. And I just want to get a little bit more clarity on if there were deal delays, maybe how that is manifesting in the pipeline or how you're kind of thinking about the future pipeline from here? David DeStefano: Yes. I appreciate the question and certainly the comments, Steve. The quarter closed largely at the back end of the -- Q3 largely closed at the back end, meaning September was a very large month. And I think that's a behavior where we expect to see again with good visibility. When we talk about pipeline in the quarter, it means stuff that's already through -- it's not caught up in that middle where like, oh, could they get delayed because of their whole ERP process slows down. When we talk about guidance -- John is thinking about guidance in the quarter, it's based on what he has visibility to that's already pretty far down the pipe of we've already been chosen. It's more about like legal getting through their process and the normal purchasing process, if you would, to close. And so I think the process is laid out pretty consistent for the quarter as we look forward to what we expect to be a normal quarter in Q4. It's our largest quarter, and we're typically headed to that way with December being the largest month, and I would expect no difference to that whatsoever. Steven Enders: Okay. And sorry, to clarify, there were deals that got pushed out or things that didn't close as you originally expecting here? David DeStefano: No, I think in Q3, we closed the deals we thought we were going to close. They closed later in the quarter than we expected for sure. That's why I said September was a very large month, which obviously cost us a little bit of revenue that would have normally been recognized in the earlier months of the quarter. And as we look forward to Q4, I think we're seeing the same setup where December is going to be a very large quarter, but the pipeline of activity in the -- is where we forecast to be and it is built into our thinking about guidance. Steven Enders: Got you. Okay. That's helpful. And just on ecosio, I appreciate the revenue contribution this quarter. But are you feeling like that is on track for this year now? Like did you kind of see the catch-up that you were expecting and I think on track for the -- was it a $16 million revenue number that you previously talked about? Is that still line of sight there? John Schwab: Yes, absolutely. We still have line of sight for that. I mean I think they've made some real good progress, and we've seen some nice upticks in the business activity over there as well as the momentum that's underlying the pipeline. And so we absolutely still have line of sight to that. And again, between the combination of that and then the continued investment we're making in that business, we're all in on e-invoicing. And so I think we expect to see those results come through as anticipated. David DeStefano: And Steve, I think that just jumps to the deadline of Belgium is coming, and that's -- I think these are decisions that are being made, and that's why we have that kind of visibility. And I think you're going to see the exact same thing play out as we move next year into the larger economies of France and Germany, where France goes live in September, and I would expect to see a real increase in activity as we get through Q1, not so much, but certainly Q2 and into Q3, you'll see a real uptick. And then the same thing as we think about Germany going live in January of '27 with back half of Q4, which is pretty much consistent with what we've been telegraphing based on our experience. Operator: We have the next question from the line of Andrew DeGasperi from BNP Paribas. Andrew DeGasperi: David, I'll add my own words as well. It's great working with you over the years and good luck in the Chairman role. Just wanted to -- over the last, I guess, Q&A, I'm just getting a message that between the e-invoicing opportunity, the SAP migrations, -- and then if you add kind of the easier comps relative to this year, I mean, is there any reason why your business shouldn't accelerate from a top line perspective next year? I know you don't give out guidance, just trying to get a better sense directionally where we're going. John Schwab: Yes. Andrew, I'll take that. I'll start with that. Again, as we think about next year, we don't give -- we're not giving guidance now. We'll do that when we have our call in February for next year. But we do anticipate certainly top line revenue growth next year. I think there's a lot of fundamental factors that are contributing, again, as David talked about, the invoicing activity continues to be strong. The SAP pipeline and the activity that's there are going to be big contributors to growth next year. And so absolutely, we anticipate revenue growth into next year -- significant revenue growth into next year because of those factors that are out there and that are still very prevalent in the business. Andrew DeGasperi: Great. And then maybe just one in terms of the -- I think you mentioned some comments earlier about some customers are paying 2 mortgages. when they do these transitions. Just wondering how much of that customer base is right now doing that? Because if you look at your cloud versus on-prem revenue, obviously, I guess the question I have is, could we see a much broader dislocation between those 2 as we look into next year? David DeStefano: No, not at all. No reason to think that these -- first of all, we always have good visibility, and we work hard to factor that into our guidance so that it doesn't come up as a surprise in terms of what happened in Q3. So no, number one, I don't think -- and we only see typically, we talk about 2% to 3% of our customer base migrating every year. And I've talked about -- there's an on-prem base that's never going to go away. Subscription revenue is going to be around for quite some time. We're already up to close to 57 or so percent of our business is cloud, and that's where it's growing. And I think we'll see a slower -- we'll continue -- the ones that haven't migrated are going to be the longest to take the time to migrate just given the nature of those businesses that we know haven't migrated. So no, I see absolutely no reason to think we're going to have that kind of a surprise that occurred. It's just these customers did their shutdown faster than normal, but I'm not worried about that actually at all. Operator: We have the next question from the line of Patrick Walravens from Citizens. Patrick Walravens: David, I think you first came to our conference in 2007. So it's been a pleasure working with you over the last 18 years. It's probably for Joe, but the prepared remarks didn't address the 2028 targets. So can we just address it head on? Are you reiterating the 2028 20% plus subscription growth and 30% plus cloud growth today? David DeStefano: Yes. I think the buyback is a signal by our Board for its confidence in the future of this company, 100%. And I certainly think we continue to be cloud first in everything we're doing. So I see no reason to fundamentally think that, that's going to shift away from the growth we expect in the future. And certainly, with what we're seeing in e-invoicing and -- what should pick up in '26 even more so from SAP as their deadline approaches, I don't see a reason to fundamentally shift anything we've said in our guidance. The numbers that you've seen in entitlements pull back, we saw this in COVID and then it snapped back nicely. I see, once again, just the fundamental nature of who the enterprise customer is. They're going to grow through bands, and we're naturally going to get those entitlements. And so no, I have no data to suggest a shift in what we're fundamentally what we've said. Patrick Walravens: Terrific. Terrific. And then can I just ask about the bankruptcies because I just looked 2 of them up quickly. And Party City and Big Lots, both of those were announced in December of '24. So how does that play out? Like, yes, how does that work? David DeStefano: So when companies file Chapter 11, sometimes they continue to be in business. They continue to operate for years. And as long as you're in business, you have to charge sales tax. So we've had customers in the past have gone bankrupt, and we continue to collect license revenue. It may be on a reduced rate because the revenue has gone down, but we continue to collect revenue from. These are ones that officially went away. And you don't know when that's going to end. We have no way of knowing that just because they file Chapter 11 doesn't mean we're necessarily going to see an immediate end of that license revenue. Operator: We have the next question from the line of Rob Oliver from Baird. Robert Oliver: David, first one for you is just one of the themes, I think, at the Analyst Day back in March was around tax not just as compliance, but as business enablement. And as part of that, you talked about not just the sort of the traditional enterprise channel, which has been a big focus of this call, but also some of the marketplaces like SAP Hybris and Salesforce Demandware. And obviously, Shopify is moving upmarket, and there hasn't been any comment on the call about this. So I really wanted to hear your view on where you guys are today relative to that opportunity where there really seems to be a burgeoning opportunity within the tax software market. And then I had a quick follow-up for John. David DeStefano: Yes, sure. I had Shopify on stage with me at my customer conference. really talking about the partnership and the work we're doing with them really working in lockstep as they continue to expand and they're rapidly succeeding upmarket. There's just a natural synergy between our 2 organizations. And so every quarter, I try to pick out a few wins that are notable. Coming out of Q2, there's a lot of questions about SAP pipeline. We had a really good quarter in SAP wins. So I thought I would just highlight a few of those on the call, but we continue to make progress across the entire base of our key technology ecosystem partners, number one. And number two, I see no reason that's not going to change. And in fact, -- you may have noticed we launched our Kintsugi powered by Vertex offering, which I think is just going to increase a new opportunity for us to generate growth in the future as we look at their ability to actually work at the lower end of the market, which is really highly suspect or highly appropriate for the type of solution that AI has -- that AI can deliver through Kintsugi. Robert Oliver: Great. That's helpful. And then, John, just I know -- it seems like the challenge now is more about entitlements true-ups than it is about the ERP opportunities. So just on that topic, with kind of 2 quarters in a row of the guidance coming down, maybe talk a little bit more about how you factored those expectations into your guide for Q4 and how we might get comfortable with the thought that that's not caught you guys by surprise, I think, a couple of quarters here. So how to think about that headed into '26? John Schwab: Yes. Thanks, Rob. Certainly, when we revised back in Q2, entitlements was a big part of the -- entitlements and true-ups were a big part of the story. And that certainly was something we took into consideration when we set that guidance. We continue to look at those, monitor those throughout this quarter. Again, a couple of other things that we pointed to this quarter that really impacted Q4 have less to do with the entitlements and the true-ups because I think we feel good about how we've captured that, but a little bit more had to do with -- around timing as well as some of the BK migration things that have moved along. Again, I feel like the BK migration, as I mentioned earlier, was somewhat anomalous and the timing of the quarter certainly is something that we're going to use and we'll continue to use as we think about our continuing -- our forecast for 2026 and then beyond as we manage through that. So that's what I would say, Rob, in terms of kind of how we're thinking about guidance. I don't think we've changed our -- we've not changed our philosophy in any way. So we'll continue to put our best foot forward and try to ensure that we are giving clear and accurate information out there. Operator: We have the next question from the line of Samad Samana from Jefferies. Samad Samana: Most of my questions have been answered. But if I just think about the bankruptcies, they were all in the like retail space. So that might be probably coincidence more than anything else. But John, can you just remind us where your biggest vertical concentrations are in terms of the book of business? And if you're at least within the retail sector taking a more conservative view given that that's where the bankruptcies were? And then I have one follow-up. John Schwab: Yes. Good question, Samad. Thank you. In terms of kind of where our big verticals are, certainly, manufacturing is our largest. Retail kind of comes in soon after. And so they're bigger focus. We certainly have taken a look at some of the rest of the customers within our vertical of retail to anticipate if anything is out there. But at this point, there's really nothing in there that caused us to pause or adjust our thinking in terms of kind of any exposures there. We feel like we're very well reserved, and we're in a good spot. Samad Samana: Understood. And then maybe just on the long-term targets, I know Pat asked the question, but I'll ask it a slightly different way. I mean with the management transition going on with the headwinds that the business has faced, if I think about the 4Q guidance kind of pointing to what looks like about like high single-digit growth, it seems like 20% is a very tough lift to get to by 2028. And so why not get rid of those targets and make it easier, especially as the management transition? And just help us think about what's the path to getting to 20%. John Schwab: Yes. I guess what I might start with, Samad, is again, I think we feel like all the overall demand drivers of the business that we've talked about, as David mentioned, are still there, and we feel good about those. There is some transition that's going on here, and we'll kind of -- we're going to certainly manage through that, as David has articulated over time. But I think at this point, we still feel like that the -- all the things that got us to those expectations back in the March time frame when we gave that are still in place and in play. And we expect to see some additional progress towards that as we think about '26 and then '27 certainly as well. And so in terms of kind of what we do with respect to longer-term guidance, I think we feel like it's a bit too early. And again, just given the demand that's in front of us, I don't know that it's the right time now to change anything. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Joe Crivelli for any closing remarks. Joseph Crivelli: Thanks, everybody, for joining us today. If you have any follow-up questions or if you'd like to schedule additional time with the team, please send me an e-mail at investors@vertexinc.com. Have a great rest of your day, and we look forward to speaking with you in the coming weeks. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: " Inge Laudy: " Linde Jansen: " Michiel Declercq: " KBC Securities NV, Research Division Marco Limite: " Barclays Bank PLC, Research Division Marc Zwartsenburg: " ING Groep N.V., Research Division Unknown Analyst: " Operator: Good morning, ladies and gentlemen. Welcome to the PostNL Q3 2025 results. [Operator Instructions]. [Audio Gap]. [Break] Inge Laudy: Good morning, and welcome to you all. We have published our Q3 '25 results earlier this morning. Unfortunately, CEO, Pim Berendsen, cannot join in this meeting due to personal circumstances today. So Linde will do the presentation. And after that, we will open up for Q&A. With that, Linde, I hand over to you. Linde Jansen: Thank you, Inge, and welcome to you all. Let me start with what highlights for this quarter. Let me start with our Capital Markets Day, which we held on 17th of September. There, we presented our new strategy and transition program, Breakthrough 2028, with the related ambitions. We launched our new purpose, connected to deliver what drives us all forward. And we launched our new strategic intent, being to grow our business, create sustainable value, lead through innovation, and make impact that matters. This is based on 4 pillars: Growth, Value, Innovation, And Impact. I will repeat our 2028 ambitions on the next slide, but let me first share the key takeaways for this quarter. The Q3 results came in as anticipated and landed below last year's results. At Parcels, volumes were up 1%. And this quarter, again, volume growth from international customers outpaced domestic growth. The Mail volumes declined by almost 5%, mainly due to ongoing regular substitution, but this quarter was supported by the first batch of the election mail and some other one-off names. The decline in normalized EBIT at Mail led to a year-to-date normalized EBIT of minus EUR 43 million, and this reinforces the urgent need for adjustments in the postal regulation. Good to mention that our cost savings are well executed and bring savings according to plan, both at Parcels and for Mail in the Netherlands. Furthermore, additional efficiency improvements at Parcels contributed to our performance. And emission-free last-mile delivery increased to 33%, which is 5 percentage points better than last year. The last thing to mention on this slide is the reiteration of our outlook for 2025. Before moving on to more details on this Q3 performance, let's do a quick recap of our Breakthrough 2028 program. Our strategy aims at delivering sustainable returns for our shareholders and value for customers, employees, and society as a whole. We truly launched a strategic turning point with our new transformation program, Breakthrough 2028, that drives our financial ambition. A short summary of the strategic objectives of our 3 business segments, which we will create as of 2026: First, E-commerce, where we will grow from volume to value through a differentiated approach and smart network utilization; secondly, platforms, where we capture international growth through asset-light models; and lastly, our Mail segment, where we want to transform to a future-proof postal service. Driven by the e-commerce market growth and our commercial initiatives, we aim to achieve GDP plus revenue growth, targeting at over EUR 4 billion in 2028 with a step-up in normalized EBIT to over EUR 175 million in 2028. A disciplined investment approach will drive incremental return on invested capital with an increase in Return On Invested Capital (ROIC) from 3.4% in 2024 towards our ambition of over 12% by 2028. And our approach towards dividends remains the same, in line with business performance, with 70% to 90% payout ratio while holding on to our aim to be properly financed. That's about a short recap of our Breakthrough 2028 program. Let's now move to the strategic attention points for Mail and Parcels, before I will explain the detailed Q3 financial results. Let me start with Mail. Early October, a next step towards a viable and future-proof postal service in the Netherlands was proposed by the minister. The following adjustments for the USO were proposed: D+2 at 90% quality as of 1 July 2026 D+3 at 92% quality as of July 2027 The consultation period closed last Friday. Without doubt, these adjustments are much appreciated. But at the same time, this proposal is still insufficient to cover the net cost. And therefore, it remains necessary to find a solution, therefore. And we have to keep in mind that the uncertainty in the timelines of the political process persists. In the coming weeks, we are expecting a decision on our appeal on the rejection of our request for financial contribution for 2025 and 2026, and also a reaction of the minister on our request for withdrawal of the USO designation. Together, these will determine our next steps towards a sustainable future of postal service on its path to reach the ambition as set out in our Breakthrough 2028 program. We will continue to make every possible effort to maintain reliable service and remain committed to accessible and financially viable postal service. Then to Parcels. As announced during the Capital Markets Day, that segment will be split in e-commerce and platforms as of 2026. And we will focus on the respective strategies as announced on the Capital Markets Day. The strategic initiatives already started and are progressing according to plan. In Q3, we see for Parcels a continuation of the trends as we have seen in the first half of this year. The price/mix effect was positive. Strong price increases were delivered according to plan. These are largely offset by less favorable mix effects that are more negative than we had anticipated. And that is mainly explained by the increased client concentration within our domestic volumes. With regard to the targeted yield measures, it is important to emphasize that these will come into effect gradually and confirm the strategic validity of our focus on consumer value, while also resulting in a slight loss in market share as anticipated. What is also important to mention that to date, we have been able to mitigate the adverse development in mix effect by own actions. Our flexible operational setup proved our agility and enabled additional efficiency improvements in our network and supply chain that contributes to our performance, on top of the ongoing planned cost savings program. Another focus area is our international expansion, especially in intra-European activities, where we are investing to capture future growth. In Q3, this resulted in the continuation of revenue growth at Spring, with some impact on the performance following our strategic investments. We are ready for the ramp-up in our operations for the peak season that is about to come. Together with our customers, we are putting all efforts in striking the optimal balance between volume, value and capacity utilization. Over to our key metrics. Let's start with the financial KPIs. Revenue in the quarter amounted to EUR 762 million, which is slightly above last year. And we see normalized EBIT at minus EUR 21 million, in line with our expectations. Looking at free cash flow, we see minus EUR 18 million in this quarter, bringing the year-to-date at EUR 98 million comparable with last year. And normalized comprehensive income that includes, for example, tax effects amounted to EUR 23 million minus. I will discuss these results of Parcels and Mail in a bit more detail in a bit. Then the nonfinancial highlights for this quarter. The share of emission-free last mile delivery improved by 5 percentage points to 33%. We have recently started the rollout of over 40 electrical vans in our transport services, so in the first and middle mile. Looking at NPS, we keep our average #1 position in relevant markets and see an improving NPS for the important ‘I receive journey’. And to evidence our innovative power, we have recently concluded successful experiments to explore how robotics can contribute to future parcel delivery, building on the knowledge and experience about the way we have implemented robotics in our sorting centers. Then our out-of-home strategy. That is continuing to gain momentum and the utilization rate being defined as the total amount of parcels, both to consumers and returns, during the week as a function of locker capacity is increasing and is now at 50%, while NPS scores for APL services remain high. Let's move to the financial details of Parcels. Revenue amounted to EUR 581 million, which is EUR 6 million above last year, following volume growth, price increases and mix effects. Overall, our volumes grew by 1%. Volumes from international customers continued its growth and were up 5% compared to last year and domestic volumes were flat. Overall, market share was slightly down as anticipated following our yield measures. We do see further client concentration with increasing share of volume from large players, domestic as well as international, but also platforms and marketplaces. In this quarter, the top 20 accounted for 57% of volume. With that in mind, it's good to see that the total price/mix impact was positive this quarter. Average price per parcel was up by $0.02, supported by targeted yield measures and regular price increases. Price increases have been implemented according to plan. But definitely, the mix effects are more negative than anticipated, driven by client concentration, predominantly within our domestic customer base. Furthermore, it is positive that our cross-border activities continued the trend. We have been seeing for several quarters with revenues at Spring up this quarter, most strongly in our intra-European activities, a promising development as international expansion is one of our strategic initiatives. When looking at costs, it should not be a surprise that in this quarter, we saw a significant organic cost increase. This is mainly labor related. However, we also see EUR 9 million in cost savings in Q3, and they were delivered according to plan. To be more specific, they came from ongoing adaptive measures like, for example, rationalization of services because we stopped parcel delivery on Sunday. Next to that, our flexible operational setup proved our agility and made us achieve additional efficiency improvements in our network, so in depots, supply chain and transport, to mitigate the adverse mix effects. In Spring, revenue growth was more than offset by the mix effects and the planned investments in international expansion. In the quarter, the financial impact from the implementation of U.S. trade barriers was limited, though we do expect some adverse effects in Q4. This brings us to the Parcels bridge, showing the reconciliation of the normalized EBIT from EUR 6 million in Q3 last year to EUR 4 million in Q3 this year. The volume growth contributed to our results, though was more than fully offset by the less favorable product customer mix effects, mainly within domestic. Organic cost increases amounted to EUR 70 million, following wage increases according to PostNL and sector collective labor agreements and indexation for delivery partners. As you can see, the impact from our price increases was EUR 30 million and came in according to plan. Other costs were EUR 11 million better, mainly as a result of the combination of cost savings and additional efficiency improvements in depots, supply chain, and transport, which we managed to deliver to mitigate the negative mix effects. In other results, I want to highlight that this is mainly applicable to Spring, where we see revenue growth being offset by mix effects. Furthermore, we again invested in international expansion, one of our strategic initiatives, which was approximately EUR 1 million this quarter for the expansion of the intra-European activities in Spring. Also good to note is that we continue to focus on further growth in Belgium. There, we also invested further. We invested in our distribution network, also amounting to EUR 1 million this quarter. Moving over to the results of our segment Mail in the Netherlands. There, the revenue amounted to EUR 289 million, exactly the same as last year. The volume decline of 5% this quarter was mainly related to substitution, a structural trend which you are seeing for a long time now but supported by the first batch of election mail and other one-off mailings. Furthermore, revenue was supported by 2 stamp price increases in January and in July of this year. Looking at costs, labor costs were up following the CLAs for PostNL and mail deliverers. However, when looking at sick leave rates, we see a first improvement compared to last year. These cost increases were mitigated by cost savings of EUR 10 million according to plan, coming from further adjustments in our current business model, such as the transition of business mail towards a standard service framework of delivery within 2 days. Altogether, this resulted in normalized EBIT of minus EUR 23 million and year-to-date minus EUR 43 million, as mentioned earlier, evidencing that the current business model for Mail is not sustainable. That brings me to the bridge of Mail in the Netherlands. Here, you see the elements of Mail I just discussed. Starting at the top, you see the stamp prices I referred to added EUR 9 million to revenue. The organic cost increases of EUR 10 million due to wage increases and other inflationary pressures are also visible. And finally, the cost savings of EUR 10 million and a bit lower labor costs related to sick leave were partly offset by lower bilateral results. Let's move over to the free cash flow. Free cash flow was minus EUR 18 million in this quarter compared to minus EUR 68 million in the same quarter last year and in line with our expectations. The delta versus last year is mainly explained by the working capital development coming from anticipated phasing effects and a nonrecurring tax settlement for prior years, including interest, which we paid in the third quarter of previous year. This brings us to the next slide, where you find our balance sheet and development of the adjusted net debt position. Of course, here you see the impact from the impairment in Q2 on our financial position, which in the end is impacting our equity. In the short and long-term debt, you see the EUR 100 million from the Schuldschein placed in June. So that was already the case in Q2, but obviously, you still see there. Movements in Q3 were limited. We ended the quarter at an adjusted net debt position of EUR 572 million. Recently, we launched a new bond with face value of EUR 300 million, a term of 5 years, and an annual coupon of 4%, and we tendered on the outstanding 0.625 percentage notes due September 26. EUR 195 million was accepted for repurchase. Please note that these related recordings and cash flows will materialize in Q4. We continue to manage our cash flow, balance sheet, and net position carefully following our aim to be properly financed. And as a reminder, we reclassified in Q2 part of cash and cash equivalents to short-term investments and adjusted comparatives. It has no impact on adjusted net debt or any other key metric. Then over to the split of normalized EBIT over the quarters. As mentioned before, in 2025, normalized EBIT has to be earned in Q4 even more than in 2024. We are ready for our peak season. Please keep in mind that the impact of pricing will be larger in Q4 than in the other quarters, which also implies that in Q4, pricing will exceed the impact from organic cost increases. When looking at year-to-date results, overall results came in, in line with expectation. For the remainder of the year, for Parcels, you should take into account that announced yield measures are expected to come into effect gradually. And for Mail in the Netherlands, we will see the majority of the election mail coming in, in Q4. In the right graph, you can see the indicative phasing for the savings is not fully divided evenly over the year, with a larger part of savings expected in Q4. Obviously, that is related to timing of some of the underlying measures. Please note that some of the savings are a bit more tied to the absolute volumes, which also explains why the amount of savings is, as usual, expected to be slightly higher in Q4. Then over to the outlook. Of course, we have to acknowledge that the external environment remains challenging and volatile. And as said before, the pace of client concentration due to changing consumer behavior is difficult to predict. We reiterate our outlook for 2025. We expect normalized EBIT to be in line with 2024 performance. Free cash flow is expected to be negative as, for example, CapEx will be above the level of 2024, including around EUR 15 million cash outflows related to the strategic initiatives. I repeat our intention to pay a dividend over 2025. We hold on to our aim to be properly financed, taking into consideration the anticipated improvement in the performance going forward and the progress towards a future-proof postal service. And good to add that normalized comprehensive income, which is, of course, the base for the amount of dividend is expected to follow a pattern that is more or less in line with 2023. In 2024, this includes some incidental positive effects. Well, this concludes my explanation of the Q3 results, and I would now like to hand back to Inge. Inge Laudy: Thank you, Linde, for your presentation. We will now open up for Q&A, and I ask you to limit your questions to two questions per person to set. So, operator, could you please explain the procedure for questions via the lines. Operator: [Operator Instructions] Your first question comes from the line of Michiel Declercq from KBC Securities. Michiel Declercq: I have two, please. The first one would be on the impact of the trade barriers. You mentioned that you expect a bit more impact of that in Q4. Can you give some color on this? Or can, is there some quantification that you can give to this? And the second question would be on Parcels on the price/mix effect. How I understood it at the beginning of the year was that the impact from the yield measures should gradually step in. Now if we look at the first three quarters, we actually see that the average pricing has actually come down. You're quite confident in the fourth quarter that you will see the biggest impact from the pricing. Can you maybe elaborate a bit on why the impact here should be the largest? Is there a big difference compared to last year in terms of surcharges or maybe penalties to your customers if their predicted volumes don't match with the actual volumes? Just why the impact of the pricing should be that much higher in Q4? And if you can quantify what you're looking at? Linde Jansen: Sure. And thanks, Michiel, for your questions. Let me take them one by one. Starting with trade barriers. Well, as I mentioned, so this quarter, we had limited impact. Of course, we do see more uncertainty and increasing volatility in the context of the U.S. trade policy and the responses from the counterparties. Well, it's not a surprise that tariff changes increase volatility and could slow down GDP growth, but could also generate opportunities on the other side, looking, for instance, at our knowledge with regard to customs. But it's, of course, too soon to tell and to say what is the exact impact for Q4. But what we see is that from a materiality point of view, we do not expect the impact to be material. It will be limited also in Q4. And to give some context on it, the direct exposure will be less than, is expected to be less than 1% of our revenue. Then that's on the first question. Then on your second question with regards to pricing for Parcels. I would not say the pricing, what you mentioned, pricing has come down year-to-date. That's actually not the case. What we see is that we, that our pricing has passed as we anticipated. What you see overall is that with the yield measures which we are taking, so we say, and we see that, that's gradually coming in. Obviously, that depends also on when new contracts are being renewed. Not every contract has the same starting date or duration of the contract where we can change that. But clearly, looking at the fourth quarter, also, of course, depending on volumes, when you see when you have made price increases, that obviously has a larger effect in the Q4 with peak periods. And there, wherever we have been introducing higher prices, yes, that obviously then also will have a higher effect, larger effect in Q4 than we have seen in the past quarters, because we have started with that gradually as of Q2. So that is why we expect the Q4 price increases for PostNL to be larger than the organic cost increases for the year. I hope that provides an answer to both your questions. Operator: Your next question comes from the line of Marco Limite from Barclays. Marco Limite: My first question is on the USO. Clearly, you set some scenarios back at the CMD in September, but we have had some more news in October. So, you're increasing prices by a lot as of 1st of Jan '26 on a year-over-year basis. And you're now implementing D+2 from early Jan '26. So my question to you is, do we think that this is enough for you to be breakeven in 2026? Linde Jansen: Yes, to start with, first of all, on the start day of D+2, that's not the 1st of January 2026, but 1 July 2026. And on your question on the developments of the breakeven point, what we highlighted in during the Capital Markets Day is that we had, we would lead to breakeven as of 2028 because that is the point where we move to D+3. At that time, the proposal from the minister was the 1st of January 2028 if a certain quality measure was achieved. That was the point of breakeven, so not 2026. So to respond to your question, we still will not be breakeven in 2026 for the Mail division given the developments, which we've had in the beginning of October because the main change over there was regarding the timing of the move to D+3, which was from 1st of January '28, he moved it more to the front 1 July 2027. And secondly, there were, he proposed reliefs on the quality levels, which were in the earlier proposal 95%. However, it's good to mention that this are just proposals from the minister and really uncertainty around the time lines and the political process really persists. Well, as you know, we've had the recent elections last week. So as I said, these are just proposals from the minister and not yet law, so to say. Marco Limite: Okay. And what is the time line for a possible response on the cash compensation? Linde Jansen: For the cash compensation, well, as you know, is that this proposal from the minister, it is a solution on the, it is a move or a first step towards a more future-proof situation. However, it does not serve or a solution yet for our net cost compensation. And as you may know or remember, we are, of course, still in proceedings on our financial contribution for 2025 and 2026. And there, we have appealed. And yes, we are waiting for the outcome of that. And as I said, on top of that, in the proposal from the minister, we also are looking still for a solution of our net costs in general. Yes. That is now not in our control, but we are awaiting a response on that from our appeal as well as the next steps from the minister. Marco Limite: Okay. And second question very quickly. So, once you achieve breakeven first half '27, sorry, 1st July '27 or '28. But then I mean, if we think about more longer term, once you achieve the breakeven, you raised the bar to the breakeven situation, but then we are once again in a situation where we will be, we have cost inflation, let the volume decline. So on the long-term, let's say, over the next 10 years, once you move to D+3, how can you make sure that the USO is, let's say, forever breakeven at least? Linde Jansen: Well, I think that is, of course, ongoing, what we are doing in Mail is trying to get an optimal network to ensure we are, well, let's say, organized as efficient as possible. I mean we don't have a glass ball, but we will make sure that we will do everything, put all our efforts to make it a future-proof situation. And as I said before, the, let's say, regulation or a solution for net costs is in the end, fundamental for a future viable situation. And that's why these first steps are welcome, but it's not yet enough to cover the full problem. Operator: We will take our next question. Your next question comes from the line of Marc Zwartsenburg from ING. Marc Zwartsenburg: First question is just a check because I think can you remind us on when the D+3 would kick in? Was it on the 1st of July '27? Or is it 1st of January '27? Linde Jansen: Yes. The proposal from the minister, which was done in the beginning of October was for the 1st of July 2027. So that is six months earlier than in the previous proposal from the minister. Marc Zwartsenburg: Yes. And then the quality has moved from 95% to 92%. That’s correct? Linde Jansen: Yes, correct. Yes. Marc Zwartsenburg: Then your Mail volumes, the minus 5% in Q3, there was a little bit of election in there. But as I remind from the earnings call, it was only a few days and not so much volumes. Most of it would be in Q4. So, if you exclude, let's say, the slight tailwind from the election in Q3, but what would have been then the underlying mail volume decline in Q3 would have been something like minus 5%, or minus 6% something like that? Linde Jansen: 5.6%, Marc. Marc Zwartsenburg: Sorry, I didn't get that. Linde Jansen: 5.6%, it would have been. So, looking at the impact from election mail, you see that in quarter three, the impact was EUR 2 million of pieces for this quarter and the remainder of it for the fourth quarter. Marc Zwartsenburg: And why is it only minus 5.6%? Is that just seasonality? Or is it just quite different from the normal trend of minus 8% to minus 10%? Linde Jansen: Yes. I think it's indeed seasonality phasing that is playing part. Marc Zwartsenburg: Okay. So in Q4, we should just assume the normalized, let's say, minus 8%, minus 10% and then add the support from the election. Is that correct? Or is there something seasonal there as well? Linde Jansen: Yes, more or less, yes, that's correct. Marc Zwartsenburg: Okay. And a question on the Amazon news last week for the investments in the Netherlands. Can you share your view on what they're saying because they want to tie their volumes in with what they have when this world wake ups. I know it's sizable client, but the other ones are bigger clients for you. So if volume shifts from your biggest client to your smaller clients and they also have a bit of a policy to do it themselves for a part. Can you show us your view what will be the impact on your Parcel volumes? Linde Jansen: Well, obviously, we are closely monitoring these developments in the market. And well, at this point in time, it's too soon to give some color on the exact implications. But what we see more and more increasingly is we see online stores expanding and getting more and more, which is also happening now with Amazon or they are testing new services and investing in the e-commerce market. And that's obviously also what we are doing. We continue to innovate in e-commerce and expanding our delivery preferences and really carefully look at consumer preferences, for instance, what we do with our out-of-home network. And with that, yes, okay, this is, of course, an event and a news which we closely monitor. And on the other side, it is still volume in the market, and we are just making sure that we continue our strategic intent and moves, which we mentioned during the Capital Markets Day to also reflect on any new or extended customers and platforms. But too soon to tell, too soon to give exact implications for that. Marc Zwartsenburg: Maybe a bit more detail on Amazon, how big is that client for you at the moment in terms of volumes? Linde Jansen: Well, I cannot give their exact color, but it's, as you say, not the largest client. Marc Zwartsenburg: It's a top 5 client, I believe. Linde Jansen: No, no, no. No. Marc Zwartsenburg: Okay. Okay. And then my last question, if I may. You mentioned that there will be more positive impact from price in Q4. You have taken some additional efficiency measures. Is it correct that the efficiency measures, the extra, if I take the flow chart, the now from the original plan and then the bridge to the EUR 11 million, which is showing there as other cost as a positive then the EUR 2 million is then from the efficiency improvements? Is that the additional ones you mentioned? Is that the correct one? Linde Jansen: Well, of course, it consists of pluses and minus. So that's not the, you cannot simply subtract the 11% from the 9% because there are, of course, pluses and minus in there. But what we see is that we have been or are able to put additional efficiency measures in our depots, transport. And there, we see that to counter our mix effects. And that is also something which we will obviously continue for our fourth quarter, which will come on top of the ongoing adaptive measures. Marc Zwartsenburg: Because if I compare the mix effect and the price effect, basically, they are a bit similar to what we've seen in Q2. Yes, shift yet feeding through while it was supposed to yield higher price and a better price/mix on balance, and that's not showing. So I'm just curious how you see that for Q4 because if it only, if the mix effect becomes bigger and the price becomes a little bit bigger, then you still have only a very mild positive price/mix effect, then you should have quite some additional efficiency improvements in Q4 to make your outlook. That's a bit where I'm puzzled. Yes. Linde Jansen: No. Well, yes. Maybe to explain is, as said, so our price increases and yield measures, they are, we are delivering them according to plan. So that is basically what we have, let's say, in control. Looking at the mix effect, where you see that's really depending on consumer behavior, that effect, that mix effect is bigger than we, more negative than we anticipated and to counter that and mitigate that. And obviously, also inherently in yield measures is also part of moving to efficient operations. There, we see the counter effect where we can control or can mitigate that negative mix effect. So yes, correct, the mix effect we anticipated is more. So larger clients getting faster big, so to say, than we had anticipated. And to counter that, we are ensuring that we put additional efficiency measures in place to mitigate that. And to your point on the yield measures coming in, that's really gradually. It's not that from one day to the other, it all hits in. That takes a bit of time. And clearly, also this quarter is, let's say, a mild quarter in the sense that not a lot is happening. So that also is, therefore, the effect of yield measures is gradually coming in and then also, of course, more heavily as such in Q4. Operator: [Operator Instructions] We will take our next question, and the question comes from the line of, please stand by, [Indiscernible] Unknown Analyst: I have a couple of questions. And I'm afraid the first one is a bit of a long one because I think it's important to understand the right context. Last year, around this time last year, you warned us for the fact that Black Friday and Cyber Monday were so close to Sinterklaas . I think you've learned a lot from last year or you got to mention it, but I'm sure that this year it plays as well because Black Friday is on the 28th of November. Cyber Monday is on the 1st of December. Sinterklaas is on the 5th of December. With the improving consumer confidence data we've seen in recent months, this could really be a challenge. How are you dealing with it? Do you see any prebuying that as we saw last year that people try to avoid Black Friday and Cyber Monday and that sort of thing. So my key question is, how do you manage it? And are you seeing prebuying already? For example, what can you share with us in relation to the volumes in Parcels you've seen in October? Linde Jansen: Well, of course, on October, I cannot comment. That's too soon to tell. But on your question with the, let's say, the density of those Black Friday and Sinterklaas , et cetera. Well, I think that's not something new. We have been, we have had this for more years where we experienced this type of density in the holiday or in the peak season, sorry. And so, what you see is that overall, those peaks get more peaky, so to say. So that is not just something for PostNL but is a general market trend. And we are in very close contact with our customers to ensure that we really optimize knowing that these days will be in the way these days will be; that we optimize volume, value and capacity utilization for this peak period, and also take into account, of course, our experiences, which we've had previous year to ensure that we streamline that peak period as good as we can. And clearly, we are very well on time with preparing for that and are really in close contact because with our customers because it's not just PostNL who needs to have that optimal utilization in the peak period, but it's actually for the whole ecosystem. So, all players in the ecosystem benefit from that. And that's why we are in close contact with them and also clearly communicate also to consumers around this. So yes, I can't say anything different that we are fully prepared for it and ready to have this organized in the most optimal way. Unknown Analyst: Have you seen any prebuying activity? Anything noteworthy that the trend was different at the end of the third quarter, for example? Linde Jansen: No, no, I haven't seen that. No. Unknown Analyst: My second question is around international volumes. If I look at the first quarter of this year, then we saw plus 15%, second quarter, plus 10% year-on-year. Now we see plus 5% I can interpret it in 2 different ways. One is that indeed, the value over volume strategy is beginning to show. But I've also heard that new parties have come to the market like Cainiao and Dragonfly, which are especially aiming cheap Chinese volumes as long as well, they are a party in the market. One of your competitors even described them as gold diggers. What is happening there? What is it exactly? Are you indeed more cautious taking on more volume from China? Or is it the competitive environment that is changing? Linde Jansen: Well, I would say, first of all, it's good to note that I think comparing by heart versus the growth of previous year, we already had a higher base. So, the first 2 quarters are not your starting point is different. Secondly, yes, our volume value strategy is clearly something which is what we aim for, and that is also for both domestic and international playing out there. So yes, that is, I think, the combination. Unknown Analyst: Okay. And then connected to that, there have been talks about implementing handling fees on Chinese Parcels. France was the first to announce that they were considering imposing a EUR 2 per item handling fee. And I recently read something that the Dutch are intending to do the same thing, if the French do it as of the 1st of January. Any news there? And how could it impact your business because [Schiphol] is one of the main hubs? Linde Jansen: Yes. Well, let me start. It's too early to provide you with a concrete statement on the impact. But in general, PostNL is supportive of a level playing field in the different European countries. However, well, as you already mentioned, the 1st of January, such a potential additional tax would really result for us in an operational challenge. It's not feasible to implement this well, we are talking about already the busiest period in the year, and it's a very short time frame to implement such a system. And it also can be, of course, disruptive, I should say. So, like with the U.S. trade barriers, where also international postal traffic to the U.S. was on hold for a bit. So that's why we are in conversations with the government on that as well. And so, we would really plea, if it's being implemented for a careful implementation, so to involve all parties and with equal timing for all the EU countries and not to diversify between the different European countries. So that being said, too soon to give a statement on that, and we are actively in conversation to align on the best approach to make this work. Unknown Analyst: And then my final question, that's an easy one, sorry for making your life so hard, nothing personal. But on the APMs, I understood that you're currently at around 1,250 APMs, APLs, you call. Linde Jansen: Yes, that's correct. Unknown Analyst: You were at around 1,100 at year-end last year. When I look back in the annual report, the intention was to increase that number by 500 to 600 a year. I can't imagine that during the peak period, all of a sudden, you're placing 400, 500 or so of the APLs. You have better things to do, I guess. What is the time path going forward? Because at the Capital Markets Day, also you highlighted the importance of APLs just the background of efficiency and that sort of things. Why am I not seeing a stronger pickup? The DHL, for example, is north of 2,000 already. It will be more and more difficult to find the right locations at the longer you wait. Linde Jansen: Yes. Well, we indeed clearly have our ambition towards over 3,000 in 2028. And what we see is that it's also about the size of the lockers which you place. So, amount of lockers is one thing, but size, how many of these lockers are in one APL is we are placing bigger sizes than initially planned. And yes, we are progressing on that. And clearly, you have to deal as well with all the governmental regulations with that, and we are clearly on top of it to deliver towards our ambition for the long term. And as said, we see positive developments in the utilization of the lockers which we place and as said, which are bigger lockers than we initially placed. So yes, that is basically where we stand. Unknown Analyst: So basically, what you're saying is there will be a catch-up in the years ahead. Linde Jansen: Yes. Yes. Operator: Okay. Then we have one last one, a follow-up from Mark, if I'm correct. So that will be then the last one for today. Marc Zwartsenburg: Yes, that's correct. A quick one. You issued a press release on the 5th of September that is asking the minister to withdraw the obligation of the USO. That's 2 days away that the 2 months are done. Should we expect some news flow in the next few days? Or can you help me with the timelines? Linde Jansen: Well, indeed, correct, we asked for within 2 months. But obviously, that is not in our control. So yes, I would say expecting it this month, but depending obviously on the time lines on the side of the government, and that is not something we can control. Marc Zwartsenburg: So could be any 6 months basically or without a date that's how. Linde Jansen: Yes, exactly, exactly. they don't confirm by then and then you get the answer. That's not how it works. Marc Zwartsenburg: And on the appeal of the cost compensation, is there. Linde Jansen: It's the same. It's also depending on there. So yes, you are just basically depending on their side and also on the legal system. So yes. Marc Zwartsenburg: Yes, I thought it was more like a court case thing that at some point, you need an outcome or is it not the case? Linde Jansen: No, no, we haven't received any guidance on when we can expect it. No, not at this point in time. Inge Laudy: Well, then we conclude our Q3 '25 results for now. Thank you all for participating and speak to you soon. Thank you all.
Operator: Good morning, and welcome to the Axsome Therapeutics Third Quarter 2025 Earnings Conference Call. My name is Daryl, and I will be your operator for today's call. [Operator Instructions] Please note that this call is being recorded. I would now like to hand the call over to Darren Opland, Senior Director of Corporate Communications. Please go ahead. Darren Opland: Thank you, Daryl. Good morning, everyone. Thank you for joining us for Axsome's Third Quarter 2025 Earnings Conference Call. With us today are Dr. Herriot Tabuteau, our Chief Executive Officer; Nick Pizzie, our Chief Financial Officer; and Ari Maizel, our Chief Commercial Officer, who will begin our call with prepared remarks. Mark Jacobson, our Chief Operating Officer, and Hunter Murdock, our General Counsel, will also be available for Q&A. This morning, we issued our press release providing a business update and detailed financial results for the quarter. I encourage everyone to visit the Investors section of our website to find the press release and accompanying presentation to today's call. Please note that today's discussion includes forward-looking statements regarding our financial performance, commercial strategy and operational plans, including research, development and regulatory activities. These statements are based on current expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to our SEC filings, including our quarterly and annual reports for a description of these and other risks. You are cautioned not to rely on these forward-looking statements, which are made only as of today, and the company disclaims any obligation to update such statements. And now I'll turn the call over to Herriot. Herriot Tabuteau: Thank you, Darren, and good morning, everyone. Axsome continues to lead in CNS innovation, driven by disciplined execution and a clear focus on sustained growth and value creation. In the third quarter, we delivered strong revenue growth with total revenue of $171 million across our 3 marketed products, representing a 63% increase year-over-year. AUVELITY continues to gain traction as a differentiated treatment for major depressive disorder, driven by strong underlying demand. We're pleased with the pace of AUVELITY's performance, which is tracking well against our long-term expectations and underscores the significant opportunity for continued growth ahead. SUNOSI remains on a steady trajectory with year-to-date sequential growth nearly double that of the same period last year, a testament to the product's durable performance and expanding adoption. SYMBRAVO completed its first full quarter of commercial launch in Q3. Our focus now is to continue strengthening the foundation for long-term success by broadening patient access and driving awareness with clinicians. Nick and Ari will speak in more detail about our financial and commercial performance and the strategic execution driving momentum across Axsome's portfolio. Beyond our continued commercial growth, Axsome's R&D engine is advancing a robust pipeline of late-stage programs with the potential to deliver transformative therapies for patients and significant value to our shareholders. Over the coming months, we expect meaningful activity across our late-stage programs, including 2 NDA stage programs and multiple registrational trials underway or initiating. I'd like to start with our top priority areas in psychiatry and neurology, Alzheimer's disease agitation, narcolepsy and ADHD. These are areas where we see substantial opportunity to transform patient outcomes, leverage our commercial infrastructure and unlock significant value. First, we are pleased to share that we have submitted our supplemental NDA for AXS-05 in Alzheimer's disease agitation. And we look forward to announcing the FDA's decision on acceptance of the filing. This submission is an important milestone for AXS-05 and for the millions of patients and caregivers affected by the serious and underserved condition. The addressable market for Alzheimer's disease agitation is substantial, and the unmet need is high with currently only one product approved. AXS-05 represents a first-in-class mechanism of action that has the potential to set a new standard in the treatment of AD agitation. Work is already underway to efficiently scale our commercial platform to deliver an impactful launch if approved. As a reminder, we are also developing AXS-05 in smoking cessation, and we are on track to initiate a Phase II/III trial in this indication this quarter. Our next pipeline priority area is narcolepsy. We continue to target the submission of our NDA for AXS-12 for the treatment of cataplexy in narcolepsy in the fourth quarter of this year. AXS-12 represents a highly differentiated opportunity to address critical gaps in current treatment. Up to 70% of patients suffer from cataplexy and many continue to experience inadequate relief or poor tolerability to existing treatment options. We are excited about AXS-12's potential to make a meaningful difference for patients living with narcolepsy. We also like its strategic fit with our existing sleep franchise, which we anticipate will enable highly efficient and synergistic launch, if approved. For ADHD, solriamfetol has demonstrated positive results in adults in the FOCUS Phase III trial completed earlier this year. The next step is a Phase III trial in children and adolescents, which we plan to initiate in the fourth quarter of this year. If successful, this indication could substantially expand the opportunity for solriamfetol beyond its currently approved indications. As a reminder, we are also developing solriamfetol in 3 additional indications, MDD with excessive daytime sleepiness, binge eating disorder and shift work disorder. For MDD, we anticipate the initiation of a Phase III trial in adults with MDD with excessive daytime sleepiness this quarter. Next year, we expect top line results from the ongoing ENGAGE Phase III trial in binge eating disorder and the SUSTAIN Phase III trial in shift work disorder, and we look forward to providing progress updates in the near future. Turning to AXS-14, we are finalizing preparations for our planned Phase III trial in fibromyalgia, which we expect to launch before year-end. These milestones highlight the continued expansion of Axsome's leading neuroscience pipeline, spanning multiple psychiatry and neurology indications with significant unmet medical needs and substantial long-term growth potential. All in all, our portfolio of novel medicines is robust and diverse and our late-stage pipeline is deep and rapidly advancing, uniquely positioning Axsome to deliver substantial near- and long-term value through multiple highly differentiated paths. With just 3 years as a fully integrated R&D and commercial organization, Axsome is shaping the frontier of differentiated innovation in brain health. The fundamentals of our business have never been stronger, and we are excited to continue building on this foundation to drive further growth. With that, I'll hand the call over to Nick to review our financial results for the quarter. Nick Pizzie: Thank you, Herriot, and good morning, everyone. Our third quarter performance underscores the continued momentum of Axsome's commercial portfolio and the breadth of our capabilities as an organization. We continue to advance multiple innovative therapies addressing diverse and critical needs in brain health, a foundation that is driving meaningful growth across our entire business. As Herriot mentioned, total product revenues for the quarter reached $171 million, representing a 63% increase year-over-year. AUVELITY continues to demonstrate impressive growth. Net product sales for the quarter were $136.1 million, up 69% versus last year. SUNOSI net product revenues for the quarter were $32.8 million, up 35% versus the prior year. SUNOSI revenues consisted of $31.6 million in net product sales and $1.2 million in royalty revenue associated with SUNOSI sales in out-licensed territories. SYMBRAVO in its first full quarter on the market generated $2.1 million in net sales. These results reflect our continued top line growth and focused execution, driving increasing operating leverage across the business. AUVELITY and SUNOSI gross-to-net discounts for the third quarter were both in the high 40% range. We anticipate that AUVELITY and SUNOSI gross-to-net discounts will increase in Q4 to the low 50% range. SYMBRAVO gross-to-net discount for the quarter was in the mid-70% range, which we anticipate will remain elevated during the launch phase. Turning now to expenses. Total cost of revenue were $11.9 million compared to $8.4 million for the third quarter of 2024. Our research and development expenses of $40.2 million decreased 11% compared to last year, primarily driven by the completion of our clinical trials for solriamfetol in ADHD and MDD. Our selling, general and administrative expenses of $150.2 million increased 57% compared to last year, primarily driven by commercialization activities for AUVELITY including the sales force expansion and our recently launched direct-to-consumer advertising campaign, along with the commercial launch of SYMBRAVO. Our net loss for the quarter was $47.2 million or $0.94 per share compared to a net loss of $64.6 million or $1.34 per share for the same period last year. The $47.2 million net loss this quarter includes $23.1 million of noncash stock-based compensation expense and a $13.2 million noncash charge related to contingent consideration. We ended the third quarter with $325.3 million in cash and cash equivalents compared to $315.4 million at the end of 2024. We continue to believe that our current cash balance is sufficient to fund anticipated operations into cash flow positivity based on the current operating plan. And with that, I'd like to turn the call over to Ari, who will now provide a commercial update. Ari Maizel: Thank you, Nick. Q3 represented Axsome's first full quarter with 3 products, and our commercial team advanced efforts across multiple fronts of Axsome's commercial business highlighted by strong performance for AUVELITY, a foundational first full quarter for SYMBRAVO and steady growth for SUNOSI. AUVELITY's momentum in major depressive disorder continues to build with strong prescription growth, increased new writer activation and the initiation of strategic commercial investments. For the quarter, approximately 209,000 prescriptions were written for AUVELITY representing 46% year-over-year growth and 9% sequential growth. By comparison, the antidepressant market grew 1% year-over-year and was flat versus the second quarter of 2025. Since our expansion of the psychiatry sales force earlier this year, average weekly new-to-brand prescriptions or NBRx has increased by approximately 35%. Our expanded team continues to drive broader and deeper engagement across prescriber segments, and we have made meaningful progress in the primary care setting. Approximately 1/3 of AUVELITY prescribers are primary care clinicians, and NBRxs from the primary care setting have increased by approximately 50% since the expansion. Approximately 5,000 new prescribers were activated this quarter, bringing the total number of unique prescribers to 46,000 since launch. In addition to strong demand growth, we continue to make progress with market access for AUVELITY. Commercial coverage increased from 73% to 75% this quarter, bringing total coverage to 85% of all lives across channels. Importantly, we have also contracted with a third large commercial group purchasing organization or GPO effective August 1, which will support continued coverage efforts moving forward. Turning now to SYMBRAVO. The third quarter marks SYMBRAVO's first full quarter on the market with early progress that is helping to establish a strong foundation for long-term growth. More than 5,000 prescriptions were written and over 3,300 new patients started SYMBRAVO in the quarter. Our targeted approach, including focused sales and marketing activity among headache specialists who drive the majority branded migraine prescriptions is effectively building awareness and driving trial. Feedback from patients continues to reinforce SYMBRAVO's robust clinical profile. SYMBRAVO's MoSEIC technology, which enables rapid absorption while maintaining a long half-life resulting in strong efficacy is resonating with HCPs. In a recent survey of migraine treaters, key drivers of prescribing include SYMBRAVO's multi-mechanistic targeting of the CGRP and prostaglandin pathways, fast migraine symptom relief, improvements in patient functioning and sustained freedom from migraine pain. We continue to make progress with SYMBRAVO market access and coverage with overall payer coverage at approximately 52% of all lives as of October 1. The proportion of covered lives in the commercial and government channels is 48% and 56%, respectively. We have also contracted with a second large GPO effective August 1 for potential coverage of SYMBRAVO. We anticipate coverage for SYMBRAVO to expand and evolve throughout the balance of the year and into 2026. And finally, SUNOSI delivered another quarter of strong and steady performance with approximately 53,000 prescriptions representing 12% year-over-year and 5% sequential growth. By comparison, the wake-promoting agent market grew 4% year-over-year and 3% quarter-over-quarter. More than 460 new clinicians prescribed SUNOSI in the quarter, bringing the total cumulative prescriber base to approximately 15,100 since launch. Payer coverage for SUNOSI remains at approximately 83% of lives covered across channels. Overall, the third quarter represented another period of strong commercial performance across Axsome's growing portfolio of differentiated CNS products. With continued execution on AUVELITY and SUNOSI and the establishment of the growth foundation for SYMBRAVO, Axsome is driving increased demand, growing prescriber and patient engagement and expanding access to our products. We remain confident in Axsome's continued growth potential and look forward to sharing future updates on our commercial progress. I will now turn the call back to Darren for Q&A. Darren Opland: Thanks, Ari. That concludes our prepared remarks. Daryl, please open the line for Q&A. Operator: [Operator Instructions] Our first questions come from the line of Leonid Timashev with RBC Capital Markets. Leonid Timashev: Congrats on the quarter. I actually wanted to ask on SYMBRAVO and your ability to extrapolate what you're seeing in the third quarter out to fourth quarter in 2026. I guess maybe can you talk about the increased depth of prescribing you're seeing and maybe what you'd like to see on the ground before you invest more in the launch and potentially in areas of bottleneck that are stopping additional patients from coming on therapy? Ari Maizel: Leon, thanks for the question. This is Ari. Obviously, it's still very early in the SYMBRAVO launch. And our -- what we're seeing so far is very positive in terms of HCP and patient response. The drug is performing as well as we expected in the real-world setting. We are -- as a reminder, we've taken a very targeted and focused approach, focused on the top 150 headache centers as well as large neurology practices around the country. And our intent is to try to penetrate as many of those providers as possible. And as we observe the impact, we'll make further decisions around expansion or incremental investment for SYMBRAVO. But at this time, we're really pleased with the early response. There's still a lot of work to do, and we're in the early days. But we are really focused on increasing prescribing in our targeted clinicians. As we mentioned earlier, we've seen improvements in market access, which is also a key area of focus for us, and we'll share additional updates as the brand progresses. Operator: Our next questions come from the line of Marc Goodman with Leerink Partners. Basma Radwan Ibrahim: This is Basma on for Marc. We have a question on AUVELITY regarding the primary care segment, which seems to be contributing more and more to the scripts right now. Do you see this segment as a key growth driver for AUVELITY? And how do you envision growing this segment? Is it mainly through sales force expansion? That's it for us. Ari Maizel: Yes. Thanks so much for the question. Yes, we believe primary care is a really important specialty area for AUVELITY in MDD, is largely because most patients in the U.S. present to primary care office upon diagnosis and many stay with primary care throughout the course of their depression episodes. As you mentioned, we are seeing very positive response in the primary care setting. It now represents roughly 1/3 of our subscriber base, and we're seeing strong performance in terms of new patient starts as well as overall prescriptions. In terms of how do we further grow the primary care segment, part of that is just our focused sales force effort. Obviously, we've expanded the team several times, and that has enabled us to reach more primary care clinicians on a routine basis. We believe the expanded market access that we've been able to accomplish over the past couple of years is also helping to ease the prescribing path for a primary care treater that may not have as many resources to support PA processing. And then finally, our direct-to-consumer campaign, which launched in the quarter, we're seeing early positive signals in terms of patient awareness, patient requests for the product, and we expect that to facilitate further growth in the primary care setting along with the psychiatry setting. Operator: Our next question comes from the line of Pete Stavropoulos with Cantor Fitzgerald. Pete Stavropoulos: Congrats on the quarter. There is a clear distinction in the clinical profile of AXS-05 versus antipsychotic. Given the differences in clinical data for Alzheimer's agitation and the mechanisms, what are your expectations for AUVELITY adoption if approved? And how do you plan to drive uptake in the various channels? And have you identified key elements from REXULTI commercialization and marketing strategy, you would do differently to ensure a greater uptake and success? Ari Maizel: Yes. Thanks for the question. Obviously, we're very optimistic about the impact AXS-05 can have on the Alzheimer's agitation market. In terms of our focus area, what we have seen in our early launch preparation is that there are a mix of specialties that are treating agitation. Primary care is the largest. There are also geriatric psychiatrists, neurologists and then traditional psychiatrists. Of course, long-term care is an important setting of care for Alzheimer's patients. And our anticipation is that we'll cover all of those different specialties and settings of care with our efforts. We see a high degree of overlap between Alzheimer's agitation and major depressive disorder in terms of prescriber base. And so we'll be able to leverage our existing sales force. We see high synergies related to promotion there. And of course, we will need to invest in long-term care promotion, which is something we don't currently have, but do anticipate bringing online if the drug is approved. In terms of REXULTI's promotion, our -- we don't typically comment on other companies and their promotional mix. But we have been following along, and they're having really nice success with REXULTI. And so there are some learnings that we'll incorporate into our launch strategy if an AXS-05 is approved. Operator: Our next question comes from the line of Sean Laaman with Morgan Stanley. Sean Laaman: I'm just wondering on the sales force expansion. I think you just mentioned on the call, you're up to 46,000 prescribers, added 5,000. Given the bump in SG&A, I'm wondering how much capacity you think you've got in the existing sales force and when you might have to go again and how that ties into your thinking about the time to cash flow positivity? Ari Maizel: Yes, I'll take the first part of the question. We are pleased with the size of our sales force at the moment. It is driving considerable growth in terms of new prescribers as well as new patients. We previously shared that we intend to add some additional representatives in support of the Alzheimer's agitation approval. And we have started our efforts in terms of laying the groundwork for future expansions, although we haven't quite settled on a final number. That is something that we're looking to do early in 2026. Nick Pizzie: Yes. Maybe just a little bit on the SG&A for the quarter. This is Nick. So in Q3, the SG&A increased slightly. That was really driven by our launch of the DTC campaign that we launched in September. Additionally, we had a full quarter of commercialization activity for SYMBRAVO. So even with that, if you take a look at our net loss on a cash basis, we continue to improve quarter-over-quarter as well as on a GAAP basis, continue to improve on the net loss. So no changes as it relates to our outlook for cash flow positivity. Operator: Our next question comes from the line of Ash Verma with UBS. Ashwani Verma: Just on the AD agitation application, can you comment on how many days past you are after the application filing? Are there some investor discussion going on whether you're past the 60 days and that's unlikely to get a priority review? And then any implications that you can draw from the government shutdown to your filing application process review and how this may play out? Ari Maizel: Sure. So as is our practice, we haven't disclosed the data of the submission, but the FDA typically let sponsors know, say, up to 74 days following the submission when -- on a potential acceptance. We don't see any potential impact from the shutdown for the timing. So we'll -- as we said, the next update that we expect to share is potential acceptance decision. Operator: Our next question comes from the line of Andrew Tsai with Jefferies. Lin Tsai: Great execution this quarter. Maybe shifting gears to the pipeline. You've got 2 Phase III readouts with SUNOSI for binge eating and shift work disorder. So can you talk a little bit about the study designs, what positive data would entail for -- in order for you guys to file 2 more sNDAs next year or 2027? Herriot Tabuteau: Sure. As it relates to binge eating disorder, it's a standard parallel-group study design. And that would be the first study that we would need in order to be able to file an sNDA. So then based upon the results of that study, we would intend to initiate another trial, so we would need 2 studies for that. Other indications for solriamfetol include ADHD and where we currently have one positive Phase III trial for that in adults, and we're looking to start our second study, which would be in pediatric subjects or pediatric patients in the fourth quarter. Operator: Our next question comes from the line of Ami Fadia with Needham & Company. Ami Fadia: My question is just sort of broader, stepping back. You've got a couple of products in the market, making your way towards cash flow positively and several other late-stage assets. Sort of from a long-term strategic perspective, where are you in terms of your thinking around the portfolio? Are you looking to add additional assets to drive sort of operational efficiencies over the next couple of years? Or do you think that you've got enough in late stage that focuses really more on execution on those assets? Herriot Tabuteau: Thank you for the question. We're in a very -- we're in a unique position from the perspective of -- as you mentioned, we do have 3 marketed products which are still in relatively early stages of launch. So there's a lot of growth ahead. And also we're very fortunate that the period of exclusivity for these products goes out into the next decade or a couple of decades. So that's a great position to be in. And on the back of that, there is the next wave of products which we would -- products and indications, which we would expect to be approved over the next couple of years. We talked about the sNDA filing for Alzheimer's disease agitation and the planned NDA filing for AXS-12. And then of course, there's AXS-14 for which we intend to launch our next Phase III trial. So all of that means that we really do not need to do anything extra as it relates to the pipeline in the near term. But that would be, I think, the standard approach, and our approach is always to make sure that we're ahead of the curve. And so as it relates to that, we are taking the opportunity of the position that we're in to field inbound as it relates to potential additions to the pipeline, which could be complementary. So we're not going to quit while we're ahead. And we'll continue to make sure that we make very good strategic decisions as it relates to potentially enhancing the pipeline, and we're in a position whereby we can be very choosy about what we bring on board. Operator: Our next question comes from the line of David Amsellem with Piper Sandler. David Amsellem: I had a question on reboxetine. I wanted to get your latest thoughts on how you're thinking of the commercial opportunity, particularly given that you'll be entering the market more or less around the same time as oveporexton, the first orexin 2 receptor agonist. So how are you thinking about the competitive dynamics here? How are you thinking about sizing this opportunity? Just wanted to get your latest thoughts on the product. Herriot Tabuteau: Yes. So I think we'll all tackle that. One thing which is really interesting about reboxetine is its focus on norepinephrine reuptake inhibition. And that is a common pathway for the orexins. So the pathophysiology of the disease is orexin neuron loss, then decreases the production of norepinephrine. And so then -- so we -- this is -- the reboxetine works in very logical, rational way in terms of the pathophysiology of the disease. So we're very excited about the product profile because we know from our experience in the sleep space with SUNOSI that there is still very high unmet medical need. Ari? Ari Maizel: Yes. And I'll just add, when you look at the clinical profile that was observed in the Phase III trials, great efficacy in cataplexy, nonstimulant daytime treatment, favorable tolerability profile. These is a lot to like about it, and what we hear from KOLs and sleep experts is that many patients require a polypharmacy. There's a lot of trial and error. And even with the entry of a new mechanistic approach, we believe that there will still be significant unmet need, which creates opportunity for AXS-12 in those patients. Mark Jacobson: And maybe just one other add is with respect to sizing, we see incredibly high synergy, almost near perfect synergy with the current sales and marketing infrastructure that we have in place for SUNOSI right now. So very, very, very complementary to what's already in place. So we're excited about that. Operator: Our next question comes from the line of Joon Lee with Truist Securities. Joon Lee: Congrats on the strong quarter. Your commercial execution on SUNOSI is quite impressive. Any idea where the demand for SUNOSI is coming from? Is it NT1, NT2, IH or something else? And given your strength in combining products, any thoughts on combining SUNOSI with AXS-12 to address both EDS and cataplexy? Or do you think it's just better to keep them a la carte? Ari Maizel: Yes, I'll take the first part of that question. We're seeing sort of -- the predominant growth is coming from the OSA segment. There is significant unmet need in terms of excessive sleepiness with OSA patients. And it represents roughly 2/3 or so of the overall prescribing for SUNOSI, and we are seeing very strong demand for SUNOSI with those patients. Narcolepsy, of course, is an important component of the SUNOSI sales mix, but what we've seen particularly over the past couple of years is a greater awareness of excessive sleepiness among OSA patients. And as a consequence, we're seeing increased utilization there. Herriot Tabuteau: Yes. And as it relates to your question about whether it should be an a-la-carte approach for AXS-12 and SUNOSI, given how complementary the planned indications are. Our priority is to make sure that we get the product approved. That's first and foremost. So let's start with that. And that's going to accomplish our main goal, which is to provide clinicians extra treatment options. And clearly, given how the patients are treated with narcolepsy, given the varied symptomatology, probably undoubtedly, there would be patients who receive both SUNOSI and AXS-12. And our goal is to provide clinicians the data such that they can treat the patients in the best way that they see fit. Operator: Our next question comes from the line of Ram Selvaraju with H.C. Wainwright. Raghuram Selvaraju: Congratulations on all the progress. Just with respect to SYMBRAVO, I was wondering if you could elaborate on the number of centers that you expect to target in the next wave after the initial 150 headache centers. And also if you could tell us a little bit about the timing with which you expect the DTC campaign for SYMBRAVO to be engaged, if we should be thinking about the time line as being similar to the time line with which you initiated the DTC promotional activity in support of AUVELITY. Ari Maizel: Thanks, Ram. So regarding the, I guess, increase in number of centers, the way to think about it is right now, we are really focused on the predominant headache centers and headache specialists in the country. A future expansion would enable us to actually expand out more into the primary care market where you might have a heavy proportion of migraine treaters. And so right now, we feel very good about our coverage of headache centers and headache specialists, but that next wave would really be more about primary care expansion. As it relates to DTC, I think it's a little premature to talk about potential timing. If you look at AUVELITY and our timing related to our DTC launch, it really was a function of ensuring we had a strong foundation of HCP prescribers support from a prescriber perspective. We have reached a critical mass in terms of market access, and we had a sales force size that was big enough to support the increase in patient requests coming from a DTC campaign. So when that might happen, obviously, we're focused on execution across all fronts, and we'll evaluate as the brand progresses. Operator: Our next question comes from the line of Jason Gerberry with Bank of America. Dina Ramadane: It's Dina on for Jason. Congrats on the quarter. Just on AXS-05 for Alzheimer's disease agitation, could you maybe share your understanding of the clinical profile bar that's necessary for priority review under breakthrough designation? Is there a requirement that AXS-05 shows efficacy benefit relative to REXULTI? And maybe how do you think investors should think about that scenario and the read-through to the ACCORD trial? And then just a quick follow-up on your comment on AXS-05 ADA long-term care promotion. Could you just maybe detail what those efforts look like? Are there docs that are affiliated with long-term care facilities? I appreciate any additional color there. Mark Jacobson: So just one thing just to share, our base case here is always a standard review for the application. And we are eligible and -- for a potential priority review, but our understanding is that currently, the default position for the FDA for any application is standard review. And with respect to like quantitative efficacy bars, that's not how it works, right? It's -- so it's not a specific or again, quantitative analysis that the agency does. So it's hard to give you anything there for what may or may not go into an analysis like that. But again, our base case has always been standard review. And I think we will -- as we said, we'll keep people posted on a potential acceptance decision as I think the next thing that we'd expect for the course of the review. Ari Maizel: Yes. And Dina, in terms of your long-term care question, it's a little different than traditional outpatient facilities where you may be calling on MDs, NPs, PAs along with office staff. In long-term care facilities, there's a significant nursing staff, pharmacy directors, medical directors. Of course, there are physicians, NPs and PAs that will make rounds in long-term care, but they also are treating patients in the community. And so there is a synergistic effect of the community-based promotion for those clinicians that go into long-term care. So it is a little bit of a different approach, which is why we feel it's necessary to have a dedicated team focused on long-term care facilities if the drug is approved. Operator: Our next question comes from the line of Yatin Suneja with Guggenheim Partners. Yatin Suneja: One more question on the ADA. How do you think about the AdCom? Is that going to be required given that we already had one for the space with REXULTI? Just curious to hear your thoughts on how you are thinking about it. Mark Jacobson: In AdCom, that's something companies find out on potential acceptance decisions for FDA. So stay tuned on that. Operator: Our next question comes from the line of Graig Suvannavejh with Mizuho Securities. Graig Suvannavejh: Congrats on the continued success across the board, both commercially and on the pipeline. Just want to talk about AUVELITY commercially. I just wanted to revisit the gross to net and its evolution. I think you mentioned that the gross to net was in the high 40s in the third quarter. I'm wondering what led to that happening and whether there are any unique onetime events or items that contributed to that. And also just looking forward on the progress you've made with contracting. Are there any other significant gains that you're looking forward to? I mean it seems like you're in a pretty good place, but just wondering just in the future, how we should think about that dynamic. Nick Pizzie: Graig, this is Nick. Thanks for the question. You're correct, AUVELITY discount for the quarter improved from the mid-50s to the high 40s in Q3. So pleased with the net price improvement around AUVELITY. And something that did change during the quarter is that we received additional 28 million lives in Q3. And so we were able to see those lives covered in an improved fashion in first-line or first switch. So improved access, improved amount of patients covered along with improved net price from a GTN perspective. Ari, do you want to take the second question? Ari Maizel: Yes. So I think, first and foremost, we're at 85% total lives covered, which we're really pleased with. We shared on the opening remarks that we signed the third large GPO. Our expectation is to continue to add additional covered lives. Our goal is to try to get to as close as 100% as we can. Obviously, with the third GPO signed, that will enable additional covered lives moving forward. As you know, it's very difficult to predict exactly when those new PBM contracts will come online. But we do feel optimistic that there's great interest and the team is continuing to focus on driving additional covered lives moving forward. Operator: Our next question comes from the line of David Hoang with Deutsche Bank. David Hoang: Congrats on the quarter. I just wanted to go back to the planned sales force expansion for ADA. Recognize that it's early days, but could you maybe bookend or at least point us towards maybe a minimum number of reps that you think would be sufficient to execute a successful launch in that indication? And are those numbers already contemplated in your guidance for reaching cash flow positivity? Ari Maizel: Yes. Thanks, David. The plan would be to expand the team if the drug is approved. In terms of the overall number, we're still working through that. There's obviously 2 pieces to it. One is, are there clinicians we don't -- we would like to cover that, we don't currently cover with the current team and what sort of incremental headcount numbers that we need to reach them. And then the long-term care area is something that we'll need to think through in terms of overall headcount needed to appropriately educate and engage with long-term care setting. So a little early to share a specific number, but the goal is to expand the team if AXS-05 is approved, and we'll share additional updates in the future. Unknown Executive: And David, would you mind just repeating, I think you had a question about cash flow positivity. David Hoang: Yes, whether the ADA -- anticipated ADA sales force expansion is already contemplated within the existing guidance or cash flow positivity? Nick Pizzie: Yes, David, it's Nick. Absolutely, it's contemplated. We -- the way that we forecast our cash is assuming that everything is positive as it relates to clinical and regulatory outlooks and then the additional associated costs with that. So obviously, upon the launch, you would have -- it would be capital intensive in the first few quarters. And then ultimately seeing an ROI. So yes, the answer is we have already included that in our cash flow. Operator: Our next question comes from the line of Troy Langford with TD Cowen. Troy Langford: Congrats on all the progress in the quarter. Just with respect to AUVELITY, approximately how many quarters do you think it will take to see an impact from the recently launched DTC campaign on prescriptions? And do you think we'll see any sort of inflection in the current trajectory of prescriptions? Or do you think we'll see just more of a continued gradual upward trend? Ari Maizel: Yes. Thanks, Troy, for the question. In terms of number of quarters, it's hard to predict exactly when the most significant impact from DTC will hit. But one of the things that we're looking at is changes in our weekly new patient starts. We have begun to see an increase in new patient starts. In general, it's sort of 8 to 12 weeks is when we'd be looking for anything significant in terms of DTC impact. Right now, we feel like it's still early days, but we're pleased with some of the trends that we've observed, and we'll continue to provide updates. Operator: Our next question comes from the line of Myles Minter with William Blair. Myles Minter: Just the first on the third GPO contract in those P&T meetings coming online. Would you expect that commercial covered lives moving from 75% to somewhere in the mid-90% to have a similar favorable gross to net impact, as you saw with the 28 million lives coming online in the third quarter there? And then secondly, just given the FDA news this morning with uniQure and then George Tidmarsh, obviously, resigning. Just anything you can say about the confidence of the FDA as you work through the regulatory process on the CDER side? Nick Pizzie: Myles, I'll take the first one on GTN. I think it's too early to say where GTN will land with an additional contract now at hand. So -- but we are pleased, as we shared with where we are with the improvement in GTN as well as the improvement in the amount of lives covered and the formulary access. So stay tuned for where that -- where we will land. But we will continue to negotiate in a similar fashion as we have previously, ensuring that we maintain long-term value and try to have as many patients covered as possible. Mark Jacobson: And on the FDA side, right now, things are status quo for us in terms of our dialogue and interactions with -- across the various divisions that we engage with. Operator: Our next question comes from the line of Madison El-Saadi B. Riley Securities. Madison Wynne El-Saadi: Congrats on the quarter. On AUVELITY and SUNOSI as well, but more so AUVELITY, are you seeing per prescriber activity trending upward? Just trying to kind of get a sense of how much growth here is sensitivity to promotion versus more organic growth? Obviously, the sensitivity to promotions is great. But my sense is that there's also some organic growth here as well. If you could just comment and then maybe a follow-up. Ari Maizel: Yes. Thanks for the question, Madison. We are -- I guess the way that I would recommend sort of thinking about the growth is it's a function of 2 things: productivity among the existing writer. So the number of prescriptions per existing writer and then our ability to add additional new writers into the prescriber mix. And for both brands, we're seeing those things come to fruition, which I think is a testament to the impact that these medicines are having on patients' lives, the positive reinforcement that these clinicians are hearing from their patients and our team's ability to engage with them and educate them on a routine basis. So those are things that we'll continue to look to drive moving forward. Madison Wynne El-Saadi: Got it. Understood. And then secondly -- so we have 4 Phase III trials planned to initiate this quarter. Just wondering on the cadence of those, should we think of these as almost parallel launches? Or will these kind of come in a sequence throughout the remaining quarter? Herriot Tabuteau: Yes. So with 4 Phase III trials launching, there are a lot of moving parts from an operational perspective to make sure that, that happens. So it's very unlikely that they're all going to happen on the very same day. So do expect a natural cadence. It's nothing that we're preplanning. However, we are working towards and are on track for the initiation of those studies in the fourth quarter. Operator: Our last questions will come from the line of Benjamin Burnett with Wells Fargo. Unknown Analyst: This is Craig on for Ben. So just a couple from us here. So given your successful track record of getting products through the finish line, I'm curious, can you provide a little bit of color of how your regulatory interactions in regards to the sNDA for AXS in ADA has maybe differed from some of those past programs? And I guess second question, in regards to narcolepsy, I feel like we're seeing a lot of estimates of the epidemiology of those indications kind of expanding and expanding further. So out of curiosity, what do you guys think is driving that? And are you seeing growth in IH, NT1, NT2, any one particular area? Yes, any color there would be helpful. Mark Jacobson: I'll take the first part. So it's ordinary course at the moment based on where we are in the cycle, in terms of the submission for AXS-05 in AD agitation. Herriot Tabuteau: Yes. And from an epidemiological perspective, for narcolepsy you've got to look at the surveys that are done and the quality of the surveys. And however, one aspect of the market that we've always pointed to is the fact that in this orphan indication, there's still a large percentage of patients who, one, have remained diagnosed in the past; and secondly, who are treated. So certainly, as there is more interest in the space as more products are being developed and coming to market, one would expect that there would be an increase in awareness and maybe that's what you're seeing. Anything that you would add, Ari? Ari Maizel: No. I think you mentioned NT1, NT2, IH, I think that there's a lot of symptomatology overlap in different formalized diagnoses, which may muddy the waters a little bit. But from our perspective, we feel good about our current estimates, which is around 185,000 people in the U.S. suffering from narcolepsy, and that's what we're building our plans around. Operator: There are no further questions at this time. I would now like to hand the call back over to management for any closing comments. Herriot Tabuteau: Thank you. And thanks, everyone -- thank you to everyone for joining us this morning. As we've highlighted today, Axsome delivered another strong quarter. We continue to drive robust growth across our commercial portfolio, and we are well positioned to deliver significant long-term value through our advancing pipeline. We look forward to sharing our continued progress over the coming months. Thank you. Operator: Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
Operator: Hello, everyone, and welcome to the Ryanair Holdings plc H1 FY '26 Earnings Release. My name is Nadia, and I'll be coordinating the call today. [Operator Instructions] I will now hand over to your host, Michael O'Leary, Group CEO of Ryanair Holdings plc to begin. Please go ahead. Michael O'Leary: Thank you, Nadia. Good morning, ladies and gentlemen. Welcome to the H1 results conference call. I'm joined by the entire team here in London and on other phone lines. We published the results this morning, Neil and myself have done a 30-minute Q&A on the website. So I would direct you to the ryanair.com website for that while you're there, book a low-fare flight. Quick couple of comments. One, as you see, I'd prefer to deal with Q2 because the H1 was distorted by the very ridiculously strong Q1 and the weak prior year comp. But if you look at Q2, so traffic is up 2% because of the Boeing delivery delays. They have improved in the last couple of months. We've now taken 23 of the 29 aircraft that they should have delivered to us at the start of the summer. That gives a little bit of headroom to increase traffic growth this year from 206 million to 207 million. So we should get growth of about 3.5% this year. Fares in Q2 were up 7%, very strong recovery. That is the recovery of last year's 7% fare decline, and we think we will continue that through the remainder of the year. I caution, we do have slightly stronger prior year or tougher prior year comps in the second half when we began to repair the OTA boycott or the impact of the OTA boycott was less significant. So the fare growth in the second half won't be as strong as it is in the first half. But overall, on the year, we're pretty confident now we get back all of last year's 7% fare decline, maybe a little bit above that, but it won't be much. Much more important, as always, unit costs well under control, only up 1% in the second quarter despite significant cost inflation on air traffic control and a little bit on the engineering side. Clearly, the lower hedge cost this year playing a significant role in that. And as a result, Q2 profits are up 20% to EUR 1.72 billion. Taking forward, in kind of themes I would give you that we want to cover in the call, Boeing are doing a much better job. I think they asked us to take those -- could we take the aircraft through August, September, October. We said didn't -- there were no use to us at that stage, but we would work with them. We would take those aircraft if they could deliver them. They've delivered 23 of the 29 aircraft in the last 3 months. We get 2 more in November and then the final 4 will be delivered in January, February of next year. So we will have all 210 Gamechangers in the fleet by the end of March next year or in advance of summer '26, which puts us well on track, I think, for traffic growth to 215 million, 216 million passengers in FY '27. And that will be the first year since the MAX groundings that we're not dealing with Boeing delivery delays in the spring or disruptions to our summer schedule. So we think that will lead to strong traffic growth and hopefully maintaining pricing and profit recovery into summer '26. The good news this morning is we've taken advantage of our recent fuel weakness. As you know, we were 85% hedged out to March 2026 or for this year at $76 a barrel, down from $84 a barrel last year. Today, we're able to announce that we're 80% hedged for FY '27 at just under $67 a barrel. That will be a very significant 10% saving on our fuel bill, will save us about EUR 600 million next year, which I think will enable us to incentivize and stimulate growth, but also fund what will be another painful increase in emissions ETS taxes and viral taxes in Europe, where Europe continues to damage its own competitiveness by taxing only intra-EU travel, whereas all the extra or the non-EU travel or people arriving to and from Europe are exempt from these egregious environmental taxes. Balance sheet continues to strengthen. We paid back the EUR 850 million bond in September. We have the final EUR 1.2 billion bond we will pay in May, and then we will be entirely debt-free with a fleet of 640 aircraft. We have hedged, and I think the treasury team has done a wonderful job start this year, the dollar was about 1.08 to the euro. It weakened in recent months with some of the Trump spectaculars to 1.24. And we've now hedged the first 50 of our 150 firm MAX 10 aircraft orders at 1.24, which is about a 15% euro cost saving -- euro saving on CapEx on those first 50 aircraft, and we're looking for opportunities to extend those CapEx hedges. And you can only do that with the kind of strong balance sheet Ryanair have. The real underlying, I think, story, though, is here that Europe capacity continues to be constrained and will remain constrained out to 2030 because of manufacturer delivery delays, Airbus fleet still largely grounded repairing engines, a program that won't be completed until 2028 or 2029. And therefore, I think as we add capacity next year, there's a reasonable prospect that we would grow traffic, but we'll see modest fare increases coming through the system. The one negative in Europe is Europe is continuing to fail on competitiveness. We've had the Draghi report, now it's 14 months old. He pointed to a whole series of areas where Europe can and must be more competitive. von der Leyen has committed herself to delivering on that competitiveness agenda and then done absolutely nothing for the last 14 months. All of Europe's airlines are calling for 2 competitive initiatives. One moved the ETS environmental tax emissions trading system tax rates in line with CORSIA, which is what the non-European airlines are paying. It is indefensible that Europe is harming itself by having these excessive environmental taxes, move ETS in line with CORSIA, and it would result in dramatic improvements in competitiveness and also lower fares for consumers traveling on intra-EU air services. And then second, reform Europe's broken ATC services. We need the protection of overflights during national ATC strikes. We cannot have a single market if it can be shut down every time some air traffic control union wants to go on strike. It isn't much of an ask. The legal mechanism already exists because in Spain, Italy and Greece, they already protect overflights during ATC strikes and they ground the domestic flights. But as we all know, in France, they protect a disproportionate amount of the domestic flights and cancel all the overflights. This is unsustainable and von der Leyen should take action. I think with what is a very impressive new Transport Commissioner, Tzitzikostas. He wants to reform, but everything ties in the dead hand of von der Leyen's office. So she should stop talking about reform and competitors and start delivering it, protect over flights and then fix staffing on the first wave of ATC staffing on the first wave of flights, which, again, Germany, France and NATS in the U.K. are inexplicably short staffed. It's inexcusable. The airlines we roster standby pilots and standby cabin crew. ATC, they just allowed the system to fall over and they cut capacity. It's not acceptable. Air traffic control fees have gone up 14% this year, and we're still getting a s***** third rate, third world service. And if von der Leyen can't deliver competitiveness, frankly, she should leave and be replaced by somebody competent who can deliver competitiveness in Europe. Other than that, I think the good news is we're seeing a sea change in environmental taxation at national level. Governments in Sweden, Hungary, Italy, Slovakia and regional Italy are all abolishing their environmental taxes. And we are switching an enormous amount of capacity away from high-tax economies like Germany, France and the U.K., where Rachel Reeves is increasing APD by another GBP 2 in April. And moving that capacity to Sweden, Hungary, Italy, et cetera, where governments are get it, they're abolishing the environmental taxes and they're also incentivizing traffic growth. So we want to reward those countries that are incentivizing growth and penalize those countries like Germany, France and the U.K. who are incentivizing tax increases and damaging growth. And that will continue. But I think the fact that countries like Sweden, the home of Greta Thunberg and flight shaming 5 years ago are now have worked out. They're abolishing the environmental taxes, gives us hope and I think some degree of optimism that the way forward is not penalizing Europeans. It is abolishing those taxes and allow airlines like Ryanair to invest heavily in new engine technology. Our new MAX 10s will carry 20% more passengers, but burn 20% less fuel per flight. So a 40% reduction in fuel and emissions on a per seat basis. Other than that, there's also some other government and competencies, the Irish government, which was elected last year on a program to abolish the Dublin Airport cap 12 months later, nothing done. We have a do-nothing Prime Minister and a do-nothing Deputy Prime Minister, both of whom have been sitting on their arses for the last 12 months, talking about passing legislation despite the fact they have a 20-seat majority. They're now talking about legislation might be moved by the end of 2026. Ireland and growth cannot wait for these do-nothing politicians. They have a 20-seat majority, they should pass the legislation scrapping the cap at Dublin Airport before the end of 2025 and allow the airlines, Ryanair and the other airlines to get on with growing traffic at Dublin Airport, the way we're growing, and we're adding aircraft in Shannon and Cork. So there's always some stupid government and some incompetent politician holding back the growth. But thankfully, there's better politicians in Sweden, Italy, Hungary, Slovakia, all of whom are working closely with Ryanair to abolish taxes and allow us to grow strongly. I think we're looking forward particularly with the improvements Boeing have made in the deliveries, the quality of the deliveries. Kelly Ortberg and Stephanie Pope are doing a terrific job. They have got -- they've gone up from rate 38 to rate 42 in October. We think the FAA will increase that to rate 46 in March, April next year. They are gradually catching up on the delivery delays. They are pretty confident that they'll certify the MAX 7 even with the current government shutdown in Q2 next year, the MAX 10 in Q3, which will be about 6 months in advance of our first 15 MAX 10 deliveries in the spring of 2027. So we have the 29 aircraft delivered this winter that enables us to grow to 215 million passengers in FY '27. The first 15 MAX 10s coming in the spring of '27 will enable us to grow to about 225 million passengers by FY '28. And then we are off and running on what I believe will be an 8- to 10-year program to grow from 207 million passengers this year to over 30 million -- 300 million passengers by 2034. Currently, we're making a profit of approximately EUR 10 per passenger. I think it's reasonable to suppose that, that profit will rise from EUR 10 towards EUR 12 or EUR 14 profit per passenger over the next 10 years. There will be 1 or 2 curveballs in the middle of that. We are a cyclical industry. We have a strong balance sheet. We will have 0 debt in May of next year. And I think we are poised for very strong growth, particularly if the European economies continue to lag in growth, people will get more and more price sensitive and will switch to Ryanair from high fare competitors elsewhere. So I have never been more excited about, I think, the growth outlook for the next 4 or 5 years. I think we have a number of challenges in moving politicians to a competitiveness agenda. But within that, Ryanair is going to grow strongly and profitably, I think, for the next 4 years up to 2030. And with that, Neil, I want to hand over to you, anything you want to highlight in the P&L or on the balance sheet? Neil Sorahan: Yes. I'll maybe just focus again on a couple of things in the quarter and in the half. Firstly, as you already pointed out, costs put in an excellent performance, up just 1% on a per passenger basis. That was down to our strong fuel hedging, which very much helped offset double-digit increases in ATC and environmental costs. We're still guiding modest unit cost inflation for the full year. What's modest, it remains somewhere between 1% and 3% on a full year basis, probably a little bit higher than the 1% that we had in the first half in the second half of the year. We have extended our hedges into FY '27, as Michael said. We've also extended our OpEx hedging into next year at 1.15 compared to 1.11 on the euro-dollar. So we're locking in significant price savings next year, and that will go a long way to help offset a jump up in our environmental ETS next year somewhere from about EUR 1.1 billion this year to somewhere between EUR 1.4 billion and EUR 1.5 billion next year. Balance sheet, rock solid, BBB+ rated, 610 unencumbered aircraft and in a very strong position now to be debt-free by May of next year, which I think is a great place to be. Also, we're locking in euro savings on our MAX 10 CapEx moving forward with a 35% hedge in place where we've hedged 35% at a firm order, that's 150 aircraft at 1.24. Buyback moving along at a nice pace. We're pleased with the pace that the brokers are moving at. They managed it well through indexation. So we're just over 35% of the way through that, and that will run out to the back end of 2026. And then finally, the last thing I'll point to business as usual, but we've announced an interim dividend this morning of EUR 0.193, which similar to last year, will be paid at the end of February. And that's all I wanted to touch on, Michael. Michael O'Leary: Okay. Thanks, Neil. With that, Nadia, we'll open up to Q&A, please. Operator: [Operator Instructions] The first question goes to Harry Gowers of JPMorgan. Harry Gowers: First question just on the Q3 fares, maybe you could provide us with what you're currently tracking for the quarter? And if you've seen any changes strengthening or weakening around that number in the last few months? And then second question on the online travel agents, that clearly, the fare comparatives are normalizing into the Q3 versus last year. I was wondering if you think you're still getting like any actual realizable uplift or specific tailwind from those official partnerships? Or is this just like fully past us now and we're back to a more regular kind of pricing cycle, just fully dependent on supply/demand in any quarter? Michael O'Leary: Yes. Thanks, Harry. I mean I wouldn't want to split out where we think we are on Q3 fares because so much of it is dependent on the close-in bookings at Christmas, over the Christmas and New Year period. But October is strong, up on last year. November is a little bit weaker, slightly down on last year's fares and Christmas at the moment is booking strong ahead of last year on fares. I think all I want to -- I wouldn't want to go any further than give you the kind of -- we have moved from being hopeful to being now confident that average fares will recover the full 7-year fare decline from last year in this year's numbers. We're up 13% average fares in the first half of the year. We have tougher prior year comps in the second half of the year. So you won't see, I think, 7% fare increases in Q3 or in Q4. But I think rounded out for the full year, we're pretty confident now we will be up -- average shares will be up 7%. Maybe we might get to 8% if we have a strong Christmas. But again, we need to see how those close-in figures book. And I think that is what leads us with a reasonable degree of confidence to see a strong profit recovery this year, but we can't put a number on it yet because it's so heavily driven by Christmas and the New Year holiday bookings. The new aircraft from Boeing will gives us the capacity to add a few extras there over that Christmas-New Year period. That's why we've been able to bring the traffic up from 206 million to 207 million this morning. On the OTAs, the big impact on us on the OTA boycott last year was through the first half of the year when you lost the people who I kind of complacently thought would be price sensitive. Therefore, they'll book the holidays directly with us. They didn't. A lot of them moved to the tour operators last year to the Jet 2s and the easyJet holidays. They've come back to us in the first half of this year. You see that reflected. We have weak prior year comps and a strong H1. We see some of those kind of tour operators, easyJet, Holidays Jet 2 (sic) [ Jet2 Holidays ] talking about a bit more price sensitivity in their bookings through the first half of the year. And it's because that traffic -- the OTAs have moved that traffic back to us. They need our low fare access. And so -- but that's not a key feature into the second half of the year. The OTAs are a lot less impactful in Q3 and 4. And therefore, we didn't have the same decline in airfares in Q3 and 4 last year. We've got much -- we have a tougher prior year comp, which is why we think, again, the second half of the year, you won't see 7% fare increases. It will be a little bit less than that. But overall, in the round, we'll come out at fares up about 7% on the full year. Eddie, do you want to add anything to that on Q1, Q2 or OTAs? Edward Wilson: No, I mean like what we've said, there sort of covers it off about what has happened, like slightly less in terms of fares in November, but Christmas, we're happy with how it's booking. So nothing really to add there at all. And I think we are through that sort of tail end of the OTAs, and I don't think there's going to be any further uplift. I just think it's, as you say, much tougher for our competitors out there on the prior year comparable. Operator: The next question goes to James Hollins of Exane BNP Paribas. James Hollins: I'll start one for Neil, actually. Just on the ex-fuel unit cost performance was only up 2%. I think noticeable was the EUR 30 million Q2 decline year-on-year in marketing, distribution and other. I'm assuming that's all lower distribution costs -- sorry, lower disruption costs. Or am I missing something else within that particular line? And secondly, Michael, clearly, using this platform as ever to get your point across on EU, progress on overflights, et cetera. Maybe just give us an update on what this new transport minister might be able to achieve? And secondly, whether there's any update on the sort of comedy baggage regulation they're looking at? Michael O'Leary: Okay, Neil. You okay if we have -- Tracey come in after? Neil Sorahan: Yes, sure. On the marketing line, I think you're particularly referring to some of that's down to lower EU261, lots of disruptions, but keeping them below the 3 hours. Equally, we've got up to 60 million people a week coming through on social, which is keeping our marketing costs way down. A little -- some of it's a bit of timing. We will do a bit more marketing over the Christmas period. And then offsetting that somewhat would be higher input costs for the onboard spend, which is going particularly well from an ancillary perspective. Michael O'Leary: Okay. Thanks, Neil. And on its commissioner Tzitzikostas, who's the Transport Commissioner, has had a really impressive start. One of the most notable things is they finally moved on the infringement proceedings against Spain over the crazy Spanish bag fines that were levied only on the low-fares airlines in Spain, but not on the high-fare airlines. It's clearly illegal. It's in breach of EU Regulation 1008/2008, which guarantees the airlines' freedom to set prices free from government interference or regulation. He does want to reform ATC. But like I think a lot of commissioners, he's frustrated. They're all expressed frustration at how little comes back out of von der Leyen's office. There is a real dead hand of Germany incompetence at the top of the European Commission and either she should deliver reform and deliver reform and competitiveness or go, preferably be replaced with someone who can actually do something. I would like to say we should get an Irish politician there given it was Peter Sunderland, who originally deregulated air travel. But given the lack of action from the Irish politicians on the Dublin Airport [ mad ], Dublin Airport cap, I wouldn't be recommending any of our Irish politicians either. At the EU Parliament, as is it won't is -- we elect a bunch of clowns, and we should be not surprised in a circus that they come out with crazy ideas. One of which is now that everybody should have the right to bring 2 free bags onboard an aircraft. We have politely pointed out that there isn't room on board the aircraft for 2 free bags for 189 passengers. That does seem to be a detail that they've missed. We've also pointed out that actual bag, one of the greatest things here that limiting people to bringing one free bag on board, and that was the wheeling judgment, the ECJ judgment in 2014, we do allow half the passengers who are priority boarding to bring a second carry -- free carry-on bag. That's about as much capacity as the aircraft has. But what the European parliament now part of this is that the commission under Tzitzikostas is looking for a reform of EU261. There talk about bringing compensation up from 3-hour delays to 4-hour delays, which does make sense. The parliament then pushes back with some ridiculous suggestion like 2, 3 bags on board. What that would do is they create huge queues at Europe's airports as everybody starts struggling with 2 bags through airport security. A bit like you have in American airports where you take forever to get through security because they're all bringing 5 and 6 bags attached to their persons through the airport. It would also mean inevitable flight delays because bags that don't fit in the aircraft would have to be taken away at the gate and put in the hold of the aircraft. You have more aircraft missing their slots and you would just gum up the whole system. But of course, a bunch of lunatics elected to the European parliament wouldn't worry about the day-to-day details of how people move. They only work about 3 days a week anyway and wouldn't be all that sensitive at the best of times to efficiency. This is why in America innovates, China replicates and Europe f****** regulates. And why Draghi has pointed 14 months ago, we need to get more efficient in Europe. And the best starting point would be stop issuing new bulls*** regulations invented by idiots in the European Parliament and start making Europe more efficient. If you really want to deliver efficiency for consumers of air travel in Europe and competitiveness, abolish environmental taxes or at least bring them into line with CORSIA and fix air traffic control. The European part will be much better off waste spending its time reforming air traffic control or protecting overflights in a single market than they would designing new and hopelessly impractical and unimplementable regulations, allowing passengers to bring 2 free bags on board an aircraft where there isn't room for the bags and they don't fit. Operator: The next question goes to Jaime Rowbotham of Deutsche Bank. Jaime Rowbotham: Two from me, both on growth. The first one on fares. Obviously, great to see you're making back what you lost from the OTA issues. But on an underlying basis, the pricing is broadly flat. And that's, I think, the scenario you're implicitly guiding to for this winter when the comps normalize. So as we look ahead to next summer, you're growing in Poland, Italy, Ireland, you'll shrink in Spain, Germany, France. But overall, you'll grow seats at about 4%. It looks like the industry will do 3% to 4% again as well. That being the case, I was a bit surprised to hear you talking about modest fare increases coming through the system, especially as you hinted that Ryanair will likely be passing some of its fuel cost decline on to stimulate growth. So would it not pay for us to tread quite carefully when thinking about the direction of your pricing next summer? Second one, you've announced EUR 25 million of annual investment today to accelerate cadet and first officer recruitment for the next 3 years. You've also talked previously about setting up 1 or 2 in-house engine maintenance shops. Is there any update on that project? Have you chosen the sites? And are there any other non-aircraft investments for growth that we should have on our radar? Michael O'Leary: Thanks, Jaime. I'm going to ask Eddie to deal with the growth question. I might ask Tracey McCann to come in on -- Tracey will come in on the EUR 25 million, on the first officer and on the engine shops update. Eddie, growth in 2026. Edward Wilson: Yes. I mean if you look out into the summer of next year, I think, just close to 75% of our growth will be in Italy, Poland, Albania and U.K. I mean like we've -- if you look what's happened in Italy, we've opened 2 new -- we've got bases in Trapani. Tirana base will open. We've got additional aircraft, 3 additional aircraft going into Modlin, 3 additional aircraft going into Krakow. And then you see as we begin to -- like it's not good to say that we're not growing in Spain. We're not growing in regional Spain. I mean regional airports in Spain are underutilized by about 70%, but we continue to grow in Malaga and Alicante where we will have -- probably we'll have 20 aircraft in both of those bases next year, and that'll be pretty much maxed out on early morning slots. We continue to grow places like Madrid, so it is getting more patchy and Barcelona is full. But yes, the way this is playing out in terms of you look at our competitors and their sort of cost inflation, and that's going to drive fares up while the gap between us and our competitors widens on a unit cost basis, and that gives us the opportunity to take advantage of what we believe will be like fares at least rising to some extent, the bias is going to be towards that. And we continue to grow, as I say, 75% of it across Italy, U.K., Poland and Albania and then a smattering of one aircraft increases across a wide range of bases where we're continuing to get low-cost deals. But like I could have allocated those 29 aircraft 3x over based on the appetite that's out there for particularly the stability that Ryanair brings and the longevity into those markets. Michael O'Leary: And I would just add to that point. I mean if you look at the non ex-fuel unit cost inflation in our competitors, whether it's easyJet, Wizz, Lufthansa, Air France-KLM, they are really struggling to contain unit costs. And that, I think, puts pressure on the next year to get fares up to cover these unit costs. The legacy carriers are also facing a much bigger penalty in terms of the withdrawal of the free ETS allowances. It has a much bigger impact on Lufthansa, Air France and IAG. And I think the pressure on fares is going to be upwards for the next year or 2. We have a much better unit cost discipline, and I think our fares will trend up behind them despite the fact that we've already banked up to EUR 650 million in fuel cost savings next year. Tracey, do you want to touch on the first officer recruitment issue and the progress on engine shops? Tracey McCann: Yes. So attrition rates are probably at the lowest we've ever seen. So we probably slowed down our recruitment this year of cadets probably to about 500. We should be up at about 1,000. So given the long lead time for promotions to captain been about 4 to 5 years, we're commencing recruitment now for then peak years for the MAX 10 deliveries. So there'll be a carry cost of about EUR 25 million per annum up to 2030. Michael O'Leary: And shop progress? Tracey McCann: So just on the engine shops, we're close to selecting our first MRO shop. We will open 2. So that will allow us to do 200 engines in each shop. The selection period is ongoing. There's nothing in our CapEx for this year, but we will probably start paying something next year, but we're close to announcing something on that very shortly. Michael O'Leary: We're in advanced discussions with GE and CFM on spares packages, and we would hope to have announcements of those, if not, before Christmas, maybe early in the new year. Operator: The next question goes to Jarrod Castle of UBS. Jarrod Castle: I was quite interested to hear you say that you think the profit per pax could go as high as EUR 14 at least over the next few years. And you've given some commentary on pricing and costs. But just some color on what gives you that confidence, assuming we've got like a stable GDP environment. There's no downturn, I guess. And then you've obviously spoken about a number of countries, Germany, France and I saw some comments on the U.K. But it does look like you're still continuing to grow in the U.K., which I think is about 1/5 of your capacity. And if I'm not mistaken, you're going to grow in summer by the sounds of things. So why is it still attractive to you? And what are your thoughts on the upcoming budget on the '26? Michael O'Leary: Okay. I'll maybe ask Eddie do the second half of the question on U.K. growth this year. Remember, the APD increase, that doesn't come in until April of '26. So -- but it's coming. Just on profit per passenger. If you go back to the kind of the broad brushes or my favorite back of the envelope, the real driver, I think, of our industry in Europe for the next 4 or 5 years is capacity constraint. We've gone through 25, 30 years where there was new airlines being set up, low fares airlines, the legacies were setting up low fare subsidiaries, everybody had new aircraft deliveries. There is very little capacity growth across Europe this year, next year or for the next 3 or 4 years. Nobody has any significant aircraft orders with the possible exception of Ryanair. Wizz had some orders and they've -- they're desperately trying to defer those orders now, which means their profits implode because all their profits come from [ Mizigel ] or Ponzi like sale and leaseback profits being recognized in the P&L, but that's an aside. So I think the demand for air travel remains strong. Yes, there are economic challenges in countries like Germany, France and the U.K. where the economies are not doing well, particularly in the U.K. post-Brexit. But people are not willing to forgo the travel. The kids, midterm -- we've just come through the midterm school break last week, very strong traffic flows, very strong bookings at high yields. Easter, summer holidays, Christmas, we're seeing strong demand for travel. I think, if anything, strong demand for travel with -- in Ryanair because we have such a pricing advantage over every other airline in Europe. Wherever we allocate the capacity, we are filling strongly. And I think that was reflected in this morning's bookings even into the remainder of October, November, December or November, December, where forward bookings are about almost 1% ahead of where they were this time last year. And we see that continuing. So I was asked earlier this morning, one of the interviews, if we saved EUR 650 million on fuel next year, will we pass that on in the form of lower fares? I think -- and my answer was, I think we can, but I don't expect to have to because I don't see -- if you look at the kind of cost inflation or ex fuel unit cost inflation in Wizz, easyJet, Lufthansa, Air France-KLM, it's high single digit, low and mid-double digits in the case of Wizz. Those guys have no future unless they constrain capacity and get airfares up for the next year or 2. And I think we will be the beneficiaries of that with a much more disciplined unit cost control. And I keep go back to Slide 4 in our presentation. If you look at the comparable unit cost advantage we have over every other airline in Europe, I think there's a reasonable prospect that we will see modest fare increases over the next 2 or 3 years plus or minus any unforeseen events, but modest fare increases, mid-single digits. And in Ryanair's case, most of that flowing through to the bottom line. Now we will have labor cost inflation in the next couple of years. I think ATC will continue to be out badly controlled by government. But overall, we will be -- we're moving into a decade where we're going to start taking aircraft at 20% more seats that burn 20% less fuel per flight. We're looking at a much more operating efficiencies coming through. And I think that justifies a reasonably modest growth in profit per passenger from EUR 10 to EUR 12 to EUR 14, I think, over the next 5 years to 2030. But then I'm one of like hopeless optimist, which is why I'm employed in the airline industry. Eddie, U.K. growth impact of APD. Edward Wilson: Yes. I mean, notwithstanding the sort of background of continuous APD growth in the U.K. The way we look at in terms of route development is not just season by season, but there's a continuous carousel of airports that we do deals with. And like if that -- if you've got airports even in a tough market like that, that are willing to share the investment with you in terms of lower cost, well, then we're going to reward that with extra capacity. And we've got extra aircraft going into places like Newcastle, which has gone from 0 to 2 aircraft based and 3 aircraft based now. Birmingham has got an extra aircraft. Liverpool has got an extra aircraft, Birmingham, Manchester, Stanford. All these places have extra aircraft going in because they're willing. We're in there for the long term. We're lowering costs there and incentivized for additional traffic. So it doesn't always go coterminous with the market as you make those investments, and it's going to put even more pressure on [indiscernible]. Michael O'Leary: Neil, anything you want to add there on U.K. growth or impact of APD? Neil Sorahan: Not particularly. I think we're -- Eddie and yourself have covered that off fairly well. On the profit per pax, I suppose just to reiterate, it won't go in straight line. There will be years where we'll be up and years where we'll be slightly down. Michael O'Leary: Okay. Michal Kaczmarzyk here as well, who's the CEO of Buzz. I might just add, I guess, help us to just to give you maybe his insight into growth in Central Europe, Poland, in particular, the charter market in Buzz. Michal, anything you want to add on growth in those non-tax economies like Poland and Central Europe? Michal Kaczmarzyk: There are good taxes. True. I mean Poland and CEE are performing very well. Demand is strong. We have now 80 aircraft allocated in the region. The Poland is the biggest part of the market with 44, offering more or less 40 million seats with the most attractive destinations in CEE. We have very strong brand recognition there at Ryanair, but also supported by our local structure bus generating over [ 3,500 ] direct jobs in Central Eastern Europe, supporting another 20,000 airport handling and so on. We make a lot of significant investment in the region through our hangars facility, but also crew training centers. We completed recently the biggest crew training center in Central Eastern Europe with 3 -- sorry, 4 full motion simulators. It's located in Krakow. We'll be able to train over 300 crew per day. We developed also our Warsaw ops center, focusing now on covering Central Eastern Europe, but also serves as a backup for Dublin ops center. So there is a lot of capacity still we can allocate in Central and Eastern Europe. The only -- the constraint is the number of aircraft we can allocate there. And we are in the good shape to take a lot of market share in the next 2, 3 years. Michael O'Leary: And there was talk last year of with moving aircraft back from the desert and basing aircraft in Central and Eastern Europe. Are you seeing much of Wizz in those markets? And how is the -- what's the -- Albania, where we're opening a base in Tirana, which is currently a Wizz base. How is the Tirana expansion base going head-to-head with Wizz? Michal Kaczmarzyk: So aircraft allocation -- I mean the Wizz aircraft allocation from the desert to Central Eastern Europe, I would say it's too late. I mean after pre-COVID, we increased in Central Eastern like 40%. We took their capacity or even pass capacity from the region to the region. So now we are the biggest in Poland, the Baltics, Croatia, Slovakia. We have the local structure there where we are able to compete in terms of cost level. There is no cheaper airline than past now in the region. Also with the highest fleet utilization ratio in the industry, over 6 hectares per aircraft per day. So the new base launch next summer will be Tirana for us, with quite significant capacity of Wizz. But what I mentioned, we are absolutely not afraid of that because our local structure there guarantee us the lowest cost. Once we deliver the lowest cost, we are able to deliver the lowest fares there as well. Michael O'Leary: Thanks, Michal. Eddie, anything you want to add on growth there before we... Edward Wilson: I mean just touch on the point there, you talk about Wizz and what's happening out there, where their policy or their growth strategy is to go back to Central and Eastern Europe. And certainly, what we pick up from the airports is that those that are incentivizing us to grow is that we're there for the long term. And you can see even cancellations in [indiscernible] from Wizz before they've even started back there. So some of that has been replicated. And you hear a lot of noise, but not a lot of lot of action that even extends to places like Italy, where we're doing almost 1,200 frequencies a week and you've got less than 100 frequencies a week from Wizz. So -- but I think airports recognize Ryanair is in for the long term, do a deal with Ryanair, get the cost down and you have the traffic for the long term rather than looking at these other short-term deals that are available [indiscernible]. Operator: The next question goes to Stephen Furlong of Davy. Stephen Furlong: Just on Boeing, last week, they had the results, and I thought they were pretty vague on the certification. They just said 2026, maybe the deliberately were for the MAX 10. I mean a little bit more work on the 10 and the 7 and hardware and software modifications, although they did say it was pretty straightforward. So just might talk about that, what exactly they're telling you. And then you mentioned labor. Could you just remind us what's the timetable for CLAs? I think most of them are in 2027 and stuff that would be great, the contract labor agreements. Michael O'Leary: Yes. I mean I think it's one of this -- I give Boeing more credit. The new management team is doing much more credit. The old management team would give us all sorts of pie in the sky, to be here tomorrow, next week and then miss targets all over the place. The new guys are much more cautious. They don't want to make promises they can't deliver. And I think that's the sensible place for them to be in. But you look at what they have delivered, they've got FAA approval to go from rate 38 to rate 42 in October. They're now talking about going to rate 46 in March, April next year. That doesn't really affect us. I mean we'll have finished our -- the Gamechanger deliveries at the end of February. But at least we have all 29 aircraft in for summer 2026. There is a risk at the moment with the government shutdown that certification, they're pretty confident talking to us. And actually, we get this on the other side from talking to EASA, who are involved in. EASA are very impressed with the work that the Boeing of the management team and the work that they're doing. And we get a lot of very positive feedback from EASA. So I think they're right to be somewhat cautious to underpromise and overdeliver. But we have a reasonable headroom there. At the moment, they're talking about MAX 7 being certified by -- in Q2 next year, MAX 10 in Q3. That could slip to Q4 or to Q1 of 2027, and we would still get our 15 deliveries in the spring of 2027. Now clearly, we'd be one of the lead operators of the MAX 10. I wouldn't have any issue with that. The sooner we can get them, the better. So -- but they're telling us and have gone in writing that they will meet our delivery date, the first 15 delivery dates, the first contracted 15 delivery dates in the spring of '27, they will meet. That's what gave us the confidence in the treasury function to go out and start hedging the U.S. dollar on those firm deliveries. And we're looking for more opportunities to extend those hedging. So I think Boeing were right to be a little bit cautious in their public commentary, but all of the delivery on the ground in terms of quality of what they're delivering to us and the timeliness of what they're delivering to us now has been nothing but impressive for the last 3 or 4 months. Now they clearly don't need any screw up along the way. But in Stephanie Pope who, is sitting on top of the production line in Seattle, there's somebody who's there every day. You can pick up the phone and call her. She gets back to you. She's really is well on top of it, and I would be very supportive of the work she's been doing. Maybe I'll add over -- so timetable on CLA, Eddie, while most of our labor contracts run out to -- our rates -- come up for renewal in April '27. Edward Wilson: And there's a couple of labor contracts that will be up 2 or 3 on the pilot side and again, a similar number on the cabin crew side. But like a lot of what we're -- it's not always just about pay. I mean, if you look at the disruption that's happened against the background of ATC and Ryanair's ability allow its people to actually deliver sort of a stable working environment underpinned by the continuation of the plan for roster, which will be a key part of any discussions on the CLA. And we've seen also over the last number of years, one of the dividends of doing local labor contracts is that people now not only are in the right -- most people are in the right place where they want to be, and it's relatively easy in terms of how they're paid, the local bureaucracy administration and labs have made a huge investment with that in terms of -- it's so much easier now. It's easier than it's ever been in Ryanair's history for people in far-flown basis to get the smart things done, how do I get my time off, how do I get my payroll queries, and that's all done through sort of a platform called Ryanair Connect. So there's lots of things like pilots and cabin crew more than ever value given the disruption that are there -- the disruption that is driven by ATC to have a stable working environment. I mean like this August, for example, we had our lowest cancellation level ever, completely different from the previous season. A lot of that, again, is about recovering on the day. So we'll be talking with our union partners in terms of the renewal of agreements. We will try to do long-term stable agreement, but underpinned by superior working conditions that I think are increasingly becoming more valuable. So it's not all just about one. Michael O'Leary: Touch on the Spanish CLA? Edward Wilson: We just concluded the Spanish CLA for the cabin crew, which was one of the last ones post sort of unionization. There were some bumps in the road, but actually was signed there last week, now we ratified by the local labor authority, and that's for cabin crew. That's very welcome. That goes out to 2030 into that deal. And that sort of sets somewhat of a benchmark for where we're going to go with the new deals that are going to come up, particularly on the cabin crew side. Michael O'Leary: And Darrell, you want to add anything to that on the CLA side and Chief People Officer? Darrell? Okay. Maybe Darrell's not on the line. Look, as you rightly say, Stephen, the labor contracts run out to April '27. That will [indiscernible] kind of is timed to meet the deliveries of the MAX 10s. And there's no doubt we're going to get a productivity gain out of those MAX 10 aircraft, not so much from the extra seats, but from the fuel consumption on the engines, which is dramatic. We are willing, I think, to share some of that productivity upside with our people. I think they -- but Darrell and his team have started those kind of discussions around 2026 and 2027. We have, as Tracey has already said, record low attrition. I mean we have almost no pilots and no cabin crew attrition at the moment. People are happy where they are. They're being well paid. They're in the basis they want to be in. Clearly, the Gulf carriers, which would historically have been a kind of the valve that would have recruited a lot of our pilots they don't have any capacity growth either at the moment. So things have never been more stable. But I think we will be seeing productivity gains coming over the next couple of years, and we are certainly minded to do deals with -- as long as we can do sensible deals. Will we do unsensible deals? No, we won't. I mean we've taken strikes in Belgium in the last 12 months. We've taken an occasional strike in Spain. We're happy to take strikes where people don't want to be stupid. We'll take strikes and we will face them down. But I think there is some upside coming in the next couple of years. And certainly, we will want our people to be at the front end of that. And if we can conclude new pay deals in the next -- either from April '26 or for April '27. And if that results in a step-up in labor cost, it's something I think we'd be willing to fund and finance. So watch this space, and we would hope to make progress on that over the next 6, 9, 12 months. Operator: The next question goes to Alex Irving of Bernstein. Alexander Irving: Two from me, please. First on ancillaries. Really good to see that robust growth continuing on from Q1. What's driving that? Is it product innovation? Is it pricing decompressing 2 years into 1 as you reinstate the OTAs and flat unit ancillaries at this time of last year? And then related to that, what do you expect for unit ancillary sales over the coming years? Second question is on CapEx. You've previously spoken about peak CapEx of around EUR 3 billion in FY '30, '31. You talked about locking in some of the dollar weakness and some of those gains into your future CapEx budget. What are your latest expectations for peak CapEx? When and how much, please? Michael O'Leary: Thanks, Alex. So maybe I'll ask Tracey McCann to take the ancillaries question. And Neil, you might come in and do CapEx, our peak CapEx. Tracey, ancillary? Tracey McCann: Okay. The ancillary growth, 3%. A lot of that is driven what we said from dynamic pricing. So we're starting to get better pricing on seats, better pricing on bags. We also have our order to seat service, which is increasing our onboard spend. And so probably fall back a little bit, you're going to be faced with the same thing on the comparables in the second half of the year. So maybe not as strong as the first half and probably about 2% per annum, I would say, beyond this year. But again, a lot of it is driven by what the labs team are doing in-house in driving them increments we can get on pricing. Michael O'Leary: Okay. Neil, do you want to touch on CapEx? Neil Sorahan: Yes, Alex, there's not a lot to add at this stage. We're only 35% hedged on the firm, the 150 aircraft. We haven't done anything on the options yet. The CapEx that we've guided in the past doesn't include engine shops. So it's a little bit premature to start changing numbers at this point in time. I prefer to wait until the engine shops agreed and then come out and refresh the numbers at that point in time. Michael O'Leary: John Norton here, Head of Trading. John, do you want to add on -- sorry, go ahead, Neil. Neil Sorahan: No, that's pretty much it. Michael O'Leary: John, do you want to add anything on CapEx on the treasury or currencies? John Norton: Yes. Thanks, Michael. Yes, look, we've got a nice layer in place there on the CapEx [indiscernible] for the MAX. I mean when you look at it at the start of the year, where euro dollar levels were down at 1.02, 1.03 in January. And then when you also factor in when the contract was signed and it was at 1.08. We have that nice space in place now to take us forward. Now we'll just look for opportunities when we see them just where markets going forward to build on that. Operator: The next question goes to Dudley Shanley of Goodbody. Dudley Shanley: Two questions. The first one, Michael, you were on CNBC this morning. And I think if I'm listening to you correctly, you said the consumers seem to be a little bit more price sensitive at the moment. How are you seeing that coming through your business? Is that just a temporary thing? And then the second question was to do with capacity constraints. Just what are you watching on that kind of 3- to 5-year view that it will remain as constrained? I know some people have been talking about the likes of aircraft from people like Spirit and think that's been shifted over to Europe. What do you watch? Michael O'Leary: Thanks. I mean where do we see consumer price sensitivity at the moment, I think, is the fact that forward bookings without any price promotion at the moment are running close to 1% ahead of where they were this time last year. And this time last year, we were actually coming off the kind of OTA pricing down 7%, lower fares. At the moment, fares are up in the first half of the year, 13%. We think that will be a little less in the second half of the year. And yet we're -- pricing is coming -- running against us or forward bookings are running against us. If anything, we're kind of slightly closing off cheaper seats to try to restrain forward bookings because clearly, we want to keep as much capacity we can for the closer-in bookings, particularly as you run up against Christmas and the New Year. In markets where we are expanding capacity, regional Italy, very strong. A new thing we've identified recently in Italy is Alitalia -- seem to have a number of their aircraft fleet grounded, particularly in the domestic market as the shortest spares. And we are expanding -- seeing very strong loads. Okay, the prices are lower in domestic, Italy, domestic Spain, that kind of stuff, but strong growth. And I note there is clearly a bit of consumer price sensitivity there. I'm campaigning aggressively against Rachel Reeves putting up APD or doing any more damage to the U.K. economic growth. But in a kind of slightly bizarre screwed up way, the more she damages economic growth and confidence in the U.K., the more people will switch away from paying higher fares to BA and others on to Ryanair. So I think that all augurs well for our growth over the next couple of years. Capacity constraints, what do we look for? I mean the only thing you can really look for is Boeing and Airbus orders. And they are -- the most recent one was Turkish, which I think was kind of preannounced by Trump when he was sitting with Erdogan at some meeting in Ankara. And even Turkish, which has announced an order for, I think, 200 or 250 narrow-body 737s, but they have no engines. They're now complaining that they can't get a deal out of the engine manufacturers. I mean in our day, when we order aircraft, you're Boeing, you go sort out the engines. But we wouldn't buy, order an aircraft unless it has engines attached. The market has moved so aggressively in favor of the engine manufacturers. People are now kind of ordering aircraft but with no engines and then kind of being price takers when they go to do deals on aircraft. Really, I don't see anything -- I mean if some of those aircraft appear out of Spirit, I think the chance of those appearing in Europe are 0. Airlines in Asia or in the Middle East and would be much more aggressive and willing to pay much higher lease rates than airlines in Europe. I see no demand among Lufthansa, Air France-KLM, IAG for capacity growth. They're all playing the same game. They've consolidated. They want to control capacity. If any, they'll keep shaving capacity so they can get air fares up. Wizz has canceled or desperately trying to -- well, IndiGo, not Wizz are definitely trying to postpone those Airbus orders into the mid-2030s, which by the time you've added 5 or 6 or 10 years of escalation, those already expensive aircraft will be even more expensive. And all easyJet is doing is upgauging from an A319 to 321s at their fortress airports, Gatwick, Paris, Switzerland. That makes sense. It's a sensible thing to do. But as we track across Europe, as Michal has said in Central Europe, we don't see Wizz anywhere. In fact, as Eddie has mentioned, most of the big incentives we'll get -- growth incentives we're getting from airports are from Wizz customer airports who are shooting themselves that Wizz is going to go bust in the not-too-distant future. I think there's a reasonable prospect and are getting Ryanair to come in there and kind of, if you like, almost as the insurance policy against a Wizz collapse. Now I don't think Wizz will collapse. But I mean, as a competitor, we wouldn't pay any attention to them at all. I mean the idea that they're going to close one of their desert bases in Abu Dhabi, noteworthy that they haven't closed the one in Riyadh, and they're going to move that capacity back to Central and Eastern Europe, well, [ whoopty doo ]. We haven't seen them yet. I think they've expanded their definition of Central and Eastern Europe to the stands. Apparently, most of the stands are now in Central and Eastern Europe, if you go by the Wizz definition. Meanwhile, we're charging in on top of them in Albania. They were competing with us in Italy and in Austria where 2 or 3 years ago, they disappeared. So we have a reasonably benign kind of map across Europe where most airports want us to grow there. And increasingly, countries want us to or incentivizing us to grow by abolishing environmental taxes. And that is Sweden, Albania. I don't go through the list again. One of the areas where airports were growing fastest in next year would be in Bratislava, where we had a 3 aircraft base. An hour up the road, the Austrians have failed to abolish their stupid environmental tax, which was less than EUR 160 million a year. Vienna has put up its fees by 30% since COVID. And all of the airlines, including now Ryanair are taking aircraft out of Vienna and putting in Bratislava. We had already announced an increase in our Bratislava base in 3 to 5 aircraft next year. And then about 3 weeks later, Wizz announced they're going to open 2 or 3 aircraft based in Bratislava, which is wonderful. Because in order to be able -- the only thing we could do to respond to Wiz arrival in Bratislava is put up our airfares there. So they'd be somewhat competitive with Wizz who come in there with fares that are about 40%, 50% more expensive than Ryanair. And the outcome will be exactly the same as it was previously in Vienna or in Italy. Wizz will lose, we'll win and the people of Bratislava will be left with the lowest fare airline, Ryanair, delivering all of that growth. But in Slovakia, there's a new transport minister, a new government, they've abolished environmental taxes. They've cut ATC fees by 50%, and the airport is incentivizing growth. Meanwhile, Rachel Reeves is over here in the U.K., considering whether she further increases APD, taxes the rich and follows the Marxist-Leninis North Korean growth model, which consists of taxing the s*** out of everything that moves with the result that nothing [ broken ] moves in the end. But to the extent that the U.K. economy suffers, I think more and more English people we can take will start fleeing to Ryanair and away from high-fare airlines like easyJet and BA. Operator: The next question goes to Conor Dwyer of Citi. Conor Dwyer: First question is for you, Michael. You were talking about how ETS credit prices should come in line with CORSIA, which would obviously be quite material if that did happen. But how much of this is hope and how much you think this might actually change? Is there a political will for this? And then the second question for Neil, on the cost per pax. It was obviously up 1% in the first half of the year, and you're talking about a bit of acceleration to the back half of the year, I think. You've got quite a strong fuel hedge position for that. So I'm just wondering where are you expecting some nonfuel cost pressure in the back half of the year? Michael O'Leary: Thanks, Conor. I mean talking about moving ETS to CORSIA, somebody has to leave the campaign. We've been calling for this for about 2 years. We didn't have the support of the flag carriers in A4E, Lufthansa, IAG or Air France-KLM. But they're now much more badly impacted by the withdrawal of free ETSs because they haven't grown for the last 10 years, most of their traffic was covered by free allowed ETS allowances. As Europe unwinds those free ETS allowances, they're getting much more hit or the cost impact on them is much more severe. And lo and behold, they're all now campaigning for moving -- well, if we're not going to abolish ETSs altogether, at least move in line with CORSIA, it is utterly indefensible that Europe taxes the s*** out of Europeans traveling within Europe. And yet the Americans, the Gulf carriers, the Asian carriers, all land and take off in Europe. They account for 53% of European aviation CO2 emissions and yet pay nothing. So I think the fact that A4E is now unanimous on this, I mean, how much of it is -- I'm much more optimistic that we will see some movement on that. Now we still have the dead hand of Ursula von der Leyen to deal with. But ultimately, I think you can even embarrass an incompetent German into -- I can actually do something on competitiveness. The Draghi report is 14 months old. She's done absolutely nothing. And I think if we build ahead of steam there, there's a reasonable prospect that Europe through the fog of failure will ultimately want to do something other than spend hundreds of billions on defense, but to make its economy more efficient. And air travel is clearly one of the ways of doing that. It would be material. It would be result in a dramatic or a significant reduction in airfares. Remember, passengers are paying these ETSs. It would result in a significant reduction in airfares. But at least it would mean that everybody in Europe is paying the same fair share as the non-Europeans. -- whereas at the moment, the Europeans paying all of the taxes, the non-Europeans getting completely free ride and useless Europe in the middle of it or useless von der Leyen sitting in the middle of it, terrified of Trump or taxing the non-Europeans. And so I think it's a call whose time has come. I also believe, and again, I'm one of life's great optimist, that actually, we will embarrass her into doing something about air traffic control or at least defending and protecting the single market. She was the one who was singing most vociferously during the Brexit negotiations that the single market is sacrosanct. We will do everything to defend the single market unless, of course, a couple of French air traffic controllers want to go on strike. So I think ultimately -- and I am much more motivated. Commissioner Tzitzikostas is really a guy who wants to get things done. He wants to deliver change. I think he really does want to transform air travel in Europe. He's from Greece. Therefore, they're very sensitive to making air travel more efficient. And I am very hopeful that him, together with the unanimity out of the A4E airlines, we will see some movement in Europe on ETS in the next year or 2. Neil, unit cost per passenger? Neil Sorahan: Yes, sure. Conor, a couple of bits and pieces. Firstly, I would expect that air traffic control charges will go up again in January this year. The service is just so abysmal that they have to put it up again. I think you'll see some of that marketing spend. I talked about some timing in there. Some of that will catch up into Christmas and into the stimulation for the advertising ahead of the summer. We're starting to see the Boeing compensation unwind. So that will have an impact on the maintenance line where some of those maintenance credits went. And then with the heavy maintenance at the back end of the year. Tracey also talked about we're going to start recruiting up on the cadets. That will kick off probably in the January time frame. So we'll be ramping up on the cadet side, but we'll also be ramping up as we always do ahead of the summer of 2026. So that tends to be back-ended costs in there, which is why I'm kind of been keeping the 1% to 3% unit cost inflation. Operator: The next question goes to Savanthi Syth of Raymond James. Savanthi Syth: Just on the first one, another question on the unit cost. But given you have hedging in place for next year and clarity around the Boeing deliveries, I was wondering if you could provide any kind of early thoughts on how we should think about fiscal year '27 unit costs? And then maybe a second question, just on the debt side. Usually, airlines that even have kind of good balance sheets find some value in having debt and being involved in that side of the financial market. So kind of was curious is the 0 debt view just ahead of kind of -- you do have the MAX CapEx -- MAX 10 CapEx, engine shop, other opportunities. So is that kind of a temporary 0 debt view? Or do you have a different kind of philosophy on the debt side? Michael O'Leary: Yes. Thanks, Savi. I mean I think on the hedging, I mean, I'll ask Neil to come back in and correct me if I get something wrong here. It's too early yet. We haven't done the budgets for FY '27. So I wouldn't get into unit costs at this stage other than we banked EUR 650 million in fuel cost savings with the fuel hedging. So that's a good strong start. I think the 2 critical elements on the hedging is we've hedged 80% of FY '27 fuel at just under $67 a barrel. We've made good progress on the currency hedging on OpEx. I'll ask John to come in -- John Norton to come in on where are we on the OpEx hedging for FY '27? John Norton: Yes. So we reached 80% of FY '27 at a level of [ 150 ]. So... Michael O'Leary: Where were we in the prior year? John Norton: So [ 1.11 ] [indiscernible] Michael O'Leary: Okay. So we've hedged away OpEx and a little bit of saving as well. And then clearly, it's not material in FY '27, but we've started to hedge the fixed orders on the MAX 10. So the hedging is locked down. We have the 29 aircraft will be delivered by Boeing. And I think that's much more critical here into FY '27. We have certainty now that we'll be able to deliver the headline traffic growth. And that's what drives ultimately the airfares and what drives the ancillary revenues. On the debt side, we're in this kind of artificial period. We have this kind of 2-year interregnum from '25 to '27, where in reality, we don't have a lot of CapEx. We could -- and we have -- we're coming up to -- in May next year, we have the 1.2 million bond. I mean we raised that coming out of COVID at less than 1%. So the cost of refining that bond that currently would be somewhere close to or close to about 3%, which isn't -- it's not a lot of money, but we don't need it at the moment. And therefore, collectively as a Board, our view is we should demonstrate to the market that we can pay down these bonds. When we start getting into '26 or '27, I think we would reserve the right to start. We would probably go back to the bond market as we get into the heavy CapEx again on the MAX 10. But we do so coming off with a strong balance sheet, BBB+ rated and say, look, we paid out back $4 billion worth of bonds post-COVID. And so I like -- we like the sense of we're not trying to be 0 debt for some kind of bulls*** philosophical reasons. We would expect to be -- to raise debt as long as we can raise debt cheaply, but only when we move into a period of heavy CapEx, which is where we'll be in '28, '29, we only take 15 aircraft in '27, we get another 15 aircraft in '28, but then we move up towards closer to 50 aircraft in '29 and '30. And so I would be of the view, you will see us pay down the last bond in May. We will try to build up gross cash of somewhere between EUR 3 billion and EUR 4 billion out of that. Other than that, we'll return the surplus cash to shareholders in dividends and buybacks. But then as we get into the heavier CapEx in '27, '28, '29, I think you'll see us go back to the bond market. Like there's nothing here. We have no principles here in terms of being -- having debt or being debt-free. It's just because of this kind of slightly strange -- it's the first time in 30 years, we go through a kind of a 2-year period with very little aircraft CapEx, pay down the debt, and then we can always refi again in '28, '29 from our position of strength. I don't know if you want to add anything on that on the debt. Neil Sorahan: Yes, I'd agree with that, Michael. I mean it's very much down to a cost decision at the moment. The cheapest way to fund ourselves is out of our own cash resources. And that's why we've decided to repay that bond out of our own cash. We've got nearly EUR 1 billion in dry powder in the form of our undrawn revolving credit facility. And as we've done in the past, we'll be opportunistic when we go back to the bond market. We'll go back at the time of our choosing and not just because there's a bond maturing and we have to roll it over. And I think that's how we will lock in the lowest cost ultimately long term for the group. So as Michael said, it's not just we have to be debt free. It's just it's going to fall that way for a period of time, and then we'll be back in the markets again. Michael O'Leary: And again, I would draw the point, as you look forward in terms of unit cost going forward FY '27. You look at our competitor airlines across Europe, the so-called low-cost airlines, they have huge net debt on their balance sheet, aircraft leasing costs, financing costs. And those costs are rising into the -- for the next year or 2. We will have 0 financing costs. We own 650 aircraft completely unencumbered. And it is another point of difference between us and the competition. It's also one of the reasons why they need to get airfares up in the next year or 2 to as their financing costs are rising and they have a huge leasing obligations. And why I think our underlying airfares may well rise into '27 and '28, whereas our unit costs will be well under control. Operator: The next question goes to James Goodall of Redburn. James Goodall: I just got a couple of follow-ups. So firstly, just on the MAX 10 deliveries. Do you know how many deliveries to other airlines are in front of you in the queue? I mean it looks like various airlines like United, Alaska, they've been pushing back some MAX 10 deliveries from '26 to '27. So I'm just trying to gauge the risk profile to you if the program gets pushed back any further, which I guess seems lower now given the deferrals from those airlines, but I would love your thoughts there. And then secondly, just following up from your comments around forward bookings being up 1 point in Q3. Does that forward book load factor level differ between the peak and the shoulder periods in Q3? And I guess, what does the higher book load factor level mean for you in terms of pricing strategy in the late market? Michael O'Leary: Okay. Thanks, James. Eddie will do the forward bookings. Let me touch on the MAX 10s. I mean, yes, one of the reasons why we're growing increasingly confident we'll get our first 15 deliveries in '27 is we are not delaying our MAX 10 orders. United who were the lead customer, I think, has delayed them. One stage they were talking about canceling the MAX 10s. We offered to step in and we take any MAX 10s they wanted to cancel. But it has helped, I think, Boeing to catch up with their production. I understand there's about 2 airlines in front of us. I think WestJet is one, Alaska might be another who are still ahead of us in the queue. Their due deliveries in middle to late 2026. Not sure whether they'll get them or not around. I think there's a reasonable prospect that the lead customer is likely to get the first MAX 10 deliveries in probably Q3 or Q4 of '26. We have about 6 months of headroom there before we get our first aircraft. And I would be reasonably confident we will take them. I don't think we'll be the lead operator. I don't think we'll get the first MAX 10 aircraft, but we might be second or third in the queue. And to those -- to my mind, it made no sense for United or some of those others to postpone the MAX 10s because you postpone them into the late 20s or early 30s, you're just paying a couple of more years of escalation. I would rather take the aircraft as quickly as I can get them. We don't have escalate -- well, we have -- we built in our price -- the price is averaged over the lifetime of the deliveries between 2027 and 2034. I want those aircraft as soon as I can possibly get them. I would happily take an aircraft -- any aircraft that has 20% more seats and burns 20% less fuel, will be an economically much more efficient and an environmentally much more efficient aircraft to operate here in Europe. And I would take as many as I can get as soon as I can get them, which is why we stepped in when United stupidly announced that they wouldn't maybe take theirs. I said, well, we'll take anything that United wants to cancel. They finished up not canceling and just postponing. I think we're about third or fourth in the queue, but it will be a reasonably short queue. I think the first deliveries will take place in Q3 or Q4 of '26 and our first 15 are in the spring of '27. Eddie, do you want to talk about forward bookings through November, December, maybe into Q4? Edward Wilson: Yes. I mean in Q4, we're only about 10% booked, so very little for Q4, so very little visibility there. If you look forward to, say, November has required some price stimulation, but we're happy with load factors. If you look in December and January, I mean, we've learned as well from previous years in terms of trimming our schedules as well there, particularly as we get into the -- beyond the first 10 days of January and also doing some trimming around the early December as well. So look, we're about 76%, 77% booked for November. Like our bookings are ahead of where they're marginally ahead of where they've been for each of those months, both November -- like November, December and January, comfortable with what we're seeing, but November is the one that needed a little bit of needed price stimulation to get there. But looking, we don't have to dig too deep, but we're ahead. And so we're happy, but you do have limited visibility. And like really like with 10% of bookings for Q4, you have no real visibility whatsoever. Operator: The next question goes to Muneeba Kayani of Bank of America. Muneeba Kayani: I just wanted to follow up on your outlook for the fourth quarter. Why are you saying there's no Easter benefit because there is the earlier Easter and a couple of days will fall into the end of that. So just wanted to understand your thinking around kind of the base effects into the fourth quarter. And then just on EU ETS, what sort of increase should we be expecting in fiscal '27? Because it looks like hedging levels on that are just 11% right now and the prices have gone up. So how much of those fuel savings could be offset by the ETS costs going up? Michael O'Leary: Okay. I'll ask Thomas Fowler, who's the Director of Sustainability, maybe take the ETS question for you, Muneeba. Let me deal with the outlook. I mean, yes, Easter Sunday next year is on the 5th of April. So the first weekend of the school holidays will fall into the last weekend in March. But it's not significant. We will get a little bit of a bump. But I think at this point, we're better off just to say, look, there will be no Easter benefit in Q4. If we get a little bit in the last 2 days of March, great. But really, most of it will flow into April. It's really only when you get an Easter on the end of the 31st of March or 1st of April, you see the first -- as we did 2 years ago, the first half of Easter was in the prior year Q4. Almost all of the impact of Easter next year will be in Q1. There will be a couple of days in March. And if we get a little bit of a benefit out of that well and good, but there's certainly no point in going out now, we have 2 days of Easter in March next year, what can you do? We bug all visibility in Q4, and we won't have any until we get out to the Q3 numbers in February. And we -- that's all we're trying to communicate now, Muneeba. And now I'll turn to optimistic Tom for the ETS outlook for FY '27, and you won't touch on '28 yet, unless we [ hear ] from Ursula von der Leyen in between now and then. Thomas Fowler: I think Neil alluded at the call [indiscernible] outlook. We think the ETS and SAF costs go from EUR 1.1 billion this year to somewhere between EUR 1.4 billion and EUR 1.5 billion next year, depending on the outturn of where the pricing is. Obviously, it is higher. Prices are higher going into next year, and we have to unwind the final loss of the free allowances. So somewhere between EUR 1.4 billion, EUR 1.5 billion for FY '27. Neil Sorahan: Thomas, is it worth pointing out that's the last big step-up as well that we're going to have? Thomas Fowler: Well, the last step of velocity allowance is, obviously, fair pricing changes, Neil, yes, like we hopefully won't see step up at that level the following year until mandates increase on staff in 2030. We do see the mandates grow a bit in the U.K. literally to 2030. But obviously, given it's only -- it's a portion of our business, we don't get the full impact of that through the line. Michael O'Leary: And again, sorry, and it calls into question. If Europe is serious about being competitive, this bulls*** tax needs to be rolled back. We need to bring it in line with CORSIA. And it's one of the reasons this unwinding of the free ETSs while Lufthansa, Air France, IAG are now much more vocal about the need to have a fair and level playing field on environmental taxes in Europe. We can't just be taxing ourselves to debt in Europe and exempting the Americans, the Gulf, the Asians and everybody else. It's simply insane only the Europeans would sign something that stupid and self-defeating. And therefore, I think the more we can -- the more and louder we campaign, the more likely we are to see some progressive reforms and pushing back on this bulls***. Operator: The last question goes to Ruairi Cullinane of Research RBC Capital Markets. Ruairi Cullinane: Yes, first question, a follow-up on the previous one. So it sounds like you're not focusing lobbying efforts on sustainable aviation fuel mandates. Would you like to see any changes there to rules in the U.K. or EU? And then I wondered if you'd be willing to comment on whether the U.K. has diverged at all from the Q2 fare trends you've reported or 3Q booking trends? Michael O'Leary: Sorry, Ruairi. Just speak up, you're very faint there on the -- I got the first half with the SAF. What's the second question? Ruairi Cullinane: Yes, the second question on the U.K. Has the U.K. diverged at all from the Q2 fare trends you've reported or Q3 booking trends that you've seen across the group? Michael O'Leary: Okay. Look, SAF, I'm not a believer -- sorry, I'm a believer in SAF, but I mean, there is simply -- the volumes will not be there to meet the EU 6% mandate by 2030 or the U.K.'s insane 10% mandate. You have the oil majors at the moment going back from the production of SAFs under pressure in the White House. I think the -- I think I join and I support the call of all the A4E airlines in Europe. We need to move these mandates to the right -- we may get to 6% or 10% by 2035, but I think there's no prospect of getting there in 2030. And I would be surprised even if the oil majors don't produce the SAF, there's nothing we can do to supply it. These are just another example of European -- British and European lack of competitiveness. The environmental agenda, there's a war in Ukraine, Trump in the White House. There is no, I think -- what is the word, there is no significant where -- if anything, the whole environmental agenda is moving backwards. We need competitiveness in Europe. And if the Swedes who were the home of the original environmental tax and flight shaming and all, if they worked out that Greta was wrong and they're abolishing their environmental tax, then surely the rest of the dodos in Europe will do likewise. So I think there is, I think, very little prospect of those SAF mandates being met in 2030. I don't think as an industry, we should abandon SAF, but we do need a much more either Europe and European governments should use some of the environmental taxation, this astonishing the SAF or the ETS taxation to incentivize the production of SAF or move the SAF mandates to the right or further out into 2030. There's nothing we see divergent in the U.K. Sorry, I'll let that to Eddie. Eddie wants to answer that question. U.K., Q3, fares and... Edward Wilson: I mean, as I said, like in November, required price stimulation. And even though -- if you look at U.K. leisure, U.K. leisure for us is about 1/3 of all of our seats out of the U.K., like where we've got -- you do see some price pressure there. But just in November, a lot of capacity has gone in there in the market. I think it's causing a lot more pressure for our competitors. It's a very small part of it. If you look at the rest of the U.K., our city to city, our ethnic traffic to the U.K. and Ireland and all that, that's in line with the rest of the network. That's only a slight call out there in terms of U.K. leisure, I would say. And a lot of it would be focused in the region, a lot of capacity within post-COVID. Some of that went to our competitors' way in terms of holidays last year. I think they're feeling more of the pain, but we're getting to those factors. Ruairi Cullinane: But are you seeing any divergence in U.K. traffic in [ U3 ] compared to non-U.K. or EU traffic in... Edward Wilson: I mean the only call that I would have is some of the U.K. leisure in November. And it's a very small part of our business, and the rest of the U.K. is as robust as the rest of the network Europe. Michael O'Leary: Okay. Ruairi, does that answer the question? Ruairi Cullinane: Yes. Michael O'Leary: Good. Okay. Any other questions, Nadia? Operator: We currently have no questions. Michael O'Leary: Okay. Listen, folks, thank you very much. I think we've done, what, 1 hour and 25 minutes. We appreciate your time on the call. We have extensive roadshows on the road, Ireland, U.K., Europe, North America for the remainder of this week. If you'd like a meeting on a one-on-one, please contact us either through Jamie here, our Head of IR or through the Citi, Davy, Goodbody. Thanks to Citi, Davy and Goodbody for arranging and facilitating the roadshow, and we look forward to meeting you all at some stage over the remainder of this week. If anybody wants to come visit us in Dublin after that, please feel free. As long as you fly Ryanair, we'll be happy to meet you. And otherwise, I think we are reasonably cautiously optimistic on the outlook, if not for the next 12 months, but I think for the next 4 or 5 years, keep focusing on the fundamentals. Capacity is going to remain constrained in Europe. We are doing much better deals with airports across Europe. Governments select -- are increasingly reversing these environmental taxes. And therefore, I think there's a reasonable -- I'd be reasonably cautious that we're going to see controlled growth certainly to 250 million passengers by 2030, 300 million passengers by 2034. And there's a prospect plus or minus the occasional unforeseen event that profit -- net profit per passenger will over that period of time, although lumpily move from EUR 10 towards EUR 12 towards EUR 14 per passenger. And we hope you'll all join us for the ride and see where it goes over the next 4 or 5 years. Thank you for your time. Look forward to being here this week, and thank you very much. We'll wrap it up there, Nadia, please. Thank you. Operator: Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.
Operator: Ladies and gentlemen, thank you for standing by. Hello. My name is Dustin, and I will be your conference operator today. At this time, I would like to welcome you to Third quarter 2025 Pediatrix Medical Group, Inc. Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to our Chief Administrative Officer, Mary Ann Moore. Please go ahead. Mary Ann Moore: Thank you, operator, and good morning. Certain statements and information during this call may be deemed to be forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions and assessments made by pediatrics management in light of their experience and assessment of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Any forward-looking statements made during this call are made as of today, and Pediatrix undertakes no duty to update or revise any such statements, whether as a result of new information, future events or otherwise. Important factors that could cause actual results developments and business decisions to differ materially from forward-looking statements are described in the company's filings with the SEC, including the sections entitled Risk Factors. In today's remarks by management, we will be discussing non-GAAP financial metrics. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in this morning's earnings press release, our quarterly and annual reports and on our website at www.pediatrix.com. With that, I will turn the call over to Mark Ordan, our Chief Executive Officer. Mark Ordan: Thank you, Mary Ann, and good morning, everyone. Also with me today is Kasandra Rossi, our Chief Financial Officer, who is recovering from the flu. We didn't forecast that. Our third quarter results, including adjusted EBITDA of $87 million exceeded our expectations, a confluence of positive outcomes in pricing, collections and expense controls together led to another very strong quarter. 2025 year-to-date results have been strong, and we see no reason to expect a shift from normal seasonality in the fourth quarter. Because of practice bonus variability, our outlook for the full year's adjusted EBITDA is a wider-than-usual range at $270 million to $290 million. Note that we also disclosed in our Q filing that we bought back 1.2 million shares in the quarter. To date, that number is now 1.7 million shares. After Kasandra, I will speak about the big picture about where Pediatrix is today and where we are heading. Kasandra Rossi: Thanks, Mark, and good morning, everyone. This is definitely not my real voice, so please forgive me. Our consolidated revenue decrease was driven by our portfolio restructuring activity of just under $54 million. This decrease was partially offset by strong same-unit growth of 8% and with same unit pricing up about 7.5% and patient service volumes up just under 40 basis points. Pricing was driven by solid RCM cash collections, increased patient acuity and neonatology, an increase in contract administrative fees and favorable payer mix. While volumes reflected modest growth in neonatology, where NICU days were up by 2%. Practice-level SW&B expenses declined year-over-year, also reflecting our portfolio restructuring activity. On a same-unit basis, we saw increases in salary expense, incentive compensation based on practice results and benefits expense. Salary growth for the third quarter was modestly below the ranges that we have seen for the prior 5 quarters that averaged 3% to 3.5%. Our G&A expense increased slightly year-over-year, driven by an increase in incentive compensation expense based on overall company financial results. Other nonoperating income included a net gain on investments in divested businesses of $21 million, with the remaining net increase driven by higher interest income on cash balances and a decrease in interest expense on modestly lower average borrowings at slightly lower rates. Moving to cash flow. We generated $138 million in operating cash flow in the third quarter compared to $96 million in the prior year, driven by higher earnings and increases in cash flow from AR. We also used $21 million of cash during the quarter for share repurchases and used $19 million to acquire several neonatology, MFM and OB hospitalist practices in a single transaction. We ended the quarter with cash of $340 million and net debt of just over $260 million. This reflects net leverage of just under 1x using the midpoint of our updated adjusted EBITDA outlook range for 2025. Our AR DSO at September 30 of 43.1 days were down over 3 days from June 30, but were down almost 9 days year-over-year, driven by improved cash collections at our existing units. Mark Ordan: Thanks, Kasandra. I think that when we release stronger-than-expected results, people go straight to the components of those results and miss the core of who Pediatrix really is. Yes, we employ clinicians and hospitals in an ambulatory setting. And yes, there were strong components of our results that are out of our control, but that fact is hardly unique to us. Let me tell you the combination of some factors that do make us quite unique. At our recent medical directors meeting, we assembled over 250 practice medical directors, OB hospitalists, pediatric intensive care physicians, maternal fetal medicine physicians and the neonatologist. Nobody else could assemble a group of clinicians -- of clinician leaders like we can. This is the nation's largest assembly of practices in these most critical areas. Presenting to the group were our research clinicians who, in addition to their practice work produce more research on neonatology than any other organization, including academic medical sectors. Let me give you some details. Our market-leading position. We have massive clinical scale. Our research activity is supported by our substantial neonatology clinical footprint of over 1,300 physicians and 1,170 advanced practice providers, serving patients in 322 locations across 33 states. We maintain the industry's most detailed comprehensive clinical data warehouse with 37 million patient days and 2 million NICU admissions. We drive industry standards. Our research productivity is evidenced by 1,395 peer-reviewed publications authored by our clinicians and researchers, including 62 publications in 2024. Our active research spans 39 sites conducting 72 clinical research studies. The portfolio is diversified across funding sources, including 16 federally funded studies, 19 industry-sponsored pharmaceutical studies and 7 foundation and international collaborations. As of October 31, we maintained 130 active research applications. We strongly believe that this commitment to research drives higher quality and safety, innovative and branding. Our results are also driven by our commitment to technology, and we view ourselves as the innovative technology leader in neonatology. As many of you know, we have a proprietary Pediatrix developed system called BabySteps to support clinicians as they care from for mothers and the frailest of babies. Let me elaborate. It was designed and curated by our physicians and developed by our technology team to address the needs of the highest-risk NICU patients. It specifically addresses the following: supports clinical decision-making, increases efficiency and accuracy and documentation, provides risk mitigation, including med mal and increases clinician well-being via reduced documentation and cognitive burden. It is constantly updated and evolving based on our quality and research team input. Let me give you a specific example, hypoxic ischemic encephalopathy. HIE is a condition and it may occur when a newborn baby's brain does not receive enough oxygen and blood flow with a high mortality rate in severe cases. BabySteps programming prompts timely specific intervention to assist our physicians in diagnosis and care, improving clinical outcomes. After surveying alternatives, we believe BabySteps is a clear differentiator for us and has no peer in the industry, and we are confident that our hospital partners view that as one of our many strengths. Going forward, we plan to increase our prioritization of enhanced technological support. Our clinicians don't just work in hospitals. They and we as an organization, are true partners to these hospitals. We don't just put up a sign to attract this very rare group of clinicians for our hospital partners. We have the largest and I believe, the strongest recruiting team in these areas, ensuring we welcome the finest clinicians in our critical fields. Our results include an increase in acuity. Why? Because we lead more Level 3 and Level 4 NICUs than anyone else and with the support of our research and quality teams and many others of pediatrics, we provide more support in these fields than anybody else possibly could. This all results in miracles. I speak with and spend a great deal of time with our clinicians, and it is not at all uncommon for me to hear about 22-week-old babies being discharged home. Stop and think about what that means to have an organization that is at the forefront of such amazing care to the frailest patients anywhere and likely does this more than anyone else. Our strong results to a great degree results from our focus on 4 areas of concentration. And while we restructured our portfolio to further that focus, we continue to build strength around the country in pediatric surgery, neurology, cardiac intensive care and other highly specialized areas. All of what I've described is to further our reputation as a leader in this immensely critical and vital field so that hospital systems know they could not internally do what we can do with that partner. I spoke in May about a portfolio of NICU, MFM and OBH operations we were planning to add. Very happy to report that we did this on schedule and quite successfully welcoming great clinicians and providing a significant hospital partner with the support they needed. We expect to see more of this going forward. And even on our personal note, many of my administrator colleagues are clinicians or former clinicians and many of us are not, but I will assure you that what unites us is an unwavering dedication to the support of our clinicians so that by extension, we live up to our simple charge, take care of the patients. We have a lot happening here, and I'm grateful to and proud of the work that my colleagues are doing. I will end by returning to our results and outlook. While we have had a combination of positive factors to propel our strong results, we don't view it as a being at a peak. While we are certainly in the midst of significant health care headwinds, we all know that, we still see many opportunities to strengthen our operations and our results, and we are working hard to enable a very strong future. Operator, let's now open the call for questions. Operator: Our first question comes from the line of A.J. Rice from UBS. Albert Rice: First, obviously, you're sitting on a large cash balance. Your leverage is about as low as we've seen it. Any updated thoughts on capital deployment? I know you've been fairly cautious up to this point. Any thoughts about being more aggressive on the share repurchase? Or is there other development or acquisition opportunities that are interesting? Mark Ordan: Well, a few things. One, as we said, A.J. we have fairly aggressively been buying back shares, and we're very pleased that, that's come at the same time as the results that we've been posting. We are looking at many different opportunities, both inside and possibly outside the company, nothing to detail at this moment. We announced at our last call that we had welcomed a colleague, a long-time colleague of mine, Greg Neeb, who is working with me at looking at ways that we can really expand what we do, both internally and possibly externally. As you know and anybody who's been listening to these calls, we do favor low debt, especially at a time when we have the kind of headwinds that we have. So we'll continue to be cautious, and we look forward to reporting other opportunities as we move forward. Albert Rice: Okay. Maybe one other follow-up. Obviously, the restructuring of the portfolio has been a great success in terms of improving the operating performance of the company. I wonder -- we haven't asked you a while. Has it changed the dynamics of the company in the marketplace as you talk to new practices about potentially joining with you? Does it give them pause that you did the restructuring? Or has it changed the competitive landscape in any ways? Mark Ordan: No, I think actually, on the contrary, I think that both new practices, people -- practices that we've welcomed in, as I mentioned before, and our existing practices see, if anything, just an obvious increase in concentration of our efforts because we have, in that sense, a smaller footprint. So our team is so focused on working with our hospital partners and working with our clinicians that I think it creates a much better environment than we had before. Also think about our recruiting efforts and our recruiting team, we're able to really focus on our areas of need, and that makes them also much more effective. I think in every way, while we obviously would -- it's always sad to say goodbye to terrific clinicians, we felt that this concentration makes us stronger in just about every regard. And as I mentioned, we still have very important areas in some of these subspecialties. And if a hospital system needs that kind of support, we'll work with them to figure out how to provide it. Our recruiting team can help us, can also help our hospital system partners. Operator: [Operator Instructions] Our next question comes from the line of Pito Chickering from Deutsche Bank. Kieran Ryan: You've got Kieran Ryan on for Pito this morning. So I wanted to start and see if you can maybe break out the different buckets of the strong pricing in the quarter. It sounds like it's a lot of the same stuff you saw in 2Q around collections acuity, admin fees and some payer mix. So any color you can provide on how that kind of split out in 3Q and your thoughts on the durability and how those factors look as we go into next year? Kasandra Rossi: Sure. This is Kasandra. So on the price -- on the strong pricing, over 1/3 of that was from strong RCM collections activity. And we did see some of the factors we saw in the prior quarters on acuity. Acuity made up about 20% of that pricing increase. And we have also continued to see some contract administrative fees from our hospitals increasing by about 10%. Payer mix, which had really been stable really last quarter from the increases or the favorability we saw in 2024. We actually did see a bit more favorability on that in the quarter of about 10%. So that really is the bulk of what made up a really strong pricing quarter. And as you know, many of these things are variable. So we would anticipate, like we had mentioned, payer mix continuing to be a bit stable. I think acuity has been strong in the last few quarters, but that, again, is also variable. And we've made it very clear that on the contract admin fees, it's tough to get some increases. We have had some success, but we don't see that becoming any easier with some of the pressures that hospitals are facing. And for the collections, I think I see 2025 as a reset year. Obviously, we've been talking a lot about our transition, and that has gone extremely well. And I think we are at a place where we have hit our stride there. Kieran Ryan: That's helpful. And then I guess just going back to the guidance. I appreciate the commentary on the spread and the seasonality. I was wondering if you could kind of maybe just parse that out a little bit -- a little bit more on the seasonality as well as any other factors that you'd note between the high end and the low end, particularly maybe on volumes because I mean you may have a pretty big office space comp this quarter. Mark Ordan: There's nothing on volumes. We're working on several things in the fourth quarter as the company normally does towards the end of the year, and that could create some variability there. We'll report back later if -- of course, if anything materializes from that. But that's the reason to have a slightly wider than normal, nothing else. Operator: And our next question comes from the line of Jack Slevin from Jefferies. Jack Slevin: Congrats on the really awesome quarter. Mark, I just want to dig in a little bit on some of your comments about the longer term and sort of where you can drive things. Just wondering if you can unpack those a little bit? And then maybe more specifically, as we think about a key topic for some investors has been these enhanced subsidies on the exchange plans and what that might mean for your business, not asking necessarily for you to comment on what seems to still be a period of uncertainty in Washington, but more just wanted to hear if you've had any conversations maybe on the OB side or things that you're hearing in MFN that might sort of give a lead on sort of where expecting mothers could be leading, even if they're facing premium step-ups next year, if it's something that they might be looking to sort of retain coverage on? Mark Ordan: Well, look, we've commented on it last time and I continue -- we certainly hope that the exchange credits continue. They seem to be beneficial. We're not able to pinpoint the effect that, that's had on us, but we think it's -- obviously, it's a positive for us. So again, we're hopeful. We haven't seen any change. I think the world is waiting to see what happens there. In terms of our outlook and our future, we -- I know it sounds boring. I think I used this word on our last call. We do believe that by being laser-focused on the needs of our hospital systems, that provides additional opportunities. I personally am involved with many discussions where people haven't had the results internally that they'd like to have and are looking for a partner that can specialize in these important areas. And I think at a time like this, our financial strength will inevitably provide additional opportunities. We are able to invest with hospital partners and do things that other people can't do. So that's where we see strong potential going forward. And at time like this, with the headwinds that we've seen and other companies were not financed the way we have been, there could be opportunities there as well. So we think we're in a good position that way. Jack Slevin: Got it. Okay. That's really helpful. And then maybe one just piggybacking on A.J.'s question around the capital allocation. Would just love to hear sort of if you can go back over some of the details on the deal that you completed in the quarter and sort of how that's going to feather its way into the business and into the numbers? And then secondly, just thinking about what the environment looks like out there as far as deals at the hospitals, as we expect hospitals to have a couple of years of headwinds here. Are there any acceleration of conversations for some of those practices to sort of pull their way out of hospitals or for hospitals to look to monetize? Mark Ordan: Well, no, there's no, I haven't -- we haven't seen a change in tone with hospitals trying to monetize that. We do see -- we're very fortunately partners with hospital systems that are actually strong in this environment and are growing in this environment, and we look for ways to grow with them. As far as the acquisition that we made, it wasn't material, so we didn't break out the details of it. We tend not to. We do -- we have acquisitions that take place over the years. The reason we highlighted it was that it was a hospital system that easily could have taken these units in-house and felt that we could do a better job. But -- and we think that, that's our calling part. So we are in the midst of and intend to continue to push for that to be very forward thinking with our hospital partners and say, hey, if you're growing, you need help, why would you possibly not work with us. And as I mentioned my pride and appreciation for my team, when they do, they realize that there's a group of people, a big group of people that are pulling 24/7 for them. And when I talk about our quality initiatives and our research initiatives, we bring those positives to our hospital system partners. They couldn't do this internally. So in an area when you think about the frailest patients of all the things that we do reduce risk. And if you're a hospital system, why wouldn't you want to be partners with a group that can reduce risk within your 4 walls. So we think that's a very compelling point. And by the way, it seems like a lot of them do, too. Operator: There are no further questions. I will now pass the call back over to our CEO, Mark Ordan, for closing remarks. Mark Ordan: Great. Well, thank you very much, everybody, for your support, and we look forward to updating you on our future progress. Have a great day. Operator: The meeting has now concluded. Thank you all for joining. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to onsemi Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would like now to turn the conference over to Parag Agarwal, Vice President of Investor Relations and Corporate Development. Please go ahead. Parag Agarwal: Thank you, Michelle. Good morning, and thank you for joining onsemi's Third Quarter of 2025 Results Conference Call. I am joined today by Hassane El-Khoury, our President and CEO; and Thad Trent, our CFO. This call is being webcast on the Investor Relations section of our website at www.onsemi.com. A replay of this webcast, along with our third quarter earnings release, will be available on our website approximately 1 hour following this conference call, and the recorded webcast will be available for approximately 30 days following this conference call. Additional information is posted on the Investor Relations section of our website. Our earnings release and this presentation include certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and a discussion of certain limitations when using non-GAAP financial measures are included in our earnings release which is posted separately on our website in the Investor Relations section. During the course of this conference call, we will make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially from projections. Important factors that can affect our business, including factors that can cause actual results to differ materially from our forward-looking statements are described in our most recent form 10-K, form 10-Qs and other filings with the Securities and Exchange Commission and in our earnings release for the third quarter. Our estimates or other forward-looking statements might change, and the company assumes no obligation to update forward-looking statements to reflect actual results, changed assumptions or other events that may occur except as required by law. Now let me turn it over to Hassane. Hassane? Hassane El-Khoury: Thank you, Parag. Good morning, and thank you all for joining us. We are pleased with our third quarter results, which reflect the strength of our strategy and the resilience of our business model. Our third quarter results exceeded the midpoint of our guidance with revenue of $1.55 billion, non-GAAP gross margin of 38% and earnings per share towards the high-end of our range at $0.63. We have been positioning the company for a market recovery, and we believe we are well aligned to benefit as demand normalizes. We're already seeing stabilization in Automotive and Industrial while continuing to grow in AI. Our Treo platform continues to scale across our core markets, and our recent acquisitions are expanding our portfolio and accelerating our road map. We are delivering solutions that help customers scale performance while improving energy efficiency and system cost. The growing demand for high-efficiency power delivery across our end markets of Automotive, Industrial and AI positions us for long-term growth. We remain committed to our gross margin expansion strategy through innovation with both organic and inorganic investments in differentiation and have achieved four significant milestones that I'd like to highlight. First is our Treo platform. Our new products continue to scale, and our design funnel now exceeds $1 billion, driven by strong customer engagement across Automotive, Industrial and AI infrastructure. We remain on track to double the number of products sampling this year. Teledyne Technologies selected our Treo platform to develop next-generation products for infrared imaging systems. Treo's process technology combines precision analog, advanced digital and low-voltage power features to meet the demands of infrared focal plane array systems used in aerospace, defense and security applications. Second is our vertical GaN or vGaN. Last quarter, I highlighted our strategic investment in our generation wide band gap semiconductors. Last week, we announced our vGaN platform developed on proprietary GaN-on-GaN architecture in our Syracuse fab in New York. vGaN conducts current vertically through the chip, enabling higher operating voltages versus lateral GaN and faster switching and record power density. It reduces energy loss by up to 50%, making it ideal for AI data centers, EVs, renewable energy and aerospace, defense and security. Sampling is already underway with lead customers in automotive and AI. This launch expands our leadership beyond silicon and silicon carbide, giving customers a future-ready toolkit to meet rising performance and efficiency demands. Third, our SiC JFET continues to proliferate, and we have been ramping revenue in AI data center for high current workloads. We're also seeing traction in aerospace, defense and security, where our SiC JFETs are now deployed in low-orbit satellite platforms, delivering industry-leading radiation ruggedness and power density. And fourth is our Vcore acquisition. In Q3, we expanded our analog and mixed-signal portfolio with the acquisition of Vcore Power Technology and IP assets from Aura Semiconductor. This transaction accelerates our road map for advanced multiphase controllers and monolithic smart power stages, enabling us to close key gaps in our offering and deliver comprehensive solutions for the next-generation AI data centers and compute platforms. These new products will be integrated into our Treo platform, enhancing performance, reliability and energy efficiency at the point of load and support x86 and ARM-based architectures. Sampling begins this quarter with production release expected in early 2026. Shifting to the demand environment. We are seeing stabilization in the near term with Automotive, which grew 7%; and Industrial, which grew 5% sequentially. And our design wins in both markets continue to reflect a broad global engagement. For example, our industrial image sensor funnel is up 55% year-over-year with traction in factory automation and inspection. We continue to ramp our AI revenue, which again approximately doubled year-over-year in Q3 and is now becoming material with almost $250 million expected in 2025. Regionally, our revenue in the Americas grew 22% sequentially from momentum in automotive and aerospace, defense and security. Japan was up 38% quarter-over-quarter, driven by traction in automotive and image sensing. Europe was down 4% as macro softness persisted, while China was down 7% sequentially. In China, we secured strategic wins in high-voltage traction inverters with a leading Tier 1 for multiple local OEMs. We also expanded our position at NIO with SiC for their traction inverter across their newest brand and with our 8-megapixel image sensor for their ADAS applications. AI is shaping -- is reshaping the power landscape, both inside and outside the data center. The International Energy Agency projects that electricity demand from AI optimized data centers will quadruple by 2030, making power efficiency and density critical differentiators, an area where onsemi leads. Onsemi's intelligent power technologies span the full power tree from solar and storage systems to UPS and rack-level PSUs, optimizing every watt before it reaches the processor. In Q3, we secured strategic wins in solar and energy storage platforms that are foundational to hyperscale AI deployments. Our latest generation of IGBTs and SiC in the most advanced hybrid modules were selected for high-efficiency solar inverters and energy storage systems or ESS, including wins with two of the leading utility solar inverter suppliers in China. We also secured the next-generation large-scale stationary storage with a large OEM in the U.S. as microgrid deployments are rapidly emerging as a key growth vector across our end markets. This business is reported under our Industrial segment, and we expect our latest generation Field Stop 7 IGBT revenue to increase in 2025 over 2024 with continued double-digit growth expected in 2026. Turning to the AI data center itself. At the UPS level, a leading industrial OEM has integrated onsemi SiC MOSFET into their latest 3-phase UPS platform, where superior efficiency and power density were key differentiators. At the rack level, we secured multiple design wins across high-efficiency PSUs with our SiC FETs, T10, Trench MOSFET and SiC JFET into 5.5-kilowatt AI server PSUs, with top global PSU providers delivering best-in-class thermal performance, supply assurance and switching efficiency for hyperscale deployment. At the compute board level, we have introduced high-efficiency smart power stages and secured design wins on multiple platforms with leading XPU providers. The acquisition of IP from Aura Semiconductor further strengthened our SPS and controller offerings for power to the core applications. Our collaboration with NVIDIA is also accelerating the industry's transition to 800-volt DC power architecture critical for next-generation AI data center. These technology achievements and customer engagements reflect the strength of our differentiated power and sensing portfolios and our ability to deliver system-level value in the high-growth segments of our core markets. Let me now turn it over to Thad to give you more detail on our results and guidance for the fourth quarter. Thad Trent: Thanks, Hassane. Our third quarter results were driven by disciplined execution and prudent management of the business. We have made structural changes across our portfolio and our manufacturing footprint that will enable margin expansion at scale and position us for a market recovery. These initiatives will continue in future quarters, and we are committed to extracting value through our Fab Right activities. Our investments in next-generation technologies, including Treo, Vcore, silicon carbide JFET and vertical GaN are reshaping our mix and strengthening our competitive advantage to further our leadership position. In addition, we continue to return capital to our shareholders. Year-to-date, we have repurchased $925 million of shares, returning approximately 100% of our free cash flow to shareholders. Turning to the third quarter results. We exceeded the midpoint of our guidance with revenue of $1.55 billion, increasing 6% over Q2. Automotive revenue was $787 million, which increased 7% sequentially, driven by increases in Americas, China and Japan. Revenue for Industrial was $426 million, up 5% sequentially, primarily driven by aerospace, defense and security. Outside of Auto and Industrial, our Other business increased 2% quarter-over-quarter with continued momentum in AI data center. Looking at the third quarter results between the business units, we saw sequential revenue growth in all three business units. Revenue for the Power Solutions Group, or PSG, was $738 million, an increase of 6% quarter-over-quarter and a decrease of 11% year-over-year. Revenue for the Analog and Mixed-Signal Group, or AMG, was $583 million, an increase of 5% quarter-over-quarter and a decrease of 11% year-over-year. Revenue for the Intelligent Sensing Group, or ISG, was $230 million, a 7% increase quarter-over-quarter and a decline of 18% over the same quarter last year as we strategically refocused this business. Turning to gross margin in the third quarter. GAAP gross margin was 37.9%, and non-GAAP gross margin was 38%, above the midpoint of our guidance due to favorable mix within the quarter. Manufacturing utilization was up compared to Q2 at 74% as we started to build die bank inventory to support the mass market. We expect utilization to be flat to down slightly in the fourth quarter as we complete these builds. GAAP operating expenses were $323 million, and non-GAAP operating expenses were $291 million. GAAP operating margin for the quarter was 17% and non-GAAP operating margin was 19.2%. Our GAAP tax rate was 6.5% and non-GAAP tax rate was approximately 16%. Diluted GAAP earnings per share was $0.63 and non-GAAP earnings per share was also $0.63. GAAP and non-GAAP diluted share count was 408 million shares, and we repurchased $325 million of shares in the third quarter. Since launching our share repurchase program in February 2023, we have repurchased $2.1 billion and had approximately $861 million remaining on our authorization at the end of the quarter. Turning to the balance sheet. Cash and short-term investments was approximately $2.9 billion with total liquidity of $4 billion, including $1.1 billion undrawn on our revolver. Cash from operations was $419 million and free cash flow was $372 million. Our year-to-date free cash flow is 21% of revenue, and we remain on track to deliver strong free cash flow margin for the full year. Capital expenditures were $46 million or 3% of revenue. Inventory decreased by $39 million to 194 days from 208 days in Q2. This includes 82 days of bridge inventory to support fab transitions and silicon carbide, down from 87 days in Q2. Excluding the strategic builds, our base inventory is healthy at 112 days. Distribution inventory declined to 10.5 weeks from 10.8 weeks in Q2 and within our target range of 9 to 11 weeks. Looking forward, let me provide you the key elements of our non-GAAP guidance for the fourth quarter. As a reminder, today's press release contains a table detailing our GAAP and non-GAAP guidance. Our guidance is inclusive of our current expectation that there is no material direct impact of tariffs announced as of today. We anticipate Q4 revenue will be in the range of $1.48 billion to $1.58 billion. Our non-GAAP gross margin is expected to be between 37% and 39%, which includes share-based compensation of $8 million. Non-GAAP operating expenses are expected to be between $282 million and $297 million, which includes share-based compensation of $32 million. We anticipate our non-GAAP other income to be a net benefit of $7 million with our interest income exceeding interest expense. We expect our non-GAAP tax rate to be approximately 16%, and our non-GAAP diluted share count is expected to be approximately 405 million shares. This results in non-GAAP earnings per share in the range of $0.57 to $0.67. We expect capital expenditures in the range of $20 million to $40 million. To close, we remain focused on disciplined execution and financial leverage. The structural changes we have made across our portfolio, operations and manufacturing footprint are driving margin expansion and positioning onsemi for long-term earnings power. With over 100% of our year-to-date free cash flow returned to shareholders, we continue to prioritize capital efficiency and shareholder value while investing in innovation and differentiation. As the market stabilizes, we are well aligned to scale with demand and deliver sustainable growth. With that, I'd like to turn the call back over to Michelle to open it up for Q&A. Operator: [Operator Instructions] And our first question comes from Ross Seymore with Deutsche Bank. Ross Seymore: First one, I want to ask about the automotive side of things. Upside in the quarter nicely versus the low single-digit guide that you had. So Hassane, I just wanted to get an update on what you're seeing in that end market, what caused the upside, and perhaps what's the sustainability of that sort of growth as you look into the fourth quarter and then 2026 as well. Hassane El-Khoury: Yes. So nothing really out of the ordinary. It's -- you can think about the Q3 and Q4 as I do, which what I've been talking about, I look at the second half versus first half of the year. The quarter-on-quarter lumpiness as customers try, as new designs ramp, I wouldn't read any much into it. What we're seeing in automotive is really stabilization, which is a positive from where we were. So the quarter-on-quarter, I don't think I read anything into it. It's purely between seasonality and ramps. As far as 2026, look, we'll let you know as we get closer, a lot of things going on out in the world. So we're not guiding specifically by market into 2026. But what I can tell you is demand is stabilizing, we're starting to see a seasonal trend. But one thing I would highlight is we haven't seen a restocking cycle yet. So that's still out there. Ross Seymore: I guess as my second question, perhaps a little bit of a longer-term one. You, for the first time, I believe, sized the AI business at about $250 million, I think, for this year as a whole. So what is it, roughly 4% of sales. Can you just talk about how ON differentiates in that? You mentioned the collaboration list on the 800-volt with NVIDIA, and that's great to be on that list, but there's 13 other folks on the list as well. So as you look at that market, how do you believe that $250 million will grow? And what's the differentiation ON delivers to drive that growth? Hassane El-Khoury: Yes. So that's a very good question. So overall, we expect the AI data center for us to continue to grow. We look at ourselves as really the share gainer from some of the companies that have been in that market longer than we have. So being able to post $250 million or about $250 million of revenue is pretty stellar. You can see our investments accelerating in that across the whole power tree. So from a customer perspective, to answer your question more directly, if you take that "crowded space" of 13 or however many companies and you look at who can go from wall to core, there's only 2. And we will -- we are the share gainer, we're of the two. So the way we differentiate is we're one of the only companies that are able to support the power delivery from the high voltage all the way to the core, all with the product portfolio that we have that we've grown organically or even inorganically with the Vcore acquisition. So that's how we differentiate. We have proven that differentiation through our JFET silicon carbide, through our AMG with the products that they have been delivering and the revenue growth that has doubled year-on-year every quarter in the first 3 quarters to deliver that number I gave in 2025 is really the proof of that. Operator: And our next question will come from Vivek Arya with Bank of America. Vivek Arya: So Hassane, I know it's a little early, and I'm not asking for a quantitative guidance. But I'm curious how you are thinking about seasonality in Q1 and just growth in '26 overall versus how you thought about it 3 months ago. Hassane El-Khoury: No change from where we were 3 months ago. So still with the same outlook, same expectation. Vivek Arya: Okay. For my follow-up, maybe on utilization and gross margins. Thad, I think you said something about utilization perhaps flat to slightly down. Anything more to read into it? And if you could just remind us what is your seasonal pattern in Q1? And if there is some utilization headwind from Q4, how does that kind of reflect in gross margins in Q1 just based on historical seasonal trends? Thad Trent: Yes. So our utilization increased to 74% in Q3. As I said in the prepared remarks, we've been building die bank inventory for the mass market. This is a market that we've talked about for probably well over a year about we need to seed that market. We've been doing it through the distribution channel. Now we've got to hold inventory in die bank for kind of quick turn on that mass market that we need to invest in. I expect it to be down, the utilization to be down in Q4 because we expect those builds to be completed. So going back to kind of a normalized utilization rate from that point forward. You can think about utilization, the impact on utilization is having a couple of quarter impact on the P&L. There's always a delay on that, right? So if you think about going into the next year, and obviously, we're not providing any guidance at this point, but we think between Q4 and kind of the next couple of quarters, we're looking at seasonal patterns. If you take the midpoint of our guidance for Q4, it's directly in line with normal seasonality, which is typically flat to down 2%. I think the midpoint of our guidance is down about 1.3%. And to answer your question about kind of what's the normal seasonality in Q1, it's typically down 2% to 3%. Vivek Arya: So does that mean slightly lower gross margin in Q1 time? Or just how should we be prepared based on if that kind of seasonality is what actually emerges? Thad Trent: Look, we're not guiding that far out, Vivek, but there's tailwinds as the utilization improves over time. Operator: And our next question is going to come from Chris Danely with Citi. Christopher Danely: I'm sure you've seen this ongoing Soap Opera at Nexperia. Have you seen any impact to your business either directly or indirectly? Or do you anticipate any impact longer term from all this stuff going on over there? Hassane El-Khoury: Look, as you said, there's a big impact. It's too soon to call anything. We're focusing really on the business that I've really outlined. But what I can say about that, obviously, is we have a lot of the same customers, and we are supporting our customers to the extent we can, and we'll continue to do that with the complete portfolio, not just the parts that may be impacted. So what I can say is I'm not redirecting any changes from where we are, but we are supporting customers as they request it. Christopher Danely: Okay. And for my follow-up, so it seems like the Auto market is starting to do a little better than the Industrial end market. We've seen this trend at several of your peers. Going forward, would you expect Auto to keep outgrowing Industrial for the next few/several quarters? Hassane El-Khoury: I wouldn't put the two kind of -- I guess I wouldn't compare the two and read anything into a difference in growth quarter-on-quarter. Both of them have growth vectors that we are participating in. But the lumpiness that you see between the two is purely a market timing or a build-out timing. Some of the industrial was from some of the slowdown in the solar deployment in China. That's temporary. As you go from a tariff to a market pricing, there's a shift in there. We see that kind of a temporary and will continue to grow. We talked about some of the industrial growing because of the AI data center power requirements that I highlighted like energy storage system driven by AI, but we called those out in our Industrial market. So that's some of the growth vectors in Industrial. And Automotive, obviously, it's our major market. We -- you know about the growth vectors that we have there. So both are growing, but the delta is purely market-driven and macro driven. So I wouldn't read anything into kind of the deltas in the few quarters here short term. Operator: The next question will come from Blayne Curtis with Jefferies. Blayne Curtis: I just want to ask about normal seasonal for December. Obviously, your company has gone through a lot of changes. But I think in the past, particularly auto has been up in December. So I'm just kind of curious how you're thinking about this guide, which is down 1%. Do you feel like that is a more normal range for you? Or do you think you're undershipping the market? Thad Trent: Yes. So as I mentioned, our normal seasonal pattern for Q4 is flat to down 2%. I think it's very positive that we've gone from the stabilization to now seeing seasonal patterns. I think that's the step -- the first step to recovery. As we think about the guidance there in Q4, both Auto and Industrial, we think will be down low single digits. The Other bucket will be up kind of mid- to high single digits. Hassane mentioned it, right? I don't think you should kind of read into the lumpiness of the autos just because of the ramping of programs and timing, but that's how we kind of think about Q4 as it laying out right now. Blayne Curtis: Perfect. And then I wanted to ask you about that AI. I'm assuming straddles, Industrial and this Other bucket you have. So I'm just kind of curious, is there a way to think about as we try to layer on that growth, how it impacts those two buckets? Thad Trent: Yes. So the AI data center is reported in the Other bucket. Everything prior to the data center wall is in Industrial. So think about all the energy storage, energy infrastructure, that's sitting in Industrial. But AI data center specifically inside the four walls of the data center is in the Other bucket. Operator: And our next question comes from Gary Mobley with Loop Capital. Gary Mobley: I think last quarter, it was communicated the specifics to the revenue headwind as you exit noncore businesses. If I recall correctly, it was assumed to be a $200 million revenue headwind for this fiscal year, $300 million for next year. Is there any change from that outlook? Thad Trent: No change. For Q3, we exited about $45 million of noncore exits. That leaves about $55 million here for Q4. That's right in line with our expectations. And then you nailed it going into '26, there's about 5% of the 2025 revenue that doesn't repeat. So no change from what we're talking about last quarter. Gary Mobley: Great. And I guess there's been some news, maybe it's a few months old now about the big analog player raising prices. How do you think that impacts sort of a pricing reset as we transition to the next calendar year? Hassane El-Khoury: I think we're expecting normal pricing behavior. I don't know if the other company you're talking about is something specific to them or not. But obviously, things can change. We're monitoring the situation always. As you can imagine, it's very dynamic out there. But right now, we're not expecting any of that in 2026. So you can think about it as if anything does happen, it will be upside. Operator: And the next question will come from Quinn Bolton with Needham & Company. Quinn Bolton: I'm wondering if you could give us a little bit more detail on the Vcore Power, exactly what comes into the business with that acquisition. I think in the script, you mentioned Vcore for x86 and ARM processors. Obviously, there's a huge number of voltage regulators on the XPU side. Does Vcore help you on that? Or does that come from the existing ON product portfolio? And then I've got a follow-up. Hassane El-Khoury: You can think about it as a combination of both. So the way we look at the acquisition is it complements the product offering that we're already offering with Treo. It provides products also in the short term. I talked about revenue generation coming here in 2026. So that gives you time to market while we integrate those architectural and product function into our base Treo platform. So it's a very synergistic approach that gives us the acquisition itself, time to market. And in long term, it gives us an architectural advantage from a performance perspective once we leverage the performance of Treo from a technology base. Quinn Bolton: So reading between the lines, are you taking those Aura products as they are today into the market for '26, but longer term, you'll redesign them using the Treo platform to get better performance? Hassane El-Khoury: Yes, yes. Quinn Bolton: Got it. And then just you guys mentioned the entry into the vertical GaN market. GaN to date hasn't been used that much in the high-power segments of the market, I think, because of reliability issues. Can you just address how do you feel the vertical GaN technology compares with lateral GaN on reliability? And can you give us any sense on when you think that might start to go into production? Hassane El-Khoury: Yes. So it's -- so I'll tell you, vertical GaN is better on the reliability side. It has all the inherent features from the lateral GaN, but better on reliability from a die size perspective. The one thing you need to understand the barrier for lateral GaN to be used in high-voltage application has really been the fact that lateral GaN to get it to high voltage, you have to go laterally, which makes the die size not competitive versus other similar functions. When you look at the vertical GaN, the current goes vertically, which means that we can go higher and higher voltage without increasing the die size. So not just from a performance perspective, but also from a commercial competitiveness perspective, not just the reliability. So we believe we've solved those. We're sampling. We have lead customers in our -- both in AI and automotive. So we're excited about that, that we crack that code. It is a breakthrough technology. I don't believe anybody is able to sample such technology outside. So it gives our customers the optionality to have really a broad portfolio of high voltage, high-efficiency products. So anytime you need high voltage and high switching frequency, vertical GaN is the solution, the answer. Operator: And our next question will come from Joe Quatrochi with Wells Fargo. Joseph Quatrochi: I was wondering with a quarter to go, any sort of color you could provide on your expectations for silicon carbide revenue growth this year? Hassane El-Khoury: We didn't provide any guidance on silicon carbide, but I'll tell you silicon carbide is coming in exactly where we expected. We continue to gain share in our end customers. And our position in China remains unchanged as new products are ramping. I mentioned a couple of examples here. One is the NIO launching a new brand where we were designed into that new brand with silicon carbide. And a broader deployment now in China EVs through a leading Tier 1 in China that gives us really exposure to beyond just the top 10 OEMs that we've been engaged to. So that gives you a little bit of an outlook or a feel into our penetration of silicon carbide will continue to increase, and we will continue to gain share. Joseph Quatrochi: And as a follow-up, I was wondering if you could talk about the rate of short lead time orders that you're seeing and how that compares in the third quarter relative to prior quarter? And if you're seeing any increased visibility? Thad Trent: So our lead times actually pushed out slightly. We're kind of in the mid-teen weeks. We're up around 20 weeks or so now. I don't think there's been a significant change to the short lead time orders at this point. Customers are layering in backlog as they have visibility. We probably have seen order patterns that continue to improve, which gives us that confidence in the stabilization right now. Operator: And our next question will come from Josh Buchalter with TD Cowen. Joshua Buchalter: I was hoping you could provide a little bit more color on the revenue by geography. It seemed like there was a lot of volatility this quarter with Americas up so strongly and in particular, China down. Could you maybe elaborate on some of the drivers there? Was the Americas strength led by your lead customer? And what's going on in China? Thad Trent: Yes. So there's -- I think in our prepared remarks, we laid out the quarter-over-quarter changes on each of the markets. Now there is some kind of movement of orders between some geographies as well. A large customer is now placing orders out of Japan versus Europe. So I think if you normalize for that, the Japan comes down slightly, Europe goes up a little bit. The rest of it, I think, is just kind of what we're seeing as a normal pattern at this point. So not a lot to read into those bigger swings. Joshua Buchalter: Okay. And then I was also hoping you could elaborate on why -- what you're seeing now and why it's the right time to start building up die bank inventory and taking utilization rates up, especially ahead of a couple of down seasonal quarters. Maybe how we should be thinking big picture about your capacity planning with those utilization rates? Hassane El-Khoury: Yes. Look, we've been -- I think we've been very disciplined on utilization versus inventory versus outlook and demand. I think we've proven that the formula works. We're not sitting here on a ton of inventory. Our inventory -- our base inventory is actually closer to the low-end of our target, about -- which is 110 to 120 days. I think we're sitting at like 112. So I think Thad mentioned that the die bank inventory we're building is really for the mass market. For the last kind of 2 to 3 quarters, we have been consistently talking about how we are going to be growing. Our customer count increased almost 20% year-on-year just in the mass market. Therefore, the demand is there for that, and we will make sure that we have it in die bank internally so we can respond to changes in demand that usually come from the mass market. So I think we do see the business justification for it, but that doesn't mean that we're going to be building blind. We will maintain our targets. We will maintain inventory and all of our metrics within the range that we've previously outlined. So I don't -- I see this as business as usual, really. Thad Trent: Yes. And just to point out also that even with that die bank increase, our inventory actually declined quarter-on-quarter, $39 million. So it's a mix shift within our base inventory. So to get a better profile of inventory for that mass market. Operator: And the next question will come from Tore Svanberg with Stifel. Tore Svanberg: Hassane, with the recent acquisitions, I know you have a slide that talks about power delivery from grid to processors, and the content per rack going from maybe a few thousand dollars today to maybe as much as $50,000 by '27 or so. I mean, do you have all the IP and all the building blocks right now to get there? Or is this sort of more of an opportunity and you still need to build out a few more things before you get to those types of numbers? Hassane El-Khoury: I think with whatever we need, call it, in the next couple of years, we either have it or are working on it, both organically and inorganically. Obviously, the ecosystem is evolving. Things that are needed 3, 4 years from now are slightly different. We believe we have a very full portfolio of the IP that we need, and we will be creating products very quickly based on that IP. So we have -- you can think about it as we have built a toolbox with all the IP and technology, and we are quickly deploying products. I mean you've seen us double the number of products in Treo overall year-on-year, which we remain on track to do. You're going to see kind of that same mindset on AI data center along with Automotive and so on. So we do have the toolbox. We do have the IP. We developed it internally and/or acquired it. And we will be deploying it to win in these markets to capture a lot of that share from the dollars you mentioned on the rack. Tore Svanberg: Great. And as my follow-up, and I want to just take a step back on vGaN. So could you just give us a little bit of history here? I mean I know it's obviously in your own Syracuse fab, but how many years has this been in development? Maybe back to Quinn's question, when do you start to expect some revenues here? Because obviously, this is a very unique approach to GaN. So any sort of historical context and future revenue contribution milestones would be great to know. Hassane El-Khoury: Sure. So we started working on it through acquisition of IP and assets back in 2024. Since then, we've "turned on" the fab, launched the first products, first products from a, call it, electrically speaking or yielding or functioning. Therefore, we were very aggressive in our deployment with samples to customers. We have lead customers in our major markets of Automotive and AI data centers that are currently evaluating the first-generation samples, and we're already working on the second generation. We expect revenue, you can think about it in the '27 time frame. Operator: And the next question will come from Christopher Rolland with Susquehanna. Christopher Rolland: So yes, my questions are really around AI as well and this what seems like a bigger push over the last few quarters. Just some of these applications that you mentioned, I wanted to know if you could address, could you do things like solid-state transformers? It sounds like you're in the PSU 48-volt bus converters. I guess the last one would be hot swaps as well. Do you address these? Or do you plan on addressing these over the next few years? Hassane El-Khoury: So we addressed every single one of them already. So when I refer to -- and we have it online, too, when we refer to our ability to address the power tree, that was my answer before as far as how do we differentiate. Our ability to address already today the whole power tree, including all of the IP and functionality required that you have mentioned some of them is the differentiation we bring. So the answer is yes to all. We do that today, and we will continue to expand that portfolio as we gain share. Christopher Rolland: Excellent. And Hassane, secondly on silicon carbide. As we kind of digest that growth outlook, perhaps you can talk about some of the moving parts like geographically or even across industries. And lastly, do you have the ability to convert to 300-millimeter wafers? We're hearing about the potential for new applications on 300. Hassane El-Khoury: Yes. So well, first off, there's a lot of changes in the silicon carbide as new opportunities open up. For example, a few years ago, silicon carbide in AI data centers was not even a conversation point. Today, it is, and we are gaining share and really design into the PSUs with our JFET and even our silicon carbide MOSFETs. So those are new applications that our legacy with silicon carbide in automotive allowed us to really tackle very quickly and gain share with products we already have. In Automotive specifically, the silicon carbide approach was for battery electric vehicles or BEVs. As now you see a resurgence of a mix into plug-in hybrids or range extender EVs, silicon carbide is now getting designed in even in plug-in hybrids, which historically has been assumed to remain on IGBT. That's not the case, and we are gaining share in the plug-in hybrid market with our silicon carbide. So within the market itself, there's new opportunities and really breadth of opportunities that just a few years ago, when we started on this journey, was not part of even our addressable market because it wasn't there. As far as geographical, I would say I don't expect a change in the geographical outlook for silicon carbide specifically because to a first order, it's going to match where the electrification, whether it's full electric vehicles or plug-in hybrids is going to come from and where the AI data center deployment is going to come from. And that puts it strong in China and the U.S. And following behind that is Europe and Japan. Christopher Rolland: Excellent. And 300-millimeter? Hassane El-Khoury: 300-millimeter, we've seen it, but my point is it's too far from now. I don't think 300-millimeter opens up new applications. It just -- it's a different, call it, throughput, just like 6 to 8. I've always said 6 to 8-inch provides us an additional capacity from the number of die per wafer. We see the 300-millimeter the same, but it's very, very early in development today. I wouldn't put that in any short-term models or anything. But today, we have been -- just I'll use the opportunity to give you an update on our 8-inch. Our 8-inch is in production. We're running 8-inch in our fab at 350-micron thickness, so best-in-class, and we will be shipping production on track in '26. So the 8-inch is full on, and then we're always looking at what's next to come both from a device like the SiC JFET or MOSFET, but also from a technology. Operator: And the next question will come from Harlan Sur with JPMorgan. Harlan Sur: Back to the mass market strategy, your long tail of small- to medium-sized customers, this has been a bright spot for the team, right, solid customer count improvements. It serves through distribution, rich gross margins. How big is this segment as a percent of your total distribution revenues? And how did this subsegment do in the September quarter relative to your overall disty business? Thad Trent: So let me give you a breakdown of the distribution revenue that may help you get there. So roughly about 58% of our business goes through distribution. About half of that is fulfillment, half is demand creation, right? So if you think about that half, not all of that's mass market. When we think about mass market, we're thinking small customers, right? We at onsemi, maybe don't know their names, right? They are emerging customers. The distributors do a good job of identifying the opportunity. So you can think about it as being a subset of that half. Maybe it's 25% of the total distribution revenue, somewhere in that kind of camp if you think about it. If they're a medium or large customer of that distributor, we still have -- we still track that. I wouldn't put that in the mass market. Harlan Sur: Got it. Okay. And it was good to see the technology and portfolio expansion on the wideband gap with your vertical vGAN technology. As you mentioned, I think, Hassane, looks like this was the technology that you acquired through the acquisition of NexGen late last year. Did the acquisition also include the DeWitt Syracuse fab facility? Or was that already a part of ON? And then it looks like they were able to develop this very differentiated technology, but not able to commercialize it. So what has the onsemi team done to take the technology beyond proof of concept to commercialization? Hassane El-Khoury: Great question. So yes, the fab was not part of our base fab. You can think about it as a fab that came with the technology given the differentiation of the technology. You're absolutely right on -- it's such a breakthrough and differentiated technology, very difficult to make. What the onsemi team has brought is our ability to manufacture wideband gap and the team's capability to be able to scale new technologies very quickly and reach maturity very quickly than, call it, a start-up. By the way, I will mirror this to what we've done with GTAT and silicon carbide. If you recall, same questioning, same conversations, can you guys pull it off? Why would you pull it, the others didn't? And look where we are today. You can think about it, our capability has already been proven with the GTAT acquisition and building a franchise in a couple of years that gives us leadership. You can imagine that same muscle, that same knowledge and that same team is going to do exactly that with vGaN. Operator: And the next question will come from Jim Schneider with Goldman Sachs. James Schneider: Hassane, you talked about the fact that customers are not willing to restock at this point or you're not seeing that effect. Can you maybe talk a little bit about when you speak to OEMs, what they would need to see to get more confidence to restock? And is that broadly applicable to the distributor side as well? Hassane El-Khoury: Yes. Look, well, first, I'll answer the distributor. I think distributors are -- from a mass market, Thad said it, we are increasing our die bank internally because we want to be able to make sure we see the, call it, the shelves as customers pull on the mass market. The OEM is slightly different. The OEMs, what they need to see, one is a credible demand signal. Think about it consumer level confidence, consumer level demand signal that people are going to buy cars or people are going to buy power tools or whatever the market is. That has to be seen. And the biggest thing that they want to see, which we do also is stabilization in the geopolitical aspect of it. As they're working on shuffling and changing logistical models and manufacturing sites and so on, they're not going to be replenishing given the changes that they're going through. So what I would say is consumer confidence and geopolitical stabilization will start adding more and more confidence for OEMs to restock. James Schneider: And then maybe as a follow-up, give us a little more visibility on what's happening with your Other segment for a minute. It sounds like data center is doing very, very well for you. Maybe talk about what some of the offsets are that might be headwinds you saw in this quarter and then maybe what you're seeing going forward? Thad Trent: So for Q4, I mentioned that we think that Other segment is going to be up mid- to high single digits. Now there's some normal seasonality in our noncore markets there that helps that you have AI data center that's growing as well in that market. I think those are the big drivers if you sum it up. Hassane El-Khoury: And then, of course, we have the exits that a lot of it lands into the Others bucket that's offsetting the growth. So net-net, growing is actually means the strategic market like AI, data center and so on within that is growing very, very nicely. Operator: And the next question will come from Joe Moore with Morgan Stanley. Joseph Moore: I wonder if you could give us some sense of the Automotive market by region. Any sort of different behaviors that you're seeing? And I guess, particularly on China EV, there's been sort of a lot of noise in both directions. Can you just talk to the health of that market? Hassane El-Khoury: Yes. Look, I think from a market, of course, we've always expected adjustments in that market. I've always said there's over 100 brands. So between consolidation, between success and not success, the only strategy we have, which we've been executing to and it's worked very well for us is customer diversification. So you've heard us always adding new and new customers, leading customers in the top 10, which drive a lot of volume. And then secondary is trying to reach into that tail of OEMs. So we're not sitting here picking winners or not winners in China. We want to have the majority market share across the market. And as shares shift between them, our customer diversification strategy will work to our advantage. We've proven that very well over the last few years. We're gaining share consistently across a broad range of OEMs and brands have worked for us to really derisk the lumpiness that you're referring. But I don't see that as any change from the headlines. So our strategy is working, and we'll continue to execute to that while we kind of fine-tune it as things change because things do change rapidly. Joseph Moore: Great. That's helpful. And then you addressed the Nexperia's situation. But I guess I'm just trying to figure out why that isn't a bigger deal. We've listened to some of the Tier 1 auto suppliers, and they seem quite anxious about the situation. Like shouldn't that be the catalyst for them to start building up inventory to sort of deal with the geopolitics of the situation? Or just why isn't that something that's a bigger deal for you guys in the next quarter or 2? Hassane El-Khoury: Well, we're here to support, but I'll make a comment on the Tier 1s panicking. I've been saying that inventory is low for the last 2 years, and we're draining inventory below critical levels. Whether Nexperia or not, any trip in the supply chain is going to cause a chain reaction, and this is the proof. The only way out of this is place the backlog with visibility and we will start planning and shipping. So we are seeing it. We are responding to it, and we will keep supporting it. But regardless of how the next few quarters go, we need the replenishment cycle. We need to make sure that the Tier 1s and the OEM have safety stock in order to buffer any disruption. That's the only solution. We've learned a hard lesson in COVID, and here we are again. Operator: And the next question will come from Harsh Kumar with Piper Sandler. Harsh Kumar: Hassane, if I can dare say that you seem somewhat, somewhat cautiously excited about your end markets for the first time in a long time. So if I can ask you a question on Auto, it's a two-parter. Could you give us a hint of maybe what backlog or bookings were? I'm trying to gauge that relative to your stabilization comment. And if you are talking about stabilization in Auto, then I'm looking at your 6% odd growth that you put up in the September quarter, is that seasonal growth? Or is that better than seasonal growth? And if it's better, then, of course, what drove that? Hassane El-Khoury: Yes. Look, I think I'll go back to the prior answer that I gave earlier. I don't look at the quarter-on-quarter. I would recommend you shouldn't either. I got to look at it first half, second half. And we've always said the second half of the year is going to outgrow the first half of the year in our end markets. Remember, Auto, we said the bottom was going to be in Q2. So that has been the case, and we're going to grow from there. Grow meaning closer to demand, but no restocking yet. So that's coming in exactly as we expected. So that quarter-on-quarter, I wouldn't talk about seasonality within markets and so on. I would talk about the lumpiness in project ramps, some projects ramped in Q3 versus ramping in Q4. Those, I don't think, are a read on how the market is doing. Visibility, however, with stabilization, we get better visibility. Not where we would like to see it, but it improved and we're getting better visibility. But again, there's more work to do to get the visibility. So that's what I can tell you about where we are in Automotive. I'm cautious, but I am also looking at the data in order to sound like I do. Our work is not done. It's not all behind us. But I think what you've seen from us is we will manage to what we see, and we will deliver the results that we promise. That's the consistency. Of course, we all wish it were different. We all wish it was way better than sometimes it is. Some of my peers did, but we've been very consistent, and we're going to continue to manage the company with discipline, whether in inventory, cash flow or really R&D investments in differentiated technologies. Harsh Kumar: Fair enough. Maybe one for you, Thad. As sort of you look at stabilization, I understand you'll need to ramp up your factories and fabs to be able to get to that 40% level. But is there a revenue number that I can think of where you start to get close to that 40% number? Or is it just purely a function of utilization and it ebbs and flows depending on how much die bank inventory you're building? Thad Trent: Yes, it's utilization driven, right? So we talked about every point of utilization is 25 basis points to 30 basis points of gross margin improvement. That math still holds. So as we look into the '26, utilization is going to drive the margin. Operator: This will conclude today's question-and-answer session. I would now like to turn the call back over to Hassane for closing remarks. Hassane El-Khoury: Thank you all again for joining us today. Before we conclude the call, I want to recognize the outstanding efforts of our global teams. Their focus and execution continue to drive our results and help us deliver for our customers and shareholders. We're encouraged by the signs of stabilization across our core markets and remain focused on delivering differentiated solutions and operational excellence for our customers. We are committed to being a reliable and trusted partner and continue to raise the bar on how we support their success through technology leadership, responsiveness and a deep understanding of their evolving needs. We appreciate your continued support and look forward to updating you next quarter. Thank you. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Thank you for standing by, and welcome to the Krystal Biotech Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to hand the conference over to your host, Stephane Paquette, Vice President of Corporate Development. Please begin. Stephane Paquette: Good morning, and thank you all for joining today's call. Earlier today, we released our financial results for the third quarter of 2025. The press release is available on our website at www.krystalbio.com. We also filed our earnings 8-K and 10-Q with the SEC earlier today. Joining me today will be Krish Krishnan, Chairman and Chief Executive Officer; Suma Krishnan, President of Research and Development; Laurent Goux, Senior Vice President and General Manager for Europe; and Kate Romano, Chief Accounting Officer. This conference call will and our responses to questions may contain forward-looking statements. You are cautioned not to rely on these forward-looking statements, which are based on current expectations using the information available as of the date of this call and are subject to certain risks and uncertainties that may cause the company's actual results to differ materially from those projected. A description of these risks, uncertainties and other factors can be found in our SEC filings. With that, I will turn the call over to Krish. Krish Krishnan: Thank you, Stephane. Good morning, and welcome to the call. It gives me immense pride to realize that we're now in a position to help so many DEB patients within and outside the U.S. I would like to thank the entire team at Krystal for their contributions. In Q3, VYJUVEK launch continued to build momentum and the updated U.S. label clearly strengthens long-term outlook in the U.S. We're now launched in Germany, France and Japan. We successfully negotiated pricing in Japan, and we believe the outcome bodes well for our payer conversations in Europe. We are looking forward to our readout in CF this quarter, and we're accelerating enrollment across our pipeline, including KB801 for NK. We are initiating a new clinical program for Hailey-Hailey disease. It is a rare genetic disease of the skin that is a strong fit with our HSV-1 gene delivery platform and our commercial footprint. Suma will share more about this program later on the call. Financially, we're strong and well positioned to execute on our strategic growth plans and deliver value to shareholders. Moving now to our 3Q results. We are pleased to report another quarter of revenue growth with net VYJUVEK revenue coming in at $97.8 million. The patient pausing impacts due to summer holidays that we observed earlier last quarter were mitigated by patient adds and early traction in Europe. Net VYJUVEK revenues reported here does include a contribution from Europe following our launch in Germany in late August. This brings total net VYJUVEK revenues since launch to over $623 million. Gross margins were 96% for the quarter. Gross to net dynamics were stable as with prior quarters. I'm happy to report continued acceleration in new reimbursement approvals in the U.S. Our team added over 40 new approvals since our last earnings call update, bringing the total number of reimbursement approvals in the U.S. to over 615. This is now our second sequential quarter of reimbursement approval acceleration and a reflection of our field team's efforts as well as the ongoing sales force expansion. Our expanded field force is now fully hired and being deployed as training is completed. Full impact is expected in early 2026. We're also happy to report continued expansion of our prescriber work, reflecting increased penetration into the community setting with the total number of prescribers in the U.S. now exceeding 450. I would like to highlight a recent milestone achieved in the U.S. which was the FDA approval of our updated VYJUVEK label. This label update expanded the VYJUVEK eligible patient population to include DEB patients from birth and also provided patients with full flexibility in how they choose to dose VYJUVEK. This change reinforces VYJUVEK's leadership position as the most flexible and convenient corrective therapy for DEB and should serve as a tailwind for adoption and compliance in the future. Compliance to weekly therapy continued the trend we reported in previous quarters coming in, in the low 80s as more patients achieve durable wound closure and more mild and moderate patients come on to therapy. While the revised label change should have a positive impact to compliance in the future, we, as always, continue to expect some quarter-to-quarter waviness in the U.S. revenues as we build on our long-term growth trajectory. With that, I'll now hand it off to Laurent to share his excitement in Europe. Laurent? Laurent Goux: Thank you, Krish. It is my pleasure to share an update on our progress in Europe. Our first European launch in Germany is off to a good start. Since launching in late August, we have seen widespread interest and demand across the country. Based on available aggregate level data, we estimate the number of patients prescribed VYJUVEK in Germany to be approximately 20. Just as importantly, we are seeing broad prescribing patterns across the country with prescription from over 10 centers to date. This breadth of prescribing is particularly helpful given the requirement for patients to start therapy in a health care setting. By growing the number of centers prescribing VYJUVEK, we can help patients to start therapy closer to home and avoid potential single center patient visit bottlenecks. Based on current trends, we expect continued steady growth in patient inclusion in the months ahead. We are also making rapid progress outside of Germany. In September, the Autorité de Santé, also known as HAS, the French HTA body, approved early VYJUVEK access under the post-marketing authorization Accès Précoce 2. And last month, we formally launched VYJUVEK in France. Importantly, the relevant authorities in France are also allowing VYJUVEK to be dispensed outside the hospital setting. This is the first time a gene therapy has been approved in such a setting in France, a tremendous milestone to our local team and patients across the country. Last month, HAS also appraised VYJUVEK under the Amélioration du Service Médical Rendu or ASMR classification system, a key initial step for pricing and reimbursement discussions in France. VYJUVEK received an ASMR III designation. This designation, which was only granted to 11% of the new drugs reviewed in 2024, acknowledged the added clinical benefit of VYJUVEK and may open up the possibility for EU [ priority list ] pricing in France. Finally, I'm also proud to report that VYJUVEK was granted the Prix Galien in Italy under the Advanced Therapy Medicinal Product category, a prestigious award recognizing excellence in scientific innovation to improve the state of human health. This award is an important acknowledgment of the innovative and transformational nature of VYJUVEK and a helpful touch point as we start to engage with the relevant stakeholders in Italy. With these recent achievements, we are excited about the long-term growth trajectory in Europe and maximizing VYJUVEK access to the thousands of DEB patients in the region. I'll now hand the call back over to Krish. Krish Krishnan: Thanks, Laurent. As I mentioned before, we have now also launched VYJUVEK in Japan. This summer, we were approved by the MHLW for the treatment of patients. And late last month, we successfully completed pricing negotiations with the Japanese authorities and launched VYJUVEK. We're very pleased with our pricing in Japan, and that is a testament to the clinical benefits achieved by DEB patients treated with VYJUVEK. Our core Japanese team has been in place for over a year and is now fully staffed to support the VYJUVEK launch. Our Japanese medical team has also been active for over a year, mapping key centers and patients, which will be the early focus of our launch. Although we expect contribution from Japan in 2025 to be modest, it will be another important revenue growth driver in 2026. Finally, I wanted to highlight one more contributor to the long-term growth of VYJUVEK. In addition to our direct VYJUVEK launches in the U.S., major European markets and Japan, we've started contracting with regional specialty distributors to support the commercialization of VYJUVEK in rest of the world markets. We have executed agreements in place with multiple leading distributors covering key markets in Central and Eastern Europe, Turkey and the Middle East and expect to add more in the year ahead. Health care infrastructure and access vary significantly across rest of the world markets. But even after accounting for this variability, we estimate that a global distributor partner network could help bring VYJUVEK to thousands more DEB patients around the world and supplement our exciting growth strategy in the United States, Europe and Japan. With that, I'll now hand it off to Suma to touch on recent pipeline progress. Suma? Suma Krishnan: Thank you, Krish. I would like to start today by acknowledging the hard work of our development team here at Krystal. In recent months, we have dramatically transformed the scope and ambition of our clinical stage pipeline, expanding our clinical programs in respiratory and oncology and starting up new studies in ophthalmology and dermatology. These are all important achievements, none of which would be possible without the outsized contribution of each Krystal team member. Our team also achieved another important milestone in recent weeks, a platform therapy designation from the FDA. This designation granted for our HSV-1 gene delivery platform and currently applicable to our KB801 program could significantly accelerate the path to approval, providing us the opportunity for more frequent interactions with the FDA and as well as the chance to leverage manufacturing and nonclinical safety data from VYJUVEK in our filings. The FDA may also consider previous inspectional findings related to drug manufacture. The platform technology designation is applied for on a program-by-program basis and is currently only granted to KB801, although we intend to apply for this designation for additional programs to ultimately secure the designation and associated efficiencies of our entire pipeline. I'm also excited to report that we remain on track to deliver multiple exciting readouts in the months ahead. We expect our next readout to come from our cystic fibrosis program, KB407. With the backing of the CFFTDN, we have expanded our clinical trial network and are now very close to study completion. We look forward to announcing interim data before year-end, including molecular data from null CF patients to assess the ability of the HSV-1 to deliver full-length wild-type CFTR to the lung. On success, we would expect to immediately move to a repeat dosing study, which should enable assessment of functionality including longitudinal FEV1. With our now expanded trial network and without the requirement for bronchoscopies, we expect a repeat dosing study would enroll quickly, enabling a potential FEV1 data readout next year. Our KB408 program for AATD lung disease is also moving ahead well. Having already confirmed successful delivery of functional AAT in our single-dose study, this program is in repeat dosing, and we expect to be able to provide an interim data update in the first half of next year. Together with KB407, this will serve as a robust data set, demonstrating our platform capabilities in the lung. In ophthalmology, strong enrollment is providing us with greater clarity on the timing of our first readout. Based on current rates, we expect to complete enrollment of our Phase III trial evaluating KB803 for corneal abrasions in DEB patients by end of the year. Enrollment in our randomized placebo-controlled study for KB801 in NK is also progressing well as we continue to onboard new sites globally, setting us for a potential data-rich in 2026. I would also like to share a quick update on our work in oncology, which is increasingly focused on the development of inhaled KB707 for the treatment of non-small cell lung cancer, or NSCLC. As we shared at ASCO over the summer, NSCLC is an indication where we have seen early evidence of monotherapy efficacy even in heavily pretreated and checkpoint inhibitor failed patients. Building on that readout, we were recently granted an end of Phase II meeting with the FDA to discuss potential development pathway for inhaled KB707. Based on FDA's feedback, we now expect that a single Phase III study evaluating inhaled KB707 in combination with chemotherapy versus chemotherapy alone in patients with advanced NSCLC could be sufficient to support a potential registration in combination for second-line NSCLC. In support of this potential registration pathway, we have opened a new cohort in our ongoing Phase I/II KYANITE-1 study to evaluate a fixed dose of inhaled KB707 in combination with chemotherapy. Enrollment in KYANITE-1 is ongoing. Our current expectation is to report interim data from KYANITE-1 in the second half of 2026, at which point, we would also be able to provide an update on registrational study plans and potential for Phase III initiation. Finally, I'm also happy to introduce today a new addition to our clinical pipeline, KB111 for the treatment of Hailey-Hailey Disease. Hailey-Hailey Disease is a genetic blistering disease of the skin linked to the mutation in the ATP2C1 gene and low expression of its encoded calciumtransporting ATPase. HHD is a rare disease with a prevalence that's not well understood. The most common estimate of prevalence is one case for 50,000 patients, although underreporting is possible. HHD is characterized by painful rash and blistering in skin folds with a relapsing remitting course that is exacerbated by heat and sweat. Patients often report debilitating symptoms of pain, itch, burning, body order as well as infections, resulting in severe negative impacts on quality of life, psychological distress and intimacy issues. There are no specific therapies available for treatment of this disease. Building on our experience and clinically validated HSV platform for skin delivery, we designed KB111 to deliver ATP2C1 directly to skin cells, increase ATPase levels and hopefully change the course of this terrible disease. As with VYJUVEK, KB111 is formulated for a topical administration directly to the lesions of HHD patients. We have already confirmed in preclinical studies that KB111 can efficiently transduce skin cells, resulting in functional ATPase expression and last month, cleared our IND. We expect to start an intra-patient randomized, double-blind, placebo-controlled multicenter study evaluating KB111 in HHD patients in the first half of next year. With strong execution across our pipeline and now the added benefits of the platform designation for KB801, we are well positioned to make rapid progress with multiple readouts in months ahead. With that, I'll hand the call over to Kate. Kathryn Romano: Thank you, Suma, and good morning, everyone. I'd like to provide some highlights from our third quarter financial results reported in our press release and 10-Q filing earlier this morning. VYJUVEK net product revenue for the third quarter was $97.8 million. This marks sustained growth as compared to the prior quarter, including the early sales from our German launch. Gross to net revenues remained consistent with prior quarters. Cost of goods sold was $4.3 million and gross margin was 96% for the quarter as compared to 93% last quarter. Note that the increase in gross margin this quarter was the result of U.S. product manufacturing process optimizations and the benefit of lower cost batches after FDA approval of this optimized process. While we expect these manufacturing efficiencies to continue benefiting our U.S. operations, the optimized process has not yet been approved for products sold outside the United States. As ex U.S. sales grow over the coming quarters, we anticipate gross margins will normalize towards historical levels until the optimized process is approved for products sold outside the United States. Research and development expenses were $14.6 million and general and administrative expenses were $37.6 million. Operating expenses for the quarter included noncash stock-based compensation of $13.2 million. You'll note on Slide 13 that we are revising our full year non-GAAP R&D and SG&A guidance to $145 million to $155 million compared to our prior guidance of $150 million to $175 million. This represents both a reduction and narrowing of the range to better reflect our performance so far this year as well as our continued confidence in our ability to execute with discipline for the remainder of the year. During the quarter, we released a majority of the valuation allowance that was previously recorded against our deferred tax assets, reflecting our confidence in Krystal's future profitability. This release resulted in a onetime noncash tax benefit that increased our reported EPS. We also benefited from the reversal of the Section 174 R&D capitalization requirement under the One Big Beautiful Bill legislation. This reversal was also nonrecurring. Net income for the quarter was $79.4 million, which represented $2.74 per basic and $2.66 per diluted share, reflective of these onetime benefits. And finally, our balance sheet continues to be a key point of strength for Krystal. We ended the third quarter with over $864 million in combined cash and investments, and we remain well positioned to support our commercial launches globally as well as our significant pipeline programs in the upcoming quarters. And now I will turn the call back over to Krish. Krish Krishnan: Thanks, Kate. As we close today's call, I'd like to emphasize our excitement for the path ahead at Krystal in 2026. With launches in Germany, France and Japan, VYJUVEK has now truly gone global, providing us the opportunity to dramatically expand the number of patients benefiting from VYJUVEK therapy in the months ahead. The hard part of a global VYJUVEK launch is now behind us, and Krystal's focus in 2026 is on our clinical pipeline. We have our first readout in CF before year-end. We're working towards readouts in 801 for NK and KB803 for eye lesions in DEB patients by midyear, and we shall update once enrollment is complete in these programs. These programs, along with KB111 for Hailey-Hailey fit neatly within our core global commercial capabilities. At the same time, we recognize the significant optionality that HSV-1 provides as a redoseable non-integrating large-capacity gene delivery platform and the potential upside opportunities that exist in large market indications. We will continue to invest in these programs with the same operational discipline as we have in the past to ensure that we maximize the value that we believe exists in our pipeline and platform before entering into partnerships for these programs. Thanks for listening, and I'd like to now open the call for Q&A. Operator: [Operator Instructions] Your first question for today is from Alec Stranahan with Bank of America. Unknown Analyst: This is Matthew on for Alec. Congrats on the quarter. Maybe just 2 from us. On the ex U.S. launch, I guess, whether your focus is on expanding the breadth of prescribers or depth of prescribers that have already made some prescriptions? And then maybe on the optimized process that led to better gross margins. Just curious what was sort of optimized in this process and whether you can speak to time lines for this optimized process to be expanded to ex U.S. markets? Krish Krishnan: Thank you, Matthew. In terms of your first question on ex U.S. launch, breadth of prescribers versus depth, I mean our focus -- I mean, you know our objective in Europe is primarily to accelerate getting a patient to meet the physician as soon as possible because the first clinical visit has to be in the physician office. Now purely logistically, that's a lot easier if you start focusing on centers of excellence, as you heard from Laurent, to begin with and -- but at the same time, slowly spreading out into the community. On the question about optimized process, this is essentially moving to a larger bioreactor, which got approved in the U.S., and we're working towards an application in Europe. I'll ask Suma to comment on the timing. For the approval in Europe with respect to the optimized path. Suma Krishnan: I mean we have already started the process. We have filed the scale-up. I mean it's pretty straightforward because we have a lot of data from the U.S. So we expect, hopefully, sometime next year to have the optimized and scaled-up process approved. Operator: Your next question is from Roger Song with Jefferies. Jiale Song: Great. Congrats for the quarter. Also related to the question on ex U.S. launch. So I understand the contribution in 3Q, probably not too much from Germany. But just curious about your expectation moving into next year, maybe 4Q and next year, how should we think about ex U.S. versus U.S. revenue contribution and when on -- if you will give us some breakdown later on? And also related to this ex U.S. launches, how should we think about the pricing? I understand you need to negotiate on top of the list price and then how this will change over time, particularly with the U.S. MFN policy. Krish Krishnan: Great, Roger. Thanks for those questions. Look, the only requirement, as I mentioned in the prior response, is to start in a healthcare setting. But in spite of that, we think Germany is off to a really good start with like 10-plus centers starting to prescribe. But the only point I'll make with respect to the EU launch, I would expect it to be a steady launch upwards as opposed to expecting any kind of bolus early on in either country, whether it be Germany or France. But the demand and the physicians and the patients are pretty excited, I would say, both in Germany, France and Italy is starting to go that way, too. With respect to pricing, look, we know Germany affords free pricing for the first 6 months. And then internally, we'll make a determination to start accruing for the next 12 months, depending on how pricing is proceeding. Negotiations are proceeding in France. Obviously, we start accruing from day 1. So it's very country specific. But I will say, based on the ASMR rating, based on the pricing we got in Japan, I think it bodes well. It remains to be seen, but I think the efficacy and the debilitating nature of the disease, I think that message, we're doing a really good job of conveying that, and it's being received well by these authorities in different countries. Operator: Your next question for today is from Ritu Baral with TD. Ritu Baral: I have been getting a lot of questions on NK timing. And specifically, Krish, could you take us through sort of what the gating aspects of getting that trial up and going is? How many sites and how difficult it is to open those sites? Has enrollment -- formal enrollment actually started? I think there's a lot of focus on the rapidity of getting to data and what that says about the overall NK population prevalence? And then I have a quick follow-up on CF. Krish Krishnan: Got you. On NK, I will just say, look, I think we have started to enroll patients in the study. Maybe Suma, you could add some color on how we're proceeding. Suma Krishnan: Absolutely. I mean we have quite a few sites up and running. We are actively adding additional sites. So really intend not just in the U.S. but globally because there's a lot of NK patients in Europe and the rest of the world, and we want to make this a global filing. So as you know, it takes a little while to get them up and running for the global studies, but we are right in the process. I think we will have most of our sites all completely signed up and ready to go hopefully by end of the year. And as you know, we are enrolling patients. This is one of our top priority projects. So we are excited to see the progress on this particular trial. Krish Krishnan: And I will add, Ritu, our internal timing target is to announce some kind of interim data by the middle of next year. Ritu Baral: Got it. And can you say what percentage of sites do you have -- the percentage of planned sites that you have up and running at this point? Suma Krishnan: I mean we have quite a few sites. I mean, within the U.S., we got most of the academic sites up and running. We have a few more to go, but I think we should have most of the U.S. sites up and running by end of the year. Ritu Baral: Got it. And then for CF, can you tell us how many null patients that you plan to provide data on by the year-end update? And sort of what constitutes success on molecular response? What aspects of molecular response will you be reporting? And what's success in null patient? Krish Krishnan: Yes. We're -- Ritu, thanks for that question. We are looking at a minimum 3 null patients, primarily focused on molecular correction because it's a single-dose study. Suma, anything else? Suma Krishnan: Yes. I mean, obviously, we are bronching these patients, these 3 null patients after the drug is administered. And the biopsies, we will take across the different -- across all the different areas of the lung, and we will look for expression of CFTR by immunofluorescence across, and we will see what kind of expression we are expecting to see robust expression. I mean, based on our NHP primate study, I mean, we -- hopefully, if we can recreate that, we see expression all the way up to 28 days. We see full length molecular CFTR expression across all of our biopsies, we think we feel pretty confident. Nobody is able to today show full length expression of CFTR. So hopefully, we can break that cycle. That's our goal. Ritu Baral: Could you report as like percentage of normal and sort of what threshold could result in FEV changes at a later time point? Suma Krishnan: I mean we know that you don't need much, right? Even these patients don't produce any CFTR. So even if we can produce anywhere between 5% to 10% of CFTR expression, I think that's pretty robust. So again, our intent is in these multiple biopsies across the lung, we will -- hopefully, we want to show expression in most of these biopsies and that give us some confidence that, yes, we can express and we have enough molecular correction. So especially in the null patients don't produce any CFTR. Operator: Our next question is from Gavin Clark-Gartner with Evercore. Gavin Clark-Gartner: On NK, what makes you confident that you don't need to test any different doses and why the one that you picked is the right dose? And somewhat on this topic, do you think you need 2 efficacy studies for approval or may be sufficient? Suma Krishnan: So the confidence for the dose comes from our animal studies. I mean we clearly see expression. We have a clear pharmacokinetic profile. So we know how long the expression lasts. So that has guided us into the dosing regimen in the clinic. Yes, we feel pretty sure that we just need one efficacy trial because this is, again, a rare disease. It meets the regulatory guidance for what the requirement is. So based on our study and the way we have powered the study based on our animal studies and what oxalate studies have achieved, we have powered it to hopefully see clinical significant improvement from placebo. So that's the goal of this study is successful, than we expect this to be the registrational trial. And obviously, we have the platform technology, and we have guidance on what we need from a CMC perspective. So we are -- I think you're aligned. So that's something that's positive for this program. Gavin Clark-Gartner: And is there any commentary you can provide on the safety you're seeing in the ocular DEB study or even the NK study on a blinded basis? Suma Krishnan: I mean, so far, we have not seen any adverse events of concern. Operator: Your next question is from Sami Corwin with William Blair. Samantha Corwin: Congrats on the progress. I also have one on NK. Could you remind us if you're excluding patients that have had a prior ocular HSV infection? And if you think a prior HSV infection could impact the efficacy or safety of treatment? And then in terms of the initial data set, what exactly will we see in that? Suma Krishnan: Regarding to your first question, no, we do not exclude patients that have prior infection. The only requirement is they should not have an active infection. That's the only exclusion criteria. I mean -- what are we going to announce? Yes, data said, this is a randomized 1:1 placebo-controlled study, 8 weeks. So we look at complete healing. We're using -- I mean, complete healing with an independent reader. So if you see complete healing at 8 weeks against placebo, then that's a win, just exactly like Oxervate. Samantha Corwin: Got it. Great. And then just one question on VYJUVEK. Could we expect some guidance or full year revenue guidance for VYJUVEK early next year? Krish Krishnan: No. because we have so many launches and the distribution you see it, it will take us some time to kind of get comfortable with how the different launches are going in different countries. So fortunately, Sami, we will not be guiding on revenue for 2026. Operator: Your next question is from Josh Schimmer with Cantor Fitzgerald. Alexa Deemer: This is Alexa Deemer on for Josh Schimmer, and congrats on a great quarter. So can you please provide some more color on the contribution of U.S. and ex U.S. sales in the third quarter for VYJUVEK? More specifically, what was the percentage breakdown from the U.S. versus Germany? Krish Krishnan: Yes. Look, the decision not to break down in this particular quarter was somewhat accounting auditor driven and the goal is to establish a consistent long-term practice on segment reporting. And if you follow that thought, we will be starting to break down geographies at some point in 2026. It's just that now it is so modest contribution relative to the overall net revenues of the company. Alexa Deemer: Okay. Got it. And can you provide any more specifics on how U.S. sales were in the second quarter versus the third quarter? Krish Krishnan: Yes. Definitely, I would say that the U.S. was a bit lower than what we saw in 2Q, but not to the extent like based on my comments from the last quarter, definitely, reimbursement approvals were on an uptick. And so overall, we ended up getting to a number that was higher than Q2. Operator: Your next question for today is from Andrea Newkirk with Goldman Sachs. Morgan Lamberti: This is Morgan on for Andrea. With 615 reimbursement approvals, what do you attribute this growth to? Are you seeing more patient adds from the community setting? And then how are you thinking about the path to 60% penetration from here? Krish Krishnan: No. Great question, Andrea (sic) [ Morgan ] . Look, like I mentioned maybe last quarter or the one before, it was taking us a bit longer to pull through a start form as we are getting patients more out in the community and physicians who are not -- who are far away from a center of excellence. And by just increasing the size of the sales force, I believe we have turned that issue around. We saw some acceleration last quarter. We see a continued acceleration this quarter. We expect that to go forward as more reps are being trained and out into the field. In terms of 60% market share, look, that's a number around 720. We reported 615. So we're maybe a quarter or 2 from hitting that number if you just do a simple math on that metric, which -- so we feel really good about the way the launch is going and how we've been able to reverse this or 1 quarter of deceleration in RA. Operator: Your next question is from Yigal Nochomovitz with Citi. Unknown Analyst: This is Jon Kim on for Yigal. Maybe just 2 quick ones from us. On KB408, can you just talk a little bit about your expectations there, whether you're expecting a significant uptick in AAT with repeat dosing versus a single dose and what sort of boost you'd be expecting to see or would you want to see? Krish Krishnan: Yes. Obviously, we're expecting an uptick, but we're not particularly talking right now about how much of an uptick. Suma Krishnan: I mean we are doing repeat dosing of A1AT -- I mean, of 408, and we'll be collecting bronch and lavage samples. So that's something that's ongoing. So once -- so we will show repeat dosing and expression of A1AT. Unknown Analyst: Got it. And can you speak on whether opening up more sites is also a priority for that program to continue enrolling patients given that there are quite a number of AATD programs ongoing right now? Suma Krishnan: I mean, right now, we have a couple of sites that's open because remember, again, these sites have to be able to do bronchoscopy. In case of 408, it's a little more complex because it's not just biopsies. They also need to take lung lavage fluids out to measure the A1AT and the protein levels. So there's only a few sites that are capable of doing this. So we have those sites. We have the patients. So hopefully, once we finish that cohort with the repeat dose administration in A1AT levels, then we hope to have a meeting with the agency to potentially talk about a path forward. Operator: There are no further questions in queue. Thank you. We've reached the end of the question-and-answer session and today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.