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Operator: Good afternoon, and welcome to the TransMedics Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. [Operator Instructions] I would now like to turn the call over to Ms. Laine Morgan from Gilmartin Group for a few introductory remarks. Thank you. Dorothy Morgan: Thank you. Earlier today, TransMedics released financial results for the quarter ended September 30, 2025. A copy of the press release is available on the company's website. Before we begin, I would like to remind you that management will make statements during this call, including during the question-and-answer portion of the call, that include forward-looking statements within the meaning of federal securities laws. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements. These forward-looking statements address various matters, including, among other things, future events, results and performance, financial guidance and projected expectations, potential market and business conditions, our examination of operating trends, the potential commercial opportunity for our products and services, the potential timing, outcome and impact of new clinical programs, and our potential initiatives, opportunities and plans in the U.S. and globally, including timing and expectations. These statements involve risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by the forward-looking statements. Accordingly, you should not place undue reliance on these statements. Additional information regarding these risks and uncertainties appears under the heading Risk Factors of our Form 10-Q filed with the Securities and Exchange Commission on July 30, 2025 and our subsequent SEC filings, which are available at www.sec.gov and on our website at www.transmedics.com. You can also find the company's slide presentation with information on third quarter 2025 results on the Investor Relations section of the TransMedics website. TransMedics disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, October 29, 2025. And with that, I will now turn the call over to Waleed Hassanein, President and Chief Executive Officer. Waleed Hassanein: Thank you so much, Laine. Good afternoon, everyone, and welcome to TransMedics' Third Quarter 2025 Earnings Call. Joining me today is Gerardo Hernandez, our Chief Financial Officer. Organ transplantation remains a key area of focus for policymakers in both the U.S. and around the world. In the U.S., the ongoing national modernization initiative is focused on growing transplant volumes, while streamlining organ donation, coordination and oversight processes. Internationally, efforts are similarly focused on maximizing utilization of donor organs for transplants, while also finding more efficient ways to manage organ procurements and improving post-transplant clinical outcomes. Globally, TransMedics is uniquely positioned as the ideal solution to address these initiatives through our differentiated OCS technology, NOP clinical and logistical services and our proprietary transplant digital ecosystem. As we will outline today, we are seeing strong signals supporting this conviction. We are now laser-focused on capitalizing on our momentum worldwide to provide our unique solutions to promote organ transplantation and save more lives. We are extremely proud of our strong results achieved in Q3 despite the anticipated and typical transient seasonal slowdown seen in the U.S. national transplant volumes as reported by UNOS OPTN data in Q3. Specifically, we're very encouraged by the year-over-year growth trend, which we strongly believe is a more relevant and meaningful performance metric, especially in a seasonal quarter like Q3. Let me share the summary of our results for 3Q 2025. Total revenue for 3Q 2025 was approximately $144 million, or exactly $143.8 million, representing approximately 32.2% growth year-over-year. We experienced year-over-year growth across all 3 organ segments, driven by higher overall utilization and center penetration of OCS NOP in the U.S. Specifically, we saw year-over-year growth of nearly 41% in liver, approximately 14% in heart and approximately 5% in lung revenues in Q3. Our overall gross margins for 3Q was approximately 59%, representing 2.9% growth year-over-year. We delivered operating profit of approximately $23.3 million in 3Q, representing more than 16% total revenue -- of total revenue, up from $3.9 million or approximately 4% of total revenue in 3Q 2024. And finally, we have driven strong cash generation. We have significantly improved our billing processes and have maintained a healthy AR collections, which resulted in the addition of approximately $65.6 million of cash to our balance sheet as we ended 3Q with over $466.2 million in cash. Shifting now to TransMedics' transplant logistics infrastructure and performance. Transplant logistics service revenue for 3Q was $27.2 million, representing approximately 35% year-over-year growth. Throughout 3Q, we owned and operated 21 aircraft before adding our 22nd aircraft in October, which we were targeting to end 2025 with 22 owned aircraft. In 3Q, we maintained coverage of approximately 78% of our NOP missions requiring air transport compared to approximately 61% in Q3 of 2024. Meanwhile, we have continued to add to our pilot crew, enabling us to experiment with double shifting a portion of our fleet by year-end. We are pleased by our strong operational 3Q performance achieved despite the expected transient seasonality. We are confident that this seasonal impact is behind us as we have seen volume rebound in September and into early Q4. Moving now to update on our Next-Gen OCS ENHANCE Heart and DENOVO Lung clinical programs. We are thrilled to report that several U.S. heart and lung transplant centers are approaching the initiation of patient enrollment for the ENHANCE Heart and DENOVO Lung trials. We remain confident that the enrollment will start in Q4 2025. Meanwhile, our team is actively working to complete our responses to the remaining FDA questions and expect that all IDE conditions for both trials will be satisfied by early next year. We're very excited about initiating these 2 programs to demonstrate the potential positive clinical impact of our Gen 2 modification on heart and lung transplantation in the U.S. Importantly, we hope that these programs will catalyze significant OCS Heart and OCS Lung adoption in the U.S. in 2026 and beyond. Now, please allow me to discuss our effort to expand our TransMedics NOP model outside of the U.S., which represents a key midterm growth driver for TransMedics. As I stated before, TransMedics' U.S. NOP success has been highly visible across the global transplant markets. This resulted in many international geographies engaging with TransMedics to explore the potential for replicating all or a portion of our NOP model and our integrated logistics platform to help them grow their transplant programs. Importantly, through these market engagements, we became very aware of their significant needs for a dedicated transplant logistics support for reasons similar to those we've seen and experienced in the U.S. To that end, in September, we were excited to announce our plans to launch our first OUS NOP program in Italy. We are now actively establishing up to 4 hubs to serve as launch points for that program, strategically covering both Northern and Southern Italy. We are also actively staffing up our Italian clinical support teams. Now, it is important to note that we are planning to start building an EU air and ground transplant logistics network similar to the one we have established in the U.S., however, appropriately sized to meet the European needs. Given our current knowledge of the Italian and European transplant logistics need, we see a significant opportunity for TransMedics to capitalize on by replicating our transplant logistics service in Europe. Please allow me to repeat, we -- given our current knowledge, we see a significant business opportunity and revenue-generating opportunity by replicating our transplant logistics service in Europe to meet the growing needs for a dedicated transplant network -- logistics network in European countries. We expect the Italian NOP program to launch in the first half of 2026. We're also currently engaged with several other European countries and also engage with regions outside of Europe to expand our program beyond Italy in the coming years. Stay tuned. This initiative will serve as an additional growth catalyst beginning as early as late 2026 and more meaningfully in '27 and beyond. With that, let me turn to the here and now. We are laser-focused on finishing out 2025 strong to round out another great year for our business and potentially grow the U.S. national transplant volumes for the third consecutive year in a row. We are continuing to drive adoption of our OCS NOP across all organs. We are expanding our OPO partnership to increase organ utilization for transplantation around the United States. Next week, we are hosting our annual transplant leadership forums in Boston with approximately 200 transplant leaders from all transplant market segments expected to participate. We are continuing to strengthen our clinical support staffing to meet the growing demand. And finally, we remain on track to begin double shifting a portion of our aircraft fleet by year-end to enhance operational efficiency. We are confident that all these activities will position us well to end the year strong and be in a good position for the expected ramp in adoption in 2026. Before I conclude, please allow me to provide a status update on our long-term growth initiatives and our planned new global headquarters and manufacturing facility. First, we are very pleased with the preclinical and product development progress of our OCS Kidney program, which is underway and was announced publicly at the World Transplant Congress Scientific Conference in August. We expect to reveal the design of our OCS Kidney device in early 2026 at the American Society of Transplant Surgeons Winter Symposium. Second, the development of our Gen 3 OCS platform is well underway with significant progress already made on many of the advanced technology platforms that will be encompassed in that next Gen 3 OCS platform. We expect to share more detail on Gen 3 OCS platform in the second half of 2026. Third, as Gerardo will outline later, we are actively investing in critical business infrastructure systems to better position TransMedics to scale and grow with strong controls and efficiencies. Finally, we have narrowed down our selection for the new global headquarters of TransMedics to the city of Somerville, a northern suburb of Boston. We are in the final stages of lease negotiations for a state-of-the-art new building to combine all of our functions in one campus, and we expect to announce the location in early January 2026. As you can see, we are not slowing down, and we are growing our technology platform and geographical outreach. As I have stated before, our near-term capital allocation strategy is a growth-oriented strategy. That said, while we expect operating margins to fluctuate somewhat as we deploy capital across these initiatives, we have a high degree of confidence in our long-term ability to deliver substantial top and bottom line growth. Now, let me conclude my remarks by commenting on our expectations for the remainder of 2025, which Gerardo will detail further. Based on our performance to date and our expectation to end the year strong, we are narrowing the range to raise the midpoint of our full year 2025 revenue guidance. We are now guiding to a range between $595 million to $605 million for full year 2025 revenue. This represents approximately 36% growth over the full year 2024 at the midpoint. With that, let me turn the call to Gerardo to cover the detailed financial results for the quarter. Gerardo Hernandez: Thank you, Waleed. Good afternoon, everybody. I am pleased to be here to discuss TransMedics' third quarter results. Please note that a supplemental slide presentation with additional details on our third quarter 2025 results is available in the Investors section of our website. As Waleed highlighted, we sustained momentum through the third quarter with disciplined execution across the entire TransMedics team. Despite the typical seasonal slowdown in the U.S. transplant activity, where Q2 tends to be one of the strongest periods followed by some moderation, our performance remained strong. Continued benefits from our ongoing strategic investments drove solid performance across both product and service lines, along with continued margin expansion and improved profitability versus Q3 of 2024. It's worth noting that in our earlier years, our rapid growth trajectory offset the natural seasonality in the U.S. transplant activity. As we've reached greater scale, our results have started to follow those underlying market dynamics more closely, even as the business continues to expand at a healthy pace. Total revenue for the third quarter was approximately $144 million. U.S. transplant revenue was approximately $139 million, up 32% year-over-year and down 9% sequentially. By organ, liver contributed $108 million, heart with $27 million and lungs with $4 million. OUS revenue was $3.6 million, up 41% year-over-year and down 13% sequentially. OUS revenue by organ was $3.2 million in heart, $0.3 million in lungs and $0.1 million in liver. Product revenue for the third quarter was $88 million, up 33% year-over-year and down 9% sequentially, reflecting continued momentum across both liver and heart programs and solid underlying activity levels compared to 2024. The sequential decline was in line with the typical seasonality moderation in transplant activity during the third quarter. Service revenue for the third quarter was $56 million, up 31% year-over-year and down 8% sequentially. The primary driver of growth was logistics revenue, which increased 35% year-over-year, reflecting continued expansion and strong utilization of our aviation fleet compared to 2024. Sequentially, logistics revenue declined 9%, consistent with the expected seasonal slowdown in transplant volumes during the third quarter. Total gross margin for the quarter was approximately 59%, up nearly 290 basis points year-over-year and down roughly 260 basis points sequentially. The year-over-year improvement was driven by higher fleet utilization, cost efficiencies in logistics and limited unplanned aircraft downtime. We are also starting to see early benefits from spreading the scheduled maintenance more evenly throughout the year. Sequentially, the decline mainly reflects lower activity levels in the quarter and the impact of investments we are making in infrastructure to drive future efficiencies and support our anticipated growth in 2026. Total operating expenses for the third quarter of 2025 were $61 million, up 8% year-over-year, and the increase was primarily driven by a 7% increase in R&D expenses, reflecting continued investment in our innovation pipeline and the ramp-up of our product development capabilities. SG&A expenses grew 8% year-over-year, reflecting ongoing expansion of our IT infrastructure and investments in strategic growth initiatives. Sequentially, total operating expenses were up 2%, primarily driven by an increase in SG&A in support of our ongoing expansion activities. Operating income for the quarter was $23 million, up 494% year-over-year and down 36% sequentially. Operating margin expanded to 16% compared to 4% in the prior year. Net income for the third quarter was $24 million, representing a 477% year-over-year increase and a 30% sequential decrease. Earnings per share were $0.71 and diluted earnings per share were $0.66 for the third quarter of 2025. We ended the quarter with $466 million in cash, up $66 million from June 30, 2025. This increase was driven by strong operating cash generation, supported by continued improvement in our billing processes and healthy collections, reflecting our focus on efficiency and disciplined working capital management. Overall, our third quarter performance reflects the same disciplined execution, efficiency gains and progress across our clinical and innovation programs that we've demonstrated throughout the year. Together with the scalability of our model, these results continue to validate our ability to deliver strong financial performance and sustained momentum through the rest of 2025 and beyond. Looking ahead, as Waleed mentioned before, we are narrowing our full year revenue guidance to a range of $595 million to $605 million. With only 1 quarter left in the year, this reflects our increased visibility and continued confidence in the strength of the business. At the midpoint, this represents roughly 36% growth over 2024, driven by expanding transplant volumes and sustained momentum across our service platform. In terms of gross margin, as mentioned in previous calls, we expect overall margins to remain around 60% over the coming years. This outlook reflects the various factors influencing both product and service margins beyond just mix. As we expand internationally and continue investing ahead of growth, we may experience some near-term pressure on margins. However, we expect those impacts to normalize and margins to recover as volumes scale across markets. In terms of capital allocation, our focus is on driving long-term value. We are concentrating our investments in 3 key areas: first, fueling growth through continued R&D investments and targeted expansion into selected international markets; second, building a stronger foundation by implementing systems that simplify and optimize processes across the business, improving efficiency and scalability as we grow; and third, enhancing our infrastructure to support long-term scalability, including our planned move to a new global headquarters to accommodate growth, ongoing upgrades to expand our manufacturing and product development capabilities, and our continued evaluation of strategic opportunities that could further strengthen our platform for the future. Collectively, these initiatives play an important role in preparing TransMedics for its next stage of expansion as we move towards the 10,000 transplant milestone and beyond and reinforce our global leadership in transplantation. Aligned with our focus on efficiency, we have also made progress on our double shifting pilot program to improve fleet utilization. Pilot hiring and training are advancing well, and we continue to expect early results in the first half of 2026. This insight will help us determine the appropriate fleet size and utilization model to maximize efficiency and capital returns. Recently, in October, we achieved our goals of owning 22 jets by the end of 2025. Looking ahead, we remain open to acquiring additional jets when the right conditions are in place, whether to enhance U.S. capacity or to support our international expansion efforts. Finally, with stronger top line performance, continued efficiency gains and disciplined spending, we expect to deliver at least 750 basis points of operating margin expansion for the full year of 2025 compared to 2024. While there could be additional upside, that will depend on our final sales performance and the timing of our investment plan for Q4 of 2025. We continue to expect operating margins to reach or approach 30% by 2028. While we may see some fluctuations as we expand internationally and invest ahead of growth, we remain confident in the long-term direction and scalability of our model. Our OCS technology, together with NOP platform and integrated logistics network, give us a clear advantage in expanding access to transplantation worldwide. With the scalability of our model and strong execution across the organization, TransMedics is well positioned to sustain growth, expand margins and deliver long-term value, while giving more patients a second chance at life. And with that, I'll turn the call over to Waleed for closing remarks. Waleed Hassanein: Thank you so much, Gerardo. Overall, we're very pleased with our third quarter performance and the significant progress our team continues to make across multiple growth initiatives. Importantly, we are now laser-focused, as I stated earlier, on ending 2025 on a strong note and better position TransMedics for another strong growth year in 2026. It's becoming increasingly clear that TransMedics is uniquely positioned with unparalleled attributes that include OCS technology, NOP clinical services, the transplant logistics network and our proprietary NOP Connect digital platform. All of these collectively enable us to deliver unrivaled life-saving solutions to global transplant markets. Of course, none of this would have happened without our dedicated world-class TransMedics team that are working around the clock to make organ transplantation more accessible to patients who are waiting for a new lease on life in the form of a new organ. We are inspired and committed to continue our drive to expand the access to organ transplantation and improve post-transplant clinical outcomes of organ transplant therapy around the world. With that, I will now turn the call to the operator for Q&A. Operator? Operator: [Operator Instructions] We have the first question from the line of Allen Gong from JPMorgan. K. Gong: I guess, my first is just on the trajectory into 4Q and then after that into 2026. So based on your guide, you're expecting to get to roughly just under 30% in fourth quarter, around [ $155 million-plus ] sales. So how should we think about that as a run rate looking forward into 2026? And should we think about 2025 as being an appropriate year when it comes to seasonality, given we've seen you kind of normalizing more towards market growth as you've grown larger? Waleed Hassanein: Thank you, Allen. Let me start with the second part of the question first, if you allow me. As I've stated publicly before, I think seasonality in organ transplant is something that we all have to be comfortable with and anticipate year after year, especially as we continue to grow and be a dominant player in the U.S. transplant market. As Gerardo mentioned, we see this seasonality every year, and we saw the seasonality every year nearly for the past almost a decade. And so, we should expect that going forward. Now, let me turn to the first part of your question. We plan to issue our guidance for 2026 at our next earnings call. I think 2025, our focus right now is to end 2025 strong and achieve our stated guidance. And then, that gives us time to evaluate our initiatives, the clinical programs that are underway, then we will issue guidance for 2026, which we fully expect to be a growth year for TransMedics over 2025, but allow us the time to state our 2026 expectations with the benefit of finishing the year and adding these data points that will be crucial to providing guidance for the full year 2026. K. Gong: And then, a quick follow-up just on international. I know the Italy announcement was definitely a pleasant surprise. And I guess, when we think about your efforts to expand beyond that to cover the breadth of Europe, I imagine it won't be quite as straightforward as you can call it that as your efforts in the U.S. But what kind of challenges do you anticipate ahead of you for that? And how long do you think it will take before you can get your NOP and your logistics services in Europe to the same level as they are in the U.S.? Waleed Hassanein: Thanks, Allen. Again, Europe is not a homogeneous geography. We have to be respectful and design our NOP to be tailored to each country's specific clinical and regulatory requirements. Italy is going to be a very important first step. We're very encouraged by where we are in Italy right now, and we hope to be able to deliver Italy early -- or in the first half of 2026. We're heavily engaged with other geographies in Europe. And as I said, every geography has its own specific requirements. However, the -- what's universal in Europe is the need for a dedicated transplant logistics network. It's not going to be at the scale of the U.S. for sure. It's going to be smaller. But that has a huge opportunity to even facilitate clinical adoption for the OCS in many of the European geographies that we're engaged with, as well as other regions outside of Europe. So we need to focus on our first kind of beachhead in Italy, deliver on our promises and deliver world-class service, achieve success there. And we believe wholeheartedly, especially in Europe, success delivers success. And if it works in Italy and it works well, this is going to propagate across Europe. And if it works in Italy, it will work anywhere in Europe, just given how the Italian environment is very complicated and very -- has a lot of needs. Operator: We have the next question from the line of Bill Plovanic from Canaccord. William Plovanic: I'm going to just start off -- first, I just wanted to get clarity. So you believe that you'll have the final IDE sign-off from FDA on the ENHANCE and DENOVO and enroll -- when you say enroll, treat the first patients or book the first revenue in the first half of '26, is that what you're saying at this point? Waleed Hassanein: No. Bill, thank you for the question. We are going to enroll the first patients and probably first handful of patients and book the revenue in Q4 of 2025. What we are saying is we have conditional approval for a fairly sizable initiation of the trial, so especially for the heart. So we can -- that's going to happen in Q4. What I'm saying is that limitation or cap is going to be removed or these conditions will be removed once we address all the remaining questions for FDA, and that will come in Q1 of 2026 or early 2026. And then -- and now, the trial will be uncapped and unconditional. It's going to be open. But we're going to enroll and book our first revenue in Q4. William Plovanic: Okay. Perfect. And then, just trying to understand, on the operating margin guide, you're saying 750 bps, which is 16% for the year, which is $96 million, which -- that's like $10 million on the midpoint of the fourth quarter is only 6.5%. So I'm just trying to understand, as you talk about the build-out of Europe logistics, like can you put a dollar amount on this for us? Is this $10 million, $100 million? Like how should we think about the CapEx required and the timing of those investments? Gerardo Hernandez: Bill, this is Gerardo. In terms of CapEx and investment for the European NOP, we will be providing a little bit more color next year in our next call. However, for my anticipated forecast on operating margin in 2025, it assumes that it has certainly space to improve upside. It assumes that we land in the low end of our guidance range and that we actually deliver on our investment plan in the U.S. in Q4. So I believe we have space to surpass what I shared, but we'll see where we land. Operator: We have the next question from the line of Ryan Daniels from William Blair. Matthew Mardula: This is Matthew Mardula on for Ryan Daniels. So I want to touch up with HHS decertifying an OPO in the middle of the year. Have you seen any disruptions from the OPO decertification? And I understand that HHS wants to increase the number of transplants and not have organs go to waste. But could the continued decertification of OPOs impact the number of organ transplants? Or do you just view this as a kind of small minimal risk? Waleed Hassanein: Thank you for the question. At the first part of the question, we do not see any disruption to organ transplantation in the U.S. based on the actions taken by HHS. That's number one. Number two, we believe wholeheartedly that if the stated goals and vision of HHS and HRSA and CMS to be achieved, actually, we believe it actually could provide a tailwind to organ transplant efficiency in the United States by having more performance metrics that everybody could get behind and be held accountable to. So we have to wait and see, and we have to allow the time for these initiatives to materialize, but we are confident in our ability to operate in the current OPO model or any other modernization model that will come -- that may come out from this initiative. And frankly, we see this as a potential opportunity, not a potential risk, but we have to wait and see. Operator: We have the next question from the line of Chris Pasquale from Nephron Research. Christopher Pasquale: Waleed, logistics penetration has been in the high-70s for 3 straight quarters now. Curious how you think about where that goes over time. Is 80% a bit of a ceiling because the other 20% are drivable? Or do you think that, that number could still go higher as you guys continue to roll out the service? Waleed Hassanein: Thank you, Chris. I want to clarify, Chris, that 79% -- or yes, 78% or 79% or 80%, it's our planes for only the mission requiring air transport. So we expect that number to go up definitely in the low-to-mid 80s. I think in 2025, we see a ceiling in the low-80s or 80%, roughly speaking, just because of some of the existing contracts that are supporting other logistics providers in the United States. The other element to that is the long-distance transport. Remember, our planes are short distance or relatively speaking, they're light jets. So any Alaska or Puerto Rico or -- I'm sorry, any Hawaii missions, we have to do it on third-party aircraft because that's a longer jet. But Alaska and Puerto Rico, we can do on our jet. So to summarize, we expect that number to go up in the mid-80s at least in the foreseeable future as we continue to gain market share and we continue to prove to the community that TransMedics logistics is providing not just the safest, the most efficient, but also cost-effective logistics partnership in organ transplant. Christopher Pasquale: And then, sort of related to that, you guys rolled out the new NOP Connect kind of digital ecosystem earlier this year. I'm curious whether we have enough experience with that now to see what impact that's having, either on your collection or sort of cash conversion cycle being simplified or on adoption of the broader services that you put into place? Waleed Hassanein: Chris, that's an excellent question. We are -- not only we feel very excited about the rollout of this new ecosystem, we are already taking some very good feedback from the community, and we are rolling our 2.0 or 0.2 version of it in Q4. We are seeing some great efficiencies. I wouldn't go as far as saying we're seeing the full efficiency or the full impact yet. We expect that to come throughout 2026. Operator: We have the next question from the line of Josh Jennings from TD Cowen. Joshua Jennings: I wanted to circle back just on the 2025 guidance, revenue guidance update and just the increase of $5 million at the midpoint. Waleed, maybe help us think through, and Gerardo, some of the assumptions baked in there. I mean, was 3Q results better than TransMedics' internal expectations with stronger start than expected? In October, you have another plane. But maybe just help us think through what's driving the guidance increase, a little bit more detail. Waleed Hassanein: Thank you, Josh. As you know, we don't give that much detail. All I can say is, we are confident. One, we are pleased by the results of Q3. Two, we are confident in the trends we saw at the end of Q3, into early Q4. But we have to be prudent. We're still early in Q4. We still have 2 more months to go, and we have to be respectful of that. Gerardo, do you want to add anything else? Gerardo Hernandez: Well, no, I think we have a number of tailwinds, as Waleed was mentioning, [ Chris ]. What we're seeing in terms of OCS adoption, organ utilization, it's really fueling the momentum of the OCS. So we're confident to get to the number. Of course, as you know, our philosophy has been to not only achieve, but as much as we can, go above and beyond. But we're confident with where we are right now. Joshua Jennings: Great. And just a follow-up. I think it's clear that there really hasn't been an overhang in terms of some of the headlines that came out on DCD donors and some of the New York Times expose, but wanted to just confirm that. Any impact to donor registrations that you're seeing? And then, maybe give us the status of the wait list for liver, heart and lung transplants. We just anecdotally talked to -- some heavy OCS users have talked about their waitlist going down because volumes have increased dramatically, but I think those have refilled, but maybe help us on those 2 topics. Waleed Hassanein: Thanks, Josh. Let me address the second piece first. We can't comment really on the waitlist because the waitlist is a very dynamic situation, as you know, Josh, and all that data is published. The facts are, for the last 3 years when we were operating NOP, many centers wiped down the waitlist and rebuilt it half a dozen to a dozen times. The growth in the national transplant volume speaks for itself. So the fact that centers are wiping down the waitlist, yes, that's a transient effect. It takes a quarter, maybe sometimes in very -- in large or midsized centers that are efficient with their outreach, they could rebuild it within a quarter, and some centers take a quarter to rebuild. So for that, we don't -- we are actually -- we're focusing on one thing. We're focusing on opening up the supply of available suitable organs for transplants, and we -- and the centers are responsible of rebuilding their waitlist because these are life-saving transplant procedures, as you know. So that's our answer to the second half. For first half, listen, it's a very unfortunate expose that came out. But as we've stated numerous times, we cannot allow either intentional or unintentional bad behavior from certain players in the transplant community to be taken out of context and negatively impact the national transplant volume, which is helping a lot of patients who are waiting anxiously on the waiting list for an organ transplant. So -- and I hope that some of these investigative reporters understand that, that, yes, it's important to highlight some bad acts, but we have to remember that these are very, very few, very, very limited. And ultimately, the #1 focus for us and anybody else who is involved in organ transplantation is to focus on the patients. And it is not in the best interest of the patients to portray transplantation as the Wild Wild West because it isn't. The U.S. organ transplant system remains to be, in my humble opinion, one of the best, if not the best, transplant system on planet Earth. So we have to be cognizant of that. Operator: We have the next question from the line of Suraj Kalia from Oppenheimer & Co. Suraj Kalia: Waleed, can you hear me all right? Waleed Hassanein: I can. Suraj Kalia: So Waleed, one for you and one for Gerardo. So Waleed, I'll start out with you. Look, short-term gyrations aside, you guys have delivered on your numbers. Waleed, there is this pervasive belief that incremental liver share gains are -- will be difficult to come by. Can you argue the reverse is true for FY '26? Or your confidence for FY '26 is you would characterize that it's predicated on heart and lung contribution through the trials, the OUS endeavor that you talked about? Just set the stage for us as how you guys are thinking as you shift gears in FY '26? Waleed Hassanein: Suraj, thank you so much for the thoughtful question. Let me dissect that important question into different pieces. First, it is, in my view, a false assumption propagated by some of the bear thesis out there that the penetration in liver will be difficult to come by. We see it completely different. We think we are early in our liver penetration, and we have a long greenfield opportunity in liver transplant to grow our adoption rate over the next several years, not just 2026. Where is it coming from? It's going to be coming from DBD penetration. It's going to be coming from more DCD penetration. It's going to be coming from more challenging -- from expansion potentially of the DCD wait period. So we are very, very much believers that -- the notion that growth in liver is going to be difficult to come by, we believe that's a false assumption, propagated by the wrong narrative. So that's number one. Number two, we fully believe and expect that the next-gen heart and lung clinical programs will generate significant momentum in the adoption of both DBD and DCD heart and lung. And listen, we are all going to experience that as it materializes throughout 2026. But that is our expectations going into '26. And that's where we stand from a U.S. perspective. Again, the initiation of NOP OUS will be a potential catalyst, albeit in the second half of 2026, but it is going to become a catalyst for us in next year. A lot of publications are in the launching pad or in review that will generate that evidence that will be required or will facilitate the adoption picture that I just described, Suraj. I hope I addressed your question. Suraj Kalia: Fair enough. And Gerardo, if I could, look, our math is your liver shares, you gained by almost 100 bps in the quarter, but your service revenues were obviously down, right? And one of the things that you and Waleed have been telegraphing for some time now is third-party ground transport and third-party flights picked up in the quarter. Gerardo, what -- how should we think about -- is this a blip of the screen? Is this something structural as we look forward? Just help us understand both qualitatively and quantitatively. It would be great. Waleed Hassanein: Suraj, if you allow me, I'll address one point, and then I'll turn it on to Gerardo to address the rest of it. We never telegraphed or articulated or suggested that third-party service or transportation is growing in Q3. That was a misunderstanding, or it is a misunderstanding if somebody thinks that way. All what we wanted to clarify is 2 important points, and I'll repeat them again if you allow me. One, tracking tail numbers alone is not 100% reflective of our revenue within the quarter for a variety of different reasons. Two, there is -- a good portion of our clinical missions are done using car transport alone. This was the only 2 simple facts that we wanted to highlight to the community who are just laser-focused on tracking tail numbers. And so, that's just a clarification. Gerardo, can you please address the rest? Gerardo Hernandez: Yes. Well, in reality, there is not much to add, Waleed, more. Suraj, we didn't see any, I would say, significant change in the, let's say, split between ground and air transportation through the quarter compared to what we've seen earlier in the year. And we are assuming more or less the same thing for Q4. I think that's what I would say, not much more to add. Operator: We have the next question from the line of Patrick Wood from Morgan Stanley. Patrick Wood: Amazing. I'll keep it to one, just given the time. Waleed, you mentioned double shifting twice at the start in the comments. And just curious how you're seeing that as an opportunity, what that means both financially for you guys, but then also for your customers and the ability to potentially service them faster? Is that a valid thought process? Just how do you see that affecting the business overall? Waleed Hassanein: Thank you, Patrick. Double shifting, Patrick, will give us at least -- in '25, we're just experimenting or piloting this program. The concept is to maximize the efficiency of our existing fleet and truly sweat the assets that we have before we think of adding any additional investment in our fleet. So from an impact standpoint, and this is just my perspective, and Gerardo, please correct me if I'm wrong, the idea is, at scale -- at a certain scale, we will start seeing efficiencies in the bottom line and the margin contribution of the service with that model. But Gerardo, please correct me if I'm wrong. Gerardo Hernandez: No, that's right. And basically, what will be happening, Patrick, there is that the same number of planes will fly higher number of missions, maximizing the return on capital. That's basically the concept. Operator: We have the next question from the line of Matthew O'Brien from Piper Sandler. Samantha Munoz: This is Samantha on for Matt. I guess, first, I know the 10,000 transplant target has been out there for a while, but we're now seeing you start to communicate potentially even surpassing that target. I guess, what gives you the confidence that you can get there? And then, how much of that is dependent upon these next-gen heart and lung programs? Waleed Hassanein: Thank you for the question. We have a very high degree of confidence that we will get there. And we -- when we set that target, we set that target without the expectation of acceleration of heart and lung. So our hope is to get to 10,000 transplants even without the contribution of the next-gen heart and lung programs. The contribution of heart and lung transplant, the new programs, will be to accelerate the path or increase the contribution of the heart and lung in the mix. So that's -- we have a very high degree of confidence. And please, I want to reiterate what I've stated before. If we continue on the current trajectory of growth without any catalyzation of growth in U.S. transplant volumes, in 2028, 10,000 transplants will represent approximately 50% to 55% of the national heart, lung and liver volumes, which means we have not saturated the market. The opposite is true. We have another probably approximately half of the market to continue to grow heart, lung and liver through. On top of that, what we said is, the kidney program being introduced in 2027 will give us an access to an additional 23,000 to 25,000 procedures in 2027 and beyond, and that could even catalyze our growth beyond the 10,000 target into 20,000 by 2030. So that's what we stated. So we have a very high degree of confidence reaching the 10,000 transplants. Our results are pointing in that direction. Our growth rates are pointing in that direction. And we are hoping that the next-gen heart and lung clinical programs will accelerate the path to getting there. And again, we remain convinced that 2028, at 10,000 transplant with the current market growth, we would be at approximately half of the U.S. heart and lung and liver transplant market, leaving room for growth even beyond that. Samantha Munoz: That's perfect. If I could sneak in one more also on the next-gen heart and lung programs. It's great to hear that those are going to start enrolling this quarter. How are you thinking about the duration of these trials and how long they're going to take to enroll? Waleed Hassanein: The duration of these trials, for us, it really -- it doesn't really matter what the duration is. We expect it to be somewhere between 12 to 18 months. But what is important for us is to see the trajectory or the impact -- to see the impact of these trials in the form of trajectory of penetration of heart and lung volumes every quarter. Given that these are -- these trials are revenue generating, the numbers will count in our quarterly report. That is what we are excited to see because we will know the impact even before the trial is completed. Operator: We have the next question from the line of David Rescott from Baird. David Rescott: Waleed, I wanted to follow up on some of your comments around the timing of the trial. I'm just looking for maybe some more color on what the -- the difference between starting enrolling the trial in Q4 and having these full conditional limitations, I don't know if limitations, but the full conditions on the trial that gets the IDE fully cleared in Q1. Is it something similar for both heart and lung? Would it be fair to assume maybe the Part A of the heart trial is good to go and start enrolling in Q4 and maybe it's Part B that comes in, in 2026? Just trying to understand what's going on there and maybe whether or not there is any change in the contribution you have baked in from clinical trials in Q4. Waleed Hassanein: David, thank you for the question. I just want to remind you that we really didn't account for much contribution in Q4 from the trial, pretty much 0 contribution for the trial. We're actually -- we appear to be ahead of schedule. So let me clarify, however, the difference between the 2 trials as we know them today. The heart conditional approval is for both Part A and Part B. We have a sizable conditional approval, so we can start enrolling in both Part A and Part B in Q4. The lung is slightly different. It's more a limited -- the lung is one part, so it's not 2 parts. And it's a fairly limited condition for approval because the questions that are asked for the lung is pretty straightforward, and we think we will overcome it fairly quickly. And the FDA conditions were limiting, given that the questions are fairly straightforward. So what I'm saying on this call is, we should -- we are expecting to enroll our first patients or cohort of patients in heart and lung in Q4 and hoping that by early Q1, we will remove all conditions from both IDEs and now will be -- the trials will be wide open across all indications, across the 2 parts for heart and the 1 part for lung. And then, we will not be capped. That's really the message I was telegraphing in the prepared remarks. David Rescott: Okay. That's very helpful. And maybe on Europe, a 2-part question. I know you provided some comments on it already. But I know the market in Europe is pretty fragmented and there's different agencies, maybe we'll say, that control organ donation and allocation across different end markets, so I guess -- or different countries. I guess, the first part, for Italy, is the assumption that organs that are transplanted through the new service in Italy will likely stay in Italy? Or is it possible that those are going to get moved around transplants in Europe? And then, as it relates to the margin comments there, I know you called out gross margins staying in this 60% range in general, but maybe some near-term headwinds as you expand in Europe. I'm just trying to get a context for the timing of this maybe step-down in margins and step back up in margins and still staying consistent in the 60% range. Maybe there's a difference between gross and operating, but any clarity there would be helpful. Waleed Hassanein: Sure. Thanks, David. So I'll address the first part, and Gerardo will address the part around the margins. So we are not planning, at least early on, to impact the movement of organs at all within each geography in Europe that we will be operating on. Everybody needs to be aware that -- and let me be very specific about Italy. Italy today, there is movement of organs across Italy. There's movement of organs from Switzerland to Italy. There's movement of organs from Italy to Switzerland. The same for some select other European countries. Our role is not to change any of the current dynamics that are routinely happening today. Our role is to facilitate the utilization of these organs to actual transplant successfully. Our role, even if it's a local transplant within Italy, based on our knowledge today, David, that they are having significant challenges of even securing logistics to move organs even within Italy. So for us, that's a huge opportunity and a huge business opportunity to solve that problem as we've solved it here in the U.S. at a much bigger geographical scale. And now, I'll turn it to Gerardo to address the margin question. Gerardo Hernandez: David, in our Q4 call, we're going to be providing a little bit more details on what to expect in the margin. But what I can confirm to you is, I remain confident that our long-term margin is around 60%. I believe that, that's the level that we're going to be seeing as volumes scale across in the U.S. already, but mostly outside of the U.S. But more importantly, we are laser-focused on the operating margin. That is -- because of the way we operate, operating margin is more relevant than the gross margin. Yes, so Q4 is when we're going to provide a little bit more details. Operator: We have the next question from the line of Mike Matson from Needham & Company. Michael Matson: So I had a question on the heart trial design, and this may apply to lung, too, but I wasn't able to find lung in the clinicaltrials.gov yet. But the endpoint is patient and graft survival at 30 days. And so, my understanding is that that's typically, even without using TransMedics in the -- well into the 90s. So -- and I think you're running this study with the intention of showing superiority. So are you going to have -- I mean, is this trial powered enough to actually show superiority from a high-90s number or mid-90s number versus what you're actually going to get with your -- using OCS for those organs? Waleed Hassanein: Thank you, Mike, for the question. I want to clarify one important point. The primary effectiveness endpoint is not actually patient and graft survival at 30 days alone. It's patient and graft survival at 30 days with freedom of primary graft dysfunction within the first 72 hours after heart transplant. When you combine these 2, you end up not in the high-90s as just a patient survival, but probably in the low-to-mid 80s. And that gives us the signal, the wider signal to enable us to power the study appropriately to aim for superiority. So a great point you raised, however. I think the clarification is that we are not -- that primary endpoint is not just patient and graft survival. It's patient and graft survival with freedom of primary graft dysfunction. That -- these 2 combination is what makes this powered enough for -- to hopefully demonstrate superiority. So we're very excited getting the trial launched. And both lung and heart are of the same design or the same selection of primary effectiveness endpoint to exactly achieve the goal and avoid the statistical anomaly of the very high patient survival numbers in the United States. Michael Matson: Okay. That makes a lot of sense. And then just for kidney, I think you said you're going to unveil the design in early '26. But I imagine you're going to have to run a trial there as well, so -- before you can get it approved. So just can you talk about the timing of that? And then, is that also a trial where you would -- when you started, you would actually get paid for those organs as well, like we are with the heart and lung trials? Waleed Hassanein: Yes. Mike, excellent question. Yes, we are unveiling the design of the technology and the product. There will be a significant trial in the United States and maybe even international trial. But this is all going to be revenue-generating trial. And we're excited about that trial because this trial is also going to be powered for superiority, and it will have a huge ramification not only on the clinical outcome for patients, but also financial ramification, given that CMS is the sole payer for end-stage renal failure expenses in the United States. So this is a trial that I hope and I believe CMS will be watching very keenly, and they will support it because it will have huge cost efficiencies, given the increased -- improved outcomes and higher utilization of kidneys that should be afforded by this. Operator: We have the next question from the line of Daniel Markowitz from Evercore. Daniel Markowitz: The first one, you mentioned that the prior guide wasn't assuming anything for 4Q from next-gen heart and lung trials. It's nice to hear that's running a bit ahead of schedule. Just confirming, does the new guide assume some contribution since that's running ahead of schedule now that you're closer and have visibility to it? Waleed Hassanein: That's an excellent question. Yes and no. The answer is, from a contribution, no. Yes, we're ahead of schedule. But realistically speaking, if we start enrolling in November, the impact is going to be miniscule. That's why we always guided without any meaningful contribution. All what we want to achieve is having the first handful of patients enrolled gives us an early signal of how the trial is rolling out and really teeing up to early 2026. Daniel Markowitz: Got it. Okay. And then, the second one, I wanted to ask on recent industry news. We had OrganOx takeout announcement. I just wanted to give you an opportunity to kind of react to this announcement. What do you think this means for the market and more specifically for TransMedics over the coming years? Waleed Hassanein: Thank you, Daniel. This is an excellent question. As I stated publicly before on my call with investors, we're very, very pleased, and congratulations to OrganOx and the OrganOx team about this acquisition. We're very pleased because it shows 3 things. One, it shows that TransMedics have created a multibillion-dollar industry in organ transplantation that didn't exist before. We're very pleased because it shows how undervalued TransMedics stock is, given the huge difference and improvement in OCS Liver and market share that OCS Liver have over any other platform in the market in the U.S. And number three, it validates that this is an area of the market that is now becoming an exciting opportunity for med tech industry. So again, congratulations to OrganOx, but we feel very confident in our position. We feel very confident that we are way undervalued, given our leadership position, given our outcomes, given our numbers, given our market share, and we are determined to go and continue to execute and grow our market share in liver, heart, lung and soon kidney. Operator: We have the next question from the line of Tom Stephan from Stifel. Thomas Stephan: Apologies if any of this has been asked; jumping between calls. But maybe just one for me. Waleed, market slowed in the third quarter for the second straight year, and we saw somewhat of an accompanying deceleration in OCS. So maybe can you talk about why OCS seemingly faces, I'd just say, a bit of incremental pressure during times when the U.S. transplant market seems to slow down? And then, how should we be thinking about that dynamic maybe if market softness persists? Waleed Hassanein: I'm sorry, I missed the second part of the question. Thomas Stephan: Yes. I was just wondering how we should think about that dynamic, I guess, if market softness persists. Waleed Hassanein: That's an interesting question. So we believe that the market softness and the seasonality, as I stated before, this is something that is endemic in organ transplants, and we've seen this for several years. I think what's changing is, TransMedics is taking a bigger market share in the market. And that market share is not -- is spread between top users and the current users, and we're expanding organically to newer centers. And when we look at Q3 this year, what we saw is our market share within our repeat users and top 20 accounts and consistent users was maintained, was well maintained within the institution. Any variability happens with the centers that are still coming new to the NOP or not constant users in NOP, we're tracking that dynamic. And again, we are not too concerned about it because we are maintaining our growth year-over-year. That's why I said it's much more relevant for us to look at our growth year-over-year. It's very relevant to us to track our penetration within DBD and DCD. And all of these metrics are pointing in the right direction. It's just we're becoming a bigger player in the market, and that's why it impacts us on the Q-to-Q variability. That's all I can comment on at this point. And again, we should expect this variability every year and especially in Q3, especially if we see a significant uptick in Q2. Usually, this variability happened after a very strong Q2. Operator: We have the next question from the line of Young Li from Jefferies. Young Li: I'll just keep it to one. So I appreciate all the clarifications and color on the trial enrollment. I guess, I'm kind of curious what factors allow you to enroll these trials faster than the prior trials that you have run? Waleed Hassanein: I think we're not saying it's going to enroll faster. I think our fastest enrolling trial was the DCD Heart trial when we enrolled 90 patients in 9 months. We're not saying it's going to be faster. And all what we're saying is, given the impact, given the anticipated impact, given the momentum we're seeing in centers, how rapidly they're going through the initiation process, demonstrating their excitement about these trials that usually -- that excitement, that momentum is usually coupled with rapid enrollment. That's all what we're saying. We need to go and execute it. We need to go and deliver on that. That's all what we're saying. It's all a reflection of how successful the program is. And we're looking forward to launching this program. And again, we'll be looking at the execution as it happens. Operator: Any follow-up question, Young Li? Young Li: I'm okay. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Waleed Hassanein for closing remarks. Waleed Hassanein: Thank you all very much, and look forward to chat again early next year. Thank you very much. Have a great evening. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon. Thank you for standing by. Welcome to the TTM Technologies, Inc. Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, October 29, 2025. Dan Boehle, TTM's Chief Financial Officer, will now review TTM's disclosure statement. Daniel Boehle: Before we get started, I'd like to remind everyone that today's call contains forward-looking statements, including statements related to TTM's future business outlook. Actual results could differ materially from these forward-looking statements due to one or more risks and uncertainties, including the risk factors we provide in our filings with the Securities and Exchange Commission, which we encourage you to review. These forward-looking statements represent management's expectations and assumptions based on currently available information. TTM does not undertake any obligation to publicly update or revise any of these forward-looking statements, whether as a result of new information, future events or other circumstances, except as required by law. We will also discuss on this call certain non-GAAP financial measures, such as adjusted EBITDA. Such measures should not be considered as a substitute for the measures prepared and presented in accordance with GAAP, and we direct you to the reconciliations between GAAP and non-GAAP measures included in the company's earnings release, which is available on the Investor Relations section of TTM's website at investors.ttm.com. We have also posted on the website an earnings presentation that we will refer to during our call. I will now hand the call over to Edwin Roks, our new President and Chief Executive Officer. Edwin, welcome to the TTM team and to your first quarterly conference call with us. Please go ahead. Edwin Roks: Thank you, Dan, for welcoming me. Good afternoon, everyone, and thank you for joining us for our third quarter 2025 conference call. I want to thank Tom Edman for his leadership of the company for more than a decade, and I look forward to engaging with our shareholders in the future. Before we review results, I want to reaffirm our strategic foundation. At TTM Technologies, we believe the future of electronics lies in speed, reliability and integration. With over 17,000 employees across 22 factories, we already deliver millions of printed circuit boards every year. But our road map goes further. We continue to move up the value chain into highly complex modules and subsystems that combine sensors, actuators, RF and photonics for markets where reliability and performance matter most, aerospace, defense, data centers, telecom, instrumentation and medical systems. From AI-driven PCB design to mission-critical subsystems, TTM's mission is in our name, time to market, delivering complex, high-performance solution at global scales. I know you want to hear whether I make any strategic changes. And all I will say about that now is that we're currently in the middle of our disciplined annual strategic review and will go before the Board for approval next month. This plan will guide our future conversations. But as you'll hear throughout the comments today, TTM is performing well and is aligned perfectly with key growth industries. So I'm happy to be here and excited about the opportunities for continued growth and excellence ahead. I'll now begin with a review of our business highlights from the quarter and a discussion of our third quarter results, followed by an update of our current geopolitical environment and an update of our planned expansions. Then we'll follow with an overview of our Q3 2025 financial performance and our Q4 guidance. We will then open the call to your questions. We delivered an excellent third quarter of 2025, and I would like to thank our employees for their part in delivering these results. For the fourth quarter in a row, TTM achieved sales and non-GAAP EPS above the high end of the guided range. Sales grew 22% year-on-year, reflecting continued demand strength in our data center computing and networking end markets, driven by the requirements of generative AI. Our medical, industrial, instrumentation and aerospace and defense end markets also experienced double-digit year-on-year sales growth. As you know, the company reports sales in 5 strategic end markets. Aerospace and defense is a focused end market, which we deliver a mix of approximately 50-50 between PCBs and integrated electronics products. Sales in our aerospace and defense markets were better than expected this quarter at 45% of total sales, resulting from a pull forward of sales that were originally expected in the fourth quarter. Demand in this end market continues to be strong and book-to-bill increased to very close to 1 for the third quarter, keeping program backlog steady at approximately $1.46 billion. Three of the remaining 4 end markets, data center computing, networking; and medical, industrial and instrumentation; are experiencing sales growth directly or indirectly related to the growing requirements of AI. Nearly all of data center computing and networking and approximately 25% of medical, industrial and instrumentation. In total, approximately 80% of our total sales in the quarter related to 2 very strong industries, aerospace and defense and AI. We are well positioned in both areas and offer highly innovative technologically advanced products to meet our customers' needs. We are focused on working diligently with our customers and suppliers to support the continued growth demand in each. The company's adjusted EBITDA margin was 16.1%, which is comparable to 16.3% in the same quarter a year ago, reflecting continued solid execution. Non-GAAP EPS of $0.67 reflect a solid consecutive quarterly record for TTM. And cash flows from operations were $141.8 million or 18.8% of sales, which brings the year-to-date cash flow from operation to $229 million or 10.7% of sales. To reiterate comments made over the past 2 quarters regarding the potential impact of tariffs, with our diversified supplier base and global manufacturing footprint, we do not expect a significant short-term impact of tariffs, whether through direct impact to sales or direct impact to materials and equipment purchases. And while it's possible that there could be an indirect impact such as overall end market demand weakness and economic slowdown, we have not seen that impacting our key end markets, as I mentioned. In Penang, we continue to make progress with our customer qualifications and training the local workforce. Third quarter sales matched the second quarter at $5 million, and we expect to see growth in the fourth quarter. We are focused on improving and sustaining yields to support our customers' production cycles, and it remains one of our top priorities. Customer interest in our Penang facility remains strong, and our confidence in our growth in Malaysian production is evident in our long-term plans for a second production facility announced last quarter. We will align the timing of construction of our planned second facility with the longer-term customer demand. And as of now, we have not broken ground. Progress on our Ultra-HDI PCB manufacturing facility in Syracuse, New York continues as planned. Equipment is arriving, and we are beginning to install and test equipment setups. As a reminder, we expect volume production to start in the second half of 2026. The aerospace end market represented 45% of third quarter 2025 sales compared to 45% in the second quarter and 45% in the third quarter of 2024. Sales in this market grew 20% year-on-year to a record high and were significantly better than expected, partially due to timing of sales that were originally planned in the fourth quarter. The solid demand in the defense market is a result of positive tailwinds in defense budgets, our strong strategic program alignment and key bookings for ongoing programs. We maintain a solid A&D program backlog of about $1.46 billion at the end of the quarter compared to $1.49 billion a year ago. Bookings in the aerospace and defense market ship over a longer period of time than our commercial markets and provide good visibility into future sales growth. During the quarter, we saw significant bookings related to the AMRAAM missile program, the passive detection and reporting system for the U.S. Army and the APS-153 radar system for the MH-60R helicopter. We expect sales in Q4 from this end market to represent 42% of our total sales. Sales in data center computing end markets represented 23% of third quarter 2025 sales compared to 21% in the second quarter and 20% of third quarter 2024 sales. This end market saw 44% year-on-year growth, which was better than expected and a record high due to continued demand strength from our data center customers, building products for GenAI applications. We expect this growth rate to continue, increasing this end market to 28% of the fourth quarter sales. The medical, industrial and instrumentation end market represented 14% of third quarter 2025 sales compared to 15% in the second quarter and 14% in third quarter of 2024. This end market saw year-on-year growth of 22% during the third quarter of 2025 as the medical and industrial segment saw increased demand for robotics and in the Instrumentation segment saw increased demand for automated test equipment and GenAI applications. For the fourth quarter, we expect the medical industrial instrumentation end market to represent 14% of total sales. Automotive sales represented 11% of third quarter 2025 sales compared to 11% in the second quarter and 14% in the third quarter of 2024. The year-over-year decline for automotive was primarily due to continued inventory adjustments and soft demand at several customers. We expect the automotive end market to represent about 9% of total sales in the fourth quarter. Networking represented 7% of third quarter 2025 sales compared to 8% in the second quarter and 7% of third quarter 2024 sales. Year-on-year growth was 35% as this market continues to show strong growth driven by AI-related demand and new products. In Q4, we expect this market to represent 7% of total sales. At the end of Q3, our 90-day backlog, which is subject to cancellations was $610.4 million compared to $534.5 million in the third quarter of last year. As I mentioned earlier, our aerospace and defense program backlog was $1.46 billion at the end of Q3 this year compared to $1.49 billion at the end of third quarter 2024. Our overall book-to-bill ratio was 1.15 for the third quarter of 2025 with the Commercial segment at 1.29, the A&D segment at 0.99 and the RF&S segment at 0.95. Now Dan will review our financial performance for the third quarter. Dan? Daniel Boehle: Thanks, Edwin, and good afternoon, everyone. Highlights of our third quarter financial results were included in the press release distributed today that are summarized on Slide 7 of the earnings presentation posted on our website. For the third quarter, net sales were $752.7 million compared to $616.5 million in the third quarter of 2024. The 22% year-over-year increase was due to growth in our aerospace and defense, data center computing, networking; and medical, industrial and instrumentation; end markets, partially offset by a slight decline in our automotive end market. On a GAAP basis, gross margin for the third quarter of 2025 was 20.8% compared to GAAP gross margin for the third quarter of 2024 of 21.1%. On a GAAP basis, operating income for the third quarter of 2025 was $71.9 million or 9.6% compared to GAAP operating income for the third quarter of 2024 of $51 million or 8.3%. On a GAAP basis, net income in the third quarter of 2025 was $53.1 million or $0.50 per diluted share. This compares to GAAP net income for the third quarter of 2024 of $14.3 million or $0.14 per diluted share. In the third quarter of 2025, the Aerospace and Defense segment recorded $336.8 million in net sales and $52.9 million in segment operating income compared to $279.5 million in net sales and $40.3 million in segment operating income in the year ago quarter. In the third quarter of 2025, the Commercial segment recorded $408.9 million in net sales and $60 million in segment operating income compared to $329.4 million in net sales and $51.1 million in segment operating income in the year ago quarter. In the third quarter of 2025, the RF and Specialty Components segment recorded $10.4 million in net sales and $3.1 million in segment operating income compared to $9.8 million in net sales and $2.4 million in segment operating income in the year ago quarter. The remainder of my comments will focus on our non-GAAP financial performance. Our non-GAAP performance excludes M&A-related costs, restructuring costs, certain noncash expenses items such as amortization of intangibles, impairment of goodwill, stock compensation, gains on the sale of property, unrealized gains or losses on foreign exchange and other unusual or infrequent items. We present non-GAAP financial information to enable investors to see the company through the eyes of management and to facilitate comparisons with expectations and prior periods. Gross margin in the third quarter was 21.5% compared to 22% in the third quarter of 2024. The year-over-year decrease was primarily due to ramp-up costs in connection with our fabrication plant in Penang, Malaysia. Selling and marketing expense was $20.5 million in the third quarter or 2.7% of net sales versus $18.9 million or 3.1% of net sales a year ago. Third quarter general and administrative expense was $42.1 million or 5.6% of net sales compared to $36.4 million or 5.9% of net sales in the same quarter a year ago. The dollar increase was primarily driven by an increase in the incentive compensation accrual and outside services. In the third quarter of 2025, research and development was $6.9 million or 0.9% of net sales compared to $7.7 million or 1.3% of net sales in the same quarter last year. Interest expense was $9.9 million in the third quarter of 2025 compared to $11.3 million in the same quarter last year. During the third quarter of 2025, there was $1.8 million of realized foreign exchange loss below the operating income line compared to $1.6 million of realized foreign exchange loss in the third quarter of 2024. Interest and other income totaled $2.5 million in the third quarter of 2025. This compares to interest and other income totaling $3.6 million in the same quarter of last year. Our effective tax rate was 15% in the third quarter, resulting in tax expense of $12.5 million. This compares to a rate of 10.6% or a tax expense of $6.7 million in the same quarter of last year. Third quarter 2025 net income was $71 million or $0.67 per diluted share. This compares to third quarter 2024 net income of $56.8 million or $0.55 per diluted share. Adjusted EBITDA for the third quarter of 2025 was $120.9 million or 16.1% of net sales compared with third quarter 2024 adjusted EBITDA of $100.6 million or 16.3% of net sales. Depreciation for the quarter was $27.6 million. Net capital spending for the quarter was $99.2 million. Cash flow from operations in the third quarter of 2025 was $141.8 million or 18.8% of net sales. Cash and cash equivalents at the end of the third quarter of 2025 totaled $491.1 million, and our net debt divided by last 12 months EBITDA was 1.0. Now I will turn to our guidance for the fourth quarter of 2025. We project net sales for the fourth quarter of 2025 to be in the range of $730 million to $770 million and non-GAAP earnings to be in the range of $0.64 to $0.70 per diluted share, which is inclusive of operating costs associated with starting up our Penang facility. The EPS forecast is based on a diluted share count of approximately 106 million shares, which includes the dilutive effect of outstanding stock options and other stock awards. We expect SG&A expense to be about 8.9% of net sales in the fourth quarter and R&D to be about 1% of net sales. We expect interest expense of approximately $10.2 million and interest income of approximately $2.7 million. We estimate our effective tax rate will be between 11% and 15%. Further, we expect to record depreciation of approximately $28.1 million, amortization of intangibles of approximately $9.2 million, stock-based compensation expense of approximately $12.3 million and noncash interest expense of approximately $0.5 million. And finally, I'd like to announce that we will be participating in the Stifel Midwest One-on-One Conference in Chicago, Illinois on November 6, the Bank of America Leveraged Finance Conference in Boca Raton, Florida on December 2, the UBS Global Industrials and Transportation Conference in Palm Beach, Florida on December 3; and the UBS Technology Conference in Scottsdale, Arizona on December 4. That concludes our prepared remarks. Now I'd like to turn it over for questions. Sherry? Operator: [Operator Instructions] And our first question will come from the line of Jim Ricchiuti with Needham & Co. James Ricchiuti: First off, Edwin, welcome. Best of luck to you. I wanted to start off just on the data center market. Can you talk about; 2 questions. One, how far out does your visibility extend into this market? And the follow-up really deals with the -- whether you have been able to bring on additional capacity to be able to satisfy the demand from your customers from your 2 main facilities in China? Edwin Roks: Yes. Jim, first of all, thank you for your question, and thank you for your nice comments here, and good to meet you again. Yes, the visibility is pretty okay. I would say our visibility is between 6 to 9 months. And again, we are already dealing with the top players there. So it's going relatively smooth. And if I look at capacity, Jim, I think when we are in the middle of, let's say, of our strategic planning, we are sort of, let's say, over the coming years, we're good regarding capacity, both in North America and Asia Pacific; well balanced, by the way, between these 2 continents. So that's -- yes, that's what I want to mention here. James Ricchiuti: And Penang, can you update us, maybe, Dan, you could take this one, just the margin headwind that you experienced in Penang and how you think about that in Q4 going forward? Edwin Roks: Yes. So happy to update you about Penang. First of all, Penang remains a key part of our China Plus One strategy. And we're making very good progress there, I would say. Like Tom mentioned in the last quarter, we are very much focused now on yield before we start ramping up. We want to ramp steadily with our customers. So the good news, Jim, is that we have 5 customers lined up, and we are basically qualifying these customers before the end of the year, and that's still progressing very well. The training aspect is key. We're working a lot with local staff now. The training aspect is key. That we are still planning also for that second facility in Penang. So I will say I'm pleased with the progress over the last quarter. I know we were a bit optimistic in the past, but I think we should be okay going forward. Daniel Boehle: And Jim, I'll jump in and address your question with regards to the headwind on the profit. In Q3, it was about 195 basis points to the bottom line, which is an improvement from Q2, which was about 210 basis points. And then in Q4, we're forecasting with increased revenue about 160 basis points impact to the bottom line, which is comparable to Q4 of last year, actually, when you look at it year-over-year. Operator: One moment for our next question. And that will come from the line of Mike Crawford with B. Riley Securities. Michael Crawford: Just more broadly, could you help characterize your PCB manufacturing capacity share globally in China and in the U.S.? Edwin Roks: Yes, Mike, good question. First of all, in the U.S., we are still the #1 player. And globally, it's always a bit more tricky to mention it. But of course, we are typically a high-end player. But if you look at overall, I think we're about the #6 or 7 of the world. That's basically where we are. And if you look -- concentrate on data center, it's about the #3 or 4 with some typical competition, but about the #3 or 4. Michael Crawford: Okay. And then the follow-up is in Penang, I believe you're starting out with something like maybe 15 layer boards, but where are you moving to density in China for data center applications? Edwin Roks: Yes. Yes, absolutely. You will not see us -- we still have, of course, capacity, let's say, below the 16 layers. But our focus is, let's say, beyond that, going to a lot of layers. One of our typical things happening right now is that we are demonstrating 87 layers. So this is going very, very rapidly. And also on the stack micro VS to be more -- better, higher resolution, let's say, we're making really, really good progress. So working with customers on different aspects of the road map, be it more on the material side, be it more like asymmetrical designs like in PCBs, where you put the power on one side and the signal on the other side or, let's say, be it at the pitch where you try to minimize the pitch. We want to be a leader there. And I can tell you, let's say, from my personal perspective here, we will invest a lot more in R&D and get more progress there to continue to be that top player. Operator: [Operator Instructions] Our next question comes from the line of William Stein with Truist Securities. William Stein: Congrats on the great results tonight. Edwin, for investors who have not met you or had much experience with you, maybe you can share with us a little bit about your background, what led you to TTM. I understand you have some connections to the Board of Directors, but sort of what led you to the company? And maybe talk a little bit about how your experience and background leads you to succeed at TTM. Edwin Roks: Okay. Happy to do that, Will, and good to meet you, by the way, and thank you for your nice words here. Yes, my background is, I'm an engineer. And of course, I did business school as well. 15 years, Philips, 20 years, DALSA and Teledyne, 9 years, let's say, leading the largest segment in Teledyne, the fastest-growing segment in Teledyne. And the last 2 years, I was the CEO of Teledyne, working closely with the executive chairman. And by the way, the new CEO as well, still really good relations with Teledyne and Teledyne will do great. But for me, it was time to do something else after 20 years. And TTM was a really good fit. My background is physics and electronics and mostly semiconductor physics. So with TTM being a player in the back end, let's say, where the back-end players in silicon, the packagers, the PCB players, everybody comes together in that back end is absolutely a key thing to focus on. I still have great respect for the guys who are making the most complex chips. But nowadays, it's all about the back end. How can you integrate these chips, let's say, in a very compact heterogeneous package. And that's very exciting. And that's my main motivation to be part of TTM, a fantastic company, excellent leadership. And again, a good relation with the Board of Directors. I know a few Board of Directors members, let's say, from my previous work. But again, this is a great company to be part of. Hopefully, that answers your question. William Stein: That helps. And one more, if I can follow up. The -- I don't know that these metrics are still entirely relevant because you're growing much faster now because of AI data center and also because defense is doing very well and margins are -- have been moving up. But at the last Analyst Day, the company had a 4% to 6% top line organic growth view and 11% to 13% operating margin target. Those were sort of the targets that the prior management team established. I can't imagine you're going to give us new targets on this call, but I wonder if you can help us think about at least which metrics are most important to you? What are you trying to maximize like from a, let's say, from an outsider's perspective, just looking at the financials, what metrics and what levels should we think so that we're aligned with your way of thinking for the future of the company? Edwin Roks: Yes. Great question. Thank you. First of all, we want to grow. The strategic plan, let's say, and even looking at already at next year, it's all about growth and of course, growth in a very qualitative manner. So we want to make sure that our gross margin stays very, very healthy. That's basically the #1 metric where you say -- where you can see if you're competitive. So that's the key thing here. Of course, we like to generate cash. You saw our great cash position this quarter. Year-to-date, we're at a really nice level. This gives us a possibility not only, let's say, to do acquisitions, and we can do that both in a horizontal way or vertical way, let's say, buying more PCB factories or buying, let's say, up the chain. But also we can invest in our facilities, and that's what we do. We are planning to invest hundreds of millions, let's say, in our facilities in Penang and Syracuse and of course, also investing in China again. So that's going well. The top metric for me is always cash. It's always growth, it's gross margin. And of course, our EBITDA should be healthy. Bottom line should be healthy. But again, we are set up to grow. That's my answer here. 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. Roks for any closing remarks. Edwin Roks: Thank you, Sherry. And I'd like to close by summarizing the points I made earlier. First, we delivered strong sales growth in Q3 of 22% year-on-year, driven by increases in our data center computing, networking, medical, industrial and instrumentation and aerospace and defense markets with record highs in A&D and data center markets. Second, our adjusted EBITDA of 16.1% reflected strong operating performance, leading to a record quarterly non-GAAP EPS of $0.67. And third, we had solid cash flow from operations of 18.8% of sales, enabling us to invest in our projected continued growth. In closing, I would like to thank all employees of TTM, our customers, our suppliers and our shareholders for your continued support. Thank you very much. Goodbye. Operator: This concludes today's program. Thank you all for participating. You may now disconnect.
Operator: Hello, and thank you for standing by. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2025 Vanda Pharmaceuticals Inc. earnings conference call. [Operator Instructions] Now I would like to turn the call over to Kevin Moran, Vanda's Chief Financial Officer. Please go ahead. Kevin Moran: Thank you, Mark. Good afternoon, and thank you for joining us to discuss Vanda Pharmaceuticals' third quarter 2025 performance. Our third quarter 2025 results were released this afternoon and are available on the SEC's EDGAR system and on our website, www.vandapharma.com. In addition, we are providing live and archived versions of this conference call on our website. Joining me on today's call is Dr. Mihael Polymeropoulos, our President, Chief Executive Officer, and Chairman of the Board; and Tim Williams, our General Counsel. Following my introductory remarks, Mihael will update you on our ongoing activities. I will then comment on our financial results before we open the lines for your questions. Before we proceed, I would like to remind everyone that various statements that we make on this call will be forward-looking statements within the meaning of federal securities laws. Our forward-looking statements are based upon current expectations and assumptions that involve risks, changes in circumstances and uncertainties. These risks are described in the cautionary note regarding forward-looking statements, risk factors, and management's discussion and analysis of financial condition and results of operations sections of our most recent annual report on Form 10-K as updated by our subsequent quarterly reports on Form 10-Q, current reports on Form 8-K, and other filings with the SEC, which are available on the SEC's EDGAR system and on our website. We encourage all investors to read these reports and our other filings. The information we provide on this call is provided only as of today, and we undertake no obligation to update or revise publicly any forward-looking statements we may make on this call on account of new information, future events, or otherwise, except as required by law. With that said, I would now like to turn the call over to our CEO, Dr. Mihael Polymeropoulos. Mihael Polymeropoulos: Thank you very much, Kevin, and good afternoon, everyone. Thank you for joining us to discuss Vanda's Third Quarter 2025 Results. This quarter reflects strong commercial execution with total net product sales reaching $56.3 million, up 18% year-over-year, led by a 31% increase in Fanapt sales and 35% growth in prescriptions. HETLIOZ continues to deliver stable performance with $18 million in Q3 sales. We are particularly encouraged by our advancing pipeline, with multiple near-term regulatory milestones. The tradipitant NDA for motion sickness under FDA review with a PDUFA target action date of December 30, 2025; the Bysanti NDA for bipolar I disorder and schizophrenia, also under FDA review with a PDUFA target action date of February 21, 2026; and the anticipated Q4 submission of the imsidolimab BLA for generalized pustular psoriasis. We're also investing strategically in our commercial infrastructure, including increased brand visibility through targeted sponsorships with the goal of supporting long-term market leadership and future commercial launches. We believe that these milestones, combined with our collaborative framework with the FDA will position Vanda for sustained growth and expanded therapeutic impact in 2026 and beyond. On commercial updates. During the third quarter, our Fanapt sales force further expanded their efforts, and we continued our broad awareness campaign. Fanapt revenue increased by 31% compared to the same period in the prior year, driven by the launch of the bipolar I indication. Fanapt is now promoted in the U.S. across all 50 states with a dedicated sales force of approximately 300 representatives. With the expansion of the sales force that was largely completed during the second quarter, we observed a significant increase in activity with the total number of calls growing by more than 20% as compared to the second quarter of 2025 and growing by over 100% compared to Q3 of 2024. Since the bipolar launch, demand is measured by total prescriptions, TRx, new prescriptions, NRx and new-to-brand prescriptions NBRx reached new highs in the third quarter. The commercialization of Fanapt is also supported by a broad speakers program operating across the country that educates prescribers on the profile of Fanapt and how to use it. We're excited by the progress our commercial organization has made as we continue to support the commercialization of Fanapt, aiming for further growth in the coming periods. Total revenue from our 3 commercial branded products Fanapt, HETLIOZ, and PONVORY reached $158.9 million in the first 9 months of 2025. HETLIOZ continues to be the market share leader despite the availability of 3 generic products, a testament to the brand loyalty of our patient customers over the last 11 years. We're continuing to build out and training of our dedicated PONVORY sales force team addressing prescribers for multiple sclerosis. In the last 2 quarters, we saw an increase in underlying patient demand as we intensified our consumer and prescriber awareness programs. During the first 9 months of 2025, our direct-to-consumer campaign launched in the first quarter continued to drive meaningful gains in brand awareness for the company and our products, Fanapt and PONVORY. We maintain strategic investments in our commercial infrastructure, including increased brand visibility through target sponsorships with the goal of supporting long-term market leadership and future commercial launches. Key regulatory clinical updates, collaborative framework for resolution of disputes with the FDA. On October 1, 2025, we announced a collaborative framework with the U.S. Food and Drug Administration for the resolution of certain disputes regarding HETLIOZ and tradipitant. Pursuant to the agreement, the FDA will conduct an expedited rereview of the partial clinical hold preventing long-term clinical status of tradipitant for the treatment of motion sickness by November 26, 2025. The FDA will continue its review of Vanda's new drug application for this indication with the existing Prescription Drug User Fee Act target action date of December 30, 2025. The FDA will conduct an expedited rereview of Vanda's supplemental new drug application, sNDA, for HETLIOZ for the treatment of jet lag disorder by January 7, 2026, including consideration of alternative or narrowed indications focusing on the sleep-related aspects of jet lag disorder. Bysanti, the NDA for Bysanti for the acute treatment of bipolar I disorder and the treatment of schizophrenia is under review by the FDA with a PDUFA target action date of February 21, 2026. If approved, exclusivity for Bysanti, including pending patent applications could extend in the 2040s. Bysanti is a new chemical entity, which was initially identified as an active metabolite of iloperidone. Vanta discovered that milsaperidone when administered orally, quickly interconverts to iloperidone. In clinical studies, milsaperidone and iloperidone have been shown to be bioequivalent at both low and high doses administered both in single and multiple dose studies. The results of these clinical studies were presented in late May at the 2025 American Society of Clinical Psychopharmacology Annual Meeting in Scottsdale, Arizona. The Bysanti Phase III clinical study for use as once-daily adjunctive treatment for major depressive disorder is ongoing and enrolling patients. Results are expected in 2026. We plan to randomize approximately 500 patients into the clinical study across approximately 50 sites. And as the number of patients randomized increases, we'll be in a better place to estimate the time to completion. Tradipitant, the NDA for tradipitant for motion sickness is under review by the FDA with a PDUFA target action date of December 30, 2025. In the fourth quarter of 2024, Vanda initiated clinical trial study tradipitant in the prevention of vomiting induced by GLP-1 analog, Wegovy, semaglutide. The trial is now complete, and results are expected in the fourth quarter of 2025. Iloperidone long-acting injectable. The Phase III study of the long-acting injectable formulation of iloperidone in the treatment of schizophrenia and relapse prevention is ongoing and enrolling patients. We plan to randomize approximately 400 patients into the clinical study across approximately 60 sites. In general, we have seen similar clinical studies run by other organizations, and they take around 2 years to complete. As the number of patients randomized increases, we'll be in a better place to estimate completion of that study. A clinical study of the long-acting injectable formulation of iloperidone in people with treatment-resistant hypertension is now ongoing and Vanda plans to begin enrolling patients soon. Imsidolimab, a BLA for imsidolimab in the treatment of the rare or orphan disorder, generalized pustular psoriasis is expected to be submitted to the FDA in the fourth quarter of 2025. PONVORY, investigational new drug applications for PONVORY in the treatment of psoriasis and ulcerative colitis were accepted by the FDA in the fourth quarter of 2024. Vanda has initiated the psoriasis study and plans to initiate the study in ulcerative colitis in early 2026. Early-stage program highlights. VQW-765, an alpha-7 nicotinic acetylcholine receptor partial agonist is currently in clinical development for the treatment of acute performance anxiety in social situations. Vanda has initiated the Phase III program and is enrolling patients. We plan to randomize approximately 500 patients into the clinical study across approximately 30 sites. And as the number of patients of randomization increases, again, we'll be able to estimate time to completion. The IND for VCA-894A in the treatment of Charcot-Marie-Tooth disease, axonal type 2S or CMT2S, an inherited peripheral neuropathy for which there is no available treatment, was accepted by the FDA in 2024. Previously, in 2023, VCA-894A was granted orphan drug designation for the same indication. The Phase I clinical study for VCA-894A enrolled the patient who has already received several doses of VCA-894A. With that, I'll turn now to Kevin to discuss our financial results. Kevin? Kevin Moran: Thank you, Mihael. I'll begin by summarizing our financial results for the first 9 months of 2025 before turning to discuss the third quarter of 2025. Total revenues for the first 9 months of 2025 were $158.9 million, a 9% increase compared to $145.6 million for the same period in 2024. The increase was primarily due to growth in Fanapt revenue as a result of the bipolar commercial launch. Fanapt net product sales were $84.1 million for the first 9 months of 2025, a 24% increase compared to $67.6 million in the same period in 2024. This increase to net product sales relative to the first 9 months of 2024 was attributable to an increase in volume, partially offset by a decrease in price net of deductions. Turning to HETLIOZ. HETLIOZ net product sales were $55 million for the first 9 months of 2025, a 3% decrease compared to $56.6 million in the same period in 2024. The decrease in net product sales relative to the first 9 months of 2024 was attributable to a decrease in volume. Of note, through the third quarter of 2025, HETLIOZ continues to retain the majority of market share despite generic competition for now over 2.5 years. And finally, turning to PONVORY. PONVORY net product sales were $19.8 million for the first 9 months of 2025, a 7% decrease compared to $21.3 million in the same period in 2024. The decrease in net product sales relative to the first 9 months of 2024 was attributable to a decrease in price net of deductions. For the first 9 months of 2025, Vanda recorded a net loss of $79.3 million compared to a net loss of $14 million for the same period in 2024. The net loss for the first 9 months of 2025 included an income tax benefit of $21.4 million as compared to an income tax benefit of $2.4 million for the same period in 2024. Operating expenses for the first 9 months of 2025 were $269.7 million compared to $176 million for the same period in 2024. The $93.7 million increase was primarily driven by higher SG&A expenses related to spending on Vanda's commercial products as a result of the commercial launches of Fanapt in bipolar disorder and PONVORY and multiple sclerosis and higher R&D expenses primarily related to the exclusive global license agreement with Anaptys for the development and commercialization of imsidolimab, which was entered into during the first quarter of 2025. During 2024 and 2025, we commenced a host of activities as a result of the commercial launches of Fanapt in bipolar disorder and PONVORY in multiple sclerosis, including an expansion of our sales force and the development of prescriber awareness and comprehensive marketing programs. During the first 9 months of 2025, our direct-to-consumer campaign launched in the first quarter continued to drive meaningful gains in brand awareness for the company and or products, Fanapt and PONVORY. We maintained strategic investments in our commercial infrastructure, including increased brand visibility through targeted sponsorships with the goal of supporting long-term market leadership and future commercial launches. Vanda's cash, cash equivalents, and marketable securities, referred to as cash, as of September 30, 2025, was $293.8 million, representing a decrease of $80.9 million compared to December 31, 2024, and a decrease of $31.8 million compared to June 30, 2025. The change in cash during the third quarter of 2025 as compared to the second quarter of 2025 was driven by the net loss in the third quarter of 2025 as well as timing of cash received from customers for revenue and related payments of rebates to the payers as well as the timing of cash paid to third parties for services related to operating expenses. Turning now to our quarterly results. Total revenues were $56.3 million for the third quarter of 2025, an 18% increase compared to $47.7 million for the third quarter of 2024 and a 7% increase compared to $52.6 million in the second quarter of 2025. The increase as compared to the third quarter of 2024 was primarily due to growth in Fanapt revenue as a result of the bipolar commercial launch. The increase as compared to the second quarter of 2025 was due to both growth in Fanapt revenue as a result of the bipolar launch and higher HETLIOZ revenue. Let me now break this down by product. Fanapt net product sales were $31.2 million for the third quarter of 2025, a 31% increase compared to $23.9 million in the third quarter of 2024 and a 7% increase compared to $29.3 million in the second quarter of 2025. Fanapt total prescriptions, or TRx, as reported by IQVIA Xponent in the third quarter of 2025 increased by 35% compared to the third quarter of 2024 and 11% compared to the second quarter of 2025. Fanapt new patient starts in the third quarter of 2025 as reflected by new-to-brand prescriptions, or NBRx, increased by 147% compared to the third quarter of 2024 and by 14% compared to the second quarter of 2025. The increase in Fanapt revenue between the third quarter of 2025 and the third quarter of 2024 was primarily attributable to an increase in volume, partially offset by a decrease in price net of deductions. The increase in Fanapt revenue between the third quarter of 2025 and the second quarter of 2025 was attributable to an increase in volume, partially offset by a decrease in price net of deductions. These increases in volume were primarily driven by increased total prescription demand as well as increased wholesaler inventory levels. Historically, Fanapt's inventory at wholesalers has ranged between 3 and 4 weeks on hand as calculated based off trailing demand. As of the end of the third quarter of 2025, Fanapt inventory at wholesalers was just above 4 weeks on hand, which was consistent with the level of inventory weeks on hand as of the fourth quarter of 2024, but slightly above the historic range. Turning to HETLIOZ. HETLIOZ net product sales were $18 million for the third quarter of 2025, a 1% increase compared to $17.9 million in the third quarter of 2024 and an 11% increase compared to $16.2 million in the second quarter of 2025. The increase in net product sales relative to the third quarter of 2024 was primarily attributable to an increase in volumes sold, almost entirely offset by a decrease in price net of deductions. The increase in net product sales relative to the second quarter of 2025 was primarily attributable to an increase in price net of deductions, partially offset by a decrease in volume. HETLIOZ net product sales continue to be impacted by changes in inventory stocking at specialty pharmacy customers from period to period. Going forward, HETLIOZ net product sales may reflect lower unit sales as a result of reduction of the elevated inventory levels at specialty pharmacy customers or may be variable depending on when specialty pharmacy customers need to purchase again. Further, HETLIOZ net product sales may decline in future periods, potentially significantly, related to continued generic competition in the U.S. Additionally, the company constrained HETLIOZ net product sales for the first 9 months of 2025 and for the years ended December 31, 2024, and 2023 to an amount not probable of significant revenue reversal. As a result, HETLIOZ net product sales could experience variability in future periods as the remaining uncertainties associated with variable consideration related to inventory stocking by specialty pharmacy customers are resolved. And finally, turning to PONVORY. PONVORY net product sales were $7 million for the third quarter of 2025, an increase of 20% compared to $5.9 million in the third quarter of 2024 and a decrease of 1% compared to $7.1 million in the second quarter of 2025. The increase in net product sales as compared to the third quarter of 2024 was attributable to an increase in volume. The decrease in net product sales as compared to the second quarter of 2025 was attributable to a decrease in volume sold, almost entirely offset by an increase in price net of deductions. During the second quarter of 2025, there was an increase in net product sales as compared to the first quarter of 2025, which was attributable to an increase in volume sold, a portion of which was driven by increased underlying patient demand, albeit modest, but was also impacted by increased specialty pharmacy and specialty distributor inventory on hand levels above the historic range. The inventory on hand levels remained elevated as of the end of the third quarter of 2025, but had decreased closer to the historic range. As a reminder, we completed the acquisition of the U.S. and Canadian rights to PONVORY in December 2023 and initiated the commercial launch of PONVORY in the third quarter of 2024. As such, this represents the fourth full quarter of PONVORY revenue recognition since the initiation of commercial launch activities and significant progress in diversifying our product mix with innovative and value-generating products. Of note, an amount of variable consideration related to PONVORY net product sales is subject to dispute, of which approximately $3 million was recognized for the 3 months ended December 31, 2024. For the third quarter of 2025, Vanda reported a net loss of $22.6 million compared to a net loss of $5.3 million for the third quarter of 2024. From an income tax perspective, the net loss for the third quarter of 2025 included an income tax benefit of $5.8 million as compared to an income tax benefit of $0.9 million for the third quarter of 2024. Of note, on the tax side, the company assesses the need for a valuation allowance against its deferred tax assets each quarter through the review of all available positive and negative evidence. The company generated a pretax loss for the quarter ended September 30, 2025. If the company continues to generate pretax losses and/or if the company's projections indicate pretax losses in future periods or if there are meaningful changes to our business operations, the conclusion about the appropriateness of the valuation allowance could change in the future. An increase in the valuation allowance would result in a noncash income tax expense during the period of change. The current deferred tax assets reflected in the balance sheet as of September 30, 2025, amount to $103.1 million. If it is determined that the company needs a valuation allowance against its deferred tax assets in a future period, the noncash income tax expense recorded during the period of change could be equal to the significant majority of the $103.1 million balance. Operating expenses in the third quarter of 2025 were $87.5 million compared to $58.7 million in the third quarter of 2024. The $28.9 million increase was primarily driven by higher SG&A expenses related to spending on Vanda's commercial products as a result of the commercial launches of Fanapt in bipolar disorder and PONVORY in multiple sclerosis and higher R&D expenses. During 2024 and 2025, we commenced a host of activities as a result of the commercial launches of Fanapt in bipolar disorder and PONVORY in multiple sclerosis, including expansions of our sales force and the development of prescriber awareness and comprehensive marketing programs. During the first 9 months of 2025, our direct-to-consumer campaign launched in the first quarter continued to drive meaningful gains in brand awareness for the company and our products, Fanapt and PONVORY. We maintained strategic investments in our commercial infrastructure, including increased brand visibility through targeted sponsorships with the goal of supporting long-term market leadership and future commercial launches. With regards to the launches of Fanapt in bipolar disorder and PONVORY in multiple sclerosis, as I mentioned, the launches were initiated in 2024, and we expect to continue the build-out of our commercial infrastructure with the impact of these commercial efforts expected to contribute to revenue growth in 2025 and beyond. We have already seen significant growth in our commercial activities. Several lead indicators suggest a strong initial and continued market response to our commercial launch of Fanapt for bipolar disorder, including new patient starts as reflected by NBRx, increasing by 147% in the third quarter of 2025 as compared to the third quarter of 2024. In the third quarter of 2025 as compared to the third quarter of 2024, total prescriptions or TRx increased by approximately 35%. Of particular note, Fanapt was one of the fastest-growing atypical antipsychotics in the market through the first 9 months of 2025 based on several prescription metrics. Our Fanapt sales force size continues to expand. As of the end of the third quarter of 2024, our sales force numbered approximately 150 representatives. And currently, we have approximately 300 representatives following our additional expansion during the second quarter of 2025. These expansions have allowed us to significantly increase our reach and frequency with prescribers. To that end, face-to-face calls in the third quarter of 2025 were more than 20% higher than face-to-face calls in the second quarter of 2025. And face-to-face calls in the third quarter of 2025 were more than twice the face-to-face calls in the third quarter of 2024. In addition to our Fanapt sales force, we have established a specialty sales force to market PONVORY to neurology prescribers around the country. We have grown this sales force to approximately 50 representatives in the third quarter of 2025. Of particular note, PONVORY underlying patient demand increased, albeit modestly, for the second consecutive quarter. Before turning to our financial guidance, I would like to remind folks that with Fanapt, HETLIOZ, and PONVORY already commercially available, and with HETLIOZ for jet lag currently being rereviewed by the FDA and the tradipitant NDA for motion sickness under review by the FDA, the milsaperidone or hopefully to be known under the brand name Bysanti NDA for bipolar I disorder and schizophrenia under review by the FDA and a biologics license application or BLA for imsidolimab expected to be submitted later this year, Vanda could have 6 products commercially available in 2026. Turning now to our financial guidance. Vanda is providing an update to its prior 2025 guidance. Vanda expects to achieve the following financial objectives in 2025. Total revenues from Fanapt, HETLIOZ, and PONVORY of between $210 million and $230 million. This compares to prior guidance of between $210 million and $250 million, year-end 2025 cash of between $260 million and $290 million. This compares to prior guidance of between $280 million and $320 million. This revised revenue range narrowed to the lower end of the original revenue range reflects strong Fanapt revenue growth in 2025 that is expected to grow on a quarterly basis and potentially accelerate with the full impact of the expanded sales force. The revised and lowered year-end 2025 cash guidance reflects the impact of the significant investments that Vanda is currently making to facilitate future revenue growth, both in the form of R&D investments and strategic investments in commercial infrastructure, including Vanda's direct-to-consumer campaign launched in the first quarter, which continued to drive meaningful gains in brand awareness for the company and its products as well as increased brand visibility through targeted sponsorships with the goal of supporting long-term market leadership and future commercial launches. With that, I'll now turn the call back to Mihael. Mihael Polymeropoulos: Thank you very much, Kevin. At this point, we will be happy to answer your questions. Operator: [Operator Instructions] And your first question comes from the line of Raghuram Selvaraju with H.C. Wainwright. Raghuram Selvaraju: I was wondering if you could first and foremost comment on some hypothetical scenarios with respect to the interactions with the FDA. And if these ultimately result in approval decisions, particularly as this pertains to tradipitant, when those approvals might occur? Should we expect potential -- the possibility of tradipitant approval sometime in the first half of 2026, if ultimately the interactions with the FDA proceed positively? Mihael Polymeropoulos: Yes. Thank you very much, Ram. First of all, I would say and I reiterate that we're very pleased with the new collaborative framework that has been established with the FDA. And just as a background, that comes after the significant development of a win in the appellate court by Vanda in August of this year, where we challenged the decision of rejection of HETLIOZ for jet lag without a hearing. And the court canceled the rejection by the FDA and sent it back to the FDA for further proceedings. This was one of the precipitating factors alongside with the new management at the FDA, where we sat down with them to develop a path forward. And we're very quickly able to agree on several initial steps. And the first one, as we mentioned, is the rereview of the HETLIOZ sNDA for jet lag and a promise to be completed by early January of 2026. On your question on tradipitant, tradipitant review is ongoing. And we expect the decision by December 30, 2026. The reason we are optimistic is that so far there have been no issues raised with the efficacy of the drug. And therefore, we are encouraged that this could lead to approval. One area that's very relevant with the collaborative framework to tradipitant is the reconsideration of the partial clinical hold. And to give context, this is a clinical hold on a longer-term motion sickness study. The initial study lasted 12 months and people could take up to 90 doses. We asked for an extension of that study with an amendment to further study tradipitant for an additional 12 months and an additional 90 dose within that period. And that is when, about a year ago or so, the FDA objected to that additional extension, suggesting that an additional long-term 6-month dog toxicity study is needed. And of course, we have contested that. But now the FDA was willing to reconsider that decision, and that is now with CDER with a promise to issue a decision by end of November. So with that, if cleared, alongside what is almost agreed upon, I would say, efficacy demonstrated for tradipitant motion sickness, we'll be optimistic for an approval by end of this year. Raghuram Selvaraju: Secondly, I wanted to ask about PONVORY performance and what you look for in terms of future quarterly growth rate pickup in revenue from this product, particularly given the current investment that you are making in sales and marketing behind the product at this point. Maybe you can give us a sense of what kind of quarterly growth you would expect in terms of net sales for PONVORI over the course of the next 2, 3 quarters? That would be helpful. Mihael Polymeropoulos: Yes. I will let Kevin comment on the future growth. But I would say, we're still in the early phase. The sales force that was built to about 50 people is actually a very recent event, in the last quarter or so, fully staffed. The speaker programs are just starting. And PONVORY has been a smaller piece of our direct-to-consumer campaign so far. That being said, these are significant investments, and we're investing towards future growth. But I will pass it on to Kevin for his comment. Kevin Moran: Thanks, Mihael. Thanks, Ram, for the question. Just as a bit of reminder on the background here. So we acquired the product from J&J at the end of 2023. And at that point, J&J had ceased support for the product a little over a year prior to that. We completed the transition of the PONVORY product from J&J right at the end of the third quarter of last year, so about a year ago. And what we saw during that period from when J&J ceased commercial support through the first quarter of this year was a decline in the underlying patient demand. And that would be expected given that there wasn't any active support in the market from essentially the end of 2022 through roughly the end of the third quarter of last year. What we've seen in the last 2 quarters that's very encouraging to us is we've seen increases in the underlying patient demand, both from the first quarter to the second quarter and then again from the second quarter to the third quarter. There's been some buying patterns from the SPs and SDs that have made the quarterly revenue a little bit up or a little bit down depending on the timing of their purchases, but the underlying demand during those 2 periods is up. And so for us, that's an encouraging sign that our commercial strategy and support for the product is beginning to take hold. And as Mihael had mentioned, with the recent investment in the commercial sales force that, as I mentioned in my script, was completed during the third quarter of this year, we're hopeful that we'll begin to see that trend continue and potentially increase as we exit this year and head into next year, where we not yet have provided guidance beyond 2025. Raghuram Selvaraju: And then just very quickly, 2 other time line aspects. I was wondering if you could, A, comment on the perspectives for the imsidolimab BLA to receive priority review once it has been submitted to the FDA? And secondly, if you could give us any sense of whether you have revised or more specific timing guidance to provide on the MDD study? Kevin Moran: So Ram, I think your 2 questions were on the imsidolimab priority review. Mihael Polymeropoulos: Yes. I will address that. But go ahead, Kevin. Kevin Moran: And then on the timing for the MDD study, Ram, so maybe I'll take that one second, is what we communicated at this point is that we expect results by the end of next year. But given that we've enrolled patients over the last few quarters, we'd like to see a bit more of kind of a run rate before we provide an exact timing on what period we expect to see the results in. But at this point, we've communicated results by the end of next year and hope to be able to share more as we get a few more quarters under our belt. Mihael Polymeropoulos: Yes, that's right. And sites are coming up in the U.S., but also very recently, we got approval for initiation for a number of sites in Europe. So hopefully, that will accelerate recruitment. Regarding imsidolimab, of course, this is a rare or orphan disorder, and we expect a 6-month priority review. Operator: And your next question comes from the line of Olivia Brayer with Cantor. Olivia Brayer: Can you talk a little bit about the guidance change this quarter? I mean at the midpoint, it still implies growth for 4Q, but at the lower end of the range, it wouldn't necessarily. So maybe just thoughts around the pushes and pulls of that guidance change and what you're seeing so far into October that helped inform today's update? And then I've got a couple of questions on Bysanti. Kevin Moran: Yes, absolutely. Thanks, Olivia, for the question. So a couple of pieces there. And one thing that I commented on in my script was that underlying the guidance for this year is strong Fanapt revenue growth for the year, right, which is, I think, an underpinning of our guidance. But the other thing that's a variable in that consideration is the HETLIOZ revenue, which we've commented on, can be very variable from quarter-to-quarter depending on the timing of our customers' purchases. So what we see there is that the actual underlying demand for HETLIOZ is pretty consistent. As we've mentioned, we maintain the majority of the market share still at this point, even 2.5 years post generic launch. But the actual buying patterns, which translate to the revenue patterns for HETLIOZ can vary from quarter-to-quarter. And if we saw customers not need to buy as much in the fourth quarter, that could put us on the lower end of the revenue range. So that's kind of the dynamic there. But for Fanapt, what we've seen in the last 2 quarters is both revenue meaningful growth in both quarters and the underlying demand, which we're highly focused on, right, from a quarter-to-quarter perspective, growing sequentially very strong. So we saw 14% growth Q1 to Q2 and 11% growth Q2 to Q3 from a script perspective. And so we expect to see that continue to grow in Q4 to increase relative to Q3 would be our expectation underlying that guidance. Olivia Brayer: Super helpful, Kevin. And then is there anything you guys can tell us at this point around just the engagement that you're having with the FDA for your ongoing Bysanti review? Have they indicated wanting to see any additional information as part of your submission package? And anything you can tell us on when you might enter into label discussions for that asset? And then just kind of as a -- I know there's a couple of questions in there, but as a follow-up on the commercial side, as you look out to your PDUFA next year, what's the commercial strategy for actually convincing patients to switch from Fanapt over to this newer product? Is there a commercial hook or an incentive that would actually incentivize patients to make the switch before a generic version of Fanapt becomes available? Mihael Polymeropoulos: Maybe I'll start off with the regulatory update, and I'll let Kevin comment on the commercial strategy. The -- I think we have given an update that so far, the interactions with the division have been quite positive in that there have been no issues raised on the efficacy and the safety of the drug. So that is progressing well. Now in terms of label negotiations, we don't comment if they have started or about to start. But typically, those will precede the PDUFA date by a couple of months or so. Kevin Moran: Yes. And then, Olivia, on the commercial strategy, we haven't shared, I would say, some key elements of our commercial strategy for Bysanti and the potential transition for Fanapt to Bysanti. But what I would tell you is, as we've talked about in the past, the atypical antipsychotic class is both a highly promotionally sensitive class and also a high switch class. So products that are actively promoted out there, as you know, will do significantly better than products that are not actively promoted. And as part of that, with it being a high switch class, if there are certain commercial tools that are available to prescribers, namely starter packs or titration packs in our case, or commercial co-pay programs, if those programs are available to patients that are starting, they'd be more likely to start on a product that offers those programs versus a product that doesn't. So I think both the nature of the class being highly promotionally sensitive and the potential support that could be available for patients, I think will lead to meaningful success on Bysanti when we decide to pull that trigger. Mihael Polymeropoulos: And I will add, Olivia, that the longer commercial plan is the addition of indications starting with the adjunct treatment of major depression with actually a key differentiator of how Fanapt has been used so far with a once-a-day dosing, increasing the convenience and hopefully compliance. Operator: And your next question comes from the line of Andrew Tsai with Jefferies. Unknown Analyst: On the quarter. This is [ Matt Marcus ] on for Andrew Tsai. First off, for tradipitant in motion sickness, it could be approved on December 30, and then HETLIOZ jet lag could be approved January 7. What would your marketing strategy be for these? And what would the shape of the launch curve look like for these drugs? Mihael Polymeropoulos: Yes. Thank you. We're actually very excited for both of these potential approvals because they share in common the consumer-centric focus, both in HETLIOZ in jet lag and tradipitant for motion sickness. We're developing a quite elaborate strategy that will become very consumer-centric, focusing on concierge service for supplying the drug to both of them. And our recent experiences with direct-to-consumer campaigns, but also the elevation of brand awareness of the company are going to be very important and have been strategically designed to be in place in advance of those launches. We expect if both of them approved in that time frame you mentioned, that we should be able to be in the market by the first half of 2026. And in subsequent interactions, we can discuss a little more about the latest on the total addressable market for both indications. But I will highlight, it is significant and expanded, both of increased travel, but also the unmet need in motion sickness that has not seen a treatment -- a new treatment in the last 45 years. Unknown Analyst: And then for your GLP vomiting study, can you describe that study? Like what does the positive efficacy data look like? And what would be the next steps for the program? And then similarly, for Bysanti, should have like Phase III data in 2026. What kind of measures to efficacy separation do you hope to achieve in that study? Mihael Polymeropoulos: Yes. So I will start with the last question. On MDD, like any other study, there is not a threshold of response. We are looking for a positive primary endpoint on the typical clinical scales that will be used. And of course, subsequently, people are doing a responder analysis, trying to identify a portion of patients responding to a certain effect. But there is no threshold that is required. But of course, the study is powered to detect a significant minimal threshold of efficacy. Your other question was on the use of tradipitant in preventing the GI, specifically vomiting side effects of Wegovy, semaglutide. And we know that GLP-1 analogs have to be titrated slowly because of the very frequent nausea and vomiting side effects, which actually limits the efficacy at least for a certain period of time. And for a number of patients, around 15% or so, may actually drop out of treatment and obviously the benefit of GLP-1 analogs. So this is a well understood and very significant therapeutic issue. The study we have designed, administers tradipitant for a few days prior to initiating a Wegovy injection, which is administered at a much higher dose than the recommended titration dose. Titration dose begins at 0.25 milligrams and escalates in 4-week increments. The dose we're using in the study is 1 milligram. And patients are randomized to receive either Wegovy or placebo. And what we do is we follow these people and measure the efficacy with the number of vomiting episodes and other secondary endpoints like nausea, duration of nausea, et cetera. And as I said, this study has completed now. The sites and data are being monitored and data clean, and we hope soon to be able to analyze the top line results. Operator: That concludes our question-and-answer session. I will now turn the call back over to the management for closing remarks. Mihael Polymeropoulos: Thank you very much for joining this call. We'll see you at a later time. Operator: This concludes today's call. You may now disconnect.
Operator: Good afternoon. Thank you for standing by. Welcome to Allison Transmission's Third Quarter 2025 Earnings Conference Call. My name is Shamali, and I will be your conference call operator today. [Operator Instructions] As a reminder, this conference call is being recorded. [Operator Instructions] I would now like to turn the conference call over to Jackie Bolles, Executive Director of Treasury and Investor Relations. Please go ahead, Jackie. Jacalyn Bolles: Thank you, Shamali. Good afternoon, and thank you for joining us for our third quarter 2025 earnings conference call. With me this afternoon are Dave Graziosi, our Chair and Chief Executive Officer; Fred Bohley, our Chief Operating Officer; and Scott Mell, our Chief Financial Officer and Treasurer. As a reminder, this conference call, webcast and this afternoon's presentation are available on the Investor Relations section of allisontransmission.com. A replay of this call will be available through November 12. As noted on Slide 2 of the presentation, many of our remarks today contain forward-looking statements based on current expectations. These forward-looking statements are subject to known and unknown risks, including those set forth in our annual report on Form 10-K for the year ended December 31, 2024, and quarterly report on Form 10-Q for the quarter ended June 30, 2025. Should one or more of these risks or uncertainties materialize or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those we express today. In addition, as noted on Slide 3 of the presentation, some of our remarks today contain non-GAAP financial measures as defined by the SEC. You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures attached as an appendix to the presentation and to our third quarter 2025 earnings press release. Today's call is set to end at 5:45 p.m. Eastern Time. In order to maximize participation opportunities on the call, we'll take just one question from each analyst. Please turn to Slide 4 of the presentation for the call agenda. During today's call, Dave Graziosi will provide a business update and Fred Bohley will review recent announcements across our business. Scott Mell will then review our third quarter 2025 financial performance and full year 2025 guidance update prior to commencing the Q&A. Now I'll turn the call over to Dave. David Graziosi: Thank you, Jackie. Good afternoon, and thank you for joining us. Throughout 2025, our largest end market, North America On-Highway, has been negatively affected by extraordinary and volatile global macroeconomic factors leading to substantial reductions in demand for commercial vehicles. External pressures related to tariffs evolving trade policies and upcoming emissions regulations in addition to broader economic uncertainties have led to more cautious purchasing decisions from end users, which has impacted visibility and predictability in terms of demand. We expect this operating environment to persist in the near term with market activity likely to remain subdued until there is greater clarity around these regulatory and economic factors. A meaningful shift will depend on a clear catalyst or resolution to the aforementioned issues impacting demand. Despite these challenges, we remain focused on what we can control, including meeting our commitments to operational excellence, quality, customer service and maintaining strong execution across all aspects of our business. Our performance during the third quarter reflects Allison's resilience with the ability to flex our operating cost structure and generate meaningful cash flow during low demand environments. For the quarter, although revenue decreased 16% year-over-year, we achieved an adjusted EBITDA margin of 37% and generated adjusted free cash flow of $184 million. Importantly, we remain agile and responsive to evolving market dynamics, ensuring we can quickly adapt as conditions change. As mentioned on our last earnings conference call, we see the reductions in demand in North America On-Highway as a deferral of purchases by end users as opposed to a permanent change in market size. In summary, while the operating environment remains challenging, we are managing through the uncertainty with discipline, maintaining a solid balance sheet with over $900 million of cash on hand. A sequential quarterly increase of $124 million and making prudent decisions to preserve financial strength with a commitment to delivering long-term value to our stakeholders. At the same time, we are working diligently to successfully close our acquisition of Dana's Off-Highway business. I would like to thank the Allison team for their hard work and dedication during this period. Now I'll pass the call over to Fred to review recent announcements across our business. Fred? G. Bohley: Thank you, Dave, and good afternoon, everyone. Starting with our outside North America On-Highway end market. In early August, we were excited to announce that Volare microbuses equipped with Allison's T2100 fully automatic transmissions were delivered in Brazil in support of the country's student transportation modernization initiatives. In collaboration with the National Fund for Educational Development, these vehicles represent the first school buses utilizing fully automatic transmissions in South America. Allison's fully automatic transmissions eliminate the need for manual gear shifts, simplifying operations on the roads with mud, gravel and steep inclines, drivers report less physical strain and greater control, particularly in challenging driving conditions in rough terrain. We're pleased to support better access to education while demonstrating the performance, reliability and efficiency of Allison's fully automatic transmissions. In addition to the social impact, this milestone reflects our strategic priorities for growth in markets outside of North America. In our North American On-Highway end market during the quarter, we announced that Allison's Neutral at Stop technology has been standardized by PACCAR on the Kenworth and Peterbilt trucks equipped with Allison's 4700 Rugged Duty Series transmission. Allison's Neutral at Stop technology is designed to improve fuel efficiency and lower operating costs by reducing engine load at stops and reducing unnecessary fuel consumption when vehicles are at idle. Our technology ensures that fuel is used for movement, not for idling, enhancing overall fuel efficiency. We are proud to partner with PACCAR to make this innovative solution a standard offering for customers supporting fleets in their goals to reduce fuel consumption and vehicle emissions. Also in our North American On-Highway end market, earlier this month, we announced that Ozinga Renewable Energy Logistics has successfully deployed Kenworth's T880 tractors utilizing the Cummins X15N natural gas engine integrated with our Allison 4500 Rugged Duty Series transmission. The pairing sets a new standard for sustainable heavy-duty transportation delivering exceptional power and innovative technology. The integration also demonstrates how sustainability and operational excellence can go hand in hand, allowing industries to adopt cleaner fuel solutions like natural gas without compromising on performance. With these announcements, we reiterate the fuel-agnostic nature of Allison's fully automatic transmissions. Our products pair well with all propulsion solutions, providing customers with power of choice in selecting the energy source that best suits their needs. Moving on to our defense end market. This morning, we announced that WZM, a state-owned defense vehicle service provider in Poland is now an official channel partner for tracked vehicles. Allison's propulsion solutions power a wide range of wheeled and tracked defense vehicles that are actively deployed in more than 80 U.S. allied and partner nations worldwide. As a result of our growing international defense presence, Allison now enables local commercial or government service providers to become Allison authorized channel partners. We're excited to add WZM to our global network of authorized service providers to support Allison's cross-drive transmissions for defense applications. Allison continues to enhance our global support capabilities through strategic partnerships with local service providers, further solidifying our commitment to improving the operational readiness of defense vehicles worldwide. Also in our defense end market, we're pleased to announce that Allison was selected by FNSS Defense Systems, a subsidiary of Nurol Holdings to supply our 3040MX medium-weight cross-drive transmissions for the Turkish Land Forces Korkut program. The Korkut system is a mobile air defense solution developed in Turkey to protect ground forces from drones, helicopters and low-flying aircraft. The system consists of 2 track vehicles, is designed to move with armored units and operate across difficult terrain, adding fast and flexible protection for defense forces. This partnership with FNSS and our participation in the Korkut program is a testament to the trust and confidence in Allison's capabilities to deliver high-quality, reliable transmissions that meet the demanding requirements of modern defense vehicles. In addition, this partnership further solidifies Allison's presence in the Turkish defense sector, where we are supporting numerous wheel platforms and actively engaged supplying our X1100 transmission for the Turkish Firtina Self-Propelled Howitzer program. Thank you, and I'll now turn the call over to Scott. Scott Mell: Thank you, Fred. I will now review our third quarter financial performance and provide an update to our full year 2025 guidance. Please turn to Slide 5 of the presentation for the Q3 2025 performance summary. Year-over-year net sales of $693 million were down 16% from the same period in 2024, primarily due to lower demand for Class 8 vocational and medium-duty trucks in the North American On-Highway end market. In the defense end market, we continue to execute on our growth initiatives with third quarter net sales increasing 47% year-over-year. Net income for the quarter was $137 million, a decrease of $63 million from $200 million in the same period of 2024. The decrease was primarily driven by lower gross profit and $14 million of expenses related to the acquisition of Dana's Off-Highway segment. Despite a challenging operating environment, adjusted EBITDA margin was essentially flat year-over-year at 37%. Net cash provided by operating activities for the quarter was $228 million, a decrease of $18 million from the same period in 2024. The decrease was primarily driven by lower gross profit and $13 million of payments for acquisition-related expenses, partially offset by lower cash income taxes and lower operating working capital funding requirements. Our strong cash generation remains a key strength of our business, with adjusted free cash flow of $184 million in the third quarter. We continue to maintain solid operating cash flow, reflecting the resilience of our operations and disciplined cost management. We ended the third quarter with a net leverage ratio of 1.33x and $1.65 billion of liquidity, comprised of $902 million of cash and $745 million of available revolving credit facility commitments. We continue to maintain a flexible, long-dated and covenant-light debt structure with our earliest maturity due in October 2027. A detailed overview of our net sales by end market and Q3 2025 financial performance can be found on Slides 6, 7 and 8 of the presentation. Please turn to Slide 9 of the presentation for our 2025 guidance update. Given third quarter results and current market -- current end market conditions, we are revising our full year 2025 guidance provided to the market on August 4. Allison now expects net sales to be in the range of $2.975 billion to $3.025 billion. In addition to Allison's 2025 net sales guidance, we anticipate net income in the range of $620 million to $650 million including over $60 million of expenses related to our acquisition of Dana's Off-Highway business. Adjusted EBITDA in the range of $1.09 billion to $1.125 billion. Net cash provided by operating activities in the range of $765 million to $795 million, which includes approximately $70 million of cash outlays related to our acquisition of Dana's Off-Highway business. Capital expenditures in the range of $165 million to $175 million and adjusted free cash flow in the range of $600 million to $620 million. We are maintaining the midpoint of the implied full year adjusted EBITDA margin guidance. This concludes our prepared remarks. Shamali, please open the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Rob Wertheimer with Melius Research. Robert Wertheimer: Thank you. So it's really no surprise, I guess, given truck orders that on-highway sales are down. This is a little bit of a steeper decline than we modeled and maybe we should apologize for that. But even so, it felt a little steeper than I would have thought. And I wonder if you could give -- maybe this is a little bit of a soft question, but your opinion because there's some different factors this cycle with body builders having been a bit backed up, so maybe there's more channel inventory. This cycle was a little bit higher than it was in recent downturns at least. And so I wonder if you could help us disaggregate the suddenness of this fall versus channel inventory and end market demand, which may or may not be as dramatic as this. David Graziosi: Rob, thank you for the question, Dave. So just a quick reference back to our August call when we talked about -- I mentioned what we were starting to see in terms of revisions to build rates. Getting to your question with the OEM announcements that we referenced at the time, layoffs, et cetera, that just was early Q3. There was certainly an expectation that those build rates would, at some level, start to normalize. To your point about steeper than we thought, so to speak, we, all of us, those reductions continued, frankly. So as we looked at getting by the end of third quarter or certainly earlier this quarter, you've started to see some level of normalization at those lower levels. So to your question in terms of how everybody is reading the market right now. No question that body builders continue to, in many cases, sit with quite a few chassis -- it really does depend on the end use, as you know, in terms of overall inventory levels that are out there. I think that's starting to improve in most cases. But the reality is that inventories needed to be further rationalized. I think the OEM comments about even third quarter results that are pretty fresh here all support that point. So as again, we talked about in August, medium-duty being a very tough year, vocational certainly starting to soften. And I think the comments that we referenced in our prepared script, certainly, there is no doubt that the level of uncertainty is extremely high. So it makes anybody's job at this point relatively difficult to forecast. And I think, frankly, even the ranges that the OEMs have provided for the balance of this year and even thinking about '26 are pretty wide, as you know. So we've had a very strong cycle coming out of COVID, as you mentioned. I think that certainly filled some of the gap that was there. Having said all that, equipment is being utilized. So to our prepared comments, we don't really view this as a change in market size. It's more a deferral, and you can't blame, frankly, the end users with the amount of uncertainty that they're all facing. Capital costs more. There's a higher risk premium. So from our perspective, anybody that's making investment decisions right now is likely looking for a more attractive risk-reward balance, and that's very difficult to come by until we all have more certainty around whether it be emissions, interest rates, trade, et cetera. So there's a lot out there at this point for all of us to digest. We feel very good about our market position as we continue to have very strong share, strong pull in terms of end users and our positioning to respond to whatever demand the market presents to us. So with our structure, as we talked about, whether that be cost, labor, et cetera, the investments that we've made in capacity, we feel very well placed to respond to whatever the market conditions are. But we're going to, as I said, focus on the things we can control at this point. And the revenue -- when you look at the revenue reduction on year-over-year basis, I think, again, supports the idea that we are a flexible organization. We respond accordingly and the margin performance really speaks to that. Robert Wertheimer: And then what -- I mean, you're seeing some mix trends, let's say, in construction equipment, which may be overlaps a little bit on the heavy side on vocational. Was vocational as bad as medium duty? And then if you have any way to quantify how much inventory was in the channel versus prior cycles, that would just help a little bit understand where we are. But the answer was comprehensive and I appreciate it. David Graziosi: Yes. I would just offer on the medium duty by far, much tougher sledding right now in terms of overall market. We don't necessarily view vocational as nearly as that has been challenged. And I would just point you to, I think, the OEM comments that do have meaningful share in the vocational space. They continue to support that very overtly and we believe, given all the infrastructure investment that's underway with AI data centers, et cetera, that, that certainly bodes well for the utilization of those relevant fleets. And as I said, that equipment is certainly being used right now. Operator: Our next question comes from the line of Tim Thein with Raymond James. Timothy Thein: Just a quick one. It's just on the implied revenues for the fourth quarter. The full year guide implies something like a 5% sequential improvement. And we just spent plenty of time talking about the challenges in North America On-Highway and fewer build days and OEM build plans certainly not being revised higher. So what's the offset there? Again, just what -- I don't know if defense or other segments that you'd point to in terms of why we see an improvement sequentially on the top line? G. Bohley: Thanks, Tim. This is Fred. As Dave mentioned, a tremendous amount of downtime by the OEMs in Q3, aggressively adjusting inventory levels. Rolling into Q4 is, clearly, we're going to have fewer workdays, which would generally drive that down versus Q3, but you need to take into consideration the significant amount of down days. And you also saw a defense ramp pretty aggressively off of Q2 into Q3, and we expect that to continue into Q4. Operator: [Operator Instructions] Our next question comes from the line of Ian Zaffino with Oppenheimer & Company. Ian Zaffino: Great. Just trying to understand maybe when you guys started to notice the weakness? And how did it look maybe by month throughout the quarter? And I guess what I'm trying to get at here is you guys did a great job of kind of curtailing SG&A, some of the R&D. So was that kind of a reaction to what you had seen? Or was this kind of preplanned? And then how do we think about kind of going forward in this environment? David Graziosi: Ian, it's Dave. I appreciate the questions there. So as we mentioned on the Q4 -- the August 4 call, really started to this weakness in build and reductions in build rates really started to manifest itself early Q3. What's -- to Fred's comments, there was certainly an expectation at least what we were being provided with from a build rate or forecast perspective at that stage was really focused on Q3 at that point in terms of adjustments. So what has since transpired is some level of adjustment, we would certainly look at it from a bit of a normalization from Q3 into Q4. So I think it appears to be starting to settle out simply because adjustments have been made to Fred's comments around inventory, also importantly, just bill rate capabilities. Once you start taking out your headcount, it very much does restrict output, obviously. So we see that some level of balance from Q3 into Q4. Our cost approach, as you know, you've covered us for a number of years, is pretty consistent as we entered the year and certainly focused on the macro environment and frankly, the volatility, the uncertainty, we would view as almost unprecedented other than COVID to a level because you had so many things coming into the market that became clear to us that, that was going to have the impact we believe, at the time of really inserting a tremendous amount of uncertainty into the end market for end users. So that implies that they have the ability to defer which they, in fact, have done, then we needed to better align ourselves accordingly. So what we've done has really been throughout the year, it wasn't -- we arrived in Q3 and decided to do certain things. It's been more of a full year approach. And again, thank the Allison team for their -- managing that situation in a way that is certainly consistent with our view, which is what we can control and really looking at the broader markets in terms of feedback to take whatever advantage we can, but also, I think, understanding the voice of the market in terms of what's needed, absolutely needed at this stage, and that's what's been reflected in our activity level. Operator: Our next question comes from the line of Tami Zakaria with JPMorgan. Tami Zakaria: I wanted to ask about tariffs. Given the latest Section 232 announcement. How should we think about your tariff impact, if there was any at all before this? And also the ability to offset some of these past tariffs given your U.S.-based manufacturing. So any color on the latest about tariffs would be helpful. G. Bohley: Sure, Tami. This is Fred. I think first, maybe just stepping back, big picture, our guide is $3 billion in revenue. That's down $250 million year-over-year, so down 7%. Dave talked through, certainly, the driver is our largest end market, North America On-Highway, primarily Class 6, 7, Class 8 straight, which are 80% of that total end market and the builds just being down. But operationally, we're performing at a very high level, 7% revenue down and EBITDA margin, we're guiding to being 80 basis point sup. So certainly, we're able to perform well in this challenging environment. Specific to tariffs, it's really important to continue to highlight that 85% of our components are purchased in the U.S., Mexico and Canada with the majority of those being in the U.S. The bigger impact on tariffs and then Section 232 tariffs becomes, I think, vehicle pricing, total uncertainty and how that impacts demand. But when you think about Section 232, our OEMs are certainly going to increase their prioritization on U.S.-made content and components. And that really well positions us as everything that we're providing to the OEMs in the U.S. is manufactured here in Indianapolis. So I think we're well positioned there. As far as additional cost to us, I think you can see in our disclosures, our material cost has been up very minimal because of just the footprint we have from a supply chain standpoint. And as we've talked about, we've always intended to offset that. And even in a challenging top line revenue, you see that we are doing that. Operator: Our next question comes from the line of Angel Castillo with Morgan Stanley. Angel Castillo Malpica: Just, Dave, Fred, I guess, as you roll everything up that we kind of have in place, all the puts and takes exiting 2025, I know it's still early, but if we do assume everything stays as it is today, Dana acquisition aside and assuming you continue to focus on what costs or what you can control on your end, as you noted, do you believe that, I guess, ultimately, you can grow earnings next year? Or do we need to see volume recovery in order for earnings to grow next year? How should we kind of think about that? G. Bohley: That's a tough one. We'll provide our guide in February. What we have talked about publicly is we've gotten meaningful price this year. We'll end up for the year with over $130 million in price, north of 450 basis points of price. And -- we also talked about the long-term agreements that we've signed. We didn't take all that price in year 1. So we have some visibility on pricing going into 2026. Clearly, good visibility on cost structure. I think what everybody is still really trying to get their arms around is going to be end-user demand, and Dave talked to it, the uncertainty with tariffs, do people feel a little bit better with 232 with some -- I guess, some level of more clarity now. The emissions change, is there going to be any sort of meaningful prebuy in 2026? So fortunately, we have a couple of months to continue to gather data points and really try to model the top line, and we'll provide our viewpoint in February of '26. Angel Castillo Malpica: Understood. Maybe just, I guess, given the part that you have visibility into that price, with the 450 that you did this year, the long-term agreements you have in place and the pass-through of kind of the tariffs that are -- have already kind of rolled through, what's kind of the price increase we should expect next year? G. Bohley: If you go back to pre-pandemic, we would pick up 50 to 100 basis points of price. And as we've got things modeled out, it's going to certainly be quite a bit higher than that. Operator: Our next question comes from the line of Luke Junk with Baird. Luke Junk: Maybe a tricky question to answer, but I'm just wondering maybe what your gut says in terms of how much more leeway there is in the model to maintain similar margins or at least to prevent decremental margins from getting closer, I think 60% maybe is the historical threshold. I know there's inefficiencies that were in the P&L last year because of the huge surge in production. Clearly, you're on the front foot in terms of taking tactical actions plus the incremental price into next year. Just how do you think through those permutations and sort of the level of buffer that's left in the business right now? David Graziosi: Luke, it's Dave. I appreciate the question there. So certainly, our approach, our history is that we focus a fair bit as we should on margins. I think here question on incrementals and thinking about that. The biggest unknown for us right now as we think about the future is just what this overall demand picture is going to look like. We've made, I think, good progress on our growth initiatives. The investments have been made in terms of capacity, we'll be winding up the balance of those by the end of next year, certainly early '27. So the efforts that we've also put into resourcing as well and optimizing our footprint, again, pre the Dana acquisition. But we feel very good about our ability to certainly come in within a reasonable range of maintaining margins. So we will size our -- continue to size our investments and initiatives with market opportunities. But to Fred's point, you'll certainly have some initiatives around price and cost line going into '26, and we'll take whatever appropriate actions there are consistent with end market conditions, which you would certainly view today in terms of North America On-Highway being a bit of a question mark. But when you look at our business in terms of whether it's parts support equipment, et cetera, defense, off-highway relatively, I think, stabilized at a lower level right now, we feel very good about positioning overall in terms of approaching market needs. But margins are right at the top of our list in terms of focus, and we continue to work through our plans and feel relatively good about what we're seeing at least from an initial pass, and we'll provide our guidance come February. Operator: Our next question comes from the line of Kyle Menges with Citigroup. Kyle Menges: I understand you're not wanting to give too much guidance on 2026 yet, but I would love to hear your thoughts on what you need to see for international On-Highway to hit your double-digit growth target next year. And then perhaps it would be good to hear an update on how you think the Dana acquisition positions you to win in international markets. David Graziosi: Yes. The -- it's Dave, Kyle. So on the -- overall, I would say, international On-Highway continues to be a very significant opportunity for our team. We're actually in this time of year involved in a number of regional meetings to look at the status of our growth initiatives. I believe the team there is doing a great job identifying a number of different opportunities for us. I think our relationships are where they need to be from an OEM and release plan perspective. There's always been a tremendous amount of opportunity out there. I think the team has become very focused on that, adjusting for some regional differences. The Japanese market last year moved around a fair bit because of emissions and safety regs and a number of things coming into the market that, that's a softer market this year. We expect that certainly to improve next year. And again, their ability to sell into the balance of Asia and relevant markets. We're excited about the team has done a very good job looking at applications for our product that certainly make the most sense, but where we sell based on value, as you know, versus cost. So I think on-highway outside North America continues to be a relatively large opportunity for us with very low penetration. So -- as you think about what that means over the longer term, all the investments that we've made in regional production, et cetera, and the investments specifically in China now to really be able to support Asia from the Asian region is important to us. It also reduces cost in a number of other areas. So I think all of that fits together. In terms of the Dana acquisition, we continue to work diligently towards closing that. We're pleased with the progress to date. As we mentioned on the calls around the announcement as well as the August earnings call, the attributes are very attractive to us. It's an accomplished team. It's a high-quality business. It really does allow us as a legacy Allison business to have a global footprint that starts to address some of the macro issues that I mentioned earlier. It's clear with tariffs and trade developments that there is much more of a focus from a number -- in a number of different regions for local content. The Dana footprint certainly fits well with that overall outcome, and you could look at that across all of our end markets. So for us, it's very attractive to have access to that type of footprint. It also allows us to further analyze make versus buy in a number of areas for our products as well and ultimately really start to leverage, although we've not quantified revenue synergies. We do have common customers in a number of different end markets, but also allowing our respective teams access to new customers, new markets. So overall, I think it's an exciting time for both respective teams, and we look forward to getting the acquisition closed and getting on with the business. Operator: And we have reached the end of the question-and-answer session. I would like to turn the floor back to CEO, David Graziosi, for closing remarks. David Graziosi: Thank you, Shamali and thank you for your continued interest in Allison and for participating on today's call. Enjoy your evening. Operator: Thank you. And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to Sprout's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to Susannah Livingston, Vice President, Investor Relations and Treasury. Please go ahead. Susannah Livingston: Thank you, and good afternoon, everyone. We are pleased you are joining Sprouts on our third quarter 2025 earnings call. Jack Sinclair, Chief Executive Officer; Curtis Valentine, Chief Financial Officer; and Nick Konat, President and Chief Operating Officer, are with me today. The earnings release announcing our third quarter 2025 results, the webcast of this call and financial slides can be accessed through the Investor Relations section of our website at investors.sprouts.com. During this call, management may make certain forward-looking statements, including statements regarding our expectations for 2025 and beyond. These statements involve several risks and uncertainties that could cause results to differ materially from those described in the forward-looking statements. For more information, please refer to the risk factors discussed in our SEC filings and the commentary on forward-looking statements at the end of our earnings release. Our remarks today include references to non-GAAP financial measures. Please see the tables in our earnings release for a reconciliation of our non-GAAP financial measures to the comparable GAAP figures. With that, let me hand it over to Jack. Jack Sinclair: Thanks, Susannah, and good afternoon, everyone. In the third quarter, we delivered strong earnings growth, up 34% year-on-year with a 5.9% comp and strong new store performance. Our results continue to be driven by our execution on the key pillars of our strategy. We saw an increase in customer traffic as we effectively engaged with our target customers, while our most differentiated and attribute-based products continued to drive sales as we continue to expand our store presence from C to shining C. In addition, our ongoing inventory management improvements in supply chain contributed to the expansion of our EBIT margin. Together, these achievements demonstrate the strength of our teams and the durability of our strategy. While it was a solid third quarter, it fell short of our top line expectations. As the quarter progressed, our comp sales moderated faster than expected as we came up against challenging year-on-year comparisons as well as signs of a softening consumer. As we look ahead, the investments we have made provide us with levers to manage our business and deliver earnings growth. Today, we'll walk you through our performance highlights, update you on our strategic initiatives and share how we're positioning Sprouts for the rest of 2025 and beyond. I want to thank the team for their ongoing commitment to supporting our customers on their health journey. For now, I'll hand it over to Curtis to review our third quarter financial results as well as our updated 2025 outlook. Curtis? Curtis Valentine: Thanks, Jack, and good afternoon, everyone. In the third quarter, total sales were $2.2 billion, up $255 million or 13% compared to the same period last year. This growth was driven by a 5.9% increase in comparable store sales and the strong results from new stores. Traffic remained positive and accounted for approximately 40% of our third quarter comp. Our key points of differentiation continued to drive our sales with attribute-forward products growing faster than our core business. E-commerce sales grew 21%, representing approximately 15.5% of our total sales for the quarter, with good performance from all partners. Additionally, Sprouts brand continues to resonate with our target customers and now represents more than 25% of our total sales for the quarter. While our third quarter yielded solid results, we expected more from our top line as we underestimated the impact of lapping strong numbers from last year in the context of a softening consumer backdrop. We believe our strategy always has us well-positioned to capitalize on the surging interest in health and wellness. Last year, we saw outsized gains in new customers, substantially growing our customer base. And by and large, we've kept those customers. Against that backdrop, we have managed our costs and margins effectively. Our third quarter gross margin was 38.7%, an increase of 60 basis points compared to the same period last year. This improvement was mainly attributable to improved shrink. SG&A for the quarter totaled $653 million, an increase of $73 million and 13 basis points of leverage compared to the same period last year. This improvement was largely driven by lower compensation expense, which was partially offset by increased benefit costs and pressure from our new store growth. Depreciation and amortization, excluding depreciation included in the cost of sales, was $39 million. For the third quarter, our earnings before interest and taxes were $157 million. Interest income was approximately $690,000, and our effective tax rate was 24%, including a benefit of $0.03 predominantly from a purchase discount for transferable tax credits. Net income was $120 million and diluted earnings per share were $1.22, an increase of 34% compared to the same period last year. During Q3, we opened 9 new stores, ending the quarter with 464 stores across 24 states. We are encouraged by our new store performance and the positive response we are getting from customers as we enter new communities across the country. The team continues to improve our processes and partnerships to accelerate our development cycle and our planned expansion into the Midwest and the Northeast is providing fertile ground for site approvals. We plan to open more stores in 2026 than in 2025 and believe we are on track to get to our 10% unit growth in 2027. A strong and healthy balance sheet has underpinned our financial performance. Year-to-date, we generated $577 million in operating cash flow, which allowed us to self-fund our investments of $194 million in capital expenditures, net of landlord reimbursement to grow our business. We have also returned $342 million to our shareholders by repurchasing 2.4 million shares. We have $966 million remaining under our new $1 billion share repurchase authorization that was approved by the Board of Directors in August. We ended the third quarter with $322 million in cash and cash equivalents and $23 million of outstanding letters of credit. On July 25, we closed a $600 million revolving credit facility, which replaced our previously existing $700 million revolver. The terms and conditions are substantially similar to our previous agreement with a new expiration date of July 2030. While we plan to fund operations and unit growth through our robust cash flow generation, this facility provides Sprouts with financial flexibility as we grow. As we look ahead for the remainder of this year, we are balancing the strength of our business strategy against the consumer uncertainty and challenging year-over-year comp compares. For the full year, we expect total sales growth to be approximately 14% and comp sales to be approximately 7%. Given the strong execution of our real estate pipeline and fewer time line delays, we now plan to open 37 new stores in 2025. Earnings before interest and taxes are expected to be between $675 million and $680 million, and earnings per share are expected to be between $5.24 and $5.28, assuming no additional share repurchases. That said, we expect to continue repurchasing shares opportunistically. We also expect our corporate tax rate to be approximately 24% -- during the year, we expect capital expenditures, net of landlord reimbursements, to be between $230 million and $250 million. For the fourth quarter, we expect comp sales to be in the range of 0% to 2% and earnings per share to be between $0.86 and $0.90. In the fourth quarter, year-over-year margin rate in both gross margin and SG&A are normalizing. Despite pressure to our top line, we expect to be able to grow EBIT dollars in line with our sales growth to deliver stable year-over-year margins in the fourth quarter. Despite facing challenging revenue comparisons, we remain confident that we have a resilient business capable of delivering solid earnings growth. This reflects our ongoing commitment to operational efficiency and disciplined cost management. These factors provide us with earnings stability while we continue to invest in our future growth. And with that, I'll turn it back to Jack. Jack Sinclair: Thanks, Curtis. Over the years, we have built a strong foundation for sustainable long-term value creation. We focus on driving growth through differentiated innovation, strengthening our operations, enhancing our digital capabilities to deepen customer engagement and expanding our store footprint, all while investing in our talent and technology. Together, these elements form the cornerstone of our strategy, positioning us to compete effectively. The broader health and wellness movement in the United States continues to gain popularity. With this in mind, we remain committed to expanding and strengthening our unique product offering. We continue to see strong customer demand for our attribute-driven products, which remain a key driver of our sales growth. Currently, more than 1/3 of our sales come from organic products, and we'll continue investing in this important attribute for our customers, ensuring they have access to the best in organic offerings at a great value. The supplement sector is also evolving within our stores, focused on areas such as longevity, women's health and gut health, trends that resonate with our health enthusiast customers. The Sprouts brand now accounts for more than 25% of our sales and with a robust product pipeline planned for the next 3 years, we are committed to continuing our growth. What makes our Sprouts brand unique are our innovative products and flavors, such as herb-stuffing potato chips and maple-flavored coconut pillows, new for this year's fall season. In the third quarter, we launched new wellness bowls, each priced under $10. These bowls feature attributes like grass-fed beef, organic tofu and responsibly-sourced salmon. They're packed with protein, bold flavors such as sesame garlic ponzu and high-quality fresh ingredients at a fantastic price. Our customers are responding, and we're pleased with the early results. As we look to the future of forging, we're investing to ensure that we continue to lead in this space, supported by a robust pipeline of innovation and deep partnerships with entrepreneurial brands that view Sprouts as the ideal launch platform. These partnerships energize us. And together, we're excited to introduce approximately 7,000 new products for 2025 that align with our customers' values and lifestyles. To stay ahead in a rapidly evolving market, we're expanding the capabilities of our forging team to better anticipate emerging trends and customer needs. Over the past year and into early 2025, we expanded our customer base, attracting a meaningful number of new shoppers. We are pleased to see that the vast majority have remained engaged. On the marketing front, we continue to partner with our influencers, extend our reach in new markets and have started utilizing our Sprouts Rewards to engage with our customers. Speaking of the Sprouts Rewards loyalty program, it's fully launched this week, marking an essential step in our Sprouts customer engagement and personalization journey. We have seen good growth in our identifiable customers and the stores are taking ownership of this important initiative. Although it's still early in the program, we are observing encouraging indications of increased shopping frequency and sales per customer in our early rollout geographies and are excited to see our progress in the coming months. On the supply chain front, we're excited about our ongoing transition to self-distribution in fresh meat and seafood. It has been a difficult year for us in the meat category as multiple third-party supply disruptions led to availability challenges and customer disruption, further underscoring the importance of controlling our destiny through self-distribution. Through October, we have successfully completed the transition at 4 of our existing distribution centers, leading to increased delivery frequency to our stores and improved fill rates. Looking ahead, we anticipate completing this transition by the second quarter of 2026 with the opening of our new Northern California distribution center, further solidifying our commitment to operational excellence. The new stores we've opened this year are performing well, both in terms of top line revenue and bottom line profitability. Additionally, last year's vintage is entering the comp base well, further validating the effectiveness of our model. We're particularly pleased about our robust new store pipeline, which currently includes 140 approved locations. This highlights the strength of our brand and also demonstrates the scalability of our format. We are confident that we will be able to meet the evolving needs of our customers while also achieving our ambitious growth targets. To that end, we are pleased that we plan to open 37 stores in 2025, exceeding our original target of 35. We're excited to welcome 3,700 new Sproutees to our team and to expand access for our target customers, allowing us to bring the Sprouts experience to more communities nationwide. The effective execution of our strategic initiative is made possible by the dedication and talent of our team members throughout the organization. Central to our culture is a shared belief in our purpose and values, which form the foundation of our long-term success. I want to express my gratitude to our 35,000 team members for their unwavering commitment to serving our customers every day. We acknowledge the challenges of sustaining the momentum built from last year's exceptional results alongside an evolving consumer backdrop. We have an amazing business that has significant potential. We are confident in the resilience of our business model and are dedicated to investing in our foundations for sustainable long-term earnings growth. Thank you for joining us today. We look forward to sharing more of this journey with you in the quarters to come. And with that, I'd like to turn it over for questions. Operator? Operator: [Operator Instructions] And the first question comes from Michael Montani with Evercore. Michael Montani: I just wanted to ask, we've had some questions about concerns around competition that might be potentially encroaching on your core consumer. I just wanted to see kind of how you would respond to that, if there was other cyclical temporal headwinds that we should be thinking about in the quarter and then how that could play out in the fourth quarter? And also, do you see this as a function of competition? Or is it something else? Jack Sinclair: Well, I think what we talked about in the script there, Mike, was very much there's -- we're lapping some tough numbers from last year. And at the same time, there's a kind of consumer context that feels like things are getting a little bit more difficult for the consumer. So putting that into context, we always look at what our competitors are also doing and what the competitors are playing in there. But our strategy is pretty clear. We've got 7,500 new innovative products launched. I don't think -- I haven't seen anyone else launching that kind of number of innovation and differentiation. We're building a lot of stores up to 37 stores, which we're very confident about, and we've got a great pipeline of stores coming through going forward. And we're very excited about the loyalty and personalization work. So the context of all of that, I think, shields us from what we've seen happening from our competitors. And as I say, we're pretty confident about the future, Mike. Operator: And the next question comes from Seth Sigman with Barclays. Seth Sigman: There's a concern in the market that there have been some unique drivers helping your business over the last 12 months. You've had great performance and the concern is that those drivers are going away. As you reflect on that and the current slowdown that you're seeing, is there anything you would call out that's proving more difficult to lap? And then you talked about keeping your customers. You grew your customers quite a bit last year. I mean, how are you seeing that play out? Are we seeing perhaps a change in spending behavior, lower spend per customer? Curtis Valentine: Hi Seth, this is Curtis. We've just seen some pockets and windows where we've had some outsized growth and gains. We've talked about those on the call. Certainly, last October was our strongest month that we've compared against. It was a 13-and-change comp. February, we had some help from a strike at a competitor that was upside. And then May and June, we had strong months with a good customer season from produce and some challenges in the industry from a supply and a cyber issue. We saw customers come our way in those moments. We're always well positioned to kind of capitalize in those moments. But we don't see anything structural in -- outside of those types of things that we're up against. But we do have those moments that we'll be up against over the course of the next 10 months. And then just, yes, a little bit of softness in our business. I mean we see things in more of our middle-income trade areas, some of our younger trade areas where we see those demographics, we've seen the business soften just a little bit more than the rest of the business. And those are the things that we're kind of pointing to as it relates to the customer pressure. Operator: And our next question will come from Leah Jordan with Goldman Sachs. Leah Jordan: I'll kind of stick with the same theme around the comp slowdown. Just seeing if you could provide some more detail on the key surprises versus your expectations because this was a notable miss, right, below even your guide. Has there been any major difference across the regions or product categories? And I think ultimately, you've historically talked about your offering being resilient to macro pressures as people are committed to their diets. But now you're talking about a softer consumer. So I think ultimately, has something shifted around your value proposition today? How do you view it? And I guess, why don't you see the need to invest a bit more to reengage your core consumer as you're really implying market share losses in the fourth quarter? Jack Sinclair: Well, I think the first thing we'd say is we're lapping some tough numbers from last year, and we may have underestimated the challenge of lapping those numbers. And it happened through the quarter as opposed to in the quarter. And as we look forward, we're anticipating a challenging environment. We know what we've got to lap going forward, and we're anticipating a little bit of pressure on the consumer going forward. The health and wellness macro trends are still strong for us, and we see a real opportunity in doubling down on the loyalty program behind that going forward. And there are some macro pressures that I think you'll see coming through in the marketplace that we are certainly experiencing. With regard to thinking about what should we do with -- we're not seeing a competitive dynamic changing dramatically in the marketplace in terms of pricing or activity. We've always promoted and we're very comfortable with promoting going forward. And we'll do what we need to do, but we're very strong in terms of managing our margins, managing our costs, and we'll consistently do that. You can see that from the numbers that we've just produced and the numbers that we will produce going forward. So no, we're not seeing anything dramatic in terms of the competitive dynamic in this space. We are seeing consumers under a bit of pressure, and we'll have to react to that in some ways, and we are reacting to that in the appropriate way. Curtis Valentine: And then to the miss in Q3, Leah, yes, I think we sailed through that first step change in the comp in May and June and didn't really see the underlying pressure again, probably masked a little bit of what was starting to go on there. But it was really the end of Q3, as Jack mentioned, where it really started to drop off a bit, and that's when we get up against the 10-plus comps here in September and then 13-plus in October. And so being a little bit cautious with where we are and looking ahead as we go up against the 10.5% and 10.5% roughly in November and December. Leah Jordan: Okay. That's super helpful. And I was going to ask about the compares in November, December. So that's really helpful. I guess -- so my related follow-up would be then for -- as we look into '26, right, you're going to have some difficult lapse in the front half of the year. You just talked about how you sailed through it in March of last year. So -- how should -- I know you haven't -- it's a little bit early for the guide, but how should we think about the building blocks for the comp next year, driving engagement and lapping that as well? Jack Sinclair: Well, from the building blocks point of view, I'll let Curtis talk a little about how the numbers play through. From the building blocks point of view, Leah, we've got real confidence in the innovation pipeline that we've got coming through. We're really confident about the store pipeline that we've got coming through in terms of new stores. We're really confident about the work we've been doing that hasn't come through yet in loyalty and personalization, which we're excited about. So there's a lot of real positives in terms of the consumer side of this equation going forward. I'll let Curtis talk a little bit about the numbers. Curtis Valentine: Yes. And you called it out. We are early. Obviously, we'll be going through our budget process here in the fourth quarter, and we'll talk in more specifics in February. So yes, we'll have a bit of a challenging first half up against the double-digit comps. And then as we get to the second half, again, we've got those building blocks that Jack just referenced. And so we're pretty excited about those things coming online and getting us back into kind of that algorithm range and getting back to driving towards the high end of that algorithm comp as we hit the second half of next year. Again, we'll get specific when we get to February, but we've been investing in the business to create levers to kind of manage through any environment, and we'll be working through that, and we'll manage our margins effectively here in the first half of 2026. Operator: And the next question will come from Mark Carden with UBS. Mark Carden: So to start, you guys called out strength in your most differentiated products even with the slowdown. Do you think customers are spreading out their shopping more and becoming any more price sensitive on some of the less differentiated items like, say, produce? Have you seen shifts in what you think your overall wallet share is for customers today? And just how you're thinking about really the broader promotional environment over the next few periods? Nicholas Konat: Yes. Thanks, Mark. It's Nick. On the differentiation front, we measure that really closely since it's so strategically important to us, and we haven't seen our levels of differentiation wane at all in the last year, even through, as we mentioned, some of the business dynamics here. So we feel really good about where we are from a differentiation standpoint in the market. And yes, our most differentiated and innovative products continue to be the place that we see the strongest growth in comps. And so as we continue to fill that pipeline and bring all the new products we do to market, we feel bullish about what that's going to do for us moving forward, as Jack mentioned. I do want to touch on share of wallet to your question. We're actually seeing our share of wallet hold to slightly up. So to the competitive questions and dynamics, we're not seeing our customer take their share of spend other places. We're holding our own on the share of wallet side, which I think portends to some of the macro we're seeing. And at the last part of your question, I think for us, we're not seeing a major exodus of customers. We're just seeing our customer at times spend maybe a little bit less on the tail end of their basket as they manage some of those pressures, and that's how we're seeing it come across in our dynamic. Mark Carden: Got it. That's helpful. And then you're seeing a lot of strength in private label with penetration climbing again this quarter. Just given the softening of the consumer that you talked about, any changes to how you're thinking about the pace of adding additional SKUs to your assortment? Nicholas Konat: Sure. We've been on a pretty aggressive pace over the last couple of years, adding hundreds of SKUs each year. And our team has done an amazing job of doing that. And I think what's important to keep in mind is when we build our Sprouts brand program, we're not -- we don't play sort of that national brand compare strategy. We look to find unique items that our health enthusiasts can't find other places. And to your point, what's happening around, that's really winning. We continue to see our penetration grow. Our sales growth in Sprouts brands have been really, really good. So we will continue to fill that pipeline and overinvest in that space to capture the momentum we have in the brand. Jack Sinclair: And we've got some pretty exciting plans, Nick, going forward in terms of what's happening next year and some holiday products are pretty exciting as well. So the investment in Sprouts brand will continue aggressively going forward, Mark. Operator: And the next question will come from Ed Kelly with Wells Fargo. Edward Kelly: I was curious if you could talk a bit more about the fourth quarter comp expectation and what you've seen so far quarter-to-date. Obviously, the October compare is tougher. But have you seen any stabilization yet in the 2-year as it pertains to October? And then what's the assumption that's based into the comp guidance as you think about the quarter itself? Curtis Valentine: Hi Ed, this is Curtis. Yes. So quarter-to-date, we are just north of 1 up against that 13-and-change last year for October. So the 2-year has started to stabilize a little bit here in the last, call it, 6 or 8 weeks, but we've definitely seen some ups and some downs week-to-week in the 1-year and the 2-year, and that's what's got us a little bit cautious. So we're up against, again, as I said earlier, about 10.5% in both November and December. And so we're really watching closely the 1-year versus the 2-year and there -- and how that plays out, particularly as we go through holidays with some of the consumer pressure that we've noted already. So watching closely, and we'll see how we go. We've had 2 months now up against 10-plus comps. We ran about 4% in September against the 10%, and we've run about 1% here against the 13%. And so we just want to see a few more of those months against the double digits to shore that up. Edward Kelly: Okay. And then just a follow-up, Jack, you mentioned on the loyalty side that you were encouraged by some of the things that you have seen so far. I was wondering if you could elaborate on that. And as we think about 2026, how are you thinking about utilizing the loyalty card? What you can do to sort of push on that and the contribution that you think that it might begin to deliver? Jack Sinclair: Well, we won't commit specifically to what it might deliver, Ed, but it's a great question and it's very much at the heart of. What we're encouraged by is the execution literally this week, I think where all stores have now got access. It's taken us a full 9 months or so to get this rolled out across the country. We've been really encouraged by the number of customers that are signing up, and we're encouraged by the number of customers that are scanning. So we're in a better place with identifiable customers going forward to understand exactly what they're doing. And as we go on our personalized journey and the customers go on their personalized journey, we're going to be able to take, I think, a real opportunity to sell the story of how we can tell or sell the story to our customers of new products that are relevant to them and be very targeted and efficient in that. The team are working hard on that. We made a little bit of progress on it, but I can anticipate -- I'll let Nick build on this. But I think there's real opportunity in 2026 to build even further growth from our loyalty program. Nicholas Konat: Yes. Hi Ed, it's Nick. Just a little more context there. We are seeing an ability to move customer behavior through loyalty right now with increased frequency and stronger sales per customer. The team has done a great job of getting us rolled out completely nationally. And so now we can turn the team's attention fully to how do we make that work even harder for us in '26. I think Jack gave good color on how we can do so. But we've got the rollout behind us, and we know what we've been able to move behavior. And I think we've got a lot of levers to pull next year to do even more to again, bottom line, serve our unique customers on things that's most important to them and distinctive to us to drive long-term value. Operator: And the next question will come from Tom Palmer with JPMorgan. Thomas Palmer: Look, I know you don't always give too much detail here, but I thought I'd ask on just some of the changes in customer behavior. So first, I think you made a reference smaller baskets, not fewer customer visits driving the comp slowdown. I just want to make sure I heard that right. And then second, are you seeing any notable shifts when we think regionally or in certain departments of the store? I'm just kind of wondering because it does seem to be a little bit influx in terms of customer behavior, if anything stands out on that side. Curtis Valentine: Hi Thomas, it's Curtis. Yes, I think similar to how we talked about it on the way up last year, it was traffic and it was brick-and-mortar traffic that really accelerated, and we saw it be pretty balanced across categories and geographies, and we're seeing it really play out similarly as we lap those numbers this year. So it's been a traffic slowdown. Traffic is still positive, as we noted in the script, but that's a piece that slowed down. And then, yes, we're seeing a little bit of pressure at the end of the basket, as we called out earlier now as the consumer pressure builds a bit, similar to what we saw during the inflationary period in '22 and '23, they're really managing the end of the basket, and it's creating kind of a units-per-basket-type pressure that we've seen before. So that's been the dynamic. Thomas Palmer: Okay. And then just on the fourth quarter, you noted the expectation, Curtis, for margin to be flat year-over-year. I just want to clarify, is that both gross margin and SG&A would be relatively flat? Or is one kind of moving in one direction and the other the other? Curtis Valentine: Yes. I think it's flat for EBIT margins is how we think about it, stable EBIT margins. It will be a little bit positive on the growth side and then a little bit of pressure at a 0% to 2% comp, it will be a little bit of pressure on SG&A. Operator: And the next question will come from Rupesh Parikh with Oppenheimer. Rupesh Parikh: So given the moderation that you've seen in your business recently, does this at all impact how aggressively you invest next year? And then are there levers to pull if you do see further softening from here? Nicholas Konat: Yes. I think we're going to continue to invest in the business. I think we will always make smart choices about how we allocate resources against the highest kind of priority and highest value type projects. And so we've had a good level of investment for the last 2 years. And I think that's created some levers for us. Certainly, we've talked about inventory management, category management and the things that we've been working on helping drive some of those gross margin gains. We think there's still some room to go there. And we're working hard on our cost capability on our indirect cost side, and we spent a lot of time on that this year. So we're preparing ourselves to be able to manage through, and we feel like we're in a good position as we head towards 2026. Jack Sinclair: And we're full steam ahead on building stores. We're excited about that. As we talked about, the new stores are opening well. We're really encouraged by that within the context of the macro environment that we're in the middle of. We're full steam ahead in terms of self-distribution. So we'll continue to invest in that, which will bring forward some benefits in terms of in-stocks and benefits in terms of margins. We're full steam ahead in terms of investing in innovation pipeline and making new products come through in our business. And as Nick said a minute ago, we're full steam ahead on our loyalty and personalization journey. So we're very confident in the investments that we're making going forward. And once we get past some of these lapping challenges, I think we're in really good shape. Rupesh Parikh: And then maybe just one quick follow-up. On the capital allocation front, it sounds like you're going to continue buy back shares. But has your approach at all changes given a more certain environment, but at the same time, your stock is much lower. So just curious if there's any differences in how you approach share buybacks at these levels? Jack Sinclair: Yes. I think we'll be more aggressive depending on where the shares settle out here when we're done. Certainly, we've talked about buying opportunistically over the course of the year, and we bought pretty aggressively early in the year when the stock price was a little lower through the year. And I think we'll be thinking about it the same way as we exit our quiet period here, our close period here in the third quarter. So we're excited about the $1 billion authorization, and we'll see where things land come Friday, but we'll go get after it. Operator: And the next question comes from John Heinbockel with Guggenheim. John Heinbockel: So guys, 2 operational things. What's your -- has your thought changed now that you've rolled out loyalty, how much data you're going to need, how much history, right, to really market very effectively to your base? And then secondly, how do you guys size the opportunity in in-stock, right? Because what we keep hearing, right, is that natural and organic fill rates are not anywhere near where they need to be. How can you fix that? How long will that take to address? And how big is that opportunity in in-stock? Nicholas Konat: Yes. Hi John, it's Nick. Let me tackle first the loyalty question around data and history. So listen, part of your point, the more data we get, the better we can be at personalizing and driving behavior. There's no doubt about it, right? And this is -- we mentioned loyalty is a long-term play for us to drive long-term comp, and we're going to continue to be able to create much better depth of how we personalize and more insights, the more data we get. So you're right on there, and I'm looking forward to that over the next number of years. But I will also say we're -- as we mentioned, we're able to use the data we have to drive customer behavior and plan on doing so in '26. I think as you know, our customers are not quite as frequent as your typical maybe grocery -- conventional grocer shopper. So there's a little bit of time and just hey, getting that frequency in that basket doesn't happen as quickly when you have a super high frequency customer. But we've got enough data and tools, and we're going to continue to build it now that we're rolled out nationally to increase the level of engagement with the customer and I think continue to drive a lot of value for them. So that's on the loyalty side. Do you want to talk about? Curtis Valentine: And with regard to the supply chain and the in-stock, we've talked a lot about what we've done in meat this year. That's going to make a significant difference in terms of in-stocks in meat, and we believe that will help drive some sales in that space. Natural and organic is a very long tail, John, as you know. And that does create a challenge in terms of being as in-stock as people with less SKU count in the middle of their kind of assortment. We will be looking at expanding some other areas potentially on self-distribution, which we've talked about in the past. We would like to be better as Sprouts brand in terms of how we can get more in-stock on that. We think there are certain categories that we need to double down on. Having said that, we are working very hard with our partners to get better forecasting and better anticipation of how demand could be -- we could anticipate demand even better. But there's certainly an upside in sales, in in-stock numbers. We haven't put a clear number to that. We have in the meat category. But in other categories, we haven't put a really clear number to it. But instinctively, there's some upside for us in that if we can get better over the years -- months and years ahead. John Heinbockel: All right. And maybe a follow-up, for Curtis. I know historically, right, or at least recently, right, the breakeven comp has been closer to 4%. How much do you think you can reduce that? Because you don't want to do damage to the business, right? Say, okay, we'll live with some deleverage for a while. How do you think about that trade-off? Jack Sinclair: Yes. I think it's a good call out. I think we do think about it, in the shorter term, we feel like we can manage around it with some of the levers that we've created with the investments we've made. Certainly, longer term, it's hard at 0 to 2 for a long period of time. We don't expect to be there for a long period of time. And so we believe it will be a bit of a short-term phenomenon as we go up against the numbers from last year. Again, we're working on our cost capability and how we get -- as we scale and we get more efficient and we get a little bit more automated through process and things like that. There should be some opportunities for us to better manage costs. And so that's how we'll be thinking about it, and we'll be exercising those levers here in the very near term while we get the comp momentum going again with the building blocks for '26. Operator: And the next question comes from Robbie Ohmes with Bank of America. Robert Ohmes: You guys gave thoughts on fourth quarter gross margin being up a little. When you guys come up against the tough comparisons in the first half of '26, any thoughts you can give us on gross margin puts and takes as you go through that? Jack Sinclair: I think, Robbie, it's a little bit early to be talking about '26, and I want to go through our planning process and work through that. I'll just say that we talk about stable margins. And when I think about the full year for '26, I don't see a reason why we won't be talking about that when we get there. We've got a -- we've invested in levers to help manage around some of the pressures we're facing right now. And then we'll continue to invest in some things. And so there'll always be a bit of a put and take as it relates to the EBIT margin. we like the idea of stable, but we're not going to get too specific yet on first half, second half, those types of things. Robert Ohmes: Got you. That's helpful. And then just another follow-up on the kind of pressure on the consumer you're seeing. How narrow is it? Is it a -- is it just the, say, 25- to 35-year-old demographic that you guys are seeing some of the pressures? And maybe related to that, separate from the loyalty program, is there anything on the marketing side that you might need to change to get momentum going again? Jack Sinclair: Yes, I mean I think the pressure on the consumer, I'll speak to that, and then I'll turn it over to Nick on the second question. But from a consumer pressure perspective, I mean, I think that's building everywhere is what you see in the macro, a little bit more in the kind of lower and middle income is what you read about and what you hear. I think those are the things where we just see that be a little bit outsized in those spaces. So again, I talked about middle-income trade areas, younger demographics. It's just a little more pronounced in those, but I think the pressure is there for everybody and everyone is trying to figure out how they manage through that in a dynamic environment. Nicholas Konat: Yes. Robbie, it's Nick. And then to the second part of your question there on the marketing side. I think we have a great story to tell, but we're always testing, learning how well we're telling it. I think to your point, I think we can always tighten up our value proposition. Right now, it's a good chance to continue to just refine what makes us unique. It's about innovation, freshness, quality and health. And I think if we hit those at the great prices and fair prices that we have, I think we'll be in a good place. So we're always testing, but I don't think there's any significant changes or pivots other than what we always do, which is look at how well we're telling our story and then where we're spending the money by channel and location to maximize it. Operator: And the next question comes from Scott Mushkin with R5 Capital. Scott Mushkin: So I guess I wanted to get back to the competitive environment a little bit. Our research, both research and consulting work, we've done a lot of work down in Texas, in particular, market for you guys that says the produce area has become hypercompetitive. And I guess I was wondering, where do you think you guys are priced if we're going to look specifically at the fresh basket? And who do you think you're actually competing with? In other words, if the traditional market goes hypercompetitive, is that something you actually need to react to? Jack Sinclair: We watch our -- we talk regularly, Scott, we watch produce pricing more attentively than anything else. And Texas has become a more aggressive market with H-E-B's expansion into Dallas. We're having a great time opening new store. I'm delighted with our Dallas performance alongside H-E-B. We're doing really well in terms of how those new stores are opening, and we're having success in San Antonio and Austin as well. We watch the Texas market closely. It is more competitive on produce than other parts of the country. We've got a fairly significant price gap on most grocery competitors around the country. Texas is more competitive, and we're watching that closely. When you look at the rest of the country, produce remains a competitive advantage for us going forward, and we focus on that a lot as it's such a direct comparison. But we're feeling pretty good about our produce pricing going forward. there's a lot of volatility in it, as you know, and people are -- I don't see it getting any more aggressive from a margin point of view outside of Texas going forward. Scott Mushkin: Okay. And then, Jack, when you think about your competitive set, again, some of our research suggests that Amazon proper has gotten very aggressive again on pricing of everyday essentials. If you think about Whole Foods, do you think of them as a direct competitor? I guess you would, but I mean, how sensitive are you to things that they are doing, competitive? Jack Sinclair: We watch it very close. Yes, sorry, I'll let you finish the question, Scott. Scott Mushkin: No, that was it. Jack Sinclair: Okay. Well, we do watch those guys very closely and very intently because they do sell a lot of things that we sell. But we've got very clear data over what they overlap with those guys, and we're not seeing any significant change in the stores that are facing those guys than in the stores across the rest of the country. And you kind of touched on what I think Amazon [indiscernible] Whole Foods are doing, which is chasing after maybe the 365, maybe the more entry point prices. So it's drifting away into trying to get the full basket from people. We're very much a complementary retailer and are in the space that if we keep differentiating ourselves, we're feeling pretty confident that that's the right place for us to be. And we keep watching it very closely. And we're not getting overexcited about what's happening in any of our competitors at the moment. Operator: And the next question comes from Scott Marks with Jefferies. Scott Marks: First thing I wanted to ask about is last quarter, you had called out a cannibalization factor with new stores impacting existing markets. Given that new stores are performing well for your commentary, wondering if you can just update that and update us on how you're thinking about that dynamic. Curtis Valentine: Scott, this is Curtis. Yes, I think it's still in the same general range. I think we talked about 125-ish basis points, 125 to 150, and that's kind of what we've seen. Certainly, as we ramp up the number of new stores, that will continue to grow a bit, but that's about the range we've seen. And we've had some strong openings, particularly in some dense areas that have had some larger cannibalizations, but it's in line with our expectations and not a huge change from quarter-to-quarter. Scott Marks: Okay. Appreciate that. And then next question from me. Maybe you're a little bit less exposed to that, but just wondering SNAP spend, how exposed is your business to that? And have you seen any impacts given some of the policy changes and obviously, the government shutdown having a potential to impact that? Jack Sinclair: Yes. So certainly, again, not going to be helpful from a consumer perspective. Our SNAP is about -- it's somewhere between 2% and 3% is historically where it's been. So it's a limited impact to us. I think we're just starting to see the effects of that, both from either a shutdown perspective or SNAP. I think that's happening kind of in real time in the last several weeks. So I don't think it's a huge impact to our business, but it's certainly not helping. Operator: And the next question comes from Benjamin Wood with BMO Capital. Benjamin Wood: I think this might be for Kelly Bania from BMO. I'm not sure how that happened. I wanted to talk about the promotional strategy. It seems like to us that the messaging is more aggressive with respect to price and promotion lately as opposed to the shift over the last few years, which has been to lean more on product attributes and seasonal highlights. Is that accurate? Is there any change in response to the comp trajectory from a promotional strategy? And is there any -- can you talk about how your consumers are responding to promotions today? Is there any difference in how that has been progressing through the quarter or into the quarter-to-date period in October? Nicholas Konat: Hi Kelly, thanks for the question. It's Nick. Overall, we're not changing our pricing or promotional philosophy in any consequential way. As I mentioned, for us, the customers continue to tell us they define value through quality, innovation, freshness and health, and that's what we continue to lean in on. We have a handful of key events that we do every quarter or so, things like our organic sale or vitamin sale. We do a BOGO event. And within those, we certainly try to promote the things that we know are most important to the customer, and we will play around at times with price points or messaging to try to learn what's happening with the customer. But overall, we're not having any significant changes in our strategy. And I think I want to also make clear we're not changing how we manage to our margins or our overall value proposition to the customer. So I think you're going to see us be pretty consistent. And as the onset of our personalization capability. I think that gives us another lever to target our price promotional spend to drive better return and take care of our best customers. Kelly Bania: And I guess maybe just a follow-up on that. If this consumer softness were to continue, would you reconsider your level of promotional activity at all, particularly for this customer that seems to be most sensitive to whatever is going on right now? Nicholas Konat: Yes. With what we're seeing right now, no, we wouldn't. I mean, like I said, we are always looking at -- Jack mentioned earlier, we're always monitoring our pricing on produce and our key items and the competition and making adjustments as we think we need to based on the dynamics of the local market items. But from a broad strategic standpoint, no, we don't see that. And we just don't see the same impact doing that, that maybe others do because of who our customer is. And again, what we want to win in the marketplace is winning with the areas I just mentioned. Operator: And the next question will come from Chuck Cerankosky with Northcoast Research. Charles Cerankosky: To what degree, if any, would Sprouts slow down new store openings to deal with an increased level of shopper caution? Jack Sinclair: Yes. I think, Chuck, I think we're really positive with the way the new stores are responding as we've called out a couple of times throughout. We're seeing really strong openings. We're seeing really good comps out of the second, third, fourth year vintages, and that's continued. We're continuing to get markers here on '24 vintages as they get into the comp base here in Q4 and into next year. But the results have been positive there. The customer is telling us they're looking for Sprouts and a Sprouts-like solution, and we're excited to get into as many communities as we can. Over the long term, we'll see how the pipeline plays out and those types of things. But right now, we're pretty bullish on the white space and pretty bullish on the performance we've seen. Nicholas Konat: We've got a clear purpose to help people live -- we've got a very clear purpose to help people live and eat better. And the opportunity that we've got to do that by taking our brand across the country into places where they don't exist is a key part of what we want to achieve going forward. And we're absolutely delighted by the way new stores are opening and the teams that are making this happen are doing a terrific job, and we're continuing to grow on it. And we have absolutely no intention of backing off from that. At the moment, really excited about our new stores, and it really fulfills the purpose of what everyone here is working to try and do, and we're excited about it going forward. Charles Cerankosky: Do you sense any need to maybe promote a little differently or more aggressively with some of the new stores as they debut? Jack Sinclair: Well, I think -- I think the new stores are opening really well because I think we're getting better and better understanding where to build new stores, the models that we're building about where exactly the health enthusiast customers are, are working well. And the marketing team have done a really nice job in different locations, communicating the values and what we have and grow the business within each market. We're a pretty unique business, 24 states, relatively small business, and we're going to get to a lot more states over the next year or 2 as we -- as Curtis talked about in the Midwest and the Northeast corridor. So we're going to have to think about having a different marketing approach by market, but not in terms of promotional approach. We're not going to be doing big aggressive things to drive people into the store. Nicholas Konat: Chuck, I'd just add one of the things that's been really positive in the way that we've marketed those new stores is more about getting -- it's getting into the local community and getting more local earlier in the process to really build some excitement around the store and some enthusiasm in the local community. And so again, it's just about telling our story. It's about engaging with the community, and we've seen a lot of positive traction when we've showed up in some new places. Operator: I see no further questions in the queue at this time. I would now like to turn the call back over to Jack for closing remarks. Jack Sinclair: Well, thanks, everybody, for taking the time and showing so much -- asking such great questions and showing so much attention to our company, and we look forward to continuing the dialogue with you going forward. Thanks again. Take care. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.
Andrew Angus: All right. Good morning, and welcome to the Fluence Corporation 3Q 2025 Results Webcast. My name is Andrew Angus, and I look after Investor Relations for the company. In a moment when everyone's entered the room, I'll hand over to Tom Pokorsky, CEO; and Ben Fash CFO, to conduct the webcast. All right, Tom. I think we're ready to go. So over to you. Thomas Pokorsky: Hello, everyone. Welcome to the Fluence Q3 2025 Quarterly Conference Call and Activities Report. As Andrew said, I am Tom Pokorsky, CEO and MD. And with me today is Ben Fash, our CFO. Well, we continue to make progress on our One Fluence strategy and our growth plans in the higher-margin market sectors. Our year-to-date revenue at the end of Q3 was over $52 million, which represents over a 70% growth from Q3 of -- year-to-date Q3 of last year. A good deal of that increase is, of course, due to the fact that the Ivory Coast Addendum continues to progress, which was stalled last year for most of the year. However, we also saw about a 26.6% growth in our SPS revenues, which is a critical part of our growth plans in our new strategy. Our EBITDA for the first 3 quarters is $1.2 million, representing a growth over the last year of about $2.6 million for the quarter and $6.2 million year-to-date. While a significant amount of the increase is due to the increased revenue from IVC, which is Ivory Coast, excuse me, we did have EBITDA growth in all of our units, except for the Industrial Water & Reuse who basically had a strong first half last year, but they will also end up growing this year at the end of the year. The gross margins in our key business units continue to grow, but the year-to-date gross margin is a bit less than last year because of the significant revenue contribution of Ivory Coast which has a much lower margin than the rest of our business, as you are well aware. However, we continue to make progress on rightsizing of the business and our SG&A is coming in at about $800,000 less year-to-date, which is about 5% less in the first 3 quarters of 2024. Our order bookings were strong in Q3 at over $17 million or nearly about 10% higher than Q3 of last year, which gives us a backlog of over $75 million at the end of the quarter. We also expect Q4 to be a strong booking quarter, which is important as we also expect revenues to be strong in the fourth quarter, and we need to keep adding to backlog to start next year. This all adds up to us maintaining our guidance for the year of between $80 million and $95 million in revenue and EBITDA of $3 million to $5 million, albeit, I think we'll be at the lower end of that guidance. Before I turn it over to Ben to dive deeper into the financials and cash flow, I'd like to comment on a few key wins of the quarter in early October. You may recall that a significant part of our growth strategy is the One Fluence strategy. That is the strategy where instead of having each individual business unit work almost on their own, we are trying to work as a global company with all business units cooperating with each other. And I think some of the wins that we pointed out in our key recent orders for Q3 and October is a good example. And I'd like to point out, I highlight a couple of them. First, there was a $2.2 million order for our beef processing plant in Brazil. This was a job that was originated by our Italian operation, and it was an IWB project that had some -- had to overcome some tax and tariff issues in Brazil because they were from Italy. By working jointly with our IWR unit in Argentina, we are able to maintain a reasonable competitiveness on the project, and we won the job. Without the cooperation between the 2, I do not believe we would have carried that job. The next project I'd like to highlight was the one we just announced yesterday in Saudi Arabia. It's a project called Qurayyah, it's a power plant in Saudi Arabia. It's a water treatment plant for a power plant in Saudi Arabia. Technologically, it's not a big challenge. It's a reasonable design but because of the power plant situation there are significant documentation requirements and engineering requirements that have to be put in place. In addition, it's got a very tight timetable. We were concerned that this project would cause us issues in carrying out the project. And we engaged our Industrial Water Group in Argentina to work on it with our Municipal Group who happens to manage the Mid-East group, which is where the order originated, and between the cooperation of these 2 units, our Industrial Water Group will do the project management, the engineering and the documentation on the job which will be done quickly and efficiently because they are very experienced in that kind of work. So again, the cooperation between business units really helped land a $12.2 million order, which is officially under our Municipal Group, but it will be carried out by the Municipal and the Industrial Water Group. So these are important wins for us, and they would not have been there without the cooperation of multiple business units. So it's starting to show positive numbers out of our One Fluence strategy. In addition, finally, I'd like to point out a couple of other significant orders on that list. One of the other parts of our strategy was to grow North America, and particularly grow with the MABR Group, which is our Municipal Group and the MABR technology. You'll note there's a $2.3 million for an Idaho real estate development, and it's an MABR project of decentralized containers but it's a significant MABR order in another state in America. And as I've told you before, that each state requires various approvals to get technologies approved. So we are making headway and got a significant order out of it. That's a big win for us moving forward in North America. And then finally, you'll notice on the list, there's a couple of small jobs. We also got an MBR in Hawaii. We got an MBR in Jamaica out of the North American group. So our strategy to grow the North American market, especially with our MABR technology is proving sound. I'm very pleased at the progress we're making in our new strategy, and we're now starting to gain traction, and it's starting to show up in our numbers, which is important to all of you, of course. Now I'd like to turn it over to Ben to do a deeper dive on the financials, the cash flow, and you'll probably go into the segment financials, too. So Ben, do you want to take it over? Benjamin Fash: Yes. Thank you, Tom. Good morning, everyone. As Tom said, my name is Ben Fash, I'm the CFO of Fluence, and I'd like to welcome everyone to our Q3 2025 business and financial update. As always, we appreciate your time today and your interest in Fluence. And I'm going to hit on a lot of the factors that Tom talked about, but maybe dive into a little bit more detail, particularly at the business unit level. So as Tom said, Q3 was our strongest quarter of the year, and the company has also performed very well on a year-to-date basis. We've significantly outperformed the 3 quarters of 2024 and have positioned ourselves really well for a strong finish to the year in fiscal 2025 as we anticipate an even stronger Q4. Year-to-date revenue was $52.4 million, which was $22.1 million or 72.9% higher than the same period in 2024. Clearly, the increase in revenue from the Ivory Coast Addendum project is the biggest reason for the strong growth as it went up by $18.5 million compared to the prior year. But as Tom noted, our SPS and recurring revenue is also experiencing double-digit growth. More importantly, Q4 is expected to be the strongest quarter of the year in terms of revenue contribution. And that's due to a number of our backlog projects accelerating, combined with the continued progress of the Ivory Coast Addendum project. As a result, we are forecasting strong EBITDA in Q4 and fiscal 2025 overall. As a result of the revenue growth in the quarter, EBITDA was $1.2 million in Q3 and on a year-to-date basis. That represents an increase of $2.6 million over Q3 of last year and $6.2 million when you measure it against the year-to-date period. In addition to the revenue growth the company has experienced on a year-to-date basis, we have also been able to continue to control costs as we saw an $800,000 reduction in SG&A and R&D and that also contributed to the EBITDA growth on a year-to-date basis. Gross margins were 28.8% year-to-date Q3, that represents a reduction of 3.0% compared to the prior year, but that's mostly due to the lower gross margins related to the Ivory Coast Addendum project and the large revenue contribution that project has. That said, gross margins across our core businesses continue to perform well. Municipal, Industrial Water & Reuse and Industrial Wastewater & Biogas all improved their gross margins on a year-to-date basis compared to the same period last year, illustrating the margin strength of our high-margin SPS and recurring revenue segments. Each of these business units have benefited from positive project margin variances as well, we also had several accrual reversals in the quarter from some historical projects. All business units other than Industrial Water & Reuse saw EBITDA growth through the first 3 quarters of the year, and I'll talk about that in a second. The Ivory Coast Addendum contract obviously contributed the most with $2.6 million of EBITDA through 3 quarters compared to a loss of $400,000 in the year-to-date period in 2024. Industrial Wastewater & Biogas saw an EBITDA increase of $800,000 in the year-to-date period, primarily on strong revenue growth. They are up $3 million on a year-over-year basis. Municipal Water and Wastewater saw revenue and EBITDA growth of $1.3 million and $1.1 million, respectively, through the first 3 quarters of this year, in part due to some positive project margin variances as well as a few accrual reversals on some historical projects. Southeast Asia and China is ahead of prior year as well on a year-to-date basis, both in revenue and in EBITDA, and it's expected to reduce its EBITDA loss in fiscal 2025 by as much as half. So while Industrial Water & Reuse is just modestly behind its performance, both in revenue and EBITDA through the first 3 quarters of this year, that is mainly due to some lower spare parts revenue in the first half of the year. But the business is forecasted to finish 2025 in line with its numbers from last year and frankly, maintain the highest EBITDA margins of any business unit in our company. So the business continues to be -- performed very well. And lastly, corporate cost savings of $800,000, which we've seen in our SG&A and R&D, obviously also contributed positively to our EBITDA through the first 3 quarters of 2025. I'm going to just flip ahead to a slide here. In terms of orders, Fluence booked $17.2 million and $39.7 million in Q3 and on a year-to-date basis through Q3 of this year. And that represents on a quarter-over-quarter basis, 9.6% growth and a modest reduction of 1.9% reduction on a year-to-date basis. But that said, as Tom had talked about, the large Qurayyah project that we just booked this week will more than make up for that slight decrease on a year-to-date basis through October. Even through Q3, Municipal Water and Wastewater in North America, Industrial Water & Reuse, Industrial Wastewater & Biogas and Southeast Asia and China saw a combined increase in orders through the first 3 quarters of $13.4 million or almost 50%. And Q4 is actually forecasted to be our best quarter of the year in terms of orders and exceed Q3 2025, which was our best quarter to date. So as a result of those orders, our backlog as of September 30 is $75.7 million. And when you take a look at the year-to-date 2025 revenue plus the backlog forecasted to be recognized in 2025, you get to $76.5 million. Add another $3 million of recurring revenue that we expect in the quarter and were over $79 million. And most importantly, of that backlog, over $50 million of it is forecasted to be recognized in 2026 and beyond. And so as Tom said, given the strong backlog position, the company is forecasting really strong revenue growth for fiscal 2025. We're maintaining our guidance on both -- of revenue of $80 million to $95 million and EBITDA of $3 million to $5 million, noting, however, that we are likely to finish the year closer to the low end of the range. Just on the cash flow front, the company had a really -- another really strong quarter. We ended Q3 2025 with $14.1 million in cash and $4.1 million in security deposits. Our operating cash flow in the quarter was $2.2 million, and on a year-to-date basis, totaled $7.1 million. Now this is primarily due to collecting about EUR 4.2 million related to milestone 5, the Ivory Coast Addendum in late September 2025. Even though that collection came in late, that really meant that we made a collection but had not yet settled a number of payables that were related to that collection. And so therefore, we're forecasting Q4 2025 to have negative operating cash flow. However, for the full year fiscal 2025, our operating cash flow is forecasted to remain positive. And then lastly, sorry, I wanted to give an update on Ivory Coast. So commissioning on the main works is now effectively complete, with the exception being the stabilization of an embankment for a pipe crossing of the swap. And this is largely expected -- sorry, and this will largely be completed in parallel with the Addendum works, which we're now working on. This work is expected to commence in Q4 of 2025. And the Addendum works are currently progressing on budget, largely on schedule. However, this embankment stabilization work and pipeline crossing has experienced some delays in recent months. The work is expected to start in Q4, as I noted, at which point the project will try to make up some of those delays as it progresses towards completion. Financially, the Addendum project is progressing well through Q3 2025, revenues in line with forecast, and it's a cash flow positive project. As of 30th September, the company had collected 5 milestone payments under the Addendum totaling EUR 30.3 million. That represents about 63% of the total payments. We are expecting the next milestone payment in November and has already been approved. Fluence is continuing its efforts to secure a long-term O&M contract for the plant as well. Negotiations will commence in the coming weeks after the technical proposal and business plan is submitted to the government and is reviewed. The start of the long-term O&M contract requires the Addendum works to be completed before the plant can begin producing water. Fluence is currently maintaining the plant on an interim basis, which positions the company well to be awarded the long-term O&M contract currently being negotiated. So in conclusion, Fluence continues to progress its strategic transformation through Q3 and 2025 -- sorry, and has demonstrated significant growth compared to the same period in 2024. We're also very well positioned for the strongest quarter of the year in Q4, which would result in a strong fiscal 2025 overall. We remain encouraged by the outlook for Q4 and into 2026, particularly with the strong start to order bookings in Q4 with that $12 million Qurayyah order. This is expected -- orders are expected to continue to be strong through the rest of Q4, and we're forecasting to have our strongest order booking quarter of the year. The business has enough work to deliver on its revenue and EBITDA guidance as long as we don't experience any material project delays. Combine that with the healthy and growing gross margins in our core businesses, a lower cost base, better cash management practices, and management remains optimistic about the opportunity to build a sustained -- to build sustained profitability and positive cash flow. So at this time, I will throw it back to you, Tom, for any concluding remarks, and then we can take questions from the webcast participants. I want to thank everyone again for your time and your continued interest in Fluence. Thomas Pokorsky: Yes. My only concluding remarks is a couple of years ago, we put in place some new strategies. And while it took a bit to turn the big aircraft carrier around, I believe we have turned it. And we are moving forward in a real positive fashion, and we continue to book nice orders with higher margins. And I think the outlook for the future is very, very good. With that, if there are questions, we can bring them up and look at them and answer them. Benjamin Fash: Yes. Thank you, Tom. I'll moderate the Q&A here and toss some over to you that might be appropriate or answer them myself. The first question was you mentioned a tight time frame on the Saudi project, I think referring to Qurayyah. Could you please provide some further detail on time frames for the project? Tom, why don't you take that one? Thomas Pokorsky: Sure, sure. Qurayyah is scheduled to start immediately. In fact, we've already had the kickoff meetings on it. It is scheduled to be complete, I believe, in the first half of 2027 with the majority of the work being carried out throughout 2026. The 2027 work is largely related to start-up and performance testing. So the bulk of the work will be done in 2026. And quite honestly, with all the documentation and approval requirements typically for a power plant project, that is a very tight time schedule. It's not that tight to build the product, it's tight to go through all the paperwork to get started building the product. And so we expect to take a significant part of that revenue in 2026 with a little bit in early 2027, which is mainly start-up and warranty work and things like that. So it's less than an 18-month completion for a $12 million order, which is pretty tight, in my opinion. Benjamin Fash: Yes. Thanks, Tom. When is the production facility in the U.S. due to be commissioned and start production? Thomas Pokorsky: That is -- do you want me to take that, Ben? Benjamin Fash: Why don't you take that, Tom? Thomas Pokorsky: That's a very good question. We are ready. We have the equipment in place. We have the lease ready to sign, and we are -- we are not needing the demand of that plant just yet. So we have been strategically delaying a little bit ourselves to stop the cash flow requirements until they're needed but we expect that to be complete by year-end. Benjamin Fash: The other thing I'd say for that as well is, as Tom noted, the demand for production out of that facility is not required at this moment in time. And as we start that plant up, initially, it's likely that the cost to produce the membrane are going to be higher than our Chinese plant. And even with the tariffs that we have in place -- that are in place right now, and that situation has largely stabilized, the cost of production is still lower coming out of that plant. So in part due to remain competitive on our bids, we will likely fulfill a lot of our MABR demand through that facility as we start that facility up. Thomas Pokorsky: And I'll add a comment on that, Ben. The bottom line is all of the MABR projects we have in North America currently are typically private entities, not municipalities. One of the biggest reasons we need a U.S. membrane manufacturer -- manufacturing facility is because of the Buy American clauses for municipal funded contracts. We are still -- those projects take multiple years to go forward. We have a number of them in our pipeline, but they're not needed just yet. And all the Wilshire Road, the Spring Rock project, the Hawaiian project that I talked about, and they all have -- they're all private, so they don't have to comply with the Buy American. And since it's cheaper for us to deal with China where we have the membranes built, we are building them there. And by the way, the team did yeoman's work to try and deal with the tariff requirements and we didn't get hurt badly at all on the tariffs with all the hoopla involved. But as we -- and the one municipal job we did get for membranes was San Leandro. They got, what do you call it, bypass from the laws to do that project. They got an exemption, exemption is the word I'm looking for. So we could still build that in China, and that's where it was built. But it's coming, and we got to get it done. But we're trying to save as much cash as we can and save the expense until we need it. So we're ready to go. We're just holding off until we absolutely need it. Benjamin Fash: Okay. Tom, this next one is for you as well. Can you talk through the demand from livestock/dairy farmers in similar industries in the U.S.A. for wastewater to energy plants? Thomas Pokorsky: That's a very good question. We are having a lot of demand everywhere else in the world, but the U.S. right now. There are a lot of preliminary projects being set up in our pipeline for dairy and wastewater. We got one dairy job in the U.S. but beef producing and poultry producing, we haven't gotten yet, and we had thought there would be a faster movement because of a previous law passed a couple of years ago called the Inflation Reduction Act, where they put a lot of money into renewable energy projects in the form of tax credits. But it appears those projects just didn't take off yet. They're in the pipeline, we're working on them, but they didn't go forward. We still do see a large potential but they just haven't come to pass in the U.S., but we are getting them in Ecuador, in Brazil, in Italy and in Spain. So other parts of the world, they're moving forward, but it appears North America is just a little slower than we had hoped. They're still going to come. There's still going to be there. It's just -- I don't know what the reason is, but they're just slower to develop in the U.S. Benjamin Fash: Yes. The -- I'll take the next few questions here, Tom. Will the anticipated debt refinancing be finalized this calendar year or more likely next year? It won't get finalized this year. We're targeting -- the facility matures in Q2 of next year, and that's when we're targeting refinancing that facility. There is a question, I lost connectivity, but is there any 2026 guidance in which region showing the greatest potential for growth over the next year or 2? We have not provided any guidance on 2026. We did provide a backlog number, but are not going to be providing guidance at this point in time for 2026. Another question on this line. Fiscal 2026 backlog to revenue forecasted of $50 million, how much of this relates to Ivory Coast? We expect we'll finish the year with about $12 million of Ivory Coast backlog to start 2026. Are you in the running for AI-related projects? Was this the recent $12 million win? Was it AI related? I think, referring to Qurayyah. I'll maybe answer, and then Tom, you can follow on with that. I would say the reality is, is that the thirst for increased power generation is very significant. There is a lot of demand for increased power generation for AI, for many other industries as well. It's not just AI, even though that's kind of the buzzword that's out there. So I don't -- we don't have any insight as to exactly who is the main buyers of this power. But Saudi is certainly a leader, we know this, in trying to attract AI data centers and other high energy consuming industries. So this is one of many contracts that are out there and available in terms of power generation and the water demands associated with it are very, very high. Tom, anything you'd add to that? Thomas Pokorsky: Yes. I think both, in general, electricity production is growing dramatically because of AI and other reasons. Currently, the company we signed the purchase order in Qurayyah with has got 2 other power plants are going to be working on very similar to the Qurayyah plant. So they are dealing with billions of dollars worth of power plants right now. And it does give us the possibility of adding multiple orders with that same client if it works out okay for them, and then for us. But I can also tell you in the U.S., there are these data centers being built all over the country and they're a major source of news right now. In my home state in Wisconsin, we have 3 of them on the drawing boards, and all 3 are being argued with these local municipalities about where they're going to get the power and the water for them. There's a significant amount of water treatment. So we have, in our pipeline, a number of data centers for water treatment and a number of power projects for water treatment for power projects. I believe it's going to be an explosion in the future. I really do. But right now, they're all pipeline projects for us. Benjamin Fash: But the great news is we have decades of installation history in this space and many recent wins that kind of demonstrate our capabilities. And one of the things, again, going back to Tom's earlier comment around One Fluence, what we're now accessing is these global opportunities but leveraging the expertise that we have out of our Industrial Water & Reuse group in Argentina. So having them be part of the sales process, even if it's a lead that they didn't generate initially, is tremendously value. And it's what the customers value ultimately is they want to see that you've done it, done it several times and done it successfully. Thomas Pokorsky: Yes. I think we -- I think if I'm not mistaken, Ben, we have 3 power plant projects in our backlog right now that we're working on. And I think [ Rubica ] is one, right? Qurayyah, and there's one in Argentina, right? Benjamin Fash: That's [ Aniva ], yes. Thomas Pokorsky: [ Aniva ]. So we're doing a lot of work in the power industry right now, and I can only see it growing. Benjamin Fash: Okay. There are no additional questions that came in. So as usual, we want to thank everyone for their support and their interest, the questions and the engagement. So at this point in time, I think we'll conclude. Any parting comments, Tom? Thomas Pokorsky: Other than that, I am very, very pleased right now that we are moving in the right direction. As I said before, I think we turned the big ship around and it's moving in a positive direction. And there's a lot of good outlook out there, and we're very pleased with our progress and what the future holds. So I thank you for your support and your interest in our company, and we'll continue to work hard to improve it. Thank you for tuning in. I appreciate it.
Operator: Good day, and welcome to the CBIZ Third Quarter 2025 Results. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Lori Novickis, Director of Corporate Relations. Please go ahead. Lori Novickis: Good afternoon, everyone, and thank you for joining us for today's call to discuss CBIZ' third quarter and year-to-date 2025 results. As a reminder, this call is being webcast and a link to the live webcast, along with today's press release and corresponding investor presentation can be found on the Investor Relations page of our website, cbiz.com. An archived replay and transcript will also be made available following the call. Before we begin, we would like to remind you that during the call, management may discuss certain non-GAAP financial measures. Reconciliations of these measures can be found in the financial tables of today's press release and investor presentation. Today's call may also include forward-looking statements regarding our business, financial condition, results of operations, cash flows, strategies and prospects. Forward-looking statements represent only our expectations, estimates and projections as of the date of this call and are not intended to give any assurance of future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could cause future results to differ materially, and CBIZ assumes no obligation to update these statements, except as required by law. A more detailed description of such factors can be found in today's press release and in our filings with the Securities and Exchange Commission. Joining us for today's call are Jerry Grisko, President and Chief Executive Officer; and Brad Lakhia, Chief Financial Officer. I will now turn the call over to Jerry for his opening remarks. Jerry? Jerry Grisko: Thank you, Lori, and good afternoon, everyone. I'm pleased to have this opportunity to provide you with an update on our performance and our outlook on the business moving forward. This Saturday marks the 1-year anniversary of the Marcum acquisition, and we couldn't be more pleased with, first, the quality of the Marcum organization; and the complementary fit between our 2 great companies. Next, the progress that we've made on integration, which is on or ahead of schedule in most key areas. And finally, the opportunities we now have to accelerate growth and break away from our competitors. We knew going into the acquisition that Marcum was an outstanding firm. What we've learned since has even surpassed our initial expectations. They brought great people, significant scale in key geographic markets and a substantial and attractive mid-market client base that is similar to ours. They had also made substantial investments in areas that were strategically important to us and that complemented investments that we had made in other areas of the business. We are now able to leverage those investments company-wide, including go-to-market industry groups, AI and other crucial technologies as well as offshoring resources. Marcum also had very strong leadership throughout the organization, a significant number of whom have assumed key leadership roles in the new CBIZ. From the outset, we were committed to bringing together the best of both companies. We now have a blend of leaders and are establishing standardized processes, policies and systems that allow our teams to bring the full value of the combined company to our clients. Now turning to integration. To support the ability of our teams to work together as One CBIZ and thereby enhancing collaboration, resource sharing and the pursuit of new business opportunities, we've aligned our collective teams under a common reporting structure. We've adopted many standardized operating processes and systems that allow our teams to work together in key areas, and we've begun to co-locate team members in cities where we both have offices. To improve operating efficiency, we've made significant investments in our shared resources centers, including by adding technical resources to our national tax office and to our national assurance quality and support partner, CBIZ CPAs. We've also invested in transformation and innovation team, which now has over 60 members devoted to developing new products and solutions for our clients and deploying AI and other technologies to improve operating efficiency. And we've increased our offshore resources in both India and in the Philippines. In addition, to begin unlocking the value of the combined entity to our clients and to accelerate growth, we've identified and stood up 12 industry groups to bring unmatched breadth and depth of services to our clients through solutions that are highly tailored to meet their specific needs. We've streamlined many client-facing processes to improve the client experience and to allow our client-facing teams to be more responsive. We've launched CBIZ Vertical Vector AI to enable our clients to leverage our proprietary AI platform and capabilities and to improve their business performance. And we've launched a new highly visible national brand campaign to promote the new CBIZ and highlight our expanded capabilities to the market. This campaign is already showing signs of improved brand awareness. Clearly, a lot of work has been successfully completed in a short period of time, and there are still more opportunities ahead. We are pleased with our retention of top talent and key clients through this transitionary period, and we're competing favorably on both fronts, which positions us for accelerated top and bottom line growth beginning in 2026 and beyond. Brad will review more details on our results in a minute. But before I turn it over to him, I wanted to provide you with a few of my own perspectives on the third quarter and what we're expecting for the remainder of the year. We were pleased to see that our recurring businesses held steady during the quarter. Our core accounting and tax business continued to deliver organic revenue growth consistent with the first half of the year and increased demand for our project-based advisory businesses delivered improved growth relative to the first half. Encouragingly, as we look to finish out the year, the combination of our broader service offerings and improving market conditions should lead to increased conversion of our late-stage pipeline opportunities. We have clear line of sight to achieve our 2025 revenue outlook and the entire leadership team and all our client-facing leaders are laser-focused on capitalizing on these opportunities and trends. With that, let me hand it over to Brad to cover further details on our quarter and our financial outlook. Brad? Brad Lakhia: Thank you, Jerry, and good afternoon. As Jerry said, we are very pleased with our third quarter results. Revenue and cash flow were in line with our expectations and earnings exceeded. The benefits of greater scale and the resiliency of our business model once again are reflected in our operating and financial performance and leave us well positioned for sustainable long-term growth. On a consolidated basis, third quarter revenue was $694 million and year-to-date revenue stands at $2.2 billion, a 58% and 64% increase, respectively, driven by the acquisition. For the quarter, adjusted EBITDA increased to $120 million and now stands at $476 million year-to-date. Adjusted EBITDA margin was 17.3% in the quarter and 21.5% year-to-date. Year-to-date adjusted EBITDA margin increased approximately 325 basis points versus last year, with lower incentive compensation expense representing approximately 250 of the 325 basis point improvement. Excluding the impact from lower incentive compensation, we believe our margin expansion is consistent or better than our historical performance, representing the realization of the expected benefits of greater scale. Third quarter adjusted diluted earnings per share was $1.01 per share, bringing our year-to-date adjusted EPS to $4.27 per share. Third quarter interest expense was $28 million, $23 million higher than last year, driven by higher debt levels incurred to fund the cash portion of the acquisition. Third quarter tax expense was $10 million, approximately $6 million lower than last year, driven by higher tax benefits related to stock-based compensation expense, lower pretax income and lower state tax expense, which resulted from recent tax planning actions. Our year-to-date tax expense was $76 million or $25 million higher than last year, primarily driven by an $88 million increase in pretax income. Our year-to-date effective tax rate was flat compared to prior year. Turning to our Financial Services segment. Third quarter revenue was $579 million, up $256 million or approximately 80%. Financial Services adjusted EBITDA increased 86% to $126 million, a margin of 21.7% Revenue growth was largely driven by the acquisition. On an estimated pro forma basis and consistent with the first half, we delivered low single-digit growth in our core accounting and tax service lines, which mitigated headwinds in our SEC-related business. In addition, our advisory business captured improved market conditions in relation to the first half, which enabled single-digit growth. Year-to-date, Financial Services revenue increased by 85% to $1.9 billion and adjusted EBITDA for the segment nearly doubled to $463 million. In terms of pricing, we were pleased to deliver strong mid-single-digit rate increases in the quarter and year-to-date. We are competing favorably and realizing rate increases that exceed overall inflation and capture the value of our clients gain from our leading service capability. Revenue from our Benefits and Insurance or B&I segment was $103 million with adjusted EBITDA of $22 million. Year-to-date, we're pleased with revenue growth of 2.7% and adjusted EBITDA growth of 6.7% for this segment. Turning to the balance sheet and capital allocation. We ended the quarter with net debt at approximately $1.6 billion and leverage largely unchanged from the second quarter. We had approximately $300 million of available liquidity under our revolver on September 30. In the third quarter, we took the opportunity to repurchase approximately 800,000 shares at a value of approximately $56 million. This includes approximately 400,000 shares repurchased under the terms of our right of first refusal and 400,000 shares in the open market. This brings our year-to-date share repurchases to $128 million or 1.8 million shares. Our current outstanding share count stands at approximately 54.1 million shares, reflecting a net increase of approximately 3.9 million shares since year-end. Since we've had several questions regarding the potential impact of the shares issued and yet to be issued related to the acquisition, we have included a slide on Page 18 of our investor presentation posted today that provides some additional information to help clarify this dynamic. As a reminder, our U.S. GAAP earnings per share and adjusted earnings per share are reported on a fully diluted basis, which assumes all issued and unissued shares are outstanding. As of September 30 year-to-date, the weighted average fully diluted share count stands at 63.6 million shares. In terms of capital allocation, our long-term priorities are unchanged. On Slide 21 of our investor presentation, we have included a summary of near-term and long-term capital priorities. You will see our near-term priorities are as follows: our first priority is funding organic growth and maintenance capital. This will include disciplined and targeted investment in client service delivery and operational excellence with a greater focus on technology, including AI, improving our offshore capability and capacity and our ongoing investment in attracting and retaining the very best talent in our industry. Our second priority is debt repayment. We continue to target allocating a significant portion of our free cash flow to bring our leverage to a target range of 2x to 2.5x over time. When we set this target upon announcement of the acquisition, we assumed the majority of our free cash flow would be allocated to delevering and estimated we could achieve this goal exiting 2026. Given the opportunity we've had to allocate capital to share repurchases in 2025, the timing for achieving this range may shift to 2027. Our third priority is share repurchases and/or selective strategic high-return M&A. At our current valuation, we believe share repurchases are accretive. Therefore, our approach is to remain balanced, opportunistic and disciplined with share repurchases and delevering. And with regard to M&A, as always and consistent with our history, we will continue to evaluate targeted bolt-on strategic opportunities in high-growth service lines and key geographic areas. The strength and scale of our business model and our ability to generate meaningful free cash flow provides us with continued confidence in our ability to fund investments and high-return growth initiatives while simultaneously achieving our target leverage. I will wrap up my comments with guidance and modeling. We are maintaining our revenue and earnings guidance for the year. At this time, we continue to have line of sight to the low end of the revenue guidance of $2.8 billion to $2.95 billion we set earlier this year. We are also maintaining our adjusted EBITDA and adjusted EPS guidance, and we look forward to resuming reporting organic growth metrics in 2026. In terms of our revenue guidance, there are 3 factors that we believe will enable us to deliver the low end of the range. First, the growth rate we have achieved thus far in the year within our core essential recurring accounting and tax businesses has proven resilient and sustainable, and we expect this to remain true in the fourth quarter. Second, the improved market conditions we witnessed in the third quarter have also continued thus far in the fourth quarter, and this will allow us to capture revenue opportunities in our nonrecurring project-based businesses. And finally, we plan to execute on a key operational excellence initiative that we expect will yield improved fourth quarter staff utilization and will allow us to operate more efficiently in future periods. Our guidance and modeling assumptions are included on Page 17 of our investor presentation, and there are two updates I would like to highlight. First, we have updated our synergy goal from the acquisition to a total of $50 million or more. We expect to realize $35 million in synergies this year and the majority of the balance in 2026. Slide 20 of our investor presentation provides further information on these synergies. While we've made a great deal of progress on all fronts, key real estate decisions for some of our largest metro markets remain ahead of us. Therefore, we believe there is more opportunity here, and we will provide further updates as we take actions. Along with updating our synergy goal, we've updated our integration cost estimate for 2025. We've increased our estimated 2025 integration costs by $14 million to $89 million, which is primarily driven by additional severance costs related to streamlining our combined staffing levels. We do not currently estimate any change to our 2026 integration costs. Second, we provided further modeling information on our operating expenses, including information on total compensation and benefits and our related incentive compensation programs. As you will see on Page 19, historically, our incentive compensation programs represent approximately 16% to 17% of our total compensation and benefits. For 2025 performance, we've been very careful to ensure our high-performing teams will be appropriately recognized for their 2025 performance during this integration phase. And we believe our remaining incentive pools are adequate to recognize, retain and motivate our teams. As we've highlighted previously, we have a variable pay-for-performance-based incentive programs designed to reward our team for achieving and exceeding growth, profitability and other operating goals. When our performance meets or exceeds targets, there's meaningful incremental shared value. Conversely, if goals are not met, the funding and the related expense is adjusted accordingly. While the 2025 incentive pools reflect this reality, we have also preserved appropriate funding to recognize our team members for the many important and meaningful accomplishments that are setting us up for success going forward. With that, I'll turn the call back to Jerry for some closing remarks before we turn the call over for questions. Jerry Grisko: Thank you, Brad. To reiterate a few key points, as we celebrate the 1-year anniversary of the Marcum deal, we are extremely pleased with the foundation we have now built that positions us to accelerate long-term value creation. Looking ahead to 2026, we expect increased momentum as we transition to the next phase of growth and are seeing strong evidence that we now have what it takes to break away from our competitors. Our success will be rooted in our commitment to providing unmatched client experience and operational excellence by investing in our people and state-of-the-art tools, including investments in our industry groups, data, AI and other technology capabilities as well as offshoring capacity. Together, these investments will deliver valuable client insights and impact and transform what's possible, unlocking shared value and driving sustainable long-term growth and profitability. With that, I will open the line to questions. Operator: [Operator Instructions] Our question comes from Christopher Moore with CJS Securities. Christopher Moore: Maybe we could start with pricing. It sounds like you talked about mid-single digits in Q3. I think prior to this, we were talking about 4% in '25 versus 6% or 7% in '23 and '24. I'm just trying to figure out how to view '26 and moving forward. Is 4% is that the new normal? Is there -- do you have much visibility on that at this point in time? Jerry Grisko: Yes, Chris, we're really not giving guidance into '26. But I will say as it relates to pricing, we're really pleased, first of all, this year to be realizing mid-single digits. I think that's above what we're hearing some of our competitors to be receiving in this market, and it reflects the strong relationship we have with our clients. Second, as we look forward, we've traditionally been able to get at least that kind of mid-single digits, and there's nothing structural in the industry that would prevent us from continuing to do that. So I would expect as we look into '26 and even beyond that, that, that mid-single-digit range is a pretty good target for us. Christopher Moore: Got it. Helpful. And you guys talked about some initial conflicts of interest with Marcum, but just generally trying to get a sense, have you lost any significant clients as a result of the Marcum acquisition? Jerry Grisko: Yes. Let me take that question in 2 ways. First of all, we expected to lose some clients, right? We knew that the staff business, for example, was declining going into the transaction as was some of the capital markets work they did. We sold off some business. We sold off some health care business. And then we had kind of the normal expected kind of conflicted clients, which candidly were below actually what we modeled there. So I'm pleased to see a lot of those things kind of in line with the model that we had. Put those things aside, we're really pleased with what we've seen as far as client retention rates to date and also staff retention rates. Christopher Moore: Got it. This might be a more challenging one. But just in terms of kind of thinking about rainmaking partners that are at CBIZ or now with Marcum being there. Just trying to get a sense to has there been much notable loss on that front? Jerry Grisko: Yes. I would say not notable. I mean we've had some people, of course, as you would expect, that were near retirement. But other than what you would normally expect, I wouldn't say significant notable losses in rainmakers. In fact, I think -- when I look at some of the wins which we've been looking at here, there's a significant amount of energy about what we can now bring working together through our industry groups and through the relationships that each brings to the other and the breadth of services and depth of expertise. And I have a couple of wins that I've kind of been looking at over the past week that are quite exciting. So I think there's really a lot of energy around the power of the combined entity or organization and what we can bring to the market. Christopher Moore: Helpful. And maybe just the last one for me. So Brad talked about, I think, integration costs going to be roughly $89 million this year. Understanding is that '26 will be a little bit less than that, but still very significant. Are there certain types of costs that are expected in '26 that are much different than the ones so far taken in '25? Or just kind of trying to understand how we can kind of characterize those one-timers in '26 versus '25? Brad Lakhia: Yes. No, overall, Chris, the nature and the kind of the overall mix of the integration costs will be overall pretty similar next year. Keep in mind, when you look at our integration costs, we have some retention dollars. There are some kind of retention dollars that are flowing through ratably in '25, '26. We would expect some of the mix to change this year. We had more in the way of some personnel severance-based costs where next year, we'll see some acceleration of real estate facilities-based costs. So there will be some mix there. But in general, the components are still the same. Operator: And the next question comes from Andrew Nicholas with William Blair. Andrew Nicholas: I'm going to start with a multi parter, so I hope you'll bear with me. But I just wanted to kind of ask about a few different kind of macro or end market dynamics. So I guess -- I think there's 3 or 4 here. I guess I'm wondering, first, if you've seen any benefit from the OBBBA in terms of your tax practice. Second, we've seen some market pressures in the insurance brokerage space this earnings season thus far. Just wondering if there's any softness that you've experienced in that part of your business? And then lastly, just from like an M&A market-sensitive project type work perspective, it sounds like things are getting a decent bit better to what you experienced in the first half, but any more color on what you saw in the period or in October to date would be great. Jerry Grisko: Yes, Andrew, let me take this. OBBBA, I'm glad you asked that question. As we've said many times over the years, whenever there's change in any kind of tax or other regulatory environment, that's always good for us, right? It gives us an opportunity to bring our collective thought leadership together and to bring that out into our offices and have our client-facing professionals bring those to the clients. And so we've done that. It gives us an opportunity to be in front of our clients and so yes, there has been a lot of discussions with our clients on that front and some increased revenue for sure. I think more to come. But we did see some lift in the third quarter as a result of kind of being in front of the clients and discussing things like OBBBA. So that's been positive for us. Second, turning to the soft market in the insurance industry. You may have seen that our benefits and insurance revenues were a little soft this quarter. That's exactly what it's tied to. It was really tied to some trend, some lighter trend in this period and some other factors within that P&C business as well as some softness in some of the more discretionary project work in that business. But largely just a soft P&C market compared to what we've seen in prior periods. And then as far as M&A, very pleased, as we commented, to see increased activity there compared to the first half of the year. And based on what we're seeing and hearing, we would expect that, that activity would continue kind of into the fourth quarter and hopefully into 2026. So all generally positive. Andrew Nicholas: Great. That's really helpful. In terms of the fourth quarter outlook, a lot of what you just described seems supportive of good growth to end the year and ideally sets you up nicely for next year. But is there anything you could kind of quantify for us on fourth quarter specifically in terms of what's embedded for pro forma growth? I know it's kind of hard from our vantage point to piece together the right base for Marcum last year, given it was only with you for a couple of months. But any color on kind of what rate the pro forma business would need to grow in fourth quarter or what you have line of sight into the fourth quarter? Brad Lakhia: Yes. Andrew, Brad here. Let me try to take the question. I guess I'll restate here a few things I highlighted in my earlier remarks, which is some of the kind of the underlying assumptions that we have for the fourth quarter revenue outlook. First, we expect the kind of that core recurring essential part of our business to continue to grow as we've seen thus far this year. Nothing has told us anything different 1 month into the quarter. Second, Jerry just highlighted and commented on improved market conditions that are allowing our more nonrecurring discretionary parts of our business to get back to some growth rates that are more encouraging for us. So we're seeing that still hold true thus far again in Q4, 1 month in. And then the third thing, we do have a kind of an operational excellence initiative underway where we will -- should realize upon successful execution, some improved utilization of our staff. So it's going to help us not only in terms of our overall staffing levels through the peaks and troughs of our business where there's seasonality, but will also allow us to hopefully drive some more improved revenue realization this year relative to last year. The last thing I'll say, which I didn't comment on earlier is -- and again, I know it's hard for you to kind of look at this because we only had 2 months of Marcum results in our fourth quarter last year. But we would say that in some respects, the Marcum business last year to this year provides a little bit of an easier comp for us for a multitude of reasons. So I think those factors give us confidence in the line of sight that we have. I would just say from a pro forma basis, we -- again, we're not -- we don't have a pro forma adjusted pro forma out there, but I have commented on kind of the additional $75 million that we would take off of the pro forma number that we published. So if you did some of that math and you try to square it away, Andrew, it's probably going to look like somewhere in the neighborhood of 6% to 8% growth year-over-year on our base Q4 revenue on a pro forma basis, adjusted for the things that we talked about previously, conflicted client revenue, the bleed off in the SEC or capital markets business, those kind of things. Andrew Nicholas: Perfect. No, that's in line with maybe what I would have guessed, but I appreciate that we're on the same page there. Maybe last one before wrapping it up is just on the margin puts and takes for next year. Obviously, I appreciate the revised or upwardly revised synergy target. I guess one point of clarification, the $35 million for those numbers that you outlined, that is realized synergies, correct, not actioned. Second... Jerry Grisko: Yes. Sorry, go ahead. Andrew Nicholas: Yes. No, yes. And then the second thing was just as we think about kind of the normalization of incentive comp next year, incremental synergies that you're getting from Marcum, kind of real estate, it sounds like offshore usage is ramping up pretty nicely. Is there any other kind of things that we should keep in mind as we try to estimate the margin trajectory next year because I understand that this year is pretty unique for a variety of reasons. Brad Lakhia: Yes. So let me start with the synergy piece first. So we have increased and pleased to have increased the synergy outlook for the acquisition from $25 million to more than $50 million. The $35 million that I mentioned in my remarks, Andrew, is the amount that we expect to fully realize in this year's operating income, right? So that is not like a run rate number. It is what we expect to realize in 2025. So that's reflected in our outlook and our guidance. And then we'll have an incremental -- we expect most of the majority of the other $50 million to come next year. And then I'll just also say, listen, the real estate facility work is still ahead of us. There's a lot of great activities going on there. In particular, in some of our larger metro markets, we haven't made formed kind of decisions and actions there. So I do expect further updates on that. So we think we're pretty pleased with the $50 million-plus number and may be able to provide you some more updates on that as we move through 2026 and make some of those decisions. In terms of kind of the -- obviously, we're not giving 2026 guidance at this point. But I'd point you to a couple of other things beyond synergies. One is, and you highlighted it, just other operational efficiency initiatives that we have underway, which not only include offshoring, but also include other initiatives, like I said, around utilization of staff and how we're balancing that. And then also some investments that we're making that we think will drive other operational efficiencies around technology, and that includes, in some respects, AI as well. Finally, I would just say, again, without giving guidance here, we do expect our top line to grow next year, and we'll provide more information and more outlook on that in February as we ordinarily would. But the drop-through effect of that top line growth is something that we're certainly driving hard for. So that's another lever that we have and one we'll be focused on as we go through our planning cycle here for 2026. Operator: The next question comes from Marc Riddick with Sidoti. Marc Riddick: Thanks for all the detail that's been provided and certainly I appreciate there's a lot of work that goes into that. I wanted to sort of maybe shift gears a little bit to maybe some of the big picture issues and questions. Maybe you could sort of bring us up to date on maybe what you're seeing with client feedback and activity related to potential for rate cuts, which might tie into the M&A conversation, but also the shutdown so far this year, if there's anything that you've seen there or if there's sort of a historical landmark that you would sort of use in situations like this? Jerry Grisko: Yes, Marc, this is Jerry. I'll take them one by one. As far as the rate cuts, obviously, that's very recent news, right? So we really wouldn't have heard much or seen much response to that, although that's just positive, right? I think as we've always said, 72% of our business kind of the recurring essential, that's -- that work is going to come in the door in more or less favorable times, really doesn't matter. But it's the discretionary work that we do that the clients really step back and they need more clarity. When there's positive signals in the market like rate cuts, that causes them to have more confidence and then therefore, causes them to make investments. And when they do that, they turn to us and it frees up those discretionary projects for us. So all very positive. As far as government shutdown is concerned, we haven't seen a lot there -- the only place we've seen a little bit of impact is in our government health care consulting business. As you know, those are long-term contracts with largely state agencies, but those state agencies do get federal funding. And when there is any kind of slowdown or cutbacks at the federal level, from time to time, that will delay contracts. Those contracts that work has to get done, that work -- that revenue comes back and the contracts stay in force, but it sometimes affects the timing of that revenue stream. Marc Riddick: Okay. Great. And then shifting gears, maybe you could talk a little bit about any particular client industry vertical activities during the quarter that stood out either positively or negatively? Or was it sort of across the board? Jerry Grisko: Yes. Nothing negative for sure. We had some really nice wins that we were pleased to see coming out of those industry groups. And I'd say those wins kind of fell into a couple of categories, but one that comes to mind was a very large win within our food industry that was a relationship that one side had but didn't have the industry expertise to win the engagement. We brought together people from both sides of the organization, very collective and collaborative effort and won a very big engagement that was just announced. So very pleased with that. And then we saw a couple of others, one within energy, one within our capital markets that are quite sizable. So the strength of the industry groups is early, but it's starting to come together, and you're already seeing some momentum there. So really encouraged by that. Marc Riddick: Okay. Great. And then I think in your prepared remarks, there was a commentary around some of the activities that you were engaged in, including co-location and things like that. Maybe you can shed a little bit more light on that and what the time frame on some of those activities might be. Brad Lakhia: Yes. So Marc, Brad here. So listen, on the -- bringing our people together, obviously, it's a critically important thing as we think about the broader integration work that we're doing, but really most importantly, how we bring our cultures together. So we're really pleased with the progress we've made. But a lot of that work is still ahead of us in terms of getting our people in co-located offices. Where we've also -- and this is probably a little bit more on a virtual basis, where we've also made a lot of progress is bringing from a national perspective, our groups together. So think about our national tax group, for example, they are now and have really been for a number of months working very seamlessly together. So Legacy Marcum, Legacy CBIZ tax teams working across the landscape and really seamlessly together. So when we refer to kind of co-locating and bringing our resources together, it's both at the physical location level and then on a virtual level as well. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Jerry Grisko for any closing remarks. Jerry Grisko: Yes. Thank you. To wrap up, I'd like to reiterate a few key points. First, we're very pleased with our third quarter results, which were largely in line with our expectations. Next, our core recurring essential businesses continue to perform well and improved market conditions resulted in increased growth within our non-recurring businesses. And most important, we're seeing strong validation of the Marcum acquisition, including better-than-expected synergies, and we're well positioned to drive sustainable long-term growth as our teams come together and we bring our unique value proposition to our clients and others in the high-growth middle market. Thank you for your continued interest, partnership and support, and please enjoy the upcoming holiday season. We look forward to providing an update on our full year results and 2026 outlook in February. Thank you so much. Take care. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon. My name is Diego, and I will be your conference operator today. I would like to welcome everyone to Starbucks' Fourth Quarter Fiscal Year 2025 Conference Call. [Operator Instructions] I will now turn the call over to Catherine Park, Vice President of Investor Relations. Ms. Park, you may now begin your conference. Catherine Park: Good afternoon and thank you for joining us today to discuss Starbucks' Fourth Quarter Fiscal Year 2025 results. Today's discussion will be led by Brian Niccol, Chairman and Chief Executive Officer; and Cathy Smith, Executive Vice President and Chief Financial Officer. This conference call will include forward-looking statements, which are subject to various risks and uncertainties that could cause our actual results to differ from these statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release and risk factors discussed in our filings with the SEC, including our latest annual report on Form 10-K and quarterly report on Form 10-Q. Starbucks assumes no obligation to update any of these forward-looking statements or information. GAAP results in the fourth quarter of fiscal year 2025 include restructuring and impairment charges, litigation settlements and transaction costs that are excluded from our non-GAAP results. Revenue, operating income, operating margin, EPS growth and G&A metrics on today's call are also measured in constant currency and represent non-GAAP measures. Please refer to the earnings release on our website at investor.starbucks.com to find reconciliations of these non-GAAP measures to the corresponding GAAP measures and supplemental financial information. This conference call is being webcast, and an archive of the webcast will be available on our website through Friday, December 12, 2025. Also, for your calendar planning purposes, please note that our first quarter fiscal year 2026 earnings conference call has been tentatively scheduled for Wednesday, January 28, 2026. With that, I'll now turn the call over to Brian. Brian Niccol: Good afternoon and thank you for joining. A year ago, we launched our Back to Starbucks strategy to get us back to the exceptional craft, connection and welcoming coffee houses that define the Starbucks Experience and set us apart. Since then, we've been focused on executing our plan and accelerating it where we've seen opportunity. We took the significant step of scaling several key pieces of work during the quarter, and it's clear from our results that our plan is working, and our turnaround is taking hold. We finished the fiscal year strong with 5% global revenue growth and global comparable store sales growth of 1% in the fourth quarter, making it our first positive quarter in 7 quarters. Our North America company-operated comps improved to flat year-over-year, driven by flat U.S. comp and positive comp growth in Canada. And in both markets, transaction comps continued to improve sequentially from the third quarter. Across our U.S. company-operated portfolio, we more than tripled the percentage of coffee houses with positive transaction comps from a year ago, with year-over-year transactions improving across all regions and dayparts. And we're getting back to winning the morning with flat morning daypart transactions that outpaced our overall recovery in Q4. Notably, our U.S. company-operated sales comp turned positive in September, driven by transactions, and it's remained positive through October, reflecting the momentum taking shape in our business. Our international segment continued to demonstrate the resilience of our brand, delivering 3% comp sales growth in the fourth quarter, led by strength across our top markets, including Japan, which bounced back into positive comp territory in the quarter as well as China, the U.K. and Mexico. Earnings per share of $0.52 in the fourth quarter continues to reflect the investments we're making in the business to execute our strategy. As I've said before, we expect to grow the top line first and then earnings will follow. These results demonstrate meaningful progress we've made on our Back to Starbucks plan as we bring our work to scale, and they show the early impact of investments we've made across 3 key areas in fiscal 2025 to deliver exceptional customer service, improve the look and feel of our community coffee houses and get back into culture with an overhauled approach to marketing and menu innovation. First, we've continued to invest in and scale Green Apron Service as the new standard for our coffee house customer experience. August was a milestone as we went live with a new standard across our full U.S. company-operated portfolio. We made much needed investments in staffing and hours to put more partners on the floor at the right times. We reassessed and extended hours of operations for about half of our U.S. company-operated portfolio so that nearly all are now open consistently at or before 5:00 a.m. We expanded rosters and maintained healthy hours per partner. And as a result, we had strong partner engagement, record low hourly partner turnover and improved customer experience scores in the fourth quarter. Even though we're only 2 months in, we're seeing the results we want from Green Apron Service, and we're encouraged by the future opportunity we expect it to create as our partners adopt the standard and our customers experience the difference. We set throughput goals to ensure customers get their order on time every time, whether it's in cafe, mobile order or in the drive-thru. As part of our Green Apron Service rollout, we launched our Smart Queue sequencing algorithm. Since implementation, more than 80% of our U.S. company-operated coffee houses had cafe service times averaging 4 minutes or less, even with greater transaction volumes following our fall launch. Average drive-thru service times are still below our 4-minute target, and Mobile Order and Pay remains highly accurate and on time. Our delivery business in the U.S. has also continued to expand rapidly, growing nearly 30% year-over-year in the fourth quarter and surpassing $1 billion in sales for the full fiscal year. And we will be nearly complete with the rollout of our Clover Vertica brewer in our U.S. company-operated coffee houses by the end of Q1, making it easier than ever for customers to get a fantastic and freshly brewed cup of coffee of their choice. Second, we're now delivering a great customer experience in coffee houses that are more warm, welcoming and connected to their communities. Earlier this year, we shared that we were assessing -- reassessing our North American portfolio. The reality, as we came to learn was that we were operating some coffee houses that didn't demonstrate a viable path to profitability or create a warm welcoming space for our customers and partners. As a result, for the full year in fiscal 2025, our North America company-operated store counts declined by approximately 1% on a net basis. With a healthier base of coffee houses, we see meaningful opportunity for growth. We're taking a disciplined approach to how, where and what we build to improve both the customer experience and unit economics. We are piloting a new Coffee House prototype with lower build costs and optimized space utilization that still deliver a full coffee house experience aligned to our brand. In fact, last month, we converted one of our pickup-only locations in New York into a small format version of this prototype. We're excited to test, learn and iterate. Our teams are also working at pace to ramp up our uplift renovation program, bringing warmth, texture and seating back into our coffee houses. As of the fourth quarter, we completed nearly 70 uplifts, primarily across New York and Southern California. It's a small sample size, but we are encouraged by the improvements to sales and transactions we've seen to date. We are working to complete more than 1,000 of these uplifts by the end of fiscal 2026. Third, we've overhauled our marketing and our menu innovation, and it's driving stronger customer perception scores and market share growth in the U.S. On the heels of a successful fall launch, we introduced Protein Cold Foam and Protein Lattes at the end of September. They taste great and they're made from premium ingredients, living up to the Starbucks standards. And they kick off a steady pace of disciplined stage-gated innovation in our menu pipeline. We're only about a month in, and we're learning a lot. Customer awareness continues to build, and it is bringing less frequent customers into our coffee houses. We're excited about the incremental nature of this platform and its long-term role. Our measure for brand affinity accelerated in the quarter, reaching its highest point since 2023, and Starbucks ranking as customers' first choice was a 5-year record high. We saw the biggest gains in service time, connection and care perceptions, demonstrating the power of Green Apron Service. Non-Starbucks Rewards customer transactions grew year-over-year for the second consecutive quarter across all dayparts, validating our approach to marketing. And value perception strengthened across all generations in the fourth quarter and for the fiscal year, driven by our investment in Green Apron Service and our proactive moves to bring back the condiment bar, simplify our pricing architecture and remove the extra charge for non-dairy milks. We know our value equation extends beyond pricing. And when we provide great customer service alongside handcrafted personalized beverages made with high-quality ingredients, we provide unmatched value to our customers. Turning to international. Our growth agenda and Back to Starbucks principles span well beyond North America. In the fourth quarter, our international business reached record revenues of $2.1 billion and ended the year with an all-time high of $7.8 billion. We continue to extend our global reach, opening 316 net new coffee houses in the fourth quarter for a total of more than 900 in fiscal 2025. We also opened brand-building Starbucks flagship coffee houses, including inside the legendary Santiago Bernabeu Stadium in Madrid with more flagship coffee houses in store for 2026. We'll bring one-of-a-kind experiences centered on coffee and craft to even more customers around the world. In China, the team continues to drive demand in a competitive marketplace, delivering 2% comp growth in Q4, its second consecutive quarter of positive comps, and our portfolio crossed 8,000 stores. On the strategic front, we have had very strong interest from multiple high-quality partners, all of whom see significant value in the Starbucks brand and team. We expect to retain a meaningful stake in Starbucks China and remain confident in the long-term growth potential in the region. As I reflect on fiscal 2025, we did important work to rebuild our core and strengthen our foundation, and we're entering fiscal 2026 on stronger footing. Looking to Q1, the holiday season is a cherished moment for our customers and for our business. It's the first time we're bringing all our work together. Our coffee houses will be more warm and welcoming. They'll be better staffed; orders will be better sequenced. We'll have a relevant menu with holiday classics like the Peppermint Mocha and Snowman Cookie, alongside returning favorites like the Eggnog Latte, which customers have been asking us to bring back for years. We'll have engaging new ads and great new merchandise that's worth gifting, like our limited edition Bearista glass mugs and Hello Kitty collaboration. And we'll have newly designed gift cards, which have become a holiday staple. As we bring it all together, I'm confident the holiday season at Starbucks will be iconic, and our customers will see and feel the difference. Building on investments made in fiscal 2025, we're focused on executing with excellence and driving growth through innovation in fiscal 2026. Our intent is to become the world's best customer service company. To do this, we'll double down on Green Apron Service by empowering our leaders in and above the coffee house. We'll scale the assistant store manager role across more company-operated coffee houses, and we'll dramatically simplify store-level reporting from nearly 2 dozen metrics down to a scorecard of just 5 KPIs that best correlate to comp growth. These are focused on the customer, the partner, transactions, inventory availability and food safety. We are giving our partners the tools, roster and processes to consistently deliver our standard. And as we work to deliver a consistent customer experience across every coffee house, we're also improving how we work with our licensee partners to provide more tailored support, drive operational excellence and profitably grow together. Just last week, we hosted our North America licensee partners here at our support center, and we're excited for what's ahead. As we work to lead in culture, we're driving continued menu innovation that wins the morning and helps us earn the afternoon. In 2026, we'll introduce an up-level bake case that features new artisanal bakery products and elevated service wares to mirror our coffee house vibe. And building on our recent matcha reformulation, we'll continue to optimize and up-level our matcha menu with more customizable offerings that meet customer needs and stay true to our brand. Work continues on our supply chain to support our pace of innovation and improve inventory availability. And through 2026, you'll see us announcing improvements to our rewards program and mobile app and new brand activations. Our strategy is only as good as the people who are executing. And over the past year, we underwent significant change and fast. We asked a lot of our partners across the company, and they're delivering with excellence to build a stronger Starbucks. I would like to take a moment to thank our Green Apron and support partners who are working hard to bring our strategy to life every day. You really can feel the energy and excitement in our coffee houses and the change is real and our partners are leading it. Whether it's Melissa and her team in Austin that's built up such a strong community there, Jessica and Mari Beth in Nashville, who are clearly dialed into what it takes to deliver great customer service or Oscar in New York and his commitment to coffee house excellence. Your focus on coffee, craft and connection is truly making a difference. So as I conclude, let me put it simply. We set a plan, we're working the plan, and the plan is working. We have more work to do, but we're building momentum. Regardless of the headwinds and tailwinds we may encounter, I'm confident we have the right team and strategy to deliver long-term sustainable growth. I'll now turn it over to Cathy to share more detail on our financial results. Catherine Smith: Thank you, Brian. I'll start where Brian ended by also thanking our partners around the world for their focus and commitment to building back a better Starbucks. Their hard work helped us gain traction in the fourth quarter and deliver on some critical objectives that we believe will bring us back to sustainably growing both the top and bottom line. I'll now discuss our Q4 results. Our Q4 consolidated revenue was $9.6 billion, up 5% to the prior year, reflecting 2% net new company-operated store growth and a 1% increase in global comparable store sales, driven by international outperformance, positive comps in Canada and continued progress in our U.S. business. In the U.S., our comparable store sales were flat year-over-year, with ticket up 1%, reflecting fewer discount-driven offers in the current year. While U.S. company-operated transaction comps were down 1%, we marked our fourth consecutive quarter of improvement. We are rebuilding our transaction base as we focus on improving the overall value proposition for our customers. We were especially pleased to deliver transaction-led comp sales growth approaching 1% in September as we benefited from the first full month of Green Apron Service across our U.S. company-operated coffee houses as well as the timing shift of our fall launch. Our 90-day active Starbucks Rewards member base grew 1%, both quarter-over-quarter and year-over-year to 34.2 million members. This was led by higher reengagement and fueled by customers returning for their seasonal favorites and new offerings as part of our fall launch. Transactions among this cohort also continued to improve in the fourth quarter, and our intentional shift away from last year's discounting strategies drove a healthier mix of no discounted transactions. As Brian mentioned, non-Starbucks Rewards customer transactions in the fourth quarter grew year-over-year for the second consecutive quarter. Our U.S. licensed store portfolio revenue declined in Q4, primarily due to trends in the grocery and retail channels. Travel remains a bright spot, however, with airports delivering positive transaction and ticket growth in the quarter. The College and University segment also showcased year-over-year growth, supported by a good start to the fall semester. Moving on to International. This segment reported 9% year-over-year net revenue growth in the fourth quarter, delivering another record of over $2 billion. Many of our top international markets contributed to strong comp sales performance in the quarter with China, Japan, the U.K. and Mexico leading the way. China continues to grow and improve profitability. Starbucks China's comparable store sales grew 2% in the quarter, driven by a 9% improvement in comparable transactions. The market's comp growth was driven by continued product innovation, particularly in its tea latte lineup and a fast-growing delivery business. The team remains nimble in optimizing its product and pricing architecture in a dynamic marketplace. Moreover, Starbucks China's healthy unit economics keep us motivated to capture the abundant white space we continue to see in the region. As Brian mentioned, we remain focused on our search for the right partner to help unlock our future growth potential in China. As a reminder, the value to Starbucks in a potential transaction includes 3 things: the upfront investment by our future partner, Starbucks retaining a meaningful stake in the China business and future royalty payments. In our Channel Development segment, our Q4 net revenues grew 16% year-over-year due to higher revenue from the Global Coffee Alliance. We remain market share leaders in the North America at-home and ready-to-drink coffee categories amid a challenging coffee price environment. We continue to work with our partners to adapt and innovate to broaden our reach beyond our cafes. In fact, the 2024 launch of our protein drink in the U.K. has exceeded our expectations, resulting in growth into 8 additional markets in 2025. We have expectations to expand this further next year, including in the U.S. through our North American coffee partnership. Shifting to margin. Our Q4 consolidated operating margin was 9.4%, contracting 500 basis points from the prior year. This was primarily driven by inflation, led by coffee prices and tariffs as well as investments in support of Back to Starbucks, largely in labor hours. Consolidated G&A in the quarter decreased by 2% versus the prior year to reach approximately 6.6% of revenues. And with our interest expense and effective tax rates generally coming in line with our expectations, Q4 EPS was $0.52, down 34% from the prior year. In the fourth quarter, we took decisive action on multiple fronts to accelerate getting Back to Starbucks. This included the completion of our assessment of our coffee house portfolio and identified closures as well as a simplification of our broader support organization to one that is streamlined and more closely aligned to our future growth priorities. Let me walk through some of the impacts to our financials. In the fourth quarter, we had 107 net store closures globally as part of the restructuring we announced in September. These coffee houses were deemed unable to meet our standards for customer experience even through a potential uplift or for profitability. Many fell under both categories. As a result of these closures, we expect a reduction in our baseline North America company-operated revenues, partially offset by sales transfer to nearby coffee houses that remain open. We also expect the impact to operating margins to be slightly accretive. As we look to the future, we are focused on disciplined capital deployment with work underway to reduce build costs and improve the profitability of new coffee houses while continuing to deliver a warm welcoming coffee house environment. Given that our development pipelines naturally carry long lead times, we expect the benefits of these strategic changes to flow through our P&L gradually over a multiyear period. In the near term, however, we expect that the cost reduction related to streamlining our support structure will have more immediate impacts to our P&L. As such, we expect that our consolidated G&A in fiscal 2026 will run lower than fiscal 2023 levels, serving as a partial offset to our Back to Starbucks investments. While we expect to provide our near- and longer-term outlook during our Investor Day in late January, the following are some initial considerations for our U.S. company-operated business for fiscal 2026. We're pleased with the progress we've made to date with our positive comps in September continuing through October. Our Green Apron Service standard is ramping, and we're no longer lapping heavy levels of promotion in fiscal 2026. We're excited about a strong holiday lineup, future menu innovation and our coffee house uplifts. We also recognize that we have more work to do as we continue to rebuild our transaction base. Turnarounds are difficult to forecast. And while we have good reason to believe that our U.S. company-operated comps should build through the year, we also know that recoveries are not always linear. Moving to earnings. We remain disciplined on costs as we focus on allocating our resources to our Back to Starbucks priorities. Our investments in Green Apron Service will annualize through fiscal 2026. We'll also stay nimble in navigating the current environment where tariffs and coffee prices remain dynamic. As we continue to grow, our goal is that every transaction is higher quality and more profitable. We're on a multiyear turnaround. Q4 was a turning point, having delivered the first quarter of global comp growth in 7 quarters, and we're encouraged by our trends to date in Q1. We're focused on driving our top line and managing the costs that are within our control, giving us confidence in our path to sustainable, durable long-term growth. As a token of such confidence, we announced an increase to our quarterly dividend earlier this month, recognizing our 15th consecutive year of increase. We are clear-eyed about the work ahead of us, and we're excited about our future. And with that, we are now ready to take your questions. Thank you. Operator? Operator: [Operator Instructions] And our first question comes from David Palmer with Evercore ISI. David Palmer: I'll just -- I'll try to squeeze in a couple of parts to my one question. Brian, one of the things that we often find ourselves discussing with Starbucks is this Back to Starbucks often feels like back to the old Starbucks, which might have been much more of an in-cafe coffee, espresso, hot beverage. And today, Starbucks is obviously many more channels than that. It's much more cold beverage and the competitive set itself, the way younger consumers are using the brand. It's a lot that's different. So getting back to Starbucks, people wonder if that will bring the same sort of comp energy that the old Starbucks used to have if perhaps that Back to Starbucks is addressing a fraction of the business. So maybe that's a general question that's worth discussing. But right now, some of the things you've done feel like it would be activating more of the cafe part of it. I wonder if you're seeing differences in your comps by part, by order type and maybe address that general concern about maybe activating part of the in-cafe may not be enough to drive the overall business as much. Brian Niccol: Yes, David, thanks for the question. Yes. No, Back to Starbucks is comprehensive. I think the way to think about it is, I'm talking about the definition of the brand, which is the soul of the brand is around customer connection and our craft as it relates to every beverage. Now that's not to say we aren't going to continue to innovate across all the different access points. I think the place we got the most off strategy or off brand was with the cafe and the way that we handled mobile orders actually distracted us from executing really well in the drive-thru as well as the cafe and for the kind of the new emerging channel around delivery. So what I would actually say is the thing that I love about where we are with Back to Starbucks is we've now established a new Green Apron Service standard. And that standard, okay, is going to be able to support the simple idea of what makes Starbucks a Starbucks, which is great craft, great connection. And that crafting connection can happen in mobile order. It can happen in drive-thru, and it can happen in the cafe. And I think what we saw throughout the quarter is just that. When we launched the Green Apron Service standard in the middle of August, we saw the business respond so much so that in September was the first month where we actually had comps -- positive comps driven by transactions, a point of transaction comp growth. So Back to Starbucks is a reference around the whole brand proposition. And it gets us, I think, centered on providing a great customer service experience, which separates this brand from everybody else. The foundation is this customer connection. I think the visible transformation, you'll see in our uplifts, but I think you'll also experience it when you interact with our baristas and our coffee house leaders. With the Green Apron Service model, we've actually freed our partners up to get back to focusing on moving towards customers, providing that connection and providing that customization in the beverage that people want, whether it's hot, cold, coffee, refreshers, and you're going to continue to see us innovate across matcha. So it's holistic. And what I love about it is I see it really playing out nicely in transactions right now. Operator: And your next question comes from Danilo Gargiulo with Bernstein. Danilo Gargiulo: I wanted to ask you a question on the reception of the protein platform. And specifically, what has been the feedback on the pricing point of the protein platform? And in light of the increased ticket that this might be driving, what's your updated view on the pricing that you think would be sustainable to be taking in 2026 and beyond? Brian Niccol: So yes, Danilo, I want to make sure I got your question right. I think I heard you asking how is the protein platform performing? And what's been the response to, I guess, the pricing architecture on protein. If I missed it, chime in after I give you the answer. So first of all, the protein platform, I am really excited about how this has come out of the gates. Awareness is still building. And one of the things that's great about this platform is you can now have protein in over 90% of the drinks you get from, okay? So whether that's cold foam or that's through the protein milk. And the feedback from customers, whether it's been in matcha, in Iced Americano or a latte has been, you know what, this is really delicious. And that is what we need. And it also is able -- we're able to provide the protein into the customization of the way people want to have their drinks. We're not boxing them into a certain way that they have to execute it. And we also allow you to flavor it how you want. Oddly enough, one of the top cold foams is our Pumpkin cold foam. So it's a protein pumpkin cold foam is one of our top ways that people are experiencing cold foam. I will also tell you, our value scores, and I think I mentioned this in my earlier remarks, as -- when we look at this both ways, is it worth it? And how are our value scores. They continue to increase. And the feedback we've heard on the protein specifically is it's a tremendous value with the customization, the amount of protein that you can get, so the macros associated with it. So I'm very optimistic as the awareness builds, this platform will continue to build. And this is really just kind of the first step, I think, in continuing to drive health and wellness built on, frankly, arguably one of the greatest health and wellness drinks out there called coffee. So I'm very optimistic about where we are with this. I think the marketing team has done a great job. Our partners in store have done a great job, and the feedback from our customers, not surprisingly, has been really positive. Operator: And your next question comes from David Tarantino with Baird. David Tarantino: My question is on the Green Apron Service model. And Brian, I presume this takes some time to really get the full consumer response to the changes you've made. So I guess, can you talk about where you are in the journey after only maybe a couple of months in place? And maybe you can sort of compare your current state of the ones that were upgraded to this service model in August to the ones you did earlier in the year and how that may or may not be different as you look at sort of the duration effect that this could have on the business? Brian Niccol: Yes. Thanks, David. Great point. So you're right. We started Green Apron Service standard middle of August, and we really kind of rolled it out in 3 phases over the course of the last 2 or 3 weeks in August. So I would say we're really only like 8 or 9 weeks in on it. And the good news is it does appear that it continues to build week-to-week for a couple of reasons. One, our teams have to get used to operating with the additional hours and the bigger rosters. There's also an element of hiring. And then there's also an element of giving the customer the experience so that they realize like this isn't just a one-timer. This is now the new way they're going to experience Starbucks. And probably the best evidence I have for that is the initial 650 stores that we piloted on continue to outpace the rest of our company performance. So I'm optimistic that what's going to happen is over time, as our rosters get populated, our teams get more reps with the additional investment. They understand the 5 key moments, the coffee house walks and then our customers experience it over and over again, I think we're going to continue to see us hopefully close the gap on those first 650 stores and build just like what we saw in those 650 stores. So I think it is a little bit of time and experience, both for our partners and our customers, but it's been great to see how it's been building. And frankly, Mike and the whole operating team has done a phenomenal job with the rollout and our coffee house leaders have done a phenomenal job getting their teams excited about the new way we're going to serve customers. Operator: And your next question comes from John Ivankoe with JPMorgan. John Ivankoe: The question is also on Green Apron. And I'm wondering if Green Apron was done fairly defensively, in other words, to maybe fill some gaps that were in the system to really help traffic decline or if there is a more offensive element of Green Apron to actually drive traffic? And if that's the case that more hours, more staffing is leading to more transaction growth, if we have an opportunity to step up Green Apron even further? In other words, is there a 2.0 or a 3.0 have kind of taken this even further from a staffing perspective? That's really the first part. And secondly, other than just having customers come back into the store, how do we communicate to the customer base broadly in America, some of whom may have dropped out of Starbucks to come back in and experience a better Starbucks than maybe they might have remembered it a few years ago? Brian Niccol: Yes. So thanks, John. So what I would tell you is, look, obviously, we had an incoming hypothesis that our stores weren't staffed correctly and that we weren't, I guess, sorting orders correctly or sequencing orders correctly between the drive-thru mobile order and the cafe. And I think as we learned, we figured out that, that hypothesis was correct. And what required was both the Smart Queue technology to better sequence orders and then increase staffing so that our partners were able to either stay focused on the drive-thru, stay focused on their food stations, stay focused on the customer, provide a great greeting when people came in or give them a great experience at the handoff. So I think it was a combination of fixing some missteps and then putting us on the offensive because I believe we're best positioned to provide the best customer experience in the industry. And one thing that I've heard consistently from customer feedback since we've launched this out broadly is, wow, I noticed the difference. I feel the difference. I see the difference. And it is as simple as just being greeted when you walk into our stores. And that has changed, I think, people's perceptions pretty quickly. The one thing that's great about our business, John, and you probably know this, is the frequency is so high, right? So I've never had the opportunity to work in a business with such high frequency that if we stay consistent with the Green Apron Service standard, our customers realize it quickly. And we're also a very social brand. It gets shared pretty quickly as well. Now obviously, it's really important we continue to provide innovation so that we bring people in. And one of the things I didn't mention on protein is one thing that's great about protein is we're seeing low-frequency rewards customers show up with more frequency. So it's going to be the combination of consistently great execution. It also -- what's nice, too, is as we perform better at peak, we actually earn even more hours, which then allows us to open an hour earlier. And then it feeds itself where, call it, whatever Phase 2 is, or Phase 3 is we're kind of earning our way into those as opposed to having to do the course correct that we had to do initially with Green Apron Service. So I love how the flywheel once it gets going on this, the experience builds for a partner and the experience builds for our customer. And then I think the transactions build in our results. Operator: And your next question comes from Lauren Silberman with Deutsche Bank. Lauren Silberman: You talked about flat morning transactions outperforming the overall business. What's driving the relative outperformance in the morning? And as it relates to the afternoon, do you think it's more reflective of the macro or competitive dynamics? I know there's a lot of discussion around energy and whether there's some shift to energy. So just how are you thinking about Starbucks' future in that category? Brian Niccol: Yes. So look, I think the reason why -- well, the reason -- the data would suggest the reason why we're winning in the morning is because we're better staffed, we're providing better speed of service. while still providing that craft and that connection. And so we've just seen consistent improvement in the morning and specifically number of transactions that we are delivering per 15 minutes. And that's translating into in Q1, what was a flat transaction performance. We've also, though, seen sequential improvement in the midday and afternoon. Not all the way to where we want it to be, but I think we have opportunity, frankly, on some of our drinks and food offerings in the afternoon that you're going to see us focused on going forward. And the good news now, too, is our staffing levels are no longer at just minimum staffing once you get to around 11:00, 12:00. We now are staffed correctly where we can better service the business in the afternoon, too. And so I think just like what we saw in the morning, you get better staffed in the morning, you get better throughput, you get better customer connection, we get better business results. The same thing is happening in the afternoon, and that was kind of the second and third phases of the Green Apron Service model was we first rolled out the additional staffing in the morning, then we brought it into the afternoon. And I think we're seeing the sequential improvement accordingly. But we've always said we want to win the morning, and then we'll grow our way into the afternoon. And that's exactly what I think you're seeing the business do. Operator: And your next question comes from Brian Harbour with Morgan Stanley. Brian Harbour: The investments associated with that, I guess I'm referring specifically to kind of added staffing, right? Is that in place by this point? Or I guess when you talk about leveling up Green Apron Service, could you talk about what that means from sort of an incremental investment perspective at this point? And then I guess just also on the product cost side of things as we go into '26, could you talk about -- I think you've targeted some savings here. Obviously, there's also sort of commodity inflation. Can you talk about how those things may balance each other out or not? Brian Niccol: Yes. So we've made kind of our initial investment into the Green Apron Service model. And now as it becomes our operating standard, we really will earn our way into the additional labor that comes with the growth. So we don't foresee additional investments, I would say, to be able to make the Green Apron Service standard come to life. And then on your second question in regard to commodity or coffee prices, obviously, coffee prices have not retreated. They still have stayed elevated, and we're dealing with that accordingly. We're trying to find offsets where we can in the business. But hopefully, we'll start to see that recede, but it hasn't happened yet. Cathy, I don't know if you want to add anything to that. Catherine Smith: Yes. Maybe just a little bit more on the investment in Green Apron Service. It started to roll out. We've been ramping it through our test program. And then it started to roll out more, obviously, earnestly in August. So you'll see that continue to annualize into the early parts of this year. We've got the full investment in the stores, but they will need to continue to annualize. So you'll see that. And then ASMs or the assistant store managers or coffee house leaders, we did say that those -- we would lag that investment a little bit. We've started with our initial pilot. They're all hired, and we'll start to roll that. And there's a little bit of a differential there, which we talked about, too. On the product inflation, expect coffee to continue to be a headwind at least through half a year. All of our best thinking would say that we're going to start to see some relief at the backside of the year. Operator: Your next question comes from Sara Senatore with Bank of America. Sara Senatore: I wanted to ask about the coffee houses that you're closing. You said they didn't demonstrate a viable path to profitability, but I wasn't sure if that's because AUVs are lower, or the costs are higher. Just trying to think through like sales transfer. And in that context, Cathy, as you think through the margin for the business over time, should I be thinking about like lower restaurant level margins, but also lower G&A to get back to kind of operating margins that look similar to where they were maybe pre-COVID. So just sort of the impact of store closures on top line and margins and then margin over time. Catherine Smith: Yes. So first off, we looked at, obviously, our entire portfolio to say, can it first represent the customer experience we want going forward? That was the most important criteria. Then we also ran a financial filter, as you would expect on can it also give us a return that we would be proud of. And the combination of those got us to the closures, which we don't take lightly. And to your point, as we said in the prepared remarks, it's going to be slightly accretive to our profitability going forward because they were unprofitable. To answer your question on why is that? It's a combination. But at the end of the day, what makes a coffee house a great coffee house is that you have to grow top line. So you've got to have a great top line. Generally, when we stood up those coffee houses, they had a good -- they were a good investment. They had a good occupancy. We expected the right labor. So it really starts with the top line. And if we can't get the top line or the revenue where it should be, that typically makes the coffee house not viable. So I'm not saying there aren't some nuances in occupancy and labor and all that, but the biggest one is top line. So then to answer your question -- and by the way, on transfer, we do see some transfer. We've been pleased. It's been a little higher than we expected, which is great. And we kept great density wherever we could. So we are seeing some sales transfer. Going forward, though, to your question, first off, I'll put a plug to our Investor Day. We're excited to see everyone at the end of January for our Investor Day, where we will lay out a more complete financial algorithm and picture. But to think about what do we need to be true going forward for our coffee houses, they've got to be a great return. So we've got to get an AUV. By the way, there's a pretty big spread in average unit volumes that we can make in a viable coffee house, but we have to get a good top line store, and then we'll make sure that we sign up that pro forma with a great P&L coming through it. So I say that because I wouldn't expect holistically big differences in the future. We've got to have great coffee houses, and that will drive the sales. Operator: And your next question comes from Jeffrey Bernstein with Barclays. Jeffrey Bernstein: Great. Cathy, I appreciate the qualitative color in your prepared remarks, and I think you actually just alluded to more of an update in late January at an Investor Day seemingly around earnings. But I'm just wondering if you can share any thoughts on fiscal '26 and longer term, whether there's any guardrails you can share today, top or bottom line as we think about the comps maybe returning modestly positive and the profitability that comes from that. And just tying to that, I mean, I know there was often talk about cost savings in the past. I don't know if there's any kind of ballpark range as you've had more time to think about it of potential savings or maybe the greatest buckets of opportunity. I know former leadership used to talk a lot about the dollar opportunity per year or whatnot, but any early thoughts on either the top and bottom line and the cost savings surrounding that? Catherine Smith: I'm going to, I'm sure, completely disappoint you in my response. First off, we'll give you 2026 and longer-term guidance at our Investor Day. We hope to see you there. But as you can imagine, Brian already shared, we're really excited that we've now gone from 6 quarters of negative comps to a positive in our seventh quarter, and we hope to build from here. And so it starts with top line. We hope to continue to see those transactions grow, and we are optimistic there. We've got the right plan in place that Brian has outlined. So I would say that. And then over time, earnings are going to lag. So we've said that you grow top line first and then the earnings will follow. We are taking all the necessary actions now, though, to make sure that every single transaction is more profitable going forward. And that's where I would leave it for now. Operator: And your next question comes from Andrew Charles with TD Cowen. Andrew Charles: I'm curious how the improved value perceptions play into your 2026 pricing plans and if pricing is contemplating your belief that '26 same-store sales should build through the year. And then Cathy, just separately, the past 2 calls, you've helped set the stage on the current quarter outlook, not guidance, but more outlook for North America same-store sales. And I'm wondering if you could provide some help just on how to model that for 1Q. Brian Niccol: So to answer your first question on value and worth it, obviously, it's great to see our value scores moving up and is the brand worth paying for also moving up. We always are keeping an eye on our value proposition. as we think about pricing going forward, we're going to be very strategic, very targeted with and when we use it. I don't envision us just doing broadscale pricing across our menu. So obviously, we'll continue to monitor what happens with the inflation that we have to deal with, both wage and commodities. And then we'll be smart about the growth that we get. And if we need to use that lever of pricing, obviously, we'll always keep an eye on what happens with our value rating scores as we -- if we have to move on pricing going forward. Maybe the second part of the question, I'll give to Cathy. Catherine Smith: Yes. On Q1, Andrew, so we did share in the prepared remarks, we were pleased that September had turned positive, and that trend had continued through October. So that's a good way to start thinking about the quarter. And so we would expect the quarter to be led by positive transaction comps. And as I have shared before, obviously, earnings are going to lag as we continue to annualize now that Green Apron Service investment that we've been making. We will start to see some of the offset coming through in some of the cost structure work we've done. But just it's premature to give guidance, but I would say top line growth led, and earnings will lag even versus -- obviously, not to the extent we have in the past. Operator: Your next question comes from Christine Cho with Goldman Sachs. Hyun Jin Cho: You mentioned that the college and campuses are doing well in the quarter, but there are some broad concerns about the macro pressures on the younger consumers. Are you able to comment on how the consumer spending behavior evolved with that younger consumer cohort under age 35 over the last few months and how that informs kind of your go-forward strategy? Do you view this as kind of an increasing headwind for the coffee industry in the near term? Brian Niccol: I would just say, as we look at every kind of generational cohort, we have seen a really nice response both in transactions and sales over this most recent quarter. And what we know we have to do is we have to deliver a great experience for these customers because I think they are going to be more choiceful with where they choose to spend their dollars. But that's why I think it's so important that when they do choose to spend their dollar with Starbucks, they walk away feeling like that was worth it, and they got a good value. And that's what we're continuing to see happen. Definitely in the morning day part and then as throughout the balance of the day goes, we continue to strive to make sure we give them a great experience. So they say, you know what, that was a good way to spend my dollar. And that's what we saw over the quarter, and I think it was reflected in kind of the movement we saw in transaction growth. Operator: Your next question comes from Andy Barish with Jefferies. Andrew Barish: You mentioned some work on the last call and then reiterated the license business. Can you kind of give us a sense coming out of your meetings with them, what's going on there? And is there an opportunity maybe to sort of streamline that business to help the company-owned stores? Brian Niccol: Yes. Well, as you would expect, we took a hard look at both our strategy and structure. And what we've realized is there's a real opportunity for continued growth in our license business. And we also think there is a different way of working with our license partners that will set us up for success. So that's why we also had to do some of the restructuring work in how we support that business. But we do believe there's the opportunity for us to grow from a unit standpoint. And we've got some terrific partners, some that are at small scale and others that are big scale. And we're focused on making sure that we build the right next kind of set of units and that they get operated up to the Green Apron Service standard going forward. So that was really what this whole license summit was about. We have to provide some tailoring to the execution for the certain channels. But for the most part, I think the licensor and the licensee in this case, both believe there's tremendous growth to be had in our license business. Operator: The last question comes from Chris O'Cull with Stifel. Christopher O'Cull: Brian, how is Starbucks impacted by just increased competition from all the emerging beverage brands, especially maybe in the markets where you do have a significant amount of overlap? I'm just trying to understand how you guys are thinking about this new group of beverage concepts. Brian Niccol: Yes. Look, I think the way I have been approaching it is we got to be on our best offense. And our best offense is to make sure that we stand for the craft around our coffee and drinks and food and then the customer connection and experience that we provide. The good news is we provide all the access modes that all these new emerging concepts provide. I already have the biggest drive-thru coffee chain in America. I already have the biggest mobile order and digital coffee business in America. And I also have the biggest cafe coffee business in America. And one thing I learned early in my career is scale matters, and we have scale in all those access points. And then we also, I believe, have a unique positioning around the craft and connection and the customer experience that we provide. So what I believe is we got to be on our best offense, and I think competition will make us better. And I've asked our organization to be focused that way where we need to be better than we were yesterday, and that's how I know we're on our best offense. Operator: That was our last question. I will now turn the call over to Brian Niccol for closing remarks. Brian Niccol: All right. Well, thank you for all the questions. And look, I want to -- I appreciate everybody joining because I know this is a busy day of earnings. So thank you for joining. But as we wrap up, I want to leave you with 3 things. First, we made real progress in fiscal 2025, okay? We worked really quickly to execute the Back to Starbucks strategy. We accelerated things we knew we were working like Green Apron Service, and we've seen momentum build across our U.S. business. And I think we have a clear line of sight on the growth that's in front of us in our U.S. business. It's also nice to see that our China business is back to growth. And you know what, we're seeing tremendous opportunities for growth around the globe. Second, I do want to point out because this is kind of David Palmer's initial question, Back to Starbucks is not a slogan. It is -- it's an enduring model for growth that, frankly, is centered on customers and it's going to be driven by our partners in our stores and it's for every access mode that people want to experience Starbucks. And it really is getting us back to what we do best, which is exceptional craft, genuine connection and welcoming community coffee houses. And third, I think on our fourth quarter results, it gives us confidence that we really have turned the page to a new chapter in our turnaround. Our work is to be the world's best customer service company, and we want to have the best job in retail. And I think the fourth quarter marked kind of a turn for us in our U.S. operations. So clearly not declaring any victory. We still have a lot of work in front of us, but it's clear we're moving in the right direction. And I believe we're in the process of building the best Starbucks yet. So have a great day. Thanks for joining. And obviously, we'll be talking to you in January. Take care. Operator: This concludes Starbucks' Fourth Quarter Fiscal Year 2025 Conference Call. You may now disconnect.
Andrew Angus: All right. Good morning, and welcome to the Fluence Corporation 3Q 2025 Results Webcast. My name is Andrew Angus, and I look after Investor Relations for the company. In a moment when everyone's entered the room, I'll hand over to Tom Pokorsky, CEO; and Ben Fash CFO, to conduct the webcast. All right, Tom. I think we're ready to go. So over to you. Thomas Pokorsky: Hello, everyone. Welcome to the Fluence Q3 2025 Quarterly Conference Call and Activities Report. As Andrew said, I am Tom Pokorsky, CEO and MD. And with me today is Ben Fash, our CFO. Well, we continue to make progress on our One Fluence strategy and our growth plans in the higher-margin market sectors. Our year-to-date revenue at the end of Q3 was over $52 million, which represents over a 70% growth from Q3 of -- year-to-date Q3 of last year. A good deal of that increase is, of course, due to the fact that the Ivory Coast Addendum continues to progress, which was stalled last year for most of the year. However, we also saw about a 26.6% growth in our SPS revenues, which is a critical part of our growth plans in our new strategy. Our EBITDA for the first 3 quarters is $1.2 million, representing a growth over the last year of about $2.6 million for the quarter and $6.2 million year-to-date. While a significant amount of the increase is due to the increased revenue from IVC, which is Ivory Coast, excuse me, we did have EBITDA growth in all of our units, except for the Industrial Water & Reuse who basically had a strong first half last year, but they will also end up growing this year at the end of the year. The gross margins in our key business units continue to grow, but the year-to-date gross margin is a bit less than last year because of the significant revenue contribution of Ivory Coast which has a much lower margin than the rest of our business, as you are well aware. However, we continue to make progress on rightsizing of the business and our SG&A is coming in at about $800,000 less year-to-date, which is about 5% less in the first 3 quarters of 2024. Our order bookings were strong in Q3 at over $17 million or nearly about 10% higher than Q3 of last year, which gives us a backlog of over $75 million at the end of the quarter. We also expect Q4 to be a strong booking quarter, which is important as we also expect revenues to be strong in the fourth quarter, and we need to keep adding to backlog to start next year. This all adds up to us maintaining our guidance for the year of between $80 million and $95 million in revenue and EBITDA of $3 million to $5 million, albeit, I think we'll be at the lower end of that guidance. Before I turn it over to Ben to dive deeper into the financials and cash flow, I'd like to comment on a few key wins of the quarter in early October. You may recall that a significant part of our growth strategy is the One Fluence strategy. That is the strategy where instead of having each individual business unit work almost on their own, we are trying to work as a global company with all business units cooperating with each other. And I think some of the wins that we pointed out in our key recent orders for Q3 and October is a good example. And I'd like to point out, I highlight a couple of them. First, there was a $2.2 million order for our beef processing plant in Brazil. This was a job that was originated by our Italian operation, and it was an IWB project that had some -- had to overcome some tax and tariff issues in Brazil because they were from Italy. By working jointly with our IWR unit in Argentina, we are able to maintain a reasonable competitiveness on the project, and we won the job. Without the cooperation between the 2, I do not believe we would have carried that job. The next project I'd like to highlight was the one we just announced yesterday in Saudi Arabia. It's a project called Qurayyah, it's a power plant in Saudi Arabia. It's a water treatment plant for a power plant in Saudi Arabia. Technologically, it's not a big challenge. It's a reasonable design but because of the power plant situation there are significant documentation requirements and engineering requirements that have to be put in place. In addition, it's got a very tight timetable. We were concerned that this project would cause us issues in carrying out the project. And we engaged our Industrial Water Group in Argentina to work on it with our Municipal Group who happens to manage the Mid-East group, which is where the order originated, and between the cooperation of these 2 units, our Industrial Water Group will do the project management, the engineering and the documentation on the job which will be done quickly and efficiently because they are very experienced in that kind of work. So again, the cooperation between business units really helped land a $12.2 million order, which is officially under our Municipal Group, but it will be carried out by the Municipal and the Industrial Water Group. So these are important wins for us, and they would not have been there without the cooperation of multiple business units. So it's starting to show positive numbers out of our One Fluence strategy. In addition, finally, I'd like to point out a couple of other significant orders on that list. One of the other parts of our strategy was to grow North America, and particularly grow with the MABR Group, which is our Municipal Group and the MABR technology. You'll note there's a $2.3 million for an Idaho real estate development, and it's an MABR project of decentralized containers but it's a significant MABR order in another state in America. And as I've told you before, that each state requires various approvals to get technologies approved. So we are making headway and got a significant order out of it. That's a big win for us moving forward in North America. And then finally, you'll notice on the list, there's a couple of small jobs. We also got an MBR in Hawaii. We got an MBR in Jamaica out of the North American group. So our strategy to grow the North American market, especially with our MABR technology is proving sound. I'm very pleased at the progress we're making in our new strategy, and we're now starting to gain traction, and it's starting to show up in our numbers, which is important to all of you, of course. Now I'd like to turn it over to Ben to do a deeper dive on the financials, the cash flow, and you'll probably go into the segment financials, too. So Ben, do you want to take it over? Benjamin Fash: Yes. Thank you, Tom. Good morning, everyone. As Tom said, my name is Ben Fash, I'm the CFO of Fluence, and I'd like to welcome everyone to our Q3 2025 business and financial update. As always, we appreciate your time today and your interest in Fluence. And I'm going to hit on a lot of the factors that Tom talked about, but maybe dive into a little bit more detail, particularly at the business unit level. So as Tom said, Q3 was our strongest quarter of the year, and the company has also performed very well on a year-to-date basis. We've significantly outperformed the 3 quarters of 2024 and have positioned ourselves really well for a strong finish to the year in fiscal 2025 as we anticipate an even stronger Q4. Year-to-date revenue was $52.4 million, which was $22.1 million or 72.9% higher than the same period in 2024. Clearly, the increase in revenue from the Ivory Coast Addendum project is the biggest reason for the strong growth as it went up by $18.5 million compared to the prior year. But as Tom noted, our SPS and recurring revenue is also experiencing double-digit growth. More importantly, Q4 is expected to be the strongest quarter of the year in terms of revenue contribution. And that's due to a number of our backlog projects accelerating, combined with the continued progress of the Ivory Coast Addendum project. As a result, we are forecasting strong EBITDA in Q4 and fiscal 2025 overall. As a result of the revenue growth in the quarter, EBITDA was $1.2 million in Q3 and on a year-to-date basis. That represents an increase of $2.6 million over Q3 of last year and $6.2 million when you measure it against the year-to-date period. In addition to the revenue growth the company has experienced on a year-to-date basis, we have also been able to continue to control costs as we saw an $800,000 reduction in SG&A and R&D and that also contributed to the EBITDA growth on a year-to-date basis. Gross margins were 28.8% year-to-date Q3, that represents a reduction of 3.0% compared to the prior year, but that's mostly due to the lower gross margins related to the Ivory Coast Addendum project and the large revenue contribution that project has. That said, gross margins across our core businesses continue to perform well. Municipal, Industrial Water & Reuse and Industrial Wastewater & Biogas all improved their gross margins on a year-to-date basis compared to the same period last year, illustrating the margin strength of our high-margin SPS and recurring revenue segments. Each of these business units have benefited from positive project margin variances as well, we also had several accrual reversals in the quarter from some historical projects. All business units other than Industrial Water & Reuse saw EBITDA growth through the first 3 quarters of the year, and I'll talk about that in a second. The Ivory Coast Addendum contract obviously contributed the most with $2.6 million of EBITDA through 3 quarters compared to a loss of $400,000 in the year-to-date period in 2024. Industrial Wastewater & Biogas saw an EBITDA increase of $800,000 in the year-to-date period, primarily on strong revenue growth. They are up $3 million on a year-over-year basis. Municipal Water and Wastewater saw revenue and EBITDA growth of $1.3 million and $1.1 million, respectively, through the first 3 quarters of this year, in part due to some positive project margin variances as well as a few accrual reversals on some historical projects. Southeast Asia and China is ahead of prior year as well on a year-to-date basis, both in revenue and in EBITDA, and it's expected to reduce its EBITDA loss in fiscal 2025 by as much as half. So while Industrial Water & Reuse is just modestly behind its performance, both in revenue and EBITDA through the first 3 quarters of this year, that is mainly due to some lower spare parts revenue in the first half of the year. But the business is forecasted to finish 2025 in line with its numbers from last year and frankly, maintain the highest EBITDA margins of any business unit in our company. So the business continues to be -- performed very well. And lastly, corporate cost savings of $800,000, which we've seen in our SG&A and R&D, obviously also contributed positively to our EBITDA through the first 3 quarters of 2025. I'm going to just flip ahead to a slide here. In terms of orders, Fluence booked $17.2 million and $39.7 million in Q3 and on a year-to-date basis through Q3 of this year. And that represents on a quarter-over-quarter basis, 9.6% growth and a modest reduction of 1.9% reduction on a year-to-date basis. But that said, as Tom had talked about, the large Qurayyah project that we just booked this week will more than make up for that slight decrease on a year-to-date basis through October. Even through Q3, Municipal Water and Wastewater in North America, Industrial Water & Reuse, Industrial Wastewater & Biogas and Southeast Asia and China saw a combined increase in orders through the first 3 quarters of $13.4 million or almost 50%. And Q4 is actually forecasted to be our best quarter of the year in terms of orders and exceed Q3 2025, which was our best quarter to date. So as a result of those orders, our backlog as of September 30 is $75.7 million. And when you take a look at the year-to-date 2025 revenue plus the backlog forecasted to be recognized in 2025, you get to $76.5 million. Add another $3 million of recurring revenue that we expect in the quarter and were over $79 million. And most importantly, of that backlog, over $50 million of it is forecasted to be recognized in 2026 and beyond. And so as Tom said, given the strong backlog position, the company is forecasting really strong revenue growth for fiscal 2025. We're maintaining our guidance on both -- of revenue of $80 million to $95 million and EBITDA of $3 million to $5 million, noting, however, that we are likely to finish the year closer to the low end of the range. Just on the cash flow front, the company had a really -- another really strong quarter. We ended Q3 2025 with $14.1 million in cash and $4.1 million in security deposits. Our operating cash flow in the quarter was $2.2 million, and on a year-to-date basis, totaled $7.1 million. Now this is primarily due to collecting about EUR 4.2 million related to milestone 5, the Ivory Coast Addendum in late September 2025. Even though that collection came in late, that really meant that we made a collection but had not yet settled a number of payables that were related to that collection. And so therefore, we're forecasting Q4 2025 to have negative operating cash flow. However, for the full year fiscal 2025, our operating cash flow is forecasted to remain positive. And then lastly, sorry, I wanted to give an update on Ivory Coast. So commissioning on the main works is now effectively complete, with the exception being the stabilization of an embankment for a pipe crossing of the swap. And this is largely expected -- sorry, and this will largely be completed in parallel with the Addendum works, which we're now working on. This work is expected to commence in Q4 of 2025. And the Addendum works are currently progressing on budget, largely on schedule. However, this embankment stabilization work and pipeline crossing has experienced some delays in recent months. The work is expected to start in Q4, as I noted, at which point the project will try to make up some of those delays as it progresses towards completion. Financially, the Addendum project is progressing well through Q3 2025, revenues in line with forecast, and it's a cash flow positive project. As of 30th September, the company had collected 5 milestone payments under the Addendum totaling EUR 30.3 million. That represents about 63% of the total payments. We are expecting the next milestone payment in November and has already been approved. Fluence is continuing its efforts to secure a long-term O&M contract for the plant as well. Negotiations will commence in the coming weeks after the technical proposal and business plan is submitted to the government and is reviewed. The start of the long-term O&M contract requires the Addendum works to be completed before the plant can begin producing water. Fluence is currently maintaining the plant on an interim basis, which positions the company well to be awarded the long-term O&M contract currently being negotiated. So in conclusion, Fluence continues to progress its strategic transformation through Q3 and 2025 -- sorry, and has demonstrated significant growth compared to the same period in 2024. We're also very well positioned for the strongest quarter of the year in Q4, which would result in a strong fiscal 2025 overall. We remain encouraged by the outlook for Q4 and into 2026, particularly with the strong start to order bookings in Q4 with that $12 million Qurayyah order. This is expected -- orders are expected to continue to be strong through the rest of Q4, and we're forecasting to have our strongest order booking quarter of the year. The business has enough work to deliver on its revenue and EBITDA guidance as long as we don't experience any material project delays. Combine that with the healthy and growing gross margins in our core businesses, a lower cost base, better cash management practices, and management remains optimistic about the opportunity to build a sustained -- to build sustained profitability and positive cash flow. So at this time, I will throw it back to you, Tom, for any concluding remarks, and then we can take questions from the webcast participants. I want to thank everyone again for your time and your continued interest in Fluence. Thomas Pokorsky: Yes. My only concluding remarks is a couple of years ago, we put in place some new strategies. And while it took a bit to turn the big aircraft carrier around, I believe we have turned it. And we are moving forward in a real positive fashion, and we continue to book nice orders with higher margins. And I think the outlook for the future is very, very good. With that, if there are questions, we can bring them up and look at them and answer them. Benjamin Fash: Yes. Thank you, Tom. I'll moderate the Q&A here and toss some over to you that might be appropriate or answer them myself. The first question was you mentioned a tight time frame on the Saudi project, I think referring to Qurayyah. Could you please provide some further detail on time frames for the project? Tom, why don't you take that one? Thomas Pokorsky: Sure, sure. Qurayyah is scheduled to start immediately. In fact, we've already had the kickoff meetings on it. It is scheduled to be complete, I believe, in the first half of 2027 with the majority of the work being carried out throughout 2026. The 2027 work is largely related to start-up and performance testing. So the bulk of the work will be done in 2026. And quite honestly, with all the documentation and approval requirements typically for a power plant project, that is a very tight time schedule. It's not that tight to build the product, it's tight to go through all the paperwork to get started building the product. And so we expect to take a significant part of that revenue in 2026 with a little bit in early 2027, which is mainly start-up and warranty work and things like that. So it's less than an 18-month completion for a $12 million order, which is pretty tight, in my opinion. Benjamin Fash: Yes. Thanks, Tom. When is the production facility in the U.S. due to be commissioned and start production? Thomas Pokorsky: That is -- do you want me to take that, Ben? Benjamin Fash: Why don't you take that, Tom? Thomas Pokorsky: That's a very good question. We are ready. We have the equipment in place. We have the lease ready to sign, and we are -- we are not needing the demand of that plant just yet. So we have been strategically delaying a little bit ourselves to stop the cash flow requirements until they're needed but we expect that to be complete by year-end. Benjamin Fash: The other thing I'd say for that as well is, as Tom noted, the demand for production out of that facility is not required at this moment in time. And as we start that plant up, initially, it's likely that the cost to produce the membrane are going to be higher than our Chinese plant. And even with the tariffs that we have in place -- that are in place right now, and that situation has largely stabilized, the cost of production is still lower coming out of that plant. So in part due to remain competitive on our bids, we will likely fulfill a lot of our MABR demand through that facility as we start that facility up. Thomas Pokorsky: And I'll add a comment on that, Ben. The bottom line is all of the MABR projects we have in North America currently are typically private entities, not municipalities. One of the biggest reasons we need a U.S. membrane manufacturer -- manufacturing facility is because of the Buy American clauses for municipal funded contracts. We are still -- those projects take multiple years to go forward. We have a number of them in our pipeline, but they're not needed just yet. And all the Wilshire Road, the Spring Rock project, the Hawaiian project that I talked about, and they all have -- they're all private, so they don't have to comply with the Buy American. And since it's cheaper for us to deal with China where we have the membranes built, we are building them there. And by the way, the team did yeoman's work to try and deal with the tariff requirements and we didn't get hurt badly at all on the tariffs with all the hoopla involved. But as we -- and the one municipal job we did get for membranes was San Leandro. They got, what do you call it, bypass from the laws to do that project. They got an exemption, exemption is the word I'm looking for. So we could still build that in China, and that's where it was built. But it's coming, and we got to get it done. But we're trying to save as much cash as we can and save the expense until we need it. So we're ready to go. We're just holding off until we absolutely need it. Benjamin Fash: Okay. Tom, this next one is for you as well. Can you talk through the demand from livestock/dairy farmers in similar industries in the U.S.A. for wastewater to energy plants? Thomas Pokorsky: That's a very good question. We are having a lot of demand everywhere else in the world, but the U.S. right now. There are a lot of preliminary projects being set up in our pipeline for dairy and wastewater. We got one dairy job in the U.S. but beef producing and poultry producing, we haven't gotten yet, and we had thought there would be a faster movement because of a previous law passed a couple of years ago called the Inflation Reduction Act, where they put a lot of money into renewable energy projects in the form of tax credits. But it appears those projects just didn't take off yet. They're in the pipeline, we're working on them, but they didn't go forward. We still do see a large potential but they just haven't come to pass in the U.S., but we are getting them in Ecuador, in Brazil, in Italy and in Spain. So other parts of the world, they're moving forward, but it appears North America is just a little slower than we had hoped. They're still going to come. There's still going to be there. It's just -- I don't know what the reason is, but they're just slower to develop in the U.S. Benjamin Fash: Yes. The -- I'll take the next few questions here, Tom. Will the anticipated debt refinancing be finalized this calendar year or more likely next year? It won't get finalized this year. We're targeting -- the facility matures in Q2 of next year, and that's when we're targeting refinancing that facility. There is a question, I lost connectivity, but is there any 2026 guidance in which region showing the greatest potential for growth over the next year or 2? We have not provided any guidance on 2026. We did provide a backlog number, but are not going to be providing guidance at this point in time for 2026. Another question on this line. Fiscal 2026 backlog to revenue forecasted of $50 million, how much of this relates to Ivory Coast? We expect we'll finish the year with about $12 million of Ivory Coast backlog to start 2026. Are you in the running for AI-related projects? Was this the recent $12 million win? Was it AI related? I think, referring to Qurayyah. I'll maybe answer, and then Tom, you can follow on with that. I would say the reality is, is that the thirst for increased power generation is very significant. There is a lot of demand for increased power generation for AI, for many other industries as well. It's not just AI, even though that's kind of the buzzword that's out there. So I don't -- we don't have any insight as to exactly who is the main buyers of this power. But Saudi is certainly a leader, we know this, in trying to attract AI data centers and other high energy consuming industries. So this is one of many contracts that are out there and available in terms of power generation and the water demands associated with it are very, very high. Tom, anything you'd add to that? Thomas Pokorsky: Yes. I think both, in general, electricity production is growing dramatically because of AI and other reasons. Currently, the company we signed the purchase order in Qurayyah with has got 2 other power plants are going to be working on very similar to the Qurayyah plant. So they are dealing with billions of dollars worth of power plants right now. And it does give us the possibility of adding multiple orders with that same client if it works out okay for them, and then for us. But I can also tell you in the U.S., there are these data centers being built all over the country and they're a major source of news right now. In my home state in Wisconsin, we have 3 of them on the drawing boards, and all 3 are being argued with these local municipalities about where they're going to get the power and the water for them. There's a significant amount of water treatment. So we have, in our pipeline, a number of data centers for water treatment and a number of power projects for water treatment for power projects. I believe it's going to be an explosion in the future. I really do. But right now, they're all pipeline projects for us. Benjamin Fash: But the great news is we have decades of installation history in this space and many recent wins that kind of demonstrate our capabilities. And one of the things, again, going back to Tom's earlier comment around One Fluence, what we're now accessing is these global opportunities but leveraging the expertise that we have out of our Industrial Water & Reuse group in Argentina. So having them be part of the sales process, even if it's a lead that they didn't generate initially, is tremendously value. And it's what the customers value ultimately is they want to see that you've done it, done it several times and done it successfully. Thomas Pokorsky: Yes. I think we -- I think if I'm not mistaken, Ben, we have 3 power plant projects in our backlog right now that we're working on. And I think [ Rubica ] is one, right? Qurayyah, and there's one in Argentina, right? Benjamin Fash: That's [ Aniva ], yes. Thomas Pokorsky: [ Aniva ]. So we're doing a lot of work in the power industry right now, and I can only see it growing. Benjamin Fash: Okay. There are no additional questions that came in. So as usual, we want to thank everyone for their support and their interest, the questions and the engagement. So at this point in time, I think we'll conclude. Any parting comments, Tom? Thomas Pokorsky: Other than that, I am very, very pleased right now that we are moving in the right direction. As I said before, I think we turned the big ship around and it's moving in a positive direction. And there's a lot of good outlook out there, and we're very pleased with our progress and what the future holds. So I thank you for your support and your interest in our company, and we'll continue to work hard to improve it. Thank you for tuning in. I appreciate it.
Federal Reserve chair Jerome Powell speaks after the Fed approved its second straight interest rate cut, lowering its benchmark overnight borrowing rate to a range of 3.75%-4%.
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Federal Reserve Chair Jerome Powell speaks after the Fed approved its second straight interest rate cut, lowering its benchmark overnight borrowing rate to a range of 3.75%-4%.
Federal Reserve Chair Jerome Powell speaks after the Fed approved its second straight interest rate cut, lowering its benchmark overnight borrowing rate to a range of 3.75%-4%.
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Federal Reserve Chair Jerome Powell speaks after the Fed approved its second straight interest rate cut, lowering its benchmark overnight borrowing rate to a range of 3.75%-4%.