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Antonino Ottaviano: Good morning, and thanks for joining us at Liontown September Quarter Results. My name is Tony Ottaviano. Joining me today is Ryan Hair, our Chief Operating Officer; Graeme Pettit, our Interim CFO; and Grant Donald, our Chief Commercial Officer. So if we can move to Slide 1, please. It's the typical disclaimer and then we move to our highlights slide. I'd like to provide some context today. This quarter was one of execution and we delivered exactly what we said we would. We advanced the underground ramp-up on schedule, maintained a strong and consistent plant performance and strengthened our balance sheet more than $420 million of cash following the August capital raise and also the restructuring of our debt facility with Ford. Importantly, this quarter represents the low point in our planned transition year, and it sets out the improvement story that unfolds from here. The plan is clear and unchanged. We continue to wrap up the underground production towards a 1.5 million tonnes per annum by March 2026, lift recoveries towards our target 70%, and once we process the cleaner underground ore becomes the dominant mill feed and drive costs down progressively each quarter as we fleet the open pit and move to full underground operations at the desired steady state run rate. So the key messages for investors today are: first, execution and delivery. We achieved every operational milestone to plan. During the quarter, we executed the scheduled maintenance, as we highlighted in the previous results. We're executing our OSP strategy to manage our contact tools, achieved a 105% increase in underground production, reaching our 1 million tonne per annum rate by September. We also advanced the open pit towards completion, with the final clean ore bench reached in September and full completion planned for December quarter as stated. These outcomes demonstrate once again the strong delivery against plan and the continued validation of both the ore body and the process flow sheet. Second, our financial strength. Our balance sheet is in excellent shape, providing full flexibility through our transition year. We closed the quarter with $420 million in cash, as I mentioned just earlier, supported by successful $316 million equity raise, and the Ford facility amendment to help us with the debt repayments in the course of the next 12 months. Thirdly, our operational leverage ahead each quarter from here improves the benefit as we get scale and defray our operating costs, but also our all quality improves. With the underground volumes ramping up, open pit completion imminent and recovery uplift underway, production growth, recovery strengthens and cash generation accelerates. The operational leverage is built on visible -- it is visible in the trajectory ahead. Finally, the long-term fundamentals. Lithium demand remains robust, underpinned by strong EV and the accelerating expansion of the battery -- sorry, the stationary batteries. Liontown's high-quality asset, Tier 1 partners and the fortified balance sheet helps us capture the full benefit as the market turns. So in summary, the context of today's results, disciplined execution through the trough, a clear path of improving margins and cash flow, and a business built on sustainable performance. I'll now move to the next slide, please, which is our highlights. The production for the quarter was 87,000 tonnes at a weighted average grade of 5%, and this is in line with us processing the contaminated by the contract ore being the OSP. Contract sales were 77,000 tonnes. Concentrate on hand is 20,000 or nearly 21,000. Our recovery was the 59%, again, as planned, and this will improve as we get the better quality ore. And plant availability, notwithstanding the planned shutdown, of 92%. On the financial side, I've already mentioned the cash imbalance. The revenue was $68 million, but it was impacted by the lower sales due to port congestion in September and the backward looking and we'll talk about this a little bit later in the presentation. Our realized price on a nausea basis plus our unit operating costs were exactly as planned, given that we had lower recoveries due to the OSP stockpiles. If we move to the next slide. I'll now move on to -- and introduce Ryan here, who will go through the slide for us. Ryan Hair: Yes. Thanks, Tony. So safety, our lost time into frequency rate, roughly in line with the previous quarter. The total recordable injury frequency rates up slightly on the last quarter. And as we've noted in the lead end of this slide, we are focused very heavily at the moment on a back to basic safety drive both on physical and mental well-being. Importantly, our leading indicator safety observations are still in line with our previous quarter, which is in line with our plans. And on ESG, renewable power average of 79% for the quarter. And notably, in September, peaked at 83%. And female workforce participation slightly at 23%. If we can move to the next slide. So now talking to operational performance and starting with open pit. So performance remains strong in the open pit and continued to deliver to plan. We mined 292,000 tonnes of ore at 1.3% lithia, which is 77% up on last quarter. The final clean ore zone was reached in September, and completion remains on schedule for the end of the calendar year. Focus this quarter is on completion of the pit in preparation to contractor demobilization as we transition into full underground operation, which we'll now turn to the next slide on underground. So the underground operation, we continue to perform exceptionally well here, and it does remain one of the most important indicators of our progress towards steady-state operation. During the quarter, all mined just over double to 225,000 tonnes, reaching a 1 million tonne per annum run rate in September, which is in line with plan. The pace fill and primary vent systems are now fully commissioned and performing to design, supporting delivery of the plan and improving operational efficiency. The ordering, power reticulation of materials handling infrastructure are working well, providing strong operating reliability across all levels in the mine. We've mobilized a third jumbo and a fourth production drill, which increases development and production capacity and supports continued ramp-up towards 1.5 million tonnes per annum by Q3 FY '26. The orebody continues to perform well against expectations. Volumes and grades are reconciled closely with the mine plan. fragmentation, overbreak and dilution remain well within design parameters. A total of just over 1,800 meters of development was completed for the quarter, up 8% on the prior period. To date, 18 stopes have been mined including 14 in the September quarter with an average stope size circa 15,000 tonnes. Work fronts are expanding across multiple levels, providing flexibility as we scale up production. Our key priorities now are to optimize stope turnover, continuing to increase the rate of development and refine pace fill scheduling to sustain continuous production. In short, the underground is behaving exactly as designed. Infrastructures in place, performance is consistent and the pathway to 1.5 million tonne per hour and beyond is clear and achievable. So now I'll move to the next slide on the process plant. So the plant continued to perform well and most importantly, exactly in line with the plan we outlined earlier this year with lower recoveries in production when seeding OSP material or our contact material during the early underground transition. We said we'd take this approach to manage all feed during the ramp-up phase, and it's exactly what we did. Plant reliability remains strong with 580,000 tonnes processed at 92% availability. Recoveries behaved as expected with a range of 5% Lithia processed during the quarter, averaging 59% with the recovery, reducing a 5% lithium concentrate meeting all customer specifications. This confirms the plan is performing reliably and to expectations. The current recovery is simply a reflection of the range of fleet types processed this quarter. The transition to cleaner underground ore is underway, and as that proportion increases through FY '26, recoveries were lift progressively. Our FY '26 recovery target remains unchanged with around 70% recovery expected by March 2026 as underground ore becomes the dominant feed. At the same time, recovery improvement initiatives continue to advance. The tails regrind Vertimill has been commissioned and optimization work is ongoing across grind size, reagent dosing and water quality to support incremental recovery gains. In short, the plant is running to design recovery curve is following the planned trajectory and the improvement from here is baked into our guidance. And with that, I'll hand over to Graeme. Graeme Pettit: Thank you, Ryan. Next slide, please. All right. Our results for the quarter were consistent with company expectations, reflecting the planned impacts of maintenance and OSP strategy foreshadowed in the previous quarter presentation. Revenue was $68 million, down 29% quarter-on-quarter as a result of lower shipping volumes over due to port congestion and backward-looking pricing mechanisms. Backward-looking pricing for shipments during this quarter resulted in pricing lowers of May and June impacting realized prices for the majority of the quarter. But a closing cash balance of $420 million, but we can look at in more detail on the following slide. Unit operating costs increased 22% from the prior quarter to $1,093 per dry metric tonne sold due to the drawdown of OSP stockpiles. This increase in unit operating costs was anticipated in form part of our full year guidance. What you'll see going forward is that unit costs will trend lower as volumes ramp up and clean underground ore becomes the dominant part fee. All-in sustaining costs increased 10% from last quarter to $1,154 per tonne reflecting the higher unit operating costs. This was partly offset by lower sustaining capital spend. As with unit operating costs expect to see the trend lower through the year. Next slide, please. Our tax position strengthened significantly, finished the quarter at $420 million with 21,000 tonnes of salable concentrate on hand. This excludes $20 million of the Zenith cashback guarantee, which we anticipate to receive in the coming quarters. Cash flow operating activities for the quarter was a negative $44 million and was mainly attributable to a $53 million reduction in cash receipts from customers compared to June's quarter. cash receipts were impacted by lower sales volumes and working capital movements, including an increase in the value of trade receivables and concentrates on hand. Additionally, final pricing adjustments from the prior quarter sales of $8 million further reduced cash receipts. Capital expenditure of $44 million was primarily underground development and the completion of TSF construction. Given the completion of the TSF construction and the completion of open pit mining in the December quarter, you should expect to see capital expenditure reduce in the coming quarters. Finally, on financing cash flows, inflows of $363 million represents the net proceeds of the August capital raise. The closing cash balance was also supported by the deferral of the commencement of principal and interest payments under the Ford facility, which has now been deferred for 12 months. Overall, we have a strong liquidity position and expect to see improved quarterly cash performance that will ramp up the underground and increased production volumes. Next slide, please. right. So our debt profile remains low cost, long dated and highly flexible. This slide is an update of our debt position following the Ford amendment completed in August. The effect of the amendment has pushed the first repayment under this facility out to September 2026. Looking at the maturity profile. Again, it's important to note that while the LG Energy Solution convertible notes are shown in the maturity schedule as a repayment of $414 million. cash repayment can only occur if the facility is not converted into equity before the maturity date of July 2029. Subsequent to the recent equity raise, the conversion price of the LG notes has been amended from $1.80 to $1.62 per share. And in summary, our debt structure provides a very low cost of capital with no near-term maturities, and this allows us to continue to focus on delivering the ramp-up of the underground mine and deliver the full potential of Kathleen Valley. I'll now pass to Tony. Antonino Ottaviano: Thanks, Graeme. So if we move to the next slide, please. We've actually -- when we announced our forward debt restructuring and contract arrangements, we did make some mention around our volume profile going into the future. We've just simply graph this for the market now so that you can see it visually. So there's no new information here, but it just provides a little bit of extra clarity on the contract profile for tonnes. And we are delivering into some of these already. So that's really what this slide is designed to provide. So if we move to the next one, please. Business optimization. Last year, we made $112 million worth of savings, either directly in recurring or some deferred capital. That pursuit becomes relentless. We need to continue with the business optimization because price is still where it is, and we can't lose sight of that fact. And this next exercise, this next phase is going to be a broad engagement and assessment of priorities across everything. So there will be team-led initiatives. There will be a challenge in everything we do, as I said in the slide, that we will challenge the status quo, and we will focus on our purchasing and contracts. So we will -- we've already said this, and we will continue to optimize our cost structure in the current environment. So next one, please. So I'm now back on to Ryan for this last -- next slide. Ryan Hair: Yes. Thanks, Tony. So this slide, which I think we've presented a couple of times now, recaps how FY '26 is unfolding quarter-by-quarter. In quarter 1, we deliberately executed planned maintenance activities and early technical improvements while implementing the OSP feed strategy to manage transitional ore during this ramp-up phase. That strategy delivered exactly as guided, lower production and recoveries were expected, and those outcomes were fully reflected in our prior guidance. Moving into Q2 this quarter. The focus shifts to completing open bit mining and increasing the proportion of clean underground into the plant. Recoveries are already improving month-on-month and as underground volumes continue to ramp up, throughput and grade consistency will lift. We also expect operating costs to trend lower as we shut down the open pit operation and those costs fall away and we get productivities through increasing the scale of the underground operation. By Q4, in the June quarter, we transitioned fully into steady-state operations. The process plant will be operated in design throughput. Recoveries will stabilize at or above 70% and costs were materially lower than in the first half. That's the point where the business begins to demonstrate sustained cash flow and margin that underpins our long-term investment case. So while Q1 represented the planned low point, every subsequent quarter and first year, higher underground production, stronger recoveries, lower costs and greater cash generation, all consistent with the plan we set out at the start of the year. So next slide, please. So recap on our FY '26 guidance. FY '26 remains a transition with the open pit operations, as we've already mentioned, will conclude in December and the underground ramping up. In the first half, we continue to leverage the investment already made in the rod stockpiles processing the remaining OSP material, which we have always said would be temporarily impact recoveries and production and therefore, outline. As we move into Q2, production and recovery performance are expected to improve as the proportion of clean ore in the mill feed increases and the influence of OSP material declines. This uplift will be driven by higher clean oil production from the open pit and the growing contribution from the underground. Sustaining capital remains on plan, focused on underground development, maintenance and equipment replacement to support the ramp-up. Importantly, there is no change to our recovery target of around 70% by Q3 FY '26, and we remain on track for 100% underground production by Q3 FY '26. So in summary, the transition is unfolding exactly as we planned with Q2 marking the start of a steady state improvement across production and recoveries. We now move to the next slide, please, and I'll ask Grant to lead us through that. Grant Donald: Thanks, Tony. I think it's important to highlight that there are 2 fundamental growth factors driving lithium demand. The first is EV sales and the second is factory energy stationary storage. I'll start with EV demand. As you can see here from the chart on the left, EV sales continue apace. Global sales grew 26% year-on-year from January September. Importantly, September results of the first month we've seen more than 2 million EV sales in a single month. This translated so far this year into over 3 million extra EVs sold versus 2024. And as you can see on the chart on the right-hand side, expectations are for that to continue with a very solid CAGR growth rate of 14% according to Bloomberg New Energy Finance. I think importantly, it's also very interesting to see the growth of the rest of the world. that continues to grow at very, very aggressive rates off a small base. But we are probably about a quarter away from Rest of World sales equally in total North American sales. And one of the points highlighted to me by Homburg just yesterday was that EV sales in China now exceed total auto sales in North America. If we go on to the next slide. battery energy storage systems have really come from nowhere and been a strong driver of demand in the last year plus. I think for the last 2 or 3 years, they have exceeded expectations from forecasters. What this slide is demonstrating is that not only is it accounting for 1 unit and every 4 units of growth over the next 5 years. There are also a wide range of views on how fast this market is going. You can see in the chart on the right there from SC Insights that there's a large spread between the investment bank on the left insights in the middle and CATL's prospectus on the right-hand side. I think it's important to note the spread between the high and the low point is over 765 tonnes of lithium carbon equivalent, and that is around half of the total size of volatile market today. Large-scale grid investments are continuing to accelerate, and these are driven by the rise of data centers to support the shift towards as well as making sure that grids remain reliable with a larger share of renewable power penetration. And with that, I'll hand back to Tony. Antonino Ottaviano: Thank you, Grant. So we don't go to our final slide, please. We end where we started. So we continue to deliver on our strategy. I won't repeat things but effectively, we're executing the plan. We're delivering on the underground ramp up. The compete well comfortable conclusion at the end of the year as we planned. And we've strengthened our balance sheet both with the equity raise in August, but also restructuring the Ford debt facility to give us that further strengthening of that balance sheet in the next 12 months as we see the market recovery. So with that, I'll open it up for Q&A. Operator: [Operator Instructions] Our first question comes from Hugo Nicolaci from Goldman Sachs. Hugo Nicolaci: First one for me just on realized pricing. You called out the impact of the pricing lag through the contract in the quarter impacting that realized price. Now that you've recut some of those offtake agreements after September 30, does that mean that we shouldn't expect to catch up on the pricing balance we saw through the September quarter now if you just realize closer to spot spodumene prices? Antonino Ottaviano: Go ahead, Grant. Grant Donald: Thanks, Hugo. I think anytime you've got a large delta from as we saw in May and June, which was the lowest of the year in the 600s versus where we're trading now in the 900s. You have this impact, and it's just a question of when that impact flows through your revenue line. With Q lagging, it just means it's a little bit delayed. So if you go back to last quarter, we actually had the benefit of that where we outperformed index. So we had a 105% realization compared to Fastmarkets spodumene index in the last quarter. Unfortunately, you have to pay the piper and that came through the sales this quarter. So look, I don't think you're going to necessarily completely avoid any of those impacts because those kind of QP impacts are always there in your portfolio of contracts. And I don't think you should necessarily think that we did a onetime switch where we moved Q lag and we skip out the impact of that in the future. So that's not the case. Hugo Nicolaci: And then maybe just on the cost breakdown. Can you just give a bit more color in terms of maybe on a cash basis, the magnitude of spend, let's say, the open pit underground in the quarter? Antonino Ottaviano: Go ahead, Graeme. Graeme Pettit: So during the quarter, they were roughly even Hugo's, so between $10 million and $15 million per month. Operator: Our next question is from Adam Baker from Macquarie. Adam Baker: Port congestion was called out as an issue, which contributed to the delayed shipment during the quarter. Is this something that you're still seeing? And could this resurface during the December quarter? Antonino Ottaviano: Adam, the Geraldton Port has an issue they call surge. And as a result, during the quarter, we had a number of surge events which then built up the number of ships on lean. So we have to weigh our turn in the queue for those ships to come in and be loaded. Now the government is putting money in to resolve this issue in the Jordan port. But I think we potentially will see the back of it in the next quarter, but it's really what nature puts in. Grant Donald: Yes. Adam, just for further context, it's Grant here. It's a bit seasonal. So that last quarter tends to be the seasonal high spot where you see more swell events in surge events in Geraldton. And it did perform quite a lot of queuing and we weren't the only ones impacted. In fact, everyone who ships out of the part that we ship all was impacted. And I'd say that going forward, we shouldn't expect that. But there's always quarter-end chase that's on where everyone is trying to get shipment away before the quarter end, and that would continue. So this one was particularly bad just because of those surge events. Adam Baker: Okay. And just secondly, spodumene concentrate grades 5% for the sales in the September quarter. Just wondering is this a proactive decision that was taken by the team? Or was this just a flow-through as a result of the higher propane Gabbro going through the mill? And I'm just wondering what the time line would be to get that concentrate back to 5.2%. Antonino Ottaviano: Yes. I think your summary is correct, Adam. It is the latter, which is it's a result of the high gabbro percentage, which we showed in the graph. So we expect that to unwind in the next 2, 3 quarters once we get into 100% underground mill feed -- underground ore for the mill. Operator: The next question is from Levi Spry from UBS. Levi Spry: Yes. So maybe just following up on that. So I mean, this quarter, could it be a bit lower than 5%? And just confirming your guidance is at 5.2% in terms of lithium units? Antonino Ottaviano: Yes. So firstly, the latter, our guidance is confirmed at 5.2%. As I said, once we get into more the dominant seed being underground we will see that improve. And sorry, your first part of your question? Levi Spry: Could it go lower in the short term, I guess? What that offset the basis previously? Antonino Ottaviano: Yes. No, we don't anticipate it going lower in the foreseeable future. Our contracts specify a certain amount. So we're conforming to our contracts. Graeme Pettit: So just a little bit more color, sorry. The chart that we included on the process plant, we were endeavoring to then provide a little bit of color on gabbro. We will to try and maximize recovery and still keep within customer specs is great will naturally kind of trend a little bit lower. And what you'll also see on that chart is with the lower gabbro content, grade naturally drips up. So as we stated as the -- both the amount of OSP material, but also the amount of open pit starts to fall away and we get the clear higher-grade material out of the underground naturally gray order to, which is why we are maintaining guidance on both recovery and grade through the course of FY '26 and beyond. Antonino Ottaviano: Yes, and it's a blending exercise so there is an exclusion where it does drop. We will blend it with higher-grade material when we do have those better days. So that's -- it's all about managing it within the contractor specifications. Levi Spry: Yes. Okay. And just on the price piece, just as we're seeing spodumene prices improve here, can you just help us with how we're modeling that now? So I think you -- one of the previous questions was pointing to it. But just in terms of you repricing your resetting your contracts, how do we think about now the read-through on this grade concentrate to the spot price effectively? Grant Donald: Sure, it's Grant here. Look, the pricing reference is all disclosed, right? So now we've got 1 contract on Sports mean index. On contract continues to be on carbonate at least until the end of '26 when that deal expires. And then the other contract is on hydroxide. Operator: The next question is from Glyn Lawcock from Barrenjoey. Glyn Lawcock: Just a couple of quick ones. Firstly, you talked about the cost program under Phase II. Do you have any thoughts on the quantum that could yield or is it too early? Antonino Ottaviano: It is a bit too early. We're just -- we've kicked it off in the last quarter. We're still trying to assemble all the initiatives. So I can't give you a finger just now. Glyn Lawcock: Okay. No worries. Any orders of magnitude you think similar like half of last year? Antonino Ottaviano: It's still too early, Glyn. It will come out. Glyn Lawcock: Fair enough. Okay. And then maybe just -- I know it's very early days in the markets where it is, but it may be starting to show some signs of turn on the back of EFS, et cetera. But the 4 million tonne case, the expanded option, it says in the report you're still doing a little bit of studies towards it. Maybe just an update on where you are on that timing costs associated if you do -- if the market turns enough, you to exercise that option? Antonino Ottaviano: Well, the way it works and the way we're thinking about it is as we get more real-time operational understanding of our plant, we want to make sure that the expansion option is up to date with those learnings. So there's work that's always ongoing as to how do we -- how does that process flow sheet look like as we get more information from the existing operation. So that's one aspect of it. And the second one is, well, I think until we see a sustained improvement in the market, the Board will be live to this option, but it won't be a commitment yet. Operator: We next have a text question from a private investor who asks, what do Canmax look to benefit from the recent capital raise investment? Antonino Ottaviano: I think we've already made some very good money given that everyone who supported us on the raise at $0.73 is now looking at a share price of over $1. So [ Mr. P ], he came to site and was impressed by the operations that we do, and he wanted to invest all of its financial investment. Operator: Another text question from a private investor who asks, is there any clarity regarding the large tenants recently peaked near Sandstone? Antonino Ottaviano: It's an ongoing process. As we look at our long term, as part of that previous question around future expansion, we want to secure access to good water sources -- so we continually look more broadly as to where we can potentially look for the future long-term expansion requirements for water and other infrastructure. So that's part of that process. Operator: Another text question. In your lithium demand forecast chart, which of the best BESS growth scenarios have you assumed? Antonino Ottaviano: Thanks for the question. Look, with any company, I'm always wary of single point expectations or forecasts we look at a range of scenarios. You can imagine that in our forward planning, we're thinking about what would the world look like at the low end and what would the world look like at the top end, and we try and make sure that the decisions we make are robust against either scenario. Operator: Another question from a private investor. Did you have an update on downstream feasibility studies with LG Energy Solution and Sumitomo? Antonino Ottaviano: Yes. We continue to press work with both Sumitomo and LG Energy Solutions on the potential to pull downstream. I think it's no secret that some of our peers are having challenges in that space. The capital involved is significant. And in the current market environment, margins are squeezed. So for us, we continue to do the work to be option ready, but it's not something that we plan to make a decision on in the near term. Operator: Thank you. That's all the questions we have today. Please reach out to the Liontown team if you have any follow-up questions. We thank you all for your time, and have a great day. You may now log out.
Operator: Good day, ladies and gentlemen, and welcome to the Agilysys 2026 Second Quarter Conference Call. As a reminder, today's conference may be recorded. I would now like to turn the conference over to Jessica Hennessy, Vice President of Operations and Investor Relations at Agilysys. You may begin. Jessica Hennessy: Thank you, [ Carmen, ] and good afternoon, everybody. Thank you for joining the Agilysys 2026 Second Quarter Conference Call. We will get started in just a moment with management's comments. But before doing so, let me read the safe harbor language. Some statements made on today's call will be predictive and are intended to be made as forward-looking within the safe harbor protections of the U.S. Private Securities Litigation Reform Act of 1995, including statements regarding our financial guidance. Although the company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause results to differ materially. Important factors that could cause actual results to vary materially from these forward-looking statements include our ability to achieve the provided guidance levels, maintaining sales momentum, the ability -- the company's ability to convert the backlog into revenue and the risks set forth in the company's reports on Form 10-K and 10-Q and other reports filed with the Securities and Exchange Commission. As a reminder, any references to record financial and business levels during this call refer only to the time period after Agilysys made the transformation to an entirely hospitality-focused software solutions company in fiscal year 2014. With that, I'd now like to turn the call over to Mr. Ramesh Srinivasan, President and CEO of Agilysys. Ramesh, please go ahead. Ramesh Srinivasan: Thank you, Jess. Good evening. Welcome to the fiscal 2026 Second Quarter Earnings Call. Joining Jess and me on the call today at our Alpharetta, Atlanta headquarters is Dave Wood, CFO. As has become customary in these updates, let me cover the details pertaining to sales and selling success first before switching to revenue, profitability, guidance increases and other business updates. We measure sales in annual contract value terms. We continue to exclude from our sales numbers, all aspects of the Marriott PMS project, including those pertaining to services sales. Fiscal 2026 second quarter was our best ever July to September period of sales and the second best of any quarter so far. The first half of this fiscal year was the best first half sales start to a fiscal year in our history. We can slice the sales numbers in various ways, but the long and short of the sales story is our current business momentum is excellent. All the years of diligent reengineering of the core products and the addition of 20-plus add-on software modules to create a comprehensive ecosystem of cloud-native, world-class hospitality-focused software solutions have created considerable competitive advantages for us in a hospitality technology environment that otherwise seems starved of genuine innovation and significant R&D investments. It's becoming easier for prospective customers to see the obvious pace of innovation benefits of working with one provider for as much of the required ecosystem as possible. When customers come up with an enhancement that involves changes to multiple software modules, they can clearly see who the only provider is who is capable of getting the required innovation done across all the pertinent modules in quick time. These advantages have been showing up in our sales numbers during recent quarters. In addition, the tailwinds of AI are helping us improve all areas of the business, especially the modernized software solutions, which are well positioned to take on the engineering of groundbreaking innovations that AI tools are now helping enable and increasing our competitive advantages at an even faster rate. Sales levels during the quarter were good across the various sales verticals, especially gaming casinos and international regions. Looking at sales levels during the first half of fiscal 2026, Q1 plus Q2 compared to the first half of last year, fiscal 2025. Overall global sales were up 17%, 1-7, were up 17%. But more importantly, subscription sales were up 59%. Foodservice management, FSM sales were up more than 2.5x. International sales were up 36%. Gaming casino sales were up 15%, 1-5, were up 15% despite last year being a big record sales year. Point-of-sale POS products, including add-on modules were up 23%. Property management systems, PMS products, including add-on modules, were up 34%. Inventory procurement for food and beverage products more than doubled. I will spare you recounting the entire list, suffice to say that our current business momentum is good, fueled by increasing sales success levels, which are, in turn, driven by growing product ecosystem superiority, which is sustainable and getting more pronounced and visible with every passing quarter. The modernized set of software solutions has now been in the field for anywhere from 1 to 3 years, and we continue to grow the number of reference customers who have good return on software purchase investment stories to tell. Considering that the total addressable market we serve is something like a couple of orders of magnitude bigger than our current size, we still have a long growth path ahead of us. As we continue to solve the challenge of today's Agilysys not being known well enough in large swaths of the hospitality market. International sales levels had another strong quarter during Q2, growing by more than 35% over the prior year. The ecosystem is resonating across global markets and customer needs for a unified solution set is driving more awareness and more global wins. One such win during Q2 was Rudding Park in Harrogate, England. This beautiful family-owned luxury resort, which I had a chance to visit recently located in Northern England, includes multiple golf courses and award-winning spa, upscale dining and event space. They selected as many as 21 Agilysys software solutions, including POS, PMS, service optimization, booking engine, sales and catering, golf and spa. Fiscal 2026 Q2 Foodservice management, FSM sales was twice as high as Q2 last fiscal year. The new modernized and unified POS platform is performing well in the field. And given we no longer need to mix old and new technologies and new implementations, they are becoming increasingly simpler to implement and manage, giving us strong credibility within the FSM vertical to execute on promises made. FSM sales results have not only been great during the first half of this fiscal year, but we are also seeing good momentum for continued good performance through the rest of the fiscal year. We are pleased to see FSM customers renewing and deepening their trust in our POS solutions again. The other sales verticals also generated strong results. Both gaming and hotel resorts and cruise ships, HRC verticals returned strong sales quarters. A few notable multiproduct new customer wins during the quarter within HRC included Naturally Pacific Resort on the Coast of Vancouver Island, Canada, who selected 15, 1-5, who selected 15 Agilysys products including PMS, POS, golf, reserve and spa to manage all their luxury amenity, guest experience options. And Waco Surf Waterpark and Hotel Resort, the largest inland surfing and sports facility located in Waco, Texas, who selected 13, 1-3, selected 13 Agilysys products, including PMS, POS, mobile ordering, membership and the recently introduced Guest App to increase operational efficiencies and provide exceptional guest experiences. During Q2 fiscal 2026, July to September, we added 18, 1-8. We added 18 new customers, excluding Book4Time, and all of them were subscription-based sales agreements. Each of these new customer sales wins included an average of 7 products per deal, which is a new high for us. PMS customers continue to invest in the multiproduct ecosystem with an average of 14, 1-4, with an average of 14 products per deal when PMS was part of the purchase suite. We also added 87 new properties, which did not have any of our products before, but the parent company was already our customer. Of the 114, that's 1-1-4. Of the 114 new properties added during the quarter across new customers, new properties of current parent customers and Book4Time, 108 were either partially or fully subscription-based. In addition, there were 93 instances of selling additional products to properties, which are already running at least one of our other products. These 93 instances involved a total of 241 new products sold at the rate of 2.6 products per new product sales agreement, which is the highest level we have seen so far. Now on to revenue. Fiscal 2026 Q2 revenue was a record $79.3 million, the 15th, 1-5, the 15th consecutive record revenue quarter, 16.1%, 1-6, 16.1% higher than the comparable prior year period. Overall, revenue during the first half of fiscal 2026 Q1 plus Q2 was $156 million, 18.4% that is 1-8, 18.4% higher than revenue during the first half of last fiscal year. Fiscal 2026 Q2 recurring revenue grew 23% year-over-year and 4.8% sequentially quarter-over-quarter to a record $51 million. This recurring revenue year-over-year increase was driven mainly by subscription revenue increase of 33.1%. This is now the seventh consecutive quarter of overall subscription growth of greater than 30, 3-0, greater than 30%. Subscription revenue now constitutes 65.5% of total recurring revenue compared to 60.5%, that is 6-0, 60.5% Q2 last year. Subscription revenue from POS and related add-on modules grew by 18%, that is 1-8, grew by 18% year-over-year and organic subscription revenue from PMS and related add-on modules grew by 55%. Fiscal 2026 Q2 was the best quarter on record with respect to the sum of annual recurring revenue, ARR of all subscription projects implemented during the quarter. The extent of subscription ARR installed during fiscal 2026 Q2 was 79% higher than the comparable period last year. And total subscription ARR installed during the first half of fiscal 2026, Q1 plus Q2 was 50%, 5-0, 50% higher than during the first half of last fiscal year. The increased velocity of project implementation has been a strong contributor to the acceleration of subscription revenue growth during fiscal 2026. Despite the current overwhelming customer preference for cloud SaaS installations, annual maintenance pertaining to perpetual on-premises software licenses was once again a record this quarter, 7.5% higher year-over-year. Our current subscription revenue growth levels are coming for the most part from new incremental projects and are not dependent on cannibalization of annual maintenance installations. Virtually all the modernized software solutions and recent product versions are designed to be cloud native, but can also work equally effectively in on-premises installations if that happens to be the customer preference. The fact that we allow hospitality customers, several of whom need to keep their critical business software applications on-premises for good reasons, the fact we are offering the required flexibility and allowing them to control the timing of their move to the cloud without sacrificing the benefits of ongoing innovation is a competitive advantage for us. Fiscal 2026 Q2 product revenue was $10.1 million, right in line with our expectation of product revenue levels on a quarterly basis for the rest of the year. Product backlog at the end of Q2 improved substantially during the quarter, ending up 49% higher than at the end of Q1 and 74% of previous record levels, thereby giving us better visibility for the rest of the fiscal year than we have had in quite a while. We expect product revenue levels to remain around current levels. Fiscal 2026 Q2 July to September services revenue was a record $18.2 million, that is 1-8, $18.2 million, 12% higher than the comparable prior year quarter. We continue to make good progress in our efforts to find ways to reduce customer implementation delays. Services revenue backlog reduced by 10% between the end of Q1, which was a record and end of Q2. This reduction is welcome as services revenue is now driven increasingly by project implementations with customer paid product development work becoming less of a contributor compared to recent previous quarters. Given the strong sales momentum during the first half of fiscal 2026, our expectations for full fiscal year 2026 have increased. We started the fiscal year with a full year revenue range expectation of $308 million to $312 million and subscription revenue growth of 25%, which was then increased to 27% last quarter. We now expect the full year revenue range to be $315 million to $318 million, that's 3-1-5 to 3-1-8, $315 million to $318 million and full year subscription revenue growth to be 29%. No change in the 20% adjusted EBITDA by revenue expectation. One other highlight is the increasingly positive impact AI is having on our business and competitive positioning. To begin with, virtually all our software licensing is based on number of rooms for PMS and related add-on modules, number of terminal endpoints for POS and number of sites or locations or profit centers within sites for inventory procurement for food and beverage products and certain other add-on modules. Virtually all our license structures are not based on number of users. As customers increase their operational efficiencies using AI tools and reducing user counts, that does not affect our software licensing fees. On the other hand, such customer internal efficiency improvements tend to free up more technology investment room and increase the need for modernized software solutions. Our product ecosystem software solutions have been created through tacit domain knowledge gathered and developed over decades of field work in hospitality, working closely and learning from thousands of customers and tens of thousands of product implementations. The current ecosystem of complex software solutions include in them a vast amount of customer requirement nuances and complications, which cannot be generalized by any automation tool. Product development efficiencies can definitely be greatly improved through the use of UI, through the use of AI and we are seeing with our own teams now. But domain expertise and complex decision-making of what and how to build the complex pieces of each software solution and then stitching them into a complex ecosystem, enabling customers to buy 7, 8, 10, 12 such modules together presents a formidable barrier to both entry and more crucially to reaching a stage of excellence. About 18 months ago, we launched our GetSense.ai umbrella technology brand to group the AI initiatives in the Agilysys ecosystem of products. Since then, we have launched several features that are powered by AI, including a dynamic pricing engine for room upgrades, unique revenue management capabilities based on demand across spa, golf, dining and other activities and invoice automation and inventory procurement for food and beverage products. For AI to function well in a hotel and hospitality context, it requires data. Using the ecosystem we have built over the past several years, we have now created an intelligent guest profile module that captures and surfaces consolidated guest data across all resort touch points, helping us deliver unique AI-enabled features, making personalization at scale possible across the entire guest experience, not just at 1 or 2 touch points, but across the entire guest experience. There are good reasons today why each of our successful sales efforts, which include PMS are adding up to 14, 1-4, 14 products for win. We are currently actively working on delivering several additional AI-driven capabilities in the upcoming product version releases. AI tools working in conjunction with the already modernized solutions are currently helping us increase the competitive advantage gap, apart from increasing product development and other efficiencies across various operational areas, including faster automated product implementations and easier and quicker identification of cybersecurity threats. Overall, we love the tailwinds AI is currently providing us to get better and improve the pace of innovation. We have conviction that AI is making our products and overall business better rapidly. We are realistic and pragmatic about managing it well and are optimistic about AI's potential to increase our current competitive advantage distance. One other quick note before handing the call over to Dave. The Marriott PMS project continues to make good progress and is proceeding according to plan. We are currently in the midst of beta implementations. With that, Dave? Dave Wood: Thank you, Ramesh. Taking a look at our financial results, beginning with the income statement. Second quarter fiscal 2026 revenue was a quarterly record of $79.3 million, a 16.1% increase from total net revenue of $68.3 million in the comparable prior year period. Onetime revenue consisting of products and professional services was up 5.6% over the prior year quarter and in line with our expected 5% to 10% increase in onetime revenue. Recurring revenue was up 23% on the back of good subscription revenue growth. FY '26 year-to-date revenue is currently at $156 million, up 18.4% over the prior year-to-date and currently at a higher level than the assumptions our original full year guidance of $308 million to $312 million was based on. Sales momentum remained robust during Q2, leaving total backlog at record levels despite the strong project implementation and revenue start to the year. Subscription sales exceeded plan for the second consecutive quarter. Subscription bookings were up 41% over the prior fiscal year second quarter and continue to trend ahead of our original subscription guidance. FY '26 year-to-date subscription bookings are up 59% over the prior year. Despite the strength of subscription revenue through the first half of the fiscal year, subscription backlog remains at record levels and 26% higher than the same time last year. With the current product backlog strength and sales momentum, it's safe to say the visibility into our business in fiscal year is significantly better than at this time in the prior fiscal year. Professional services revenue increased 11.8% over the prior year quarter to a record $18.2 million. Professional services revenue remains a good leading indicator for the future subscription revenue growth. In the upcoming fiscal third quarter, we expect professional services revenue to drop slightly sequentially due to less billable hours around the holiday season. Total recurring revenue represented 64.3% of total net revenue for the fiscal second quarter compared to 60.7% of total net revenue in the second quarter of fiscal 2025. Subscription revenue grew 33.1% for the second quarter of fiscal 2026. Subscription sales and backlog were again both at record levels in Q2. Although subscription revenue exceeded our revised guidance of 27%, the backlog continued to grow, rising by 30% over FY '25 exit rates. We continue to be pleased with subscription sales and revenue growth levels. Moving down the income statement. Gross profit was $49 million compared to $43.2 million in the second quarter of fiscal 2025. Gross profit margin was 61.7% compared to 63.3% in the second quarter of fiscal 2025. Gross margin was down slightly due to margins associated with onetime revenue while we continue to ramp up the newly hired professional services team members and continue to see a downward trend in on-premise perpetual license revenue. Combined, the 3 main operating expense line items, product development, sales and marketing and general and administrative expenses, excluding stock-based compensation, were 41.3% of revenue in the fiscal 2026 second quarter compared to 45.6% of revenue in the prior year quarter. Excluding stock-based compensation for the second quarter of fiscal 2026, product development decreased slightly to 18.8% compared to 20.4% of revenue in the prior fiscal year second quarter. General and administrative expenses reduced for the quarter year-over-year from 12.7% to 10.8% of revenue and sales and marketing decreased from 12.5% to 11.7% of revenue. Operating income for the second quarter of $14.1 million, net income of $11.7 million and gain per diluted share of $0.41 were higher than the prior year's second quarter income of $4.1 million, $1.4 million and gain of $0.05. Adjusted net income, normalizing for certain noncash and nonrecurring charges of $11.4 million compares favorably to adjusted net income of $9.5 million in the prior year second quarter and adjusted diluted earnings per share of $0.40 increased compared to the prior year quarter of $0.34. For the 2026 second quarter, adjusted EBITDA was $16.4 million compared to $12.2 million in the year ago quarter. FY '26 adjusted EBITDA continues to pace with our original annual guidance of 20% of revenue. Moving to the balance sheet and cash flow statement. Cash and marketable securities as of September 30, 2025, was $59.3 million compared to $73 million on March 31, 2025. As a reminder, the first half of the year cash balance is typically lower due to timing of working capital events in the first half of the year. In addition to working capital adjustments, we paid down our credit revolver by $24 million in the first half of the fiscal year, leaving us debt-free now. Free cash flow in the quarter was $15 million compared to $5.9 million in the prior year quarter. As we have said in the past, adjusted EBITDA and free cash flow over a full fiscal year after normalizing the impact of CapEx continue to be good proxies for financial health of the business. For our fiscal year 2026, we are raising guidance for subscription revenue growth again from 27% to 29% based on our current backlog and sales momentum. This quarter, we are also raising our top line revenue guidance range from $308 million to $312 million to $315 million to $318 million. As a reminder, we expect professional services revenue to decrease by more than 5% sequentially in Q3 due to less billable days available around the holidays before returning to normal levels in Q4. Adjusted EBITDA of 20% remains the same for the fiscal year 2026 as we continue to evaluate various strategic growth initiatives. In closing, we are extremely pleased how our business has worked out during the first half of fiscal 2026 and how it's shaping up for the remainder of the year. With that, I will now turn the call back over to Ramesh. Ramesh Srinivasan: Thank you, Dave. In summary, we are pleased with the fiscal 2026 Q2 July to September results. Our overall current sales and business momentum, the continuing surge in subscription software sales and the pace of project installations, it is tough not to feel bullish about our business. Compared to the same Q2 July to September quarter 4 years ago, the overall revenue has more than doubled, subscription revenue has tripled and services revenue has grown 170%. That's 1-7-0. We continue to make great progress with our modernized solution ecosystem. Increased use of AI tools is helping us build sustainable and growing competitive advantages. Our barrier to excellence in hospitality-focused technology is increasing. We have done well with retaining top talent over the past several years and continue to add more, including those focused entirely on improvements and advancements using AI. Compared to the same time last year, the number of quota-carrying sales personnel is 16%, 1-6, 16% higher now, and the global professional services team size is 23% bigger. We have recently added senior personnel strength to our global marketing teams. We continue to do extremely well with customer retention and growing revenue across both current and new customers. We continue to be strong believers in sustained, disciplined profitable growth. Major -- more major hospitality corporations are taking greater notice of us, and we are now engaged in meaningful conversations with more of them. We continue to maintain and improve on a clean balance sheet. We operate in a total addressable market that is a couple of orders of magnitude larger than us. And we continue to keep our focus undistracted and passionately on hospitality, an industry that is hungry for more technology innovation help. All that does sound like a good recipe for medium- and long-term defendable, sustained good business growth. With that, [ Carmen, ] can we please open up the call for questions? Operator: [Operator Instructions] All right, while our first question is from Mayank Tandon with Needham. Mayank Tandon: Congrats, Ramesh, Dave and Jess, on the quarter. Ramesh, I wanted to just ask about what's really changed given the record sales momentum. Would you say it's more a function of the market waking up to the adoption of cloud-based solutions that maybe they were slow to embrace? Or is it more a function of Agilysys being now maybe better known in the market with all the product innovation that you've completed. So if you could just maybe speak to -- it could be both, but I'm just curious what would you weigh more towards in terms of what's changing and what's driving the record sales momentum? Ramesh Srinivasan: Mayank, when sales and business momentum improve like this, there's always a number of reasons. But I would say that the main reason why things are truly moving forward for us is because the product ecosystem is getting better. The product ecosystem is cloud native. And we went through a period of 6, 7 years when we had to go -- do the hard yards, reengineering and converting all our products into modernized solutions and also unifying them, integrating them into one ecosystem. That took us a lot of work over 6, 7 years. And now that all that is done, those products are improving at a rapid rate. And there is not much other innovation going on in this industry now. So the competitive advantages are also increasing. In addition to all that, we've also added significant sales and other staff, senior resources like Joe Youssef, who have joined us are opening up a lot of major doors for us. So a lot of factors are working together, mostly driven by our product improvements and the higher level of senior talent who have joined us. Mayank Tandon: Got it. That's helpful color. Then maybe I'll switch over to margins. And this is more of a longer-term question. I'm just curious, as the Marriott rollout does go live over time, do you expect a step back in margins? Do you have investments to make to ensure the go-live is on schedule and goes on plan? Or do you believe that as the rollout starts, it will be margin accretive to your business? Dave Wood: Mayank, yes, for the most part, we think it will be margin accretive to the business, especially if you look over a couple of quarters or maybe an annual basis. There certainly could be a quarter where maybe we have a little bit of investment prior to the rollout. But I think we're talking about a quarter here or there. But certainly, as you look over 2 or 3 quarters combined, we have most of the people on staff and most of the revenue contribution going forward will be subscription revenue, which is at a higher margin. So, Mayank, both this major project and all the other major projects that we are continuing to sign are all going to contribute towards increasing growth and increasing margin. Operator: Our next question comes from the line of Matt VanVliet with Cantor. Matthew VanVliet: I guess I wanted to dig in a little bit on the international strength that you continue to see. I know you've made a lot of investments, both on the go-to-market team in those regions as well as kind of the global marketing organization. But curious if you could give us a little bit more detail in terms of performance in Europe and EMEA versus APAC and then maybe any rest of world contributions there? And do you feel like you're in some of those markets starting to get some of the halo effect of winning this Marriott deal? Or does that maybe come later once it's started to deploy and you've sort of proven the success there? Ramesh Srinivasan: If you ask me, Matt, it's more about product improvements than any particular halo effect from any particular project. Though as we continue to win more of these major customers who are global customers who have massive international presence, that will further add to our improving international performance. This year, so far, EMEA is working at record levels. We've really made good progress, especially in the U.K. and in other countries nearby as well. APAC, we are now working through more big opportunities than we ever have. But all those opportunities still continue to be the bigger ones. We want to get better at more the singles and doubles in APAC, especially. But we are generally pleased so far with how our international presence is picking up. We are involved in more conversations and a lot of it has to do with the product improvements. A lot of it has to do with the need for an integrated ecosystem. And as we continue winning these bigger customers, Matt, like Marriott and hopefully more customers like that, I think that will continue to improve for us. So international, we are very, very bullish on that being a major growth engine for us going forward. Matthew VanVliet: Okay. Helpful. And then it sounded like the investments in capacity around the delivery team are starting to actually kind of work through more backlog than you can book each quarter. Obviously, it's kind of a fine balance. It's great to have the strong bookings, but at a certain point, you need to get it delivered to your customers. So where do we stand in terms of capacity today? Have you primarily made the headcount and process investments to make sure that you can continue to sort of burn through the backlog just as quickly or maybe slightly more quickly than you're able to book? Or should we think about maybe a couple of other sort of bigger rounds of headcount additions over the next few quarters that kind of will create some ups and downs in the margin structure? Ramesh Srinivasan: The capacity improvements that we needed in services, we have completed this calendar year. It was done more before April. So the bulk capacity increases we needed to make in our services team, we did complete them around the April, May time frame. So -- and we'll continue to expand it. Like sales, services teams and our other teams, we'll continue to expand as we are the growing company. But in terms of giving ourselves the capacity to make sure there are no delays in projects, we have completed that. We do continue to face delays here and there because of customer delays, because delays on the customer end, and there is only so much we can help that because these are all big product ecosystem kind of implementations and customers have to be sure that they are ready for it. So to answer your question, Matt, as far as we are concerned, we do have the capacity now in terms of services to take on what we are selling and continue improving on it. So we do have that capacity. That doesn't mean we stop growing, but we don't need to bulk grow anymore. We will steadily continue improving those teams, but that is not an issue. We are doing a good job of catching up with our backlog, but we have to do more to get past the customer delays, which there is only so much we can do to help. Operator: Our next question is from Brian Schwartz with Oppenheimer. Brian Schwartz: Ramesh, following up on the last question on the growth that company is experiencing in the sales and service capacity this year. My question is on where you are on the efficiency curve of this initiative. I know it's early, but are you seeing returns that you thought you would have expected at this point of the initiative? And are you expecting bigger efficiency gains to come in the second half of this fiscal year or more likely next fiscal year? And then I have a follow-up for Dave. Ramesh Srinivasan: Yes. So we are seeing efficiency improvements, Brian, all across the organization, partially due to AI and partially due to other reasons as well. So let me just break up the question into the various pieces. As far as services is concerned, we are seeing continuous efficiency improvements due to multiple reasons. One, the significant increase in personnel strength that we had at the beginning of the calendar year or let's call it, the first half of the calendar year, the training and the personnel getting more familiar with our products and becoming better with it has exponentially increased in the last 3, 4 months. So that is there. In addition to that, the products are also becoming easier to install, Brian. Remember, we went through a massive amount of modernization of the products. Our products have been in the field for 1 to 3 years now, and they are becoming easier and easier to implement. And then you add the fact that you use AI tools to automate a lot of the implementations. A lot of the complex configuration setups of the products can now be automated using AI tools. So all of that is contributing to greater services efficiencies. People are getting better. The products are far easier to implement. There are tools available in technology, AI otherwise to speed up implementation. So all that is improving the efficiency of product implementations. Now sales, even now 75% or so of our sales comes from the top half of our sales team. So improvement in sales productivity, we still have a runway ahead of us. We increased our hotel resorts sales team, our international sales team during the beginning of the year, and they have all built a pipeline, and so those efficiencies are getting better as we go. And product development efficiencies have really become much better, thanks to AI tools and a whole lot of other reasons. So product development efficiency have improved. But it's a continuous game, Brian. There is no end game to this. Efficiencies have improved a lot this year, and I think it will improve massively next year as well. It may not directly show up in P&L because we still need the resources, but we are getting a lot more done with the current resources we have. Brian Schwartz: And the follow-up I have for Dave. I just wanted to ask you about seasonality from the summer period in the quarter. We're seeing these outstanding sales results, just wanted to check with you, did the business experience less seasonality this fiscal 2Q than it did last year? I remember last year, you called it out during fiscal 2Q. Dave Wood: Yes, I mean I really think there's a couple of things going on in that question. And some of it will be kind of reiterate what Ramesh said. When you look at this year compared to last year, there's kind of 3 differences in where we sit. I mean one, we have more sales capacity. We're still in the middle of that kind of ramp of our sales team, but we have a lot more quota-carrying sales reps on the team, which are helping with that. The second is our backlog just remaining at record levels. Like when we think about backlog, we don't think of it in terms of weeks, we think of it in terms of months. So having a backlog and then really touching on what Ramesh said, I mean, just the capacity to deploy that backlog, specifically with our professional services team just makes the year and the visibility a lot better than it was this time last year. Operator: One moment for our next question, and it comes from the line of George Sutton with Craig-Hallum Capital Group. George Sutton: Ramesh, you mentioned that more major hospitality players are looking at you. And I'm curious if that is, that would include there was a trend here in the last couple of years, some of the large players basically working with very thin code-based software vendors that don't really seem like long-term decisions. Are you starting to get the attention of some of those folks who made that kind of a decision? Ramesh Srinivasan: Well, I think, George, you are going to pick up on that more than anyone else. Yes, George, the short answer for that is yes. There are -- we are getting the attention of larger players than, say, at the same time last year or 2 years ago, a lot of the credit has to go to the product and the news is spreading that the product ecosystem is becoming more and more that is the distance between us and the competition is increasing. And also a lot of the credit goes to Joe Youssef and some of the senior sales staff he's hired as well, who are opening up into -- some of the major doors for us, right? They have credibility. Joe and others have worked with these bigger customers for a long time. So those are opening up doors. And now it's a great time to open up doors for us because the products are impressive. And if they see a demo, it really gives them pause. So short answer, George, yes, more conversations these days than we have ever had before, and that is encouraging to us. George Sutton: So Ramesh, you mentioned you have considerable competitive advantages, and I think you did a good job of walking through what some of those are. But at the same time, you mentioned you're still not well known in key circles in some of your markets. And I just wondered how much progress do you think you're making on that latter piece? Is it predominantly going to be through reference customers? Or how do you see that kind of closing that gap? Ramesh Srinivasan: We continue to close that gap, George. It's not going to -- it's not a magic bullet. It is not going to suddenly explode into everybody knows us. Now it is not just a matter of knowing Agilysys, George, it's knowing today's Agilysys. There is still large parts of hospitality who still think of us as the father's or the grandfather's Agilysys. And that is not an easy challenge to get over in -- generally in enterprise software, but we are making good progress, right? We are making significant impressive progress. Marketing has done great work for us across the international regions and domestic regions. There's a lot more thought leadership participation. The trade shows, of course, we continue to increase participating, but we are leading a lot more participation in seminars. We are sponsoring a lot more of the bigger events. So we are doing everything we can. One thing is to market Agilysys, the other thing is to make sure today's Agilysys status is well known. That's not an easy challenge that can just overcome in a matter of days or weeks, but we are making good progress with that, George. It is very encouraging looking at the number of customers, especially the larger ones who are talking to us now. George Sutton: I think the numbers are evidence of that. Congratulations. Operator: Our next question is from Nehal Chokshi with Northland Capital Markets. Nehal Chokshi: Congratulations on a great quarter, second best selling quarter, fantastic. Any customers as part of this ACV being second best selling quarter, represent more than 10% of that ACV? Dave Wood: No, Nehal, no customers over 10%. It was broad-based. I think Ramesh did a good job of pointing out all the different verticals. Certainly, gaming, international, managed food service kind of led the way. So it was really a broad-based quarter, which was nice. Nehal Chokshi: Okay. So kind of using the analogy that Ramesh had utilized in the past, getting attention from Sharks and Dolphins, that was not a part of the strong quarter then? Ramesh Srinivasan: Yes, it was broad-based, Nehal. No, nobody came close to 10%, yes. My knowledge of what is it? Oceanography is quite limited. I would Sharks, Dolphins, all kinds of fish, yes, all kinds of wins this quarter, Nehal, yes. Nehal Chokshi: No, well, we did so, right? All right. Given that the September quarter represented the second best selling quarter, which was the case last quarter, it sounds like it's safe to say that ACV sales were up Q-o-Q, which [ under a ] strong result. Can you give us a sense as to how much it was up Q-o-Q actually? Ramesh Srinivasan: Yes. Normally, Nehal, we don't get into that, but a little bit of extra color since you asked the question. The last 3 quarters are our best 3 sales quarters in our history. And so obviously, the last 4 quarters have been great for us. So it is a good trend. And each of these quarters have been the best for that particular period quarter. So it continues to do well. And the last 3 being our best 3 ever sales quarters is a pretty good indication of our progress. So overall, positive, Nehal, but not going to go into the specifics of that. Nehal Chokshi: Okay. I believe that you guys gave like sort of a midterm organic subscription revenue growth outlook in the past. Could you just reiterate what that is? And any incremental color with that? Dave Wood: Yes. It was a little bit over 25% for the quarter and trending to 25% for the year. I don't know there's a whole bunch of additional color. I mean we're really happy, like we said, with where our backlog sits. We have a lot of subscription backlog. We have a lot of momentum in the sales team selling subscription solutions. The 18 new customers we had this quarter were -- all had subscription. So I think we were a little over 25% for the quarter, and we're trending to about 25% organic for the year. Operator: And we have a question from the line of Stephen Sheldon with William Blair. Stephen Sheldon: First on just the guidance. I think you made it pretty clear that the guidance increase, it sounds like it's mostly due to better broad-based sales activity. But just wanted to ask about did your assumptions on the Marriott rollout, did those change at all materially? And was that any notable portion of the guide increase? I mean I think it was kind of a midpoint. Total revenue was up 2%. I think the subscription revenue was also up 2%. So was that -- did Marriott play into that at all? Dave Wood: Stephen, no, Marriott did not play into it at all. And just as a reminder, our -- the raise of guidance in subscription revenue from 27% to 29% excludes all Marriott subscription revenue. So for the PMS and -- so no, it didn't. The guidance raise was not Marriott related. It was just general sales momentum because as a reminder, too, all the sales numbers that Ramesh talked about exclude Marriott as well. So... Ramesh Srinivasan: It excludes the Marriott PMS project. The other Marriott product -- we are selling products to Marriott is included, but not the PMS project you're referring to. Go ahead, Dave. Dave Wood: Yes. No, it excluded Marriott PMS. Stephen Sheldon: Got it. Okay. That's encouraging. And then just on the POS side, can you talk some more about the factors driving the strength you're seeing in the Managed Food Service vertical? How big that end market is as a mix of your total POS kind of subscription revenue? And do you generally see lower levels of competition in that space, just given more complex need from purchasers? I think in that end market, there would be only a few software providers that a customer would consider. I mean is that kind of a fair thought process on that end market? Just more context on what you're seeing there. Ramesh Srinivasan: Yes, Stephen, let me address the first part of your question first. POS, like we told you before, like 1.5 years or so ago, we went through a tough transformation phase. We had completely reengineered the POS products. There are multiple parts to the POS products. So we had to do them in stages. So a lot of our implementations in the field became a mismatch of old and new technologies that caused a lot of technical challenges for us. So that's what affected POS sales, especially in the Food Service Management, FSM vertical. We have passed that stage for the last year or 1.5 years. All our new implementations are all the modernized solutions and also unified, meaning guest-facing and staff-facing feature sets are now in one system. Therefore, it's a lot easier for us to manage, a lot easier for us to implement, producing good results for the customers, including international customers. So the current new version of POS and all the new installs we've been doing, say, for the last 12 to 18 months are going very well. As you would expect a modernized unified solution to go well. So that, in turn, has helped improve POS sales, especially in the FSM vertical, which is practically for all practical purposes, only POS. So that's the reason. It's again product driven. And also some of the recent sales staff we have added to FSM are doing incredibly good work. They are very influential, and they are doing good work. So that is one part. I wouldn't say the competition is less, Stephen, in FSM. It is more from the smaller vendors. For a long time, FSM has been served more by the smaller technology vendors. You don't see the bigger ones there that much. So yes, there is competition in FSM as well, but our product sets are getting better and our implementations are getting better. We are selling with a lot more conviction and strength there. So overall, I think FSM will continue to do well for us. Stephen Sheldon: Very helpful. And maybe just one more, if I can, on the PMS product attachment. I mean you've been seeing some customers sign up with very large packages with a lot of products attached. I guess can you just remind us which ones you're seeing the highest attach rates on new sales by product? And has anything overly surprised you on the types of add-on products that are being added on to some of these PMS contracts? Ramesh Srinivasan: It's not surprising, Stephen. When we created this ecosystem around POS and PMS, we knew that the attach rates for PMS are going to be higher because there are just more add-on modules there compared to the POS number of add-on modules. So this is not surprising to us. Very often, customers come to us only looking for a core product or a couple of products, but they see the ecosystem working together. And it really is encouraging for them that they don't need to deal with disparate systems. That are difficult to integrate and not just difficult to integrate, the pace of innovation is very slow because a lot of what resorts and hotel properties need now is a unified guest experience. And for that, if you come up with an innovation idea like, let's say, use of a wrist band in a water park, you have to change 4 different systems for it. And if you're dealing with 4 different vendors, it becomes impossible to innovate at a rapid pace. So the pace of innovation is there. So we are not surprised that PMS has high add-on modules attached right now. But we are also participating in some major deals where PMS itself, the core product itself is the primary player and those customers are not yet considering the other products. So we are seeing a couple of them as well. In terms of which products are most golf, spa, sales and catering products like that come to mind. The booking engine is always one of the leading products. But one of the best sellers for us this year is loyalty promotions. Now resorts have the ability to give guests points and help them redeem points at every touch point in a resort. That's a big strength they didn't have before. So it varies from deal to deal, but these are some of the more popular ones. Stephen Sheldon: Very helpful. Appreciate the color, and great results. Operator: Thank you so much. And this concludes our Q&A session for today. And I will pass it back to our CEO, Ramesh Srinivasan, for closing remarks. Ramesh Srinivasan: Thank you. Thank you for your participation and interest in Agilysys. Please enjoy the holiday season. Merry Christmas and happy holidays to all of you. We look forward to talking to you again in about 3 months from now. Thank you. Operator: And thank you again for all who participated in today's conference. You may now disconnect. Everyone, have a great day.
Operator: Good day, ladies and gentlemen, and welcome to the Amkor Technology Third Quarter 2025 Earnings Call. My name is Diego, and I will be your conference facilitator today. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Jennifer Jue, Head of Investor Relations. Ms. Jue, please go ahead. Jennifer Jue: Good afternoon, and welcome to Amkor's Third Quarter 2025 Earnings Conference Call. Joining me today are CEO, Giel Rutten; and CFO, Megan Faust. Our earnings press release was filed with the SEC this afternoon and is available on the Investor Relations page of our website along with the presentation slides that accompany today's call. During this presentation, we will use non-GAAP financial measures, and you can find the reconciliation to the comparable GAAP financial measures in the slides. We will make forward-looking statements today based on our current beliefs, assumptions and expectations. Such statements are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to our press release and SEC filings for a discussion on the risk factors and uncertainties that may affect our future results. We assume no obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of this presentation, except as may be required by applicable law. With that, I will now turn the call over to Giel. Giel Rutten: Thank you, Jennifer. Good afternoon, everyone, and thank you for joining the call today. I'd like to begin today on a personal note and to share that I have decided to retire from Amkor at the end of 2025. It has been an honor and privilege to be President and CEO of Amkor for over 5 years, and I'm excited to see what the future holds. I will remain on the Board of Directors to provide continuity and to support our long-term strategy. I would like to congratulate Kevin Engel as my successor and will support this transition over the next couple of months. Kevin has been with Amkor for over 20 years and brings deep experience that will benefit the company during this next growth phase. You'll hear more from Kevin at upcoming investor events and on the next earnings call. With that, I will now provide updates on the quarter. Amkor delivered a strong third quarter with revenue of $1.99 billion and EPS of $0.51, both exceeding the high end of our guidance. Revenue increased 31% sequentially driven by a robust demand for advanced packaging. We executed steep production ramps and achieved record revenue in both the communications and computing end markets, demonstrating our ability to scale quickly and support our customers' product launch cycles. Communications revenue increased 67% sequentially and 5% year-on-year, driven by the latest iOS product ramp and a 17% year-on-year growth in Android. We expect Q4 to decline sequentially with some slowdown in iOS, partially offset by continued strength in Android. On a year-on-year basis, Communication is expected to be up more than 20% in the fourth quarter. As AI expands into edge devices, we are collaborating closely with customers on next-generation products and we are confident this will drive future demand for advanced packaging. Computing revenue increased 12% sequentially and 23% year-on-year. We anticipate modest sequential decline in Q4 on product mix changes, but expect continued year-on-year growth. Our high-density fan-out technology is ramping as expected with another product moving into production in Q4. Our long-term computing outlook remains robust as innovation in AI and high-performance computing fuels investments across data centers, infrastructure and personal computing, areas where Amkor has a strong customer pipeline. Automotive and Industrial revenue increased 5% sequentially and 9% year-on-year driven by growth in advanced products for ADAS applications together with improvements in our mainstream portfolio. Fourth quarter revenue is expected to be stable sequentially and grow around 20% year-on-year, supported by broad-based customer demands. Consumer revenue increased 5% sequentially, but was down 5% year-on-year reflecting the product life cycle of a wearable product introduced in the second half of last year. We expect a further decrease of this product in Q4 and anticipate a slight decline in traditional consumer applications. Year-on-year, Consumer is expected to be down mid-teens percent. Overall, our fourth quarter guidance reflects positive trends of returning to a more normal seasonal pattern and for continued year-on-year growth in both our advanced and mainstream portfolio. Now let me share an update on our strategic initiatives. The semiconductor industry is rapidly evolving as accelerated AI proliferation drives market expansion, technology transitions and increased requirements for a resilient manufacturing base. Within this dynamic landscape, Amkor remains focused on its 3 strategic pillars: investing in our technology leadership, building supply chain resilience in our manufacturing footprint and deepening partnerships with lead customers. Earlier this month, we marked a major milestone with the groundbreaking of our new advanced packaging and test campus in Arizona. Working closely with our foundry partner, this campus will be a cornerstone of U.S. semiconductor manufacturing, delivering a full turnkey supply chain with advanced packaging and test capabilities to leading customers in the industry. The Arizona investment represents a bold step forward in our strategic journey. We've increased the total projected investment to $7 billion, reflecting additional cleanroom space and a second facility. Once complete, the campus will include 750,000 square feet of clean room, space and create up to 3,000 high-quality jobs. Construction of Phase 1 is expected to be completed in mid-2027 with production beginning in early 2028. The Arizona campus will feature smart factory technologies and scalable production lines to meet evolving market demands for AI, high-performance computing, mobile communication and advanced automotive applications. It will focus on advanced packaging and testing technologies and will complement domestic foundry manufacturing, enable a full end-to-end semiconductor supply chain in the U.S. Our expanding geographic footprint with facilities in Asia, Europe and now the U.S. distinguishes Amkor in the OSAT industry. It allows us to partner more closely with customers and deliver innovative packaging and test solutions aligned with their technology road map needs. In summary, Amkor delivered a strong quarter, advanced our strategic initiatives and remains well positioned for long-term growth. With that, I will now turn the call over to Megan to provide more details on our third quarter performance and near-term outlook. Megan Faust: Thank you, Giel, and good afternoon, everyone. Third quarter results were better than expected with revenue of $1.99 billion. This represents 31% sequential growth and 7% year-on-year growth. All end markets grew sequentially, and we achieved record revenue in the communications and computing end markets, driven by robust demand for advanced packaging. Given the leverage in our financial model, profitability metrics expanded more than revenue sequentially. Gross profit was $284 million and gross margin was 14.3%, up 230 basis points as the flow-through benefit from higher volume was partially offset by an increase in material content due to a higher proportion of advanced SiP. Operating expenses came in as expected, higher sequentially, primarily due to a nonroutine benefit in Q2. Operating income was $159 million, and operating income margin was 8% compared with 6.1% in Q2. As a result of higher operating income and favorable foreign currency, net income more than doubled at $127 million, driving EPS to $0.51 for the quarter. And finally, EBITDA was $340 million and EBITDA margin was 17.1%. Turning now to operational efficiency. We are taking steps to optimize our manufacturing footprint in Japan. We are actively working with our customers to align factory capacity to market demand to assure supply is guaranteed for this broad portfolio of automotive products. Near-term focus is on reducing manufacturing costs, as well as working with customers to adjust terms to cover costs for underutilized production lines. We expect to begin to see results from these actions in Q4 2025 while additional adjustments will take effect in the first half of 2026. With the full effect of these actions, we see a path to improving corporate gross margins by around 100 basis points exiting 2027. Japan continues to be a key region for Amkor, supporting the automotive end market and offering geographic flexibility to a global customer portfolio. Over the same time period, we also expect margin improvement from Vietnam ramp-up efficiencies, mainstream recovery and scaling of leading-edge advanced packaging. We are currently refining our long-term financial targets, and I'm pleased to announce that we plan to host an Investor Day in mid-2026, where we will share these targets and deeper insights into our long-term strategy. Now moving on to the balance sheet. This year, we took proactive steps to position our balance sheet and enhance liquidity for the upcoming investment cycle, particularly for our Arizona campus. We replaced our $600 million Singapore-based revolver with a new $1 billion U.S.-based revolver. We executed a $500 million term loan. We issued $500 million of senior notes due in 2033, and redeemed $525 million of senior notes due in 2027, significantly extending our maturity profile. As of September 30, we held $2.1 billion in cash and short-term investments, and total liquidity was $3.2 billion. Total debt as of Q3 was $1.8 billion, and our debt-to-EBITDA ratio was 1.7x. Now turning to our fourth quarter guidance. Revenue is expected to be between $1.775 billion and $1.875 billion, representing an 8% sequential decline at the midpoint and a 12% year-on-year increase. We are pleased to see forecasts for both advanced and mainstream are up double-digit percent year-on-year. Gross margin is projected to be between 14% and 15%, which includes an anticipated benefit from asset sales of around $30 million. Year-on-year, gross margins are constrained due to product mix concentrated in higher material content products and higher manufacturing costs as we scale and invest in leading-edge advanced packaging. Operating expenses are expected to be around $120 million, and our full year effective tax rate is expected to be around 20%, excluding discrete items. Net income is forecasted to be between $95 million and $120 million, resulting in EPS between $0.38 and $0.48, which includes the anticipated asset sale benefit. Our 2025 CapEx forecast has increased to $950 million, up from $850 million to support expanded investment in our Arizona campus. In addition to investment in our geographic footprint, our focus remains on scaling capacity and capability for leading-edge technologies, including high-density fan-out, advanced SiP and test solutions. We will provide more details on our CapEx spend levels and timing for our new Arizona facility when we give 2026 CapEx guidance at our next earnings call. In closing, our third quarter results reflect the effectiveness of our strategy, strengthening our technology leadership, building supply chain resilience by expanding our broad geographic footprint and deepening partnerships with lead customers in growth markets. With the upcoming CEO transition, we remain committed to investing in our long-term growth and our capital allocation strategy, positioning Amkor to deliver sustainable value for our shareholders. This concludes our prepared remarks, and I'll now turn the call over to the operator for Q&A. Operator: [Operator Instructions] Our first question comes from Ben Reitzes with Melius Research. Benjamin Reitzes: Yes. I appreciate it, and Giel, wish you the best of luck. Look forward to talking to you later, but enjoyed you on these calls. I got two questions. First of all, with regard to the gross margin guidance in the fourth quarter, if you take out the asset sale, I believe it's 160 basis points lower, which puts you below what we were expecting a bit. You mentioned some higher manufacturing costs. Could you just elaborate on that? And what the pressures are that kind of puts you without the sale below 14%? Megan Faust: Ben, this is Megan. I'll take that one. So normalizing for that asset sale, you've got the math right. So that sequential incremental flow-through is actually in line with our financial model. You'll see it's probably about 30% incremental. What's happening there probably compared to last Q4 is we do have a higher material content in Q4. If you look at last year, we actually had over 350 basis points drop in the material content between Q3 and Q4. That was related to a deeper communications drop last year. So that's effectively what's impacting margin in our Q4 guidance. And then you had a follow-up? Benjamin Reitzes: Yes. Just wondering if you could talk a little bit more about the communications segment. I'm sorry if you said this, but we're picking up indications that there's upside into 4Q with one of -- with your biggest customer at least. And I was wondering about the dynamics there on the consumer guide, if you can elaborate, are you seeing it? Or is there an offset in Android? Or is there a conservatism in your guidance for communications in particular? Giel Rutten: Thanks, Ben. Let me try to answer that question. Overall, I think the Communications segment, we're guiding down slightly into Q4, we see continued strength in Android, and that's also reflected in our guide. We see a slight tapering off in the iOS ecosystem. How that exactly reflects into end product outlook is difficult to say. I think we're a little bit deeper into the supply chain where we supply our services. I think for now, this is the exposure that we have, and we take that forecast in our guidance. Operator: [Operator Instructions] Your next question comes from Randy Abrams with UBS. Randy Abrams: Yes. I wanted to also congratulate you, Giel, just on the next chapter. It has been good working with you. I wanted to ask the first question on the Compute opportunities, where you mentioned the start of shipping the high-density fan-out. If you could go how you see the pipeline for AI and networking and also for the first tranche of CoWoS-S capacity, if you see opportunity to utilize that with some of the new products coming out? Giel Rutten: Let me take that, Randy. Well, first of all, thanks, with your congrats. With respect to the high-density fan-out opportunities, I mean we start shipping the first product in the quarter. We have two more products lined up, one with the same customer and the other with an external party. So we believe that, that high-density fan-out technologies, and I reiterate the question, let's say, the outlook that we shared last time, is a solid foundation of future growth for Amkor. And it was good to see the ramp going into this quarter and also into next quarter. So we expect that to continue. I think we see a strong outlook there. With respect to the 2.5D, I mean short term, we see a slight moderation there. Longer term, we see, let's say, a stronger potential pipeline coming up. And I think we had a review last couple of weeks with our customers on that specific technology, and that's signaled positive trends going forward. It may take a few more quarters before these products are going to be released, but it's encouraging to see that, that technology will continue to be a solid foundation also going forward. Randy Abrams: Okay. Good. And then my follow-up question on the system and package pipeline. This year, you gained back a key socket. It looks like two different things going on that improving, but the consumer pulled back. If you could talk broadly about SiP, how you see the pipeline into next year, continuing on the communication gain and then maybe what's happening on the consumer side. Giel Rutten: Yes. I think the sockets on the communication side, that is performing as expected. We're executing the ramp going into Q3 and Q4. And also there, I think the outlook for the full year is in line with what we shared in February, including the socket ramp. So we're pretty positive on the communication side. With respect to the consumer side, I mean the end product goes through a predicted and forecasted sequential decline. It's a cyclicality of that product portfolio. We're encouraged with next products that are being launched going forward in that same portfolio, but we expect that Q4, as guided, will be a correction and a further slowdown of that existing product. Operator: Your next question comes from Steven Fox with Fox Advisors. Steven Fox: I had a couple of questions as well. First, Megan, can you just round out some of the margin talk. You mentioned in the prepared remarks also that manufacturing costs were weighing year-over-year. So I was curious how much that is and where you are relative to sort of peak pressures on that? And the same thing for the material content mix, how do we think about that sort of ongoing pressures into next year? If there's any way to give clues on that? And then I had a follow up. Megan Faust: Sure, Steve. So with respect to the Q4 gross margin, year-over-year, there's really two things constraining flow through. One is the higher manufacturing costs, and that's really attributable to our leading-edge advanced technology, most of which Giel just mentioned, but having higher overhead and CapEx to support that ahead of scale. So as we build scale with those leading-edge advanced technologies, which we see that scaling well into 2026, that will not be a headwind. The other half is related to, what I would say, year-over-year unfavorable product mix. So the decline in our peak material content we had in Q3 to Q4 will probably be around 100 basis points compared to last year, which was over 300 basis points. And that's really attributable to a more stable SiP and a more normal seasonal pattern with regards to that sequential behavior. Steven Fox: Great. That's helpful. And then just bigger picture on the $7 billion investment for Arizona now. I guess if you can comment a little bit further than what has been described so far and like public comments about why the increase in investment, what does it signal about Amkor's opportunities longer term? And then I was curious, does it create any near-term opportunities like stamp of approval for winning near-term business in other parts of the world? Giel Rutten: Steve, let me comment to that. I mean, over the last, let's say, 12 months, we see an increased interest in U.S. manufacturing and that comes from multiple customers that is driving up local investments, not only in scale for silicon to be manufactured in the U.S., but also an increased demand for advanced packaging. So we're working very closely with these lead customers, but also with our foundry partner to scale the capacity that we put in place in line with demand of our lead customers. And that's the basis of the increased investment to $7 billion. You have to keep in mind that this investment is coming in different phases, and we stepped that up through two important phases with the two additional -- or a second additional building. And also, of course, we only put equipment then based on real market demand. But overall, we expect that the $7 billion is justified given the increased interest in the U.S., but also given the alignment that we have with lead customers here on to require capacity for U.S. manufacturing. Operator: Your next question comes from Craig Ellis with B. Riley Securities. Craig Ellis: Yes. and I'll start just by thanking you and wishing you well, Giel, for all the help. And then Kevin, look forward to working with you more intensely next year. On to the question, I think there was an indication that within the automotive and industrial end market, we saw broad strength that sounds like ADAS is starting to improve, as I think you expected three months ago against what's been a pretty tepid automotive market. Could you give us a sense for the potential for ADAS and some of your other programs to continue to benefit that segment as we look beyond 4Q into 2026? Giel Rutten: Thanks, Craig. Yes, let me try to answer that. I mean we expect, going forward, that advanced packaging in the automotive domain will continue to increase and will continue to drive growth. ADAS, it's a broad range of technology going into automotive, and we expect that, that will continue to grow certainly because of the proliferation of that functionality deeper into the car range, but also further electrification of the automotive market. So we expect that to continue over the next, I would say, a couple of years, and that will step-by-step move to a more self-driving functionality into the car and more connectivity into the automotive domain. We are well positioned there. I mean we're working with the leaders in the semiconductor area that deliver products in this functionality, and we're very pleased with our opportunities and pipeline there. The other positive element in the automotive domain is the recovery of our mainstream portfolio. We saw the second quarter of this year reaching a trough. And going into the third quarter, we see improvement, and we expect that to continue into the fourth quarter. And our customers signaling a strong, let's say, improvement of the overall inventory in the supply chain with a more balance there, and that ultimately will drive a more balanced revenue base in the automotive domain for Amkor. Craig Ellis: That's really helpful, Giel. And then I wanted to follow up with a clarification for Megan. Megan, nice to see the significant gross margin improvement coming from the facility rationalization in Japan. The question is, for the 100 basis point gross margin improvement by end next year, what's our baseline? Is it the adjusted fourth quarter level after taking out that $30 million benefit? Or were you pointing back to the third quarter as the baseline? Megan Faust: Thanks, Craig. Yes. So I would use our Q3 as our baseline, given we are going to begin seeing benefits moving into Q4. I did want to clarify the 100 basis point benefit, we had stated the full impact of that would be seen by the end of 2027. And that marks a 2-year activity, which is, for us, very standard as we're managing through rationalizations of this sort in Japan, supporting mainly an automotive customer base. Operator: And your next question comes from Joe Moore with Morgan Stanley. Joseph Moore: I wonder if you could just address the overall cyclical environment for the OSAT business. Are you seeing customers starting to get concerned about potential tightness and any impact that you could see -- have seen on like-for-like pricing and may see in the future on like-for-like pricing? Giel Rutten: Well, good question, Joe. Thanks for that. Across our portfolio of mainstream and advanced packaging, we see on the advanced packaging side in some pockets, tightness of supply where our lines are filling up quite significantly. That holds for, for example, a flip chip portfolio or some wafer level packaging. So I don't see tightness still occurring in the next quarter, but we see that in some pockets, there is tightness of supply, not only with respect to overcapacity, but there is also some limitations in certain areas, for example, substrates where we're working closely with suppliers to make sure that we have a continued supply base there. Joseph Moore: Okay. Great. And then in terms of the strength that you've seen in the smartphone business, any indication that any of that could be pull forward tariff related, anything like that? I mean it seems like there's pretty solid demand, but I just wanted you to address that because you get the question a lot? Giel Rutten: I mean it's difficult to say what next year will bring on the smartphone base. I mean for Amkor, it's important to reconfirm our position in this domain, both on the Android side as well as on the iOS side, where we can confirm that we are convinced that we have a very strong footprint on both sides of certainly the premium tier smartphones. We also see an increased evaluation of next-generation products in that supply chain, enabling future phones for more AI functionality as edge devices. When that will materialize in a change or increased semiconductor content, it's difficult to share with you at this moment, Joe. But overall, we're confident that we have a solid position in the market, difficult to predict how the individual phone segments will develop into next year. Joseph Moore: Congratulations again on your retirement. Operator: And your next question comes from Peter Peng with JPMorgan Chase & Company. Peter Peng: Giel, I want to echo my peers' comments as well and best of luck in your next chapter. Just on your CoWoS-L, there's increasingly more and more of your hyperscaler customers and merchant transitioning to CoWaS-L in their technology road maps. I know you guys have something equivalent to your S-Connect. Maybe you can share some update on the progress there with your S-Connect and how do you believe you're positioned in this area? Giel Rutten: Well, it's difficult to comment on CoWaS-L. We're working very closely with our foundry partner to make sure that we have a complementary supply chain in place. Current focus is very much on what we label high-density fan-out, an equivalent of CoWoS-R, and we see significant opportunities there. With respect to the other CoWoS-L, I think we're currently evaluating the on-substrate part of that technology in Asia as well as to make sure that we have a complementary supply chain put in place in the U.S. So overall, that's our approach there, Peter. But overall, I think the computing market has multiple opportunities for Amkor. I think we're working closely, both with customers as well as with the foundry partner going forward on the different technology domains. Peter Peng: Got it. Okay. And then maybe just you talked about some new ramps in your -- the CoWoS-R equivalent high-density fan-out. How is that going to impact seasonality as we think about the first half of next year? Is that anything significant that would alter seasonal? Or do you think those are like less beneficial until later on. Maybe just talk about seasonality and how you think about those products ramping? Giel Rutten: Well, seasonality for Amkor in the past and also now is, to a large extent, driven by our exposure to the communication market. I think there was a strong and there is a strong seasonality in the communication market. If you look to our other markets, be it automotive, computing and also consumer, there is less pronounced seasonality. So the product launches that we are referring to, we expect them to show significantly less seasonality. And with more growth in the compute domain that would ultimately level out the significant seasonality that we have, although we foresee, of course, that for the time to come, the Communications segment will be our biggest segment. Operator: And your next question comes from Tom Diffely with D.A. Davidson. Thomas Diffely: Congratulations, Giel, on your next chapter. So maybe just one more question on the new facility in Arizona. When you think about the $7 billion, the increase to $7 billion, how much of that is because of the extra capacity you're adding versus the increase in costs that we've seen kind of across the board these days in construction? Giel Rutten: Well, Tom, I think I can be short on that. This is exclusively related to the increased capacity that we are planning for. You may have been informed that we also moved the location of the factory to a different location, a location closer to the TSMC location that gives us twice the land area with an additional option to further expand with 50 acres for potentially a third facility. So that offers opportunity to grow. We're in close cooperation and in close alignment between the different partners and customers to make sure that we scale the facility correctly when it comes to scale, but also make sure that we ramp that facility with the right technology in line with what customers need in the U.S. So it is not related -- the increased investment is not related to the higher cost, it is strictly related to the capacity expansion. Thomas Diffely: Okay. Great. That's very encouraging. And then as a follow-up, when you think about the CapEx of $950 million for next year, how much of that is specifically for Arizona? Megan Faust: So Tom, I can take that. So we had increased our CapEx guide for 2025 to $950 million, and that was really driven by having more visibility in what we would need to spend in 2025. We have not yet given guide for CapEx for 2026. So we will give that at our next earnings call, along with more visibility on the timing and expense for the Arizona facility. Thomas Diffely: Okay. But the increase in '25 was all driven by Arizona being... Megan Faust: Correct. Operator: And your next question comes from Steve Barger with KeyBanc Capital Markets. Steve Barger: I had another compute question. Giel, I think RDL formats are replacing silicon interposer to some degree, which should be good for OSATs. How much of your CapEx has been to support RDL? And does that shift drive higher value add that translates to unit margins? Or would the primary benefit be volume? Giel Rutten: Steve, with respect to the relative CapEx that goes into the expansion of high-density fan-out, the RDL-based technology, it's a significant, I would say, the majority of our CapEx. I want to reiterate there that a large part of our capital investments when it comes to individual equipment is highly fungible, fungible between standard wafer level packaging, even bumping to 2.5D into the high-density fan-out. But if we look to the ramp that we're preparing for, and I have to correct myself, I think we're ramping up with our lead customers, 3 individual products and with the second customer, another product in the early part of the year. So there's a significant ramp expected, and we made a significant commitment to our customers to support that ramp where we are working in close cooperation with our lead customer there. So that's how we see the investment in high-density fan-out. Steve Barger: And I know it's being driven by compute right now, but what are the gating factors to the higher volume applications like PC or mobile? Are there technology challenges for those applications? Or is it just really a function of customers making the decision to go that direction? Giel Rutten: Yes. Good question, Steve. From our perspective, this technology will be applied in multiple domains. One is the data center domain, as we just discussed, but it definitely will go into the more higher volume PCs and ultimately also in the mobile communication domain. The technology is basically the same. I think we use the same production lines for that technology. Of course, the individual specification of the technology is slightly different for each application. But the basic capacity that we put in place is supporting products into -- in the PC domain as well as in the data center and communication domain. Operator: And your next question comes from Denis Pyatchanin with Needham & Company. Denis Pyatchanin: Great. Well, we'd like to mirror everyone's congratulations as well. And for a quick question about Computing. So Computing looks like it was up over 20% year-over-year. Can you discuss the key drivers of this growth? And if you will see these persisting into Q4, even with revenue guided down somewhat quarter-over-quarter? Giel Rutten: Yes, Denis. I mean Computing in the last quarter showed broad-based strength. I think all applications in the computing domain from PCs as well as networking as well as data center products were up in the quarter. And we expect that, that will continue. I mean we see on the more consumer products on the PC product, we still see strength, and that's also what the market predicts. But definitely also on the networking and data center product side, we see a continued strength. So overall, we're optimistic. We had a good quarter and a good year in Computing. We had a record in the third quarter. I have to remind you that the AI and the AI proliferation is just started. So there will be more products being developed going into the edge and edge devices as well as into networking and data centers. So we stay [Technical Difficulty] and we remain very optimistic there, and we're confident that we have a client there. Denis Pyatchanin: Great. And then for my follow-up, for communications, I think you mentioned strength in Android persisting into next quarter. Can you provide some more color on that, maybe perhaps by geography? Giel Rutten: That is difficult to say. I mean we believe that there is a trend in the Android market, and I also mentioned that last quarter, there is a trend to higher-end devices, so the premium tier smartphones, and that's a global trend. And I cannot go to individual customers there, Denis. We saw that there was inventory in that supply chain. But overall, we believe that currently, that inventory is digested. So overall, we are very positive on the Android players. Operator: And ladies and gentlemen, at this time, I'm showing no further questions. I would like to turn the call back over to Giel for closing remarks. Giel Rutten: Thank you. Now let me recap our key messages. Amkor delivered a strong third quarter with record revenue in both the Communications and Computing end markets. Fourth quarter revenue is expected to increase 12% year-on-year at the midpoint. We are focused on enhancing operational efficiency and optimizing our manufacturing footprint in Japan. And we look forward to hosting an Investor Day in mid-2026, where we will share financial targets and deeper insight in our long-term strategy. Thank you for joining the call today. Operator: Ladies and gentlemen, this concludes today's conference call. You may now disconnect.
Operator: [Audio Gap] I'd now like to hand the conference over to Mr. Bob Fulker, CEO and Managing Director at Hillgrove Resources. Please go ahead. Robert Fulker: Thank you, Harmony. Good morning, everyone, and thanks for joining the Hillgrove Resources September Quarter 2025 Results Webinar. I'm joined on the call today by Luke Anderson in his first full quarter with Hillgrove. September quarter was a pivotal time for Hillgrove. The mine's output is showing improved stability with higher output, which are demonstrating the potential of the operation has from a productivity perspective. This has started to flow through to our all-in sustaining cost, which has reduced from the high of last quarter. The Nugent ramp-up has commenced, and we filed the first stope at the start of October. There are 3 takeaways for me from today. Firstly, record stope production since underground operations started, has seen the biggest quarter since we started mining and is at our annualized rate of 1.5 million tonnes per annum. In September, the mine delivered 1,075 tonnes of copper produced and the quarter's gross all-in sustaining costs have reduced to be the lowest quarter this year. The all-in sustaining cost unit costs were affected by the low copper sold versus production. Secondly, the Nugent project has been delivered ahead of schedule with stoping underway in October. This is the second mine production center online as promised. And finally, our on-site exploration success has given us the potential of a third mining front to further increase our total tonnes from the Emily Star region. The Emily Star exploration incline design has been released and we'll start development activities there this quarter. Operationally, ore mines for the quarter reached a record of 375,000 tonnes, and we finished the September month with ore on the [ ROM ] for the start of October. The underground load and haul improvements have been maintained into October and the commencement of the Nugent stoping will gradually grow our production over the next 6 months. The consistency of the mine delivery has led to the mill operating for longer periods of time, allowing improved stability within the processing plant. Tonnes processed rose to 366,000 tonnes at an average weighted -- at a weighted average grade of 0.81% copper and 94.5% recovery. This is a steady and reliable performance increase -- increasing copper production by 8% from the previous quarter to 2,808 tonnes. During the quarter, we announced the Nugent acceleration project finished ahead of schedule in August. We have developed the 1020 Southern ore drive and are now developing the Northern ore drive. We have set the primary ventilation up. We have got emergency egress to the pit and subsequent to the quarter, refiled and extracted the first stope. The second stope is ready to the fire as we speak. The Nugent decline will break through to the Kavanagh working area before Christmas as planned. And the Emily Star exploration [ tudy ] is now the Emily Star exploration incline and ready for development. When completed, this will allow for improved diamond drilling performance with a top 4 sublevels of the Emily Star resource. On lease exploration and resource drilling continues. We currently have 2 drill rigs underground. Our plan is to increase to 3 drill rigs when we have the locations available. We are on track to deliver the 60,000 meters of drilling within the 2025 year as previously announced. There have been some exceptional holds during the quarter Emily Star's first hole of 19 meters at 1.9% copper and 0.15g/t gold and 5.7 meters at 2.12% copper and 0.36 grams per tonne gold, both in Emily Star are outstanding. More holes are still being assayed, and we'll release these as soon as we have them. Emily Star is a key exploration focus for what I expect to be the third mining front to underpin a further increase in our copper and operational outputs. I'll leave the majority financial report to Luke, but a couple of highlights from myself. Gross all-in sustaining costs have reduced by 10%. Despite shipment timing, we reduced sold -- which reduced sold copper, our all-in sustaining cost unit rate actually reduced by 5%. Our realized price lifted to [ $14,447 ] per tonne as the lower hedges are filled. And we are increasing exposure to the higher spot price. To close, we're building predictability, we are lowering our operating costs and increasing the number of operating levers. The operational improvements have continued into October. And we are moving through the pinch zone. The Nugent ramp-up and the Emily Star potential, combined with the continued operating discipline are the backbone of our plan to improve profitability and our margins. I'll now hand it over to Luke, who will take you through the financials. Luke Anderson: Thanks, Bob, and good morning, everyone. I will now walk you through the financial performance for the quarter. All amounts are referred to are in Australian dollars unless otherwise stated. The quarter showed an improving operating performance. The headline items were copper produced increased 8% to 2,808 tonnes and an average realized price of [ $14,447 ] per tonne. Gross all-in sustaining costs reduced 10% compared to quarter 2. Year-to-date, all-in costs of USD 4.24 per pound remained in line with our average guidance of USD 4.2 to USD 4.45 per pound. And completion of a AUD 28 million placement at AUD 0.035 per share to institutional and sophisticated investors. Now moving to the detail. All-in unit cost metrics are calculated on copper payable tonnes sold, which was lower than copper tonnes produced due to timing of shipments, which negatively impacted unit cost metrics. C1 costs improved to AUD 4.69 from AUD 5.24 per pound quarter-on-quarter. Most pleasingly, our gross all-in sustaining costs reduced by 10%, and and all-in costs by 7% against the prior quarter, partly reflecting the realization of a number of cost reduction initiatives over the last couple of months. Our all-in costs, excluding urgent, was AUD 7.1 per pound or USD 4.54 per pound. Year-to-date, this number is USD 4.24 per pound. Which is tracking within updated FY '25 guidance of USD 4.2 to USD 4.45 per pound. The average realized price for copper sold during the quarter was [ $14,447 ] per tonne despite delivery into a number of lower-priced hedges. The quarter-on-quarter reduction in copper payable tonnes sold from 2,572 to 2,422 tonnes reflects timing only, with unsold concentrate stocks increasing from 502 tonnes to 1,729 tonnes at quarter end. The copper price continues to strengthen on strong demand. with supply also impacted by the recent mud slide and resulting closure of the Grasberg Mine in Indonesia, which is the second biggest copper mine in the world and represents over 3% of global supply. The company's liquidity, which is made up of mainly cash, receivables and unsold concentrate was AUD 15.6 million at 30 September. Post quarter end, AUD 22.9 million was received from Tranche 1 of the capital raise completed at the end of September. High capital expenditure of AUD 12.2 million for the quarter included AUD 9.6 million on mine development, AUD 1.7 million on exploration and AUD 0.9 million on other capital projects. A total of AUD 18 million has been spent on the new capital development thus far with approximately AUD 3 million remaining to be spent. The company maintains a prudent hedging policy covering roughly 30% of forecast production to protect a proportion of fixed costs against the deterioration in copper price. The currently -- the company currently has 4,450 tonnes of copper hedged at a weighted average price of AUD 1,400 tonne -- sorry AUD 14,413 per tonne for delivery from November '25 to September '26. A number of lower price hedges were delivered into during the quarter. A busy quarterly period culminated in the completion of a AUD 28 million placement at AUD 0.035 per share. This was strongly supported by Australian and overseas institutions and sophisticated investors. Replacement will be undertaken in 2 Tranches: Tranche 1 has raised AUD 22.9 million pre-costs, which was received in early October. Tranche 2 will see an additional AUD 5.1 million pre-cost to be received, subject to shareholder approval and an upcoming EGM to be held on 25 November. Now to summarize. We remain on track to deliver FY '25 copper production guidance of 11,000 to 11,500 tonnes. All-in cost guidance, excluding Nugent acceleration CapEx of USD 4.2 to USD 4.45 per pound remains on track. With Nugent stoping underway and inventory available for shipment, we expect improved sales volume and further improvement in unit cost in quarter 4. Finally, with the recent capital raise, we are now well funded to deliver on Nugent and to accelerate Emily Star. Which is an exciting time as the operations start to ramp up over the next quarter and deliver stronger cash flow generation. I'll now hand back to the moderator for questions. Operator: [Operator Instructions] Your first question comes from Nick [indiscernible] from [indiscernible]. Unknown Analyst: Bob and Luke. Just a few quick ones from me. Obviously, with the transition to multiple mining fronts at Kavanagh, Nugent and Emily Star. Can you talk about how you're managing the trade-off between increasing mining rates and maintaining overall mine life at the operation? Robert Fulker: Thanks, Nick. I'll try to answer if I don't get exactly where you're wanting just let us now and I'll go there. The increase from where we were last year at around about 900,000 tonnes for the 2024 calendar year. This year was to ramp up to about 1.4 million tonne, we ramped up to 1.5 million tonne rate as of last quarter. That actually is a combination of what we've been doing within the Kavanagh and the Spitfire regions, with increased development as well from ore increases. The opening of Nugent allows us to actually spread the mine out to a second mining front. Emily Star in the future that to become 3, but that's into the future. With that second mining front, we aren't intending to ramp straight up to 1.7 million to 1.8 million tonnes. We're intending to ramp up to that rate over the next 6 to 7 months, so that we can keep our production aligned with our development rates. Development between 600 and 650 meters per month gives us a growth of our stoping areas and allow us to rate the decline from the Nugent working area to the Kavanagh working area, so we can get easy access for trucks and loaders and the drill rigs. So over time, we will slowly ramp our production up to that 1.7 million, 1.8 million rate by June next year or thereabouts. Unknown Analyst: And then just on the back of that, obviously, with the ore bodies coming online, are there any implications on the current plant configuration? Robert Fulker: Nick, there is 0 that we need to do in the plant. Even at 1.8 million tonnes, we're only -- around that 50% of the nameplate capacity or what the plants run it before. We are actually running the plant slower than was run in previous incarnations. So we're running at a rate that gives us a higher recovery and gives us higher residence time so we can get that recovery. As we increase our tonnes, we'll continue to optimize that for the most profitable and most copper effective output. Unknown Analyst: And just last one for me. Obviously, there's a buildup in concentrate inventory over the quarter. Could you just give us a sense of how much of that has been shipped so far in October and to what extent you expect that to unwind by the year-end? Luke Anderson: Yes. Thanks, Nick. Look, yes, that really was just was a timing issue. So we built stocks, I think, by about 1,200 tonnes at the end of the quarter, which really was sold in October. So that would have already been sold. And then that will continue through the quarter. And yes, I'd expect that to reduce, but it depends on the timing of the shipments towards the year-end, but you should see that decrease. Operator: [Operator Instructions] There are no further questions at this time. I'll now hand back to Mr. Fulker for closing remarks. Robert Fulker: Thank you, everyone, for listening in today. As we enter the last quarter in our reporting calendar, we are seeing improvements in all our operating metrics and a reduction in our cash spend. We are seeing the realization of these improvements being implemented. So all the things that we've been doing over the last 12 months, we've actually seen coming to provision now. If there are any other questions that people would like to ask as I read the report in full, please don't hesitate to call Luke and myself. And thank you very much, and now see you in next one. Operator: It does conclude our conference for today. Thank you for participating. You may now disconnect.
Operator: Thank you for standing by, and welcome to the Syrah Resources Q3 Quarterly Report Update. [Operator Instructions] I would now like to hand the conference over to Mr. Shaun Verner, Managing Director and CEO. Please go ahead. Shaun Verner: Thank you. Good morning, and thanks to everyone for joining us on the call today. With me is our CFO, Steve Wells; and our EGM of Strategy and Business Development, Viren Hira. So after a very challenging 12 months, it's great to be able to report on a more productive quarter with a positive Balama natural graphite ramp-up of operations following restart, sales, strengthening market conditions for Balama fines and supportive policy and market tailwinds for the Vidalia business. This morning, we'll work through the presentation provided with the quarterly report to update you on the important developments in the quarter, and then we'll be happy to answer any questions at the end. So turning to Slide 3, and I wanted to first remind everyone of our clear and differentiated investment proposition. Syrah is the leading integrated natural graphite and active anode material producer outside China with the hard one investment and capability in place, providing a lead time [indiscernible]. Vertical integration from mine to end customer offers a secure source of high-quality critical mineral supply outside China. Our unique asset base is OpEx cost competitive with China and leading ex China and well placed to generate strong margins over the longer term. Our leading sustainability position, including external assessment provides full auditability and traceability from raw material through to finished products. And finally, in response to expected continued strong growth in our end markets, we have clear expansion opportunities that we can execute in line with the needs of our customers and government stakeholders. Moving on to Slide 4, and let me spend a moment now talking about our most important values of safety and sustainability. As we continue to develop a position as a leading critical minerals producer, we're guided by 3 core objectives: being positive for the communities in which we operate, being sustainable for the environment and providing secure supply for our customers. I'm pleased to say that in the quarter, our performance on key metrics measuring safety and sustainability were very strong. Our people and our local communities are critical to our success and the resolution of community and national issues impacting Balama in Q2 this year continued to progress positively through Q3. The health, safety and security of employees and contractors will always remain Syrah's highest priority. As we strive for zero harm in our operations, I'm pleased to report that our total recordable injury frequency rate remains very low at 1.1 incidents per million hours worked across the group, a result which any operation globally could be proud of. During the quarter, I also had the opportunity to meet with President Chapo of Mozambique and Minister Pale of Mineral Resources and Energy Portfolio, who both reaffirmed the importance of Balama to Mozambique and their support for the operation. And we also note in recent days that Total has removed its force majeure notice for its $20 billion LNG project in Cabo Delgado, demonstrating increased confidence in the new government's ability to manage security and developments following the election. Our safety focus is underpinned by our work on critical risk hazard management and in-field leadership interactions. Syrah's operations are clearly aligned with leading global sustainability standards. Last year, Balama became the first graphite operation globally and the first mining operation in Mozambique to achieve the Initiative for Responsible Mining Assurance or IRMA 50 level of performance for sustainability. This achievement highlights nearly a decade of strengthening our differentiated performance, including a strong safety record, investment in training and developing a highly skilled workforce, ongoing community development and human rights due diligence. Along with our ISO certification and external auditing required under our U.S. government funding arrangements, we continue to prioritize health and safety and environmental management systems, confirming our commitment to operating sustainably and driving continuous improvement in this area. A final point I wanted to reiterate on sustainability is the global warming potential of our integrated natural graphite anode product relative to other suppliers. The independent life cycle assessment, or LCA, completed on Syrah's integrated operations by Minviro from Balama origin to Vidalia customer gate estimated 7.3 kilograms of CO2 equivalent per kilogram of anode material produced, which is around 50% lower than equivalent natural graphite anode material from a benchmark supply route in Heilongjiang province in China and 70% below synthetic graphite benchmarks from China. We believe that these efforts give Syrah a competitive advantage as the most sustainable source of integrated natural graphite anode material available at scale today. On Slide 5 and turning now to a more detailed look at our performance and highlights in the third quarter. As we previously reported, after restarting operations in mid-June, in July, we recommenced shipments from Balama and removed the force majeure declaration that had been in place since December 2024. We ran a 6-week production campaign throughout the quarter and produced 26,000 tonnes of natural graphite. Difficult to make clear comparisons with prior periods given that we were ramping up operations after an extended outage, but comparisons will be more relevant in future quarters. Recovery of 68% was below our target as we restarted and worked through some initial maintenance requirements and utilization of older ore feed stockpiled through the outage. But the team focused heavily on quality and volume to meet the 2 initial break box sales in line with customer expectations. Given the outage period had depleted finished product inventory completely, we essentially sold everything we produced in the quarter with approximately 24,000 tonnes sold. With the breakbulk shipments [indiscernible] to Indonesia and our first ever bulk shipment to the U.S., we were pleased to be able to meet some of the pent-up demand resulting from the production outage in this first campaign. Our weighted average sales price for the quarter was USD 625 per tonne, CIF delivered. Our C1 operating cost during the operating period was USD 585 FOB per tonne and the freight averaged $92 a tonne. Importantly, this provides strong indications of better than historical pricing and a good basis for lower C1 costs as we can increase volumes, indicating positive future cash flow opportunity. At Vidalia, as we previously announced, the business claimed and received a $12 million cash paid Section 45X tax credit for the 2024 calendar year in connection with the operations of the anode material facility. Ongoing tax credits are expected in line with the relevant legislation annually, subject to the phasedown period from the start of the next decade. We continue to work through highly detailed and extensive qualification requirements at Vidalia and are making positive progress, albeit slower than we would like. Our product quality and performance are excellent, and we continue to deal constructively with a highly complex mix of policy, commercial and technical factors. We're focused on achieving sales as early as possible, but expect that material sales volumes will only occur in 2026. But we emphasize that our work here will pay off with our investment and development experience demonstrating the considerable time required for others to follow. Our cash flow from operations of negative USD 3 million includes receipts from sales of natural graphite shipments of $12 million, along with the $12 million tax credit I just mentioned. Excluding the tax credit, our cash outflow from operations reduced markedly from the prior quarter with production and sales ramp-up and inventory availability to facilitate further improvement in the quarters ahead. We're highly focused on getting Balama to operational cash flow breakeven as quickly as possible. Finally, the company had a strong cash balance of $87 million following the equity raising that was completed in Q3, noting that there are restrictions on use under our funding arrangements. I'll now hand over to Steve to provide some further detail on our financials and cash flow movements in the quarter. Stephen Wells: Thanks, Shaun, and good morning, everybody. I'll turn your attention to the waterfall chart on Slide 6, which shows our cash flow through the quarter. As Shaun mentioned, our cash outflow from operations in the quarter was $3 million and reflects revenue, operating costs and the positive benefit of the $12 million Section 45X tax credit, which is an operating cost tax credit and can be received as a direct cash payment rather than a credit against future tax liabilities. While we won't have this benefit every quarter, as we noted in our ASX release at the time, we received this credit. We estimate Section 45X credits to be roughly $7 million to $9 million per annum prior to phase down of the credit in accordance with current legislation. In terms of timing, it is likely that direct payments for further 45X credits will be ordinarily received in the second half of the following calendar year. Other movements to call out in this quarter were the equity raising that was launched at the end of July and completed in August and delivered net proceeds of $44 million. The company also received a $6.5 million disbursement from its loan with the DFC, which net of USD 2.2 million of refinancing repayments led to a $4 million net proceeds from borrowings. While operating cash flow was marginally negative as articulated, we also had a net cash inflow from borrowings so that excluding the net proceeds from the equity raise, the group was cash flow neutral for the quarter. In all, we closed the quarter with a cash balance of USD 87 million, which is made up of $27 million of unrestricted cash and $60 million of restricted cash for lender reserves and for use in each of our operating assets. We also have further liquidity available under the DFC facility, which is part of the ongoing DFC loan restructuring discussions. With that, I'll hand it back to Shaun. Shaun Verner: Thanks, Steve, and I'll spend some time now providing an update and our perspectives on various market developments and the government policy backdrop. On Slide 7, you can see on the left-hand chart that the global EV demand picture remains strong, though volatile month-to-month. Over the first 9 months of the year, global EV sales were up 28% on a year ago with strongest growth in China, positive developments in Europe and the spike in demand in the U.S. in Q3 prior to the expiry of the Section 30D consumer tax credit rebate. Anode production growth in China continues to increase strongly, reflecting not only the EV market, but also the rise of energy storage system requirements for data centers and other stationary storage applications. But of course, on the supply side of the picture, synthetic graphite anode material production overcapacity in China has resulted in intense competition for market share and destructive pricing behavior in the domestic market. Prices for synthetic graphite anode material, especially lower-grade products remain below estimated production costs in many cases. Anode margins are also impacted by higher coke feedstock costs and low capacity utilization, which industry observers estimate to be around 40% on average across the Chinese industry. In natural graphite anode material production, finished anode material producers have driven precursor margins and upstream feedstock margins lower over successive spherical graphite purchasing cycles in China. Although a few of the larger anode material producers remain profitable, many Chinese feedstock and precursor suppliers are not currently operating due to poor margins and low demand driven by domestic market price substitution. In the ex-China market, natural graphite anode material demand remains positive and a significant structural shift is underway driven by policy. China export controls and U.S. government tariffs and the anti-dumping and countervailing duty implementation are seeing a shift to lower Chinese exports evident in the charts on the right-hand side of the slide. And that's being replaced by supply from Indonesia for anode material into the U.S. This is positive for both Balama supplying Indonesia and Vidalia, where increasing demand for ex-China supply for commercial and policy reasons is becoming evident for coming years supply. There are continuing deep market challenges and financial pressures across the global battery and input materials sector arising from the dominance of incumbent Chinese producers in both cell production and feedstock and precursor supply. Policy actions are key to the evolution of both demand and pricing for ex-China supply, and we're seeing positive developments in this area. On Slide 8, encouragingly, government policy settings are delivering material potential support to Syrah's strategy to become the leading ex-China integrated natural graphite and anode material producer. Over the course of 2025, we've seen key U.S. government policy changes, in particular, the anti-dumping and countervailing duties investigation and combined preliminary tariff imposition of at least 105% and various other additive import tariffs and policy instruments, including the definition of prohibited foreign entities impacting future availability of the 45X tax credit to battery and auto manufacturers in the U.S., a credit which is hugely important to their profitability. On the supply side, increasing concern arising from China's further export license controls announced in the last few weeks on graphite anode and processing equipment similar to those imposed on rare earth exports are also driving ex-China purchasing diversification decisions from our customers. The combination of these factors is leveling the playing field for ex-China supply and Syrah's major investment and capability build will allow us to capitalize on both the competitiveness and value of Balama feedstock and our anode material from Vidalia for OEM and lithium-ion battery manufacturers in the U.S. Turning now to Slide 9 and a summary of our key strategic priorities and milestones for the coming 6 to 12 months. In this current final quarter of 2025, we'll drive further campaign production to support increasing natural graphite shipments to ex-China customers with a particular target on further breakbulk shipments into the anode material supply chain. This will generate important revenue for the company as we continue to progress our technical qualification steps with Vidalia customers and drive towards sales there, in line with evolving commercial and policy conditions. At an industry level, we're awaiting the final determinations for the anti-dumping and countervailing duties investigation in the U.S., which are due before the end of the year. However, we understand that this timing may be impacted by the U.S. government shutdown. The preliminary duties are finalized. They will be in place for a minimum of 5 years, providing important stability and a mass leveling of the competitive position for Syrah relative to Chinese imports into the U.S. Geopolitical developments, vulnerabilities caused by a concentrated structure of graphite supply and anticipated demand growth, particularly outside China, led to higher strategic interest and transactions being announced in the graphite and battery sector globally. Taking advantage of these conditions, Syrah has commenced a process advised by Macquarie to review strategic partnering options to enable strengthened position from which to pursue opportunities. At Vidalia, we're making strong progress in technical qualification with high-quality product, but immediate customer purchasing intent remains uncertain given the complex policy and market interactions, and we do not expect commencement of material commercial sales volumes from Vidalia this quarter, but rather from 2026. Concurrent with moving our Vidalia operations to commercial sales volumes, we're also targeting additional customer and financing commitments ahead of a potential expansion investment decision, hopefully in 2026. We're optimistic that there are both improving market and policy fundamentals now and a number of clear positive catalysts ahead that have the potential to deliver significant value to shareholders. Our asset and corporate teams are working very hard to deliver against these objectives safely, and we look forward to communicating further progress. I'm now happy to move to any questions. Operator: [Operator Instructions] Your first question comes from Mark Fichera with Foster Stockbroking. Mark Fichera: Just a question on the partnering process. Just can you give maybe an indication or flavor for what types of companies in terms of industry participants or people or companies potentially outside the industry that could be considered. Shaun Verner: Thanks, Mark. So we've previously talked about potential interest in downstream partnering for expansion of Vidalia. And given the fairly significant policy and market developments that we're seeing at the moment, we're seeing increased interest across the supply chain that's prompted us to, I think, more broadly view what options might be out there. And that's the genesis of the process with Macquarie. We have an open mind around the types of potential partners. But clearly, within the supply chain and across the broader battery and auto supply chain, there is significant interest. And the government policy developments have, I think, prompted broader interest from a wider range of financial investors. So we are keeping an open mind. We're at the early stages of that process. We're not communicating any sort of time line or milestones at this point. But our objectives are clearly to identify high-quality aligned partners and get to a position that will strengthen the balance sheet and derisk our growth options. Operator: [Operator Instructions] Your next question comes from Ben Lyons with Jarden Securities Limited. Ben Lyons: Apologies, I haven't had a chance to go through all of the detailed disclosure yet. However, previously, we've talked about advanced conversations with potential customers for Vidalia getting near to actually signing formal offtake agreements. Just wondering if you can possibly give us an update on any materially advanced conversations that are close to finalization. Shaun Verner: Yes. Thanks, Ben. We haven't made any specific disclosure around that in this quarter. What I would say is that our Phase 3 project remains very high on the list of potential suppliers to a number of key customers. We are progressing with technical qualification with a number of customers outside our offtakes with Tesla and Lucid. The key issues at the moment really revolves around the uncertain policy environment. And I think customers are no doubt looking to understand the outcomes of the anti-dumping and countervailing duties investigation and also considering the potential issues around the 45X prohibited foreign entity material cost ratio requirements for non-Chinese purchasing over the coming years as well. So there are a number of uncertainties, not least of which also the export controls and whether those are implemented more stringently out of China. And I think final decisions on further offtakes from customers are really pending greater visibility on some of those key items. And as I said in the call, we expect the anti-dumping and countervailing duty outcomes, which were expected in December, probably to move into January, but that will be absolutely key to Phase 3 offtakes. Ben Lyons: Okay. I completely understand, supportive policy backdrop, but it would be good to get greater certainty to really get those customers to sign up. Shaun Verner: Thanks, Ben. Operator: Thank you. There are no further questions at this time, and that does conclude our conference for today. Thank you for participating. You may now disconnect.
Operator: [Audio Gap] I'd now like to hand the conference over to Mr. Bob Fulker, CEO and Managing Director at Hillgrove Resources. Please go ahead. Robert Fulker: Thank you, Harmony. Good morning, everyone, and thanks for joining the Hillgrove Resources September Quarter 2025 Results Webinar. I'm joined on the call today by Luke Anderson in his first full quarter with Hillgrove. September quarter was a pivotal time for Hillgrove. The mine's output is showing improved stability with higher output, which are demonstrating the potential of the operation has from a productivity perspective. This has started to flow through to our all-in sustaining cost, which has reduced from the high of last quarter. The Nugent ramp-up has commenced, and we filed the first stope at the start of October. There are 3 takeaways for me from today. Firstly, record stope production since underground operations started, has seen the biggest quarter since we started mining and is at our annualized rate of 1.5 million tonnes per annum. In September, the mine delivered 1,075 tonnes of copper produced and the quarter's gross all-in sustaining costs have reduced to be the lowest quarter this year. The all-in sustaining cost unit costs were affected by the low copper sold versus production. Secondly, the Nugent project has been delivered ahead of schedule with stoping underway in October. This is the second mine production center online as promised. And finally, our on-site exploration success has given us the potential of a third mining front to further increase our total tonnes from the Emily Star region. The Emily Star exploration incline design has been released and we'll start development activities there this quarter. Operationally, ore mines for the quarter reached a record of 375,000 tonnes, and we finished the September month with ore on the [ ROM ] for the start of October. The underground load and haul improvements have been maintained into October and the commencement of the Nugent stoping will gradually grow our production over the next 6 months. The consistency of the mine delivery has led to the mill operating for longer periods of time, allowing improved stability within the processing plant. Tonnes processed rose to 366,000 tonnes at an average weighted -- at a weighted average grade of 0.81% copper and 94.5% recovery. This is a steady and reliable performance increase -- increasing copper production by 8% from the previous quarter to 2,808 tonnes. During the quarter, we announced the Nugent acceleration project finished ahead of schedule in August. We have developed the 1020 Southern ore drive and are now developing the Northern ore drive. We have set the primary ventilation up. We have got emergency egress to the pit and subsequent to the quarter, refiled and extracted the first stope. The second stope is ready to the fire as we speak. The Nugent decline will break through to the Kavanagh working area before Christmas as planned. And the Emily Star exploration [ tudy ] is now the Emily Star exploration incline and ready for development. When completed, this will allow for improved diamond drilling performance with a top 4 sublevels of the Emily Star resource. On lease exploration and resource drilling continues. We currently have 2 drill rigs underground. Our plan is to increase to 3 drill rigs when we have the locations available. We are on track to deliver the 60,000 meters of drilling within the 2025 year as previously announced. There have been some exceptional holds during the quarter Emily Star's first hole of 19 meters at 1.9% copper and 0.15g/t gold and 5.7 meters at 2.12% copper and 0.36 grams per tonne gold, both in Emily Star are outstanding. More holes are still being assayed, and we'll release these as soon as we have them. Emily Star is a key exploration focus for what I expect to be the third mining front to underpin a further increase in our copper and operational outputs. I'll leave the majority financial report to Luke, but a couple of highlights from myself. Gross all-in sustaining costs have reduced by 10%. Despite shipment timing, we reduced sold -- which reduced sold copper, our all-in sustaining cost unit rate actually reduced by 5%. Our realized price lifted to [ $14,447 ] per tonne as the lower hedges are filled. And we are increasing exposure to the higher spot price. To close, we're building predictability, we are lowering our operating costs and increasing the number of operating levers. The operational improvements have continued into October. And we are moving through the pinch zone. The Nugent ramp-up and the Emily Star potential, combined with the continued operating discipline are the backbone of our plan to improve profitability and our margins. I'll now hand it over to Luke, who will take you through the financials. Luke Anderson: Thanks, Bob, and good morning, everyone. I will now walk you through the financial performance for the quarter. All amounts are referred to are in Australian dollars unless otherwise stated. The quarter showed an improving operating performance. The headline items were copper produced increased 8% to 2,808 tonnes and an average realized price of [ $14,447 ] per tonne. Gross all-in sustaining costs reduced 10% compared to quarter 2. Year-to-date, all-in costs of USD 4.24 per pound remained in line with our average guidance of USD 4.2 to USD 4.45 per pound. And completion of a AUD 28 million placement at AUD 0.035 per share to institutional and sophisticated investors. Now moving to the detail. All-in unit cost metrics are calculated on copper payable tonnes sold, which was lower than copper tonnes produced due to timing of shipments, which negatively impacted unit cost metrics. C1 costs improved to AUD 4.69 from AUD 5.24 per pound quarter-on-quarter. Most pleasingly, our gross all-in sustaining costs reduced by 10%, and and all-in costs by 7% against the prior quarter, partly reflecting the realization of a number of cost reduction initiatives over the last couple of months. Our all-in costs, excluding urgent, was AUD 7.1 per pound or USD 4.54 per pound. Year-to-date, this number is USD 4.24 per pound. Which is tracking within updated FY '25 guidance of USD 4.2 to USD 4.45 per pound. The average realized price for copper sold during the quarter was [ $14,447 ] per tonne despite delivery into a number of lower-priced hedges. The quarter-on-quarter reduction in copper payable tonnes sold from 2,572 to 2,422 tonnes reflects timing only, with unsold concentrate stocks increasing from 502 tonnes to 1,729 tonnes at quarter end. The copper price continues to strengthen on strong demand. with supply also impacted by the recent mud slide and resulting closure of the Grasberg Mine in Indonesia, which is the second biggest copper mine in the world and represents over 3% of global supply. The company's liquidity, which is made up of mainly cash, receivables and unsold concentrate was AUD 15.6 million at 30 September. Post quarter end, AUD 22.9 million was received from Tranche 1 of the capital raise completed at the end of September. High capital expenditure of AUD 12.2 million for the quarter included AUD 9.6 million on mine development, AUD 1.7 million on exploration and AUD 0.9 million on other capital projects. A total of AUD 18 million has been spent on the new capital development thus far with approximately AUD 3 million remaining to be spent. The company maintains a prudent hedging policy covering roughly 30% of forecast production to protect a proportion of fixed costs against the deterioration in copper price. The currently -- the company currently has 4,450 tonnes of copper hedged at a weighted average price of AUD 1,400 tonne -- sorry AUD 14,413 per tonne for delivery from November '25 to September '26. A number of lower price hedges were delivered into during the quarter. A busy quarterly period culminated in the completion of a AUD 28 million placement at AUD 0.035 per share. This was strongly supported by Australian and overseas institutions and sophisticated investors. Replacement will be undertaken in 2 Tranches: Tranche 1 has raised AUD 22.9 million pre-costs, which was received in early October. Tranche 2 will see an additional AUD 5.1 million pre-cost to be received, subject to shareholder approval and an upcoming EGM to be held on 25 November. Now to summarize. We remain on track to deliver FY '25 copper production guidance of 11,000 to 11,500 tonnes. All-in cost guidance, excluding Nugent acceleration CapEx of USD 4.2 to USD 4.45 per pound remains on track. With Nugent stoping underway and inventory available for shipment, we expect improved sales volume and further improvement in unit cost in quarter 4. Finally, with the recent capital raise, we are now well funded to deliver on Nugent and to accelerate Emily Star. Which is an exciting time as the operations start to ramp up over the next quarter and deliver stronger cash flow generation. I'll now hand back to the moderator for questions. Operator: [Operator Instructions] Your first question comes from Nick [indiscernible] from [indiscernible]. Unknown Analyst: Bob and Luke. Just a few quick ones from me. Obviously, with the transition to multiple mining fronts at Kavanagh, Nugent and Emily Star. Can you talk about how you're managing the trade-off between increasing mining rates and maintaining overall mine life at the operation? Robert Fulker: Thanks, Nick. I'll try to answer if I don't get exactly where you're wanting just let us now and I'll go there. The increase from where we were last year at around about 900,000 tonnes for the 2024 calendar year. This year was to ramp up to about 1.4 million tonne, we ramped up to 1.5 million tonne rate as of last quarter. That actually is a combination of what we've been doing within the Kavanagh and the Spitfire regions, with increased development as well from ore increases. The opening of Nugent allows us to actually spread the mine out to a second mining front. Emily Star in the future that to become 3, but that's into the future. With that second mining front, we aren't intending to ramp straight up to 1.7 million to 1.8 million tonnes. We're intending to ramp up to that rate over the next 6 to 7 months, so that we can keep our production aligned with our development rates. Development between 600 and 650 meters per month gives us a growth of our stoping areas and allow us to rate the decline from the Nugent working area to the Kavanagh working area, so we can get easy access for trucks and loaders and the drill rigs. So over time, we will slowly ramp our production up to that 1.7 million, 1.8 million rate by June next year or thereabouts. Unknown Analyst: And then just on the back of that, obviously, with the ore bodies coming online, are there any implications on the current plant configuration? Robert Fulker: Nick, there is 0 that we need to do in the plant. Even at 1.8 million tonnes, we're only -- around that 50% of the nameplate capacity or what the plants run it before. We are actually running the plant slower than was run in previous incarnations. So we're running at a rate that gives us a higher recovery and gives us higher residence time so we can get that recovery. As we increase our tonnes, we'll continue to optimize that for the most profitable and most copper effective output. Unknown Analyst: And just last one for me. Obviously, there's a buildup in concentrate inventory over the quarter. Could you just give us a sense of how much of that has been shipped so far in October and to what extent you expect that to unwind by the year-end? Luke Anderson: Yes. Thanks, Nick. Look, yes, that really was just was a timing issue. So we built stocks, I think, by about 1,200 tonnes at the end of the quarter, which really was sold in October. So that would have already been sold. And then that will continue through the quarter. And yes, I'd expect that to reduce, but it depends on the timing of the shipments towards the year-end, but you should see that decrease. Operator: [Operator Instructions] There are no further questions at this time. I'll now hand back to Mr. Fulker for closing remarks. Robert Fulker: Thank you, everyone, for listening in today. As we enter the last quarter in our reporting calendar, we are seeing improvements in all our operating metrics and a reduction in our cash spend. We are seeing the realization of these improvements being implemented. So all the things that we've been doing over the last 12 months, we've actually seen coming to provision now. If there are any other questions that people would like to ask as I read the report in full, please don't hesitate to call Luke and myself. And thank you very much, and now see you in next one. Operator: It does conclude our conference for today. Thank you for participating. You may now disconnect.
Operator: Hello, and welcome to the BioMarin Pharmaceutical Third Quarter 2025 Conference Call. [Operator Instructions]. I would now like to turn the conference over to Traci McCarty. Please go ahead. Traci McCarty: Thank you, operator. To remind you, this nonconfidential presentation contains forward-looking statements about the business prospects of BioMarin Pharmaceutical Inc., including expectations regarding BioMarin's financial performance, commercial products and potential future products in different areas of therapeutic research and development. Results may differ materially depending on the progress of BioMarin's product programs, actions of regulatory authorities, availability of capital, future actions in the pharmaceutical market and developments by competitors and those factors detailed in BioMarin's filings with the Securities and Exchange Commission, such as 10-Q, 10-K and 8-K reports. In addition, we will use non-GAAP financial metrics as defined in Regulation G during the call today. These non-GAAP measures should not be considered in isolation from, as substitutes for or superior to financial measures prepared in accordance with U.S. GAAP, and you can find the related reconciliations to U.S. GAAP in the earnings release and earnings presentation, both of which are available in the Investor Relations section of our website. Please note that our commentary on today's call will focus on non-GAAP financial measures unless otherwise indicated. Beginning on Slide 3 and introducing BioMarin's management team, joining today's call, Alexander Hardy, President and Chief Executive Officer; Brian Mueller, Chief Financial Officer; Cristin Hubbard, Chief Commercial Officer; and Greg Friberg, Chief R&D Officer. I will now turn the call over to BioMarin's President and CEO, Alexander Hardy. Alexander Hardy: Thank you, Traci. Good afternoon, everyone, and thank you for joining us on today's call. Starting on Slide 5, I am very pleased with the strong results across the business, leading us to raise full year total revenues guidance at the midpoint and reaffirm our VOXZOGO revenue outlook for 2025. In addition to top line performance, BioMarin has delivered expanding profitability and significant growth in operating cash flow, bringing our cash and investments balance to approximately $2 billion at the end of the third quarter. We are focused on finishing the year strong, positioning ourselves to achieve record commercial results for the full year. To date this year, we have delivered 11% increase in top line growth year-over-year. These strong results are driven by the performance of our global enzyme therapies and Skeletal Conditions business units as we deliver for patients around the world. We have built the Enzyme Therapies business unit into a $2 billion-plus franchise over the last 12 months with continued growth anticipated. In the Skeletal Conditions business unit, our first indication with our first product, VOXZOGO, the treatment of achondroplasia is expected to generate more than $900 million in revenues this year, leading us to reaffirm our full year 2025 VOXZOGO outlook and representing 25% growth at the midpoint of our guidance range. As the established standard of care in achondroplasia, VOXZOGO revenue has increased 24% year-to-date compared to 2024. Now in the fourth year of its global launch, VOXZOGO has represented a breakthrough therapy for families seeking treatment for their children with achondroplasia. Building on this innovation, we are excited to bring VOXZOGO's second indication forward for the treatment of children with hypochondroplasia. We have high confidence in the upcoming pivotal data readout for hypochondroplasia expected in the first half of next year based on proof-of-concept data and more than 10,000 patient years of safety and efficacy data in achondroplasia. Building on the rapid and successful global commercialization of VOXZOGO in achondroplasia, now available in 55 countries, we are well positioned to execute a strong global launch in hypochondroplasia, targeting 2027 should the data be supportive. Cristin and Greg will provide more details in a moment. Turning now to our broader strategic objectives. Over the past 18 months, we have undertaken a series of initiatives designed to prepare BioMarin for future growth and expansion. As part of this effort, we have made difficult decisions, including the discontinuation of multiple research programs that did not meet our criteria for advancement. Accordingly, today, we are announcing the decision to pursue options to divest ROCTAVIAN and remove it from our portfolio as we focus on the business units aligned with our strategic priorities. ROCTAVIAN is an innovative gene therapy that holds potential within the treatment landscape for severe hemophilia A. As a result, we are working to find an alternative that will allow for ROCTAVIAN to reach its full potential by ensuring access to those interested in a gene therapy treatment. In the meantime, ROCTAVIAN will be commercially available in the United States, Italy and Germany. Throughout this process, we will support and monitor patients who have received ROCTAVIAN as their well-being is our top priority. As we look to the future, we are pleased that our breakthrough medicines are in high demand and reaching thousands of patients around the world. Our financial performance so far this year reflects strategic investments in the enzyme therapies and Skeletal conditions business units, both of which remain central to our growth strategy, along with increased business development opportunities and our own advancing internal pipeline. Building on this momentum, we look forward to the many data readouts and potential new approvals ahead, along with new business development opportunities as we focus on the next stage of BioMarin's growth. With that, I will now turn it over to Brian. Brian Mueller: Thank you, Alexander. Please refer to today's press release for detailed third quarter 2025 results, including reconciliations of GAAP to non-GAAP financial measures. All 2025 results will be available in our upcoming Form 10-Q, which we expect to file in the coming days. Starting on Slide 7. Strong global demand across our portfolio of innovative medicines drove a year-to-date total revenue increase of 11% compared to the same period in 2024. Revenues from VOXZOGO and PALYNZIQ each increased by more than 20% on a year-to-date basis. As we shared last quarter, we anticipate VOXZOGO revenue in Q4 to reach its highest level of the year due to the timing of contracted orders as well as increasing numbers of patients on therapy, and we expect full year 2025 VOXZOGO revenue of between $900 million and $935 million. We are pleased with 8% year-to-date growth of the Enzyme Therapies business unit led by PALYNZIQ. Due to large orders for NAGLAZYME and VIMIZIM in the second quarter, we note that Enzyme Therapies revenue was lower in Q3 quarter-over-quarter. And compared to Q3 2024, Enzyme Therapy revenue in the quarter was relatively flat, primarily due to a higher volume ALDURAZYME quarter last year. Given the strong top line performance so far this year and our expectations for the fourth quarter, we are raising the lower end of our full year 2025 total revenue guidance to $3.15 billion, with the midpoint of the range representing double-digit year-over-year growth. Now moving to Slide 8. Q3 2025 results include a charge of $221 million for acquired in-process research and development, or IPR&D, on a pretax basis related to the Inozyme Pharma acquisition completed on July 1 of this year. This acquisition-related expense represents an approximate impact of $1.10 on a per share basis. The IPR&D charges significantly increased both GAAP and non-GAAP R&D expenses in the third quarter and along with higher SG&A investments across our skeletal conditions and Enzyme Therapies business units resulted in lower year-over-year operating margin and diluted earnings per share, both on a GAAP and a non-GAAP basis. However, looking past the IPR&D charge, BioMarin's underlying strong revenue performance and operational efficiencies drove increased year-to-date GAAP and non-GAAP diluted earnings per share. Further, we recognized lower tax expense during the third quarter due to the timing impact of the Inozyme IPR&D charge on our quarterly estimated tax rate as well as some tax benefits from the recently enacted tax law. Taking these dynamics into account, alongside our expectations for strong revenue growth and continued operational execution in Q4 2025, we are updating full year 2025 non-GAAP operating margin guidance to between 26% and 27% and non-GAAP diluted earnings per share guidance to between $3.50 and $3.60. BioMarin continues to generate robust operating cash flow, reaching $369 million in the third quarter and $728 million year-to-date, contributing to the company's total cash and investments balance of approximately $2 billion at the end of Q3. We expect this momentum to continue, both solidifying the sustainability of our profitability and cash flows and building incremental capital to invest in future growth through business development. Now moving to Slide 9 and to summarize, we have updated our full year 2025 guidance across total revenues, non-GAAP operating margin and non-GAAP diluted earnings per share, incorporating the impact of the Q3 IPR&D charges. This update reflects a net improvement in our expected financial performance, net of the IPR&D charge of about $0.15 per share for non-GAAP diluted earnings per share. We are executing on our business plan so far this year, and today's guidance updates reflect both our year-to-date performance and our confidence in strong top line and profitability growth in the final quarter of 2025. Finally, we are sharing an update on our previously provided 2027 revenue outlook given the high level of interest. Based on the many unknowns and variables impacting our revenue over the next 2 years, mostly the impact of VOXZOGO potential competition, we recognize that there are a range of outcomes from which a single scenario cannot be predicted with enough certainty at this point in time. We have developed a number of scenarios and we will share that the lower end of our range of estimates is in line with current 2027 top line consensus for FactSet, excluding ROCTAVIAN. And on the higher end of the range of estimates, there are scenarios that reach $4 billion in total 2027 revenues, also excluding ROCTAVIAN. But again, given the many unknowns between now and then, we are not providing a specific estimate or more narrow range. Going forward, we will continue to execute on our strategy and monitor the most impactful variables. However, we do not plan to provide additional estimates of 2027 revenues, and we plan to follow our usual process of providing full year guidance at the beginning of each year with the usual quarterly updates. Thank you for your attention, and I will now turn the call over to Cristin for a commercial update. Cristin? Cristin Hubbard: Thank you, Brian. I want to begin by acknowledging the exceptional work from our teams across the world, whose dedication has delivered strong year-to-date results for BioMarin's commercial portfolio. Now moving to Slide 11. We are pleased that PALYNZIQ'S strong performance resulted in another quarter of more than 20% growth, reflecting more patients reaching efficacy and adhering to therapy. PALYNZIQ'S sustained growth demonstrates the PKU community's continued belief in its unparalleled efficacy profile and the importance of reaching normal Phe levels for effective treatment. We are pursuing approval of PALYNZIQ for adolescents aged 12 to 17 in the United States and Europe in 2026, potentially enabling this younger group of people to have access to therapy during an important period of transition to adulthood. Beyond PALYNZIQ, year-to-date revenue growth across our enzyme therapies portfolio reflects increased new patient starts across all products and strong adherence to therapy, reinforcing the durability and high penetration of these treatments despite quarter-to-quarter order timing dynamics. Now moving to Slide 12. VOXZOGO for the treatment of achondroplasia was available in 55 countries as of the end of the third quarter with new launches across multiple geographies. Global expansion and demand drove year-over-year VOXZOGO revenue growth of 15% in the third quarter and 24% year-to-date with growth in patient numbers quarter-over-quarter. For the remainder of 2025, we expect large contracted OUS orders, deeper penetration across our growing VOXZOGO footprint and quarter-to-quarter new patient starts to result in Q4 being the highest of VOXZOGO revenue for the year. Outside the U.S., with a large majority of children eligible for VOXZOGO located, our global footprint remains a powerful growth engine, and we saw strong uptake across key large markets during the quarter. With approximately 75% of year-to-date VOXZOGO revenue generated outside the U.S., we expect significant opportunity ahead as we open new countries and more deeply penetrate countries that currently have access. Leveraging VOXZOGO's best-in-class evidence package of health benefits beyond height, international treatment guidelines recommending treatment as early as possible and broad age label, we are focused on increasing access to VOXZOGO for more children around the world and keeping them on therapy to realize the greatest health benefits. In the United States, the team has been laser-focused on initiatives to expand VOXZOGO treatment. These efforts drove new patient starts across all age groups during the third quarter with the majority of new starts from children under 2 years of age, and we expect that trend to continue. Due to the geographical dispersion and management across a range of specialties for older children in the U.S., we have implemented initiatives to address slowing uptake in that age group, noting that the initiatives will take time to show results. We have expanded this prescriber base across the country and increased the number of children on therapy across all age groups in Q3 versus Q2. Importantly, the strong adherence rates observed among families with children receiving VOXZOGO remain a key indicator of the product's value proposition. Now moving to Slide 13. We look forward to building on the momentum we have established with the breakthrough treatment of achondroplasia as we pursue the next 5 indications in our skeletal conditions business unit. Achondroplasia represents the first of 6 indications we are pursuing for treatment with VOXZOGO and/or BMN 333, our long-acting CNP. With the pivotal data readout just around the corner in hypochondroplasia, we are preparing for a strong global launch should those data be supportive, and I'll share more about that in a moment. We are also advancing our CANOPY clinical studies with VOXZOGO across 4 additional indications, including Phase II studies in idiopathic short stature, Noonan syndrome, Turner syndrome and SHOX deficiency. These Skeletal Conditions represent a total addressable population or TAPP, of approximately 420,000 patients, acknowledging our focus will be on the most severely impacted subset of these children, representing a modest proportion of the total TAPP. We are expanding our leadership position in skeletal conditions, building on VOXZOGO as the standard of care in achondroplasia with future potential indications, the second in hypochondroplasia and 4 follow-on indications across the CANOPY trials. Our next-generation product, BMN 333, offers the promise of even greater efficacy, not just the convenience of the extended dosing interval, and we look forward to starting our Phase II/III study in the first half of 2026. Now moving to Slide 14. Our experience launching VOXZOGO for the treatment of achondroplasia has given us a strong foundation to scale globally. We've built the infrastructure, the relationships and the expertise to execute effectively as new indications come online, and VOXZOGO for the treatment of hypochondroplasia represents a potential significant breakthrough for patients. Hypochondroplasia is underdiagnosed because children with growth delays often do not receive a full diagnostic workup for various reasons, in part because hypochondroplasia presents with a wide range of symptoms and no single sign confirms the diagnosis. And families often face a complicated referral process and barriers to genetic testing, which slows down the path to diagnosis. These challenges mean many children go undiagnosed for too long, and that is why one of our priorities is improving early diagnosis for hypochondroplasia worldwide. We're driving initiatives like genetic reclassification, clinician education and patient and caregiver awareness, all aimed at driving earlier diagnosis. We're also optimizing diagnostic pathways so that in the future, children can potentially access therapy as early as possible. Importantly, we're seeing robust engagement from health care providers across multiple specialties. That enthusiasm reflects growing recognition of the unmet need in hypochondroplasia. This positions us well for the next phase. Our Phase III program in hypochondroplasia is progressing with data expected in the first half of 2026 and a potential launch in 2027. I'll now turn the call to Greg to provide an R&D update. Greg? Gregory Friberg: Thank you, Cristin. Now moving to Slide 16 and to provide a little more color, hypochondroplasia is a serious condition with a potentially broad impact on the health and daily life of those affected. Children and adults with hypochondroplasia can face significantly higher rates of comorbidities and procedures when compared to the general population, covering areas like respiratory, orthopedic, ear nose and throat and mental health. As a result, they often undergo more surgeries, adding to the overall burden of the condition. Beyond the medical challenges, the condition can affect quality of life in very real ways, making everyday tasks harder and creating social and emotional strain. These insights reinforce why it's important to advance treatment options for hypochondroplasia, a condition for which no approved therapies are broadly available today. Now moving to Slide 17. At ASBMR in September, we presented important spinal morphology data for children under 5 years old with achondroplasia. These children were treated on our Phase II CANOPY study with either vosoritide or placebo. Spinal morphology is one of the factors that contributes to spinal stenosis, a leading cause of morbidity in achondroplasia. Spinal stenosis, particularly in the lumbar region, is a serious and all too common medical complication in achondroplasia, resulting in pain, muscle weakness and reduced mobility in the most severe cases. Since measures of spinal canal reach near final size by age 5, early intervention is essential to prevent complications. Radiographs of the spine in our CANOPY study demonstrated that children who received VOXZOGO experienced improved spinal measurements across all lumbar vertebrae and an overall improved curvature of the spine after just 1 year of treatment. As a reminder, these improvements were seen as compared to placebo rather than simply describing the natural history of growing children. As these anatomic measures are often predictors of complications later in life, we intend to follow these patients in our CANOPY extension study to confirm that they translate to reduced morbidity or need for surgical correction. Importantly, with these results, VOXZOGO is the only approved therapy with data showing a positive impact on spinal morphology, and these findings add to the extensive body of evidence supporting VOXZOGO's health benefits beyond improving growth. Now moving to Slide 18 and BMN 333, we will focus on our next-generation therapy for achondroplasia. Last call, we shared that multiple cohorts from our Phase I study had demonstrated superior pharmacokinetic measures of free CNP as compared to another long-acting CNP agent. We're advancing the program and are targeting initiation of Phase II/III in the first half of 2026. We have a strong conviction that the multifold increases in free CNP AUC that we observed with the BMN 333 can translate into clinical benefit. That confidence comes from 3 pillars: preclinical data showing roughly double the attributable growth versus VOXZOGO at high free CNP exposures, human genetics, where natural CNP pathway overactivation leads to extreme height without unexpected safety issues and clinical dose response data from other long-acting CNP agents suggesting that additional growth may be possible at higher exposures. BMN 333 is the right agent to test this hypothesis. And in our Phase I study, we observed multiple cohorts, which met our modeled PK requirements to deliver superior growth. From a design standpoint, the upcoming study will include a dose-ranging Phase II portion followed by a Phase III comparison against VOXZOGO, assessing safety, growth and resulting functional outcomes. Our goal is clear. BMN 333 is designed to deliver superior efficacy versus VOXZOGO without additional safety signals. We've engineered the molecule to safely achieve these higher free CNP levels and our target product profile reflects that ambition. We've aligned with regulators on this approach, and our strategy is to establish a new standard of care for achondroplasia. BMN 333 represents a major opportunity to build on VOXZOGO's success and further strengthen our leadership in skeletal conditions. Finally, on Slide 19, here's a snapshot of a few highlights expected across the pipeline through the coming quarters. As mentioned, in our skeletal conditions portfolio in the first half of next year, we're excited for the Phase III data readout for VOXZOGO in hypochondroplasia as well as the initiation of our Phase II/III registrational enabling study for BMN 333 in achondroplasia. For enzyme therapies, we look forward to extending PALYNZIQ access to younger populations with a potential approval in 2026 of the PALYNZIQ label extension for adolescents aged 12 to 17. In the first half of 2026, we also expect Phase III data for BMN 401 in children aged 1 to 12, providing a potential first-in-disease medicine for ENPP1 deficiency. Our earlier-stage pipeline is also advancing, and we plan to share a clinical update by the end of the year for BMN 351 for the treatment of exon 51 skip amenable Duchenne's muscular dystrophy. At this next update, we intend to share whether data from our 6 and 9 milligram per kilogram cohorts supports our stated ambition to reach mean muscle dystrophin increases of 10% at steady state. And a reminder, this is without additional adjustment for muscle content. Safely achieving this target defines our go criteria for a potential registrational study. In summary, we have multiple data readouts and regulatory milestones ahead, and we look forward to keeping you updated as we execute on these opportunities to drive growth and deliver value for patients. Thank you for your attention today. We will now open the call to your questions. Operator? Operator: [Operator Instructions]. Your first question comes from Phil Nadeau with TD Cowen. Philip Nadeau: My question is on the 2027 guidance. Can you talk a little bit more about the scenarios you see? And maybe more specifically, why are you rescinding the guidance now? What has changed over the last year since it was initially issued? Brian Mueller: Phil, this is Brian. Thanks for the question. I'll take that one. Since we shared the original $4 billion 2027 outlook last year, we've had a year to assess the various factors that have arisen since then, including the impact of potential VOXZOGO competition. There's other puts and takes. We've got our acquisition of Inozyme and the potential for BMN 401 to launch in the pediatric indication in '27. We've also incorporated today's announcement that we're pursuing options to divest ROCTAVIAN. We've developed a number of scenarios to capture what we believe are different outcomes across these key variables across the entire portfolio. But given the many unknowns and their impact on predicting 2027 revenue, instead of taking an official position on those key assumptions, what we've done is outline the range of our lower case estimates and our higher case estimates. I'll share that in the lower case estimate, that reflects the scenario with 2 competitors successfully launching and taking significant share by 2027. And I'll share in the high case, that reflects the scenario where there's a significant delay in the competition, for example, successful intellectual property events for BioMarin. And again, in between there, there are a number of outcomes, highly uncertain at this time and therefore, narrowing the range or coming up with more specific point-in-time estimates at this time isn't appropriate. Again, I'll just finish by saying, reiterating my comments in the prepared remarks that in that lower case estimate for BioMarin, we are still at consensus for 2027. Philip Nadeau: And maybe just a follow-up. I think when you issued the guidance a year ago, you were -- you suggested that competition was factored into the guidance. Do you now have a different appreciation or a different concern about how much share that competition could take, specifically against VOXZOGO? Brian Mueller: Yes. Thanks, Phil. We did the initial work last year following Investor Day when the competitor data was released and at the time, modeled some competitive impact. There was some ability to absorb that into our original forecast at the time, and we did have some other upsides last year. We have taken a different view. We've observed trends in the marketplace, both what we are experiencing in these markets as well as, again, different potential competitor scenarios. And this is not a single point in time estimate. It is not our forecast. We merely wanted to reflect what the range of outcomes could be from our view. Operator: The next question comes from Salveen Richter with Goldman Sachs. Salveen Richter: Could you speak to why VOXZOGO sales were down quarter-over-quarter? And then also just help us understand here the business development strategy, just given that there seems to be so much of a focus on VOXZOGO and how that plays out, but you're kind of stuck from just given all these various dynamics competitively, when can we start to see that business development lever or levers kind of emerge to really add to your portfolio? Brian Mueller: Salveen, this is Brian. I'll take the first part of the question on Q3, VOXZOGO. And yes, slightly down quarter-over-quarter. Looking back to the remarks that we made back last quarter when we signaled that we were expecting VOXZOGO revenue for the second half of the year to be back weighted to the fourth quarter. We noted a couple of specific larger orders where there were true timing shifts, but also just our market-by-market forecast for Q3 and Q4, what ended up happening in Q3 is that, that was just a bit more exacerbated and the timing shifted a little more. I'll point you to 2 things. One, reaffirming the total VOXZOGO range today for the year of $900 million to $935 million, again, just timing between Q3 and Q4. And then secondly and most importantly, steadily adding patients across all markets and all age groups in Q3, which, again, just -- that's the key indicator of long-term demand, and we're going to continue to experience some of these quarter-to-quarter order timing fluctuations. Alexander Hardy: Salveen, thanks very much for your question. It's Alexander. I'll answer the part of your question around business development. First off, I would say we've got strong underlying business performance in both Enzyme Therapies and in Skeletal Conditions. I mean, 11% year-to-date growth across both business units. But we are also producing significant cash flow. Our balance sheet is very strong, and we have conviction that assets are worth more in our hands than they are right now. So business development is a very important part of our strategy right now. We have a number of deals that we're in pursuit of. We've always been a company focused on early-stage collaborations. But what is different or how our strategy has evolved is we're also looking at Phase III pre-commercial and commercial assets because, again, we think we can add value to all stakeholders with those in our hands. So we have a number of deals in the works and in sight. I mean, obviously, business development is never completely within your control, but it remains a very high priority for us, and we're looking forward to sharing more information when we have that. Operator: The next question comes from Cory Kasimov with Evercore. Cory Kasimov: I guess I have a follow-up on 2 questions that were asked. First of all, Brian, I appreciate the commentary you made on the previously issued '27 guidance. I think the way you framed it is helpful. However, I'm curious if you have any qualitative commentary you could also share on your prior long-term mid-2030s guidance with regard both to the opportunity for VOXZOGO as well as the anticipated CAGR for the Enzyme Therapies business. And then a follow-up for Alexander's capital deployment commentary. Given the pretty big cash balance and good operating cash flow generation you alluded to, have you given much consideration to share buybacks? Or are you really just holding that capital for other uses like BD as you were talking about? Brian Mueller: Thanks, Cory. This is Brian. Appreciate the question. And it's a similar analysis, as I shared with the 27 range of estimates there. We are absolutely planning on continued sustainable growth across the business. I'll share that we are still targeting high single-digit sustainable growth rate for the enzyme therapies over time. VOXZOGO, we do plan to continue to grow the brand by deepening patient penetration across all markets, plus the indication expansion opportunities where we will always have a lead. However, the offsets to that, most notably being potential competition are still very uncertain at this time. So we and the investor community will watch all of these variables very closely, and we'll keep you updated in terms of what we're seeing along the way. But again, we feel it's prudent to avoid taking an official position on a forecast with so many uncertainties. So not quoting a long-term growth rate at this time for that reason. Alexander Hardy: Cory, this is Alexander. I'll answer the second part of your question with regard to capital allocation. It's obviously something we discuss with our Board frequently. It's very, very important, obviously, that we're really effective stewards of the significant capital that we've generated through the success of our business. We actually think that business development is the greatest opportunity for us to drive significant incremental growth rate on the top line, and that's the most highly correlated with stock appreciation. We have this strong financial profile. We have this capability in rare diseases, whether it's in research, development, manufacturing, commercialization. And we're convicted that assets are worth more in our hands than where they are right now. In an environment that we have right now in the U.S. with biotech stocks, there are many rare disease companies that are undercapitalized and underresourced and those assets are worth more in our hands. So we are -- as you can tell, we're very convicted that business development is the best use of our capital. That remains our priority, but it's something that as a Board, we constantly look at. Operator: The next question comes from Joe Schwartz with Leerink Partners. Joseph Schwartz: For the upcoming BMN 333 PK data, what specific exposure levels would give you confidence that you can achieve clinical superiority over VOXZOGO? And as you move into a head-to-head superiority trial against VOXZOGO, what is the minimum annualized growth velocity delta over VOXZOGO that you believe could be required to demonstrate clear clinical superiority, drive patient switching and reestablish standard of care in the face of potential competition? Gregory Friberg: Thanks, Joe. This is Greg. I'll take a stab at both of those. With regard to the exposure levels, the stated level that we were looking for from our Phase I PK study was while we were looking at the free CNP levels. So in the case of VOXZOGO, of course, that's the drug itself. In the case of other molecules, it would be the released active quantity. We were looking for increases of at least 3x on the AUC. And as I mentioned in our prepared remarks, we actually saw 3 different dose levels where we achieved that in that ongoing Phase I study. So in our dose ranging, again, we'll have an opportunity to test a variety of levels that met that criteria. With regard to the change in AGV over VOXZOGO, not ready to comment today on an actual number. Sorry to disappoint you there. I will add, though, that we have looked at this very closely, spoken with both clinicians as well as patients, and we've determined a level of differentiation that we think will be not only clinically meaningful, but also has the potential to pull through to the endpoints that really count, which are not just linear growth, but are all of those measures of health and wellness and function that we think, again, these patients deserve from a next-generation therapy. Operator: The next question comes from Jessica Fye of JPMorgan. Jessica Fye: I had a couple on the guidance and a couple on the pipeline. On the guidance, I don't have FactSet. What is the 2027 FactSet consensus, excluding ROCTAVIAN, just we know what that lower bound is? And then the second one on the guidance, maybe just asking about the other 2 elements of the longer-term targets that I don't think Cory mentioned. Should we still expect 40% non-GAAP operating margin starting in '26 that could expand to the low to mid-40s and the greater than $1.25 billion of CFO starting in 2027? Or were those sort of top line dependent and more in question now? And then the 2 on the pipeline, for 351, my understanding is we'll get 6-month biopsy data for the 6-milligram cohort. What should we expect for the 9-milligram cohort? And second one on the pipeline is for hypochondroplasia, can you remind us of the powering for that trial? And is that fig sufficient in your mind? Or is there some minimum delta on efficacy you want to see to meet your target product profile? Brian Mueller: Thanks, Jess. This is Brian. I'll speak to those first couple. So first, just to clarify that FactSet math for you, we are showing FactSet total revenue consensus for 2027 of $3.725 billion, and that includes $75 million of ROCTAVIAN. So that without ROCTAVIAN consensus would be $3.65 billion in '27. And then with respect to the 40% operating margin target next year, that does remain our target. Just a reminder that we've grown profitability and operating margin significantly over the last 2 years due to our strong underlying execution and the focused cost transformation, we do expect that to continue heading into next year and hold that 40% target. I will say that our operating margin objective is rooted in driving efficiency in the business through cost and process transformation, but without compromising value-creating activities. So in the event, in the lower end scenario over time, if we do face a trade-off, and this is less next year or more beyond, if we face a trade-off between preserving those value-creating activities and hitting the 40% margin, we will prioritize value creation to maximize long-term shareholder value. But right now, cost transformation and the target for next year is on track. We'll be prepared to update that again when we issue '26 guidance early next year. Gregory Friberg: Thanks, Jessica, and this is Greg. Let me take your 2 pipeline questions. With regard to 351, just as a reminder, what you can anticipate is a top line result that will be a combination of all the safety data that we have. That will be the 6-milligram and the 9-milligram per kilogram cohorts as well as the early data that we have, we'll be looking at the 12 milligram per kilogram, which is currently enrolling. What we will be also looking at is biopsy results and dystrophin levels from muscle biopsies in both the 6 and the 9-milligram per kilogram cohort. Our goal, again, is to have a level that predicts it steady state that we would be hitting this 10% level, which is a quite ambitious target. That's not correcting for fat and muscle content. That is a level that has yet to be seen in programs targeting exon 51. With regard to hypochondroplasia, we powered the study to measure for an AGV delta similar to what's been seen with VOXZOGO with achondroplasia, though as a quick reminder, the Dr. Dauber data would suggest that growth in hypochondroplasia may be on the order of 1.8 centimeters per year, a little bit more, which gives us confidence again that this is a well-powered study for hypochondroplasia. Brian Mueller: Sorry, Jess, this is Brian. I'll come back again because I realized you had another part to your question about that '27 cash flow and that greater than $1.25 billion. So I'll use your words there. That was top line dependent. And therefore, in the lower case scenarios would be somewhat proportional to the overall revenue scenario. But I will say, again, we're generating significant operating cash flow today, almost $370 million this quarter, over $700 million year-to-date. We've got a number of working capital optimization initiatives that we're introducing across the enterprise over the next 2 years. As Alexander touched on with respect to our capital allocation strategy and business development, these cash balances and the sustained cash flow that we're building has the opportunity to be -- opportunity to be deployed as growth capital going forward. So it's a top priority for the company. But in short, that $1.25 billion was tied to the $4 billion. Operator: The next question comes from Paul Matteis with Stifel. Julian Pino: This is Julian on for Paul. You talked about how your views have changed on the market as well as in thinking about some of these best case scenarios and some of these more bearish scenarios. Can you talk about the contributions of potential commercial competition versus the risk to some of these competitors entering the market? And how much do you think could be attributed to your overall view on being able to have a positive outcome in litigation? Just curious on what you think about that. And then further, on the DMD program, can you just talk a little bit more about the 10% bar that you're sort of setting for yourselves there? Obviously, I think a lot of investors believe that the bar for regulatory approval is meaningfully lower when thinking about exon skippers that are currently approved. So just thinking about what sort of informs that view and if there's any sort of outside case that you could push a program forward that doesn't meet that bar. Brian Mueller: Thanks for the question. This is Brian. I'll start with just outlining those bookends of the lower case estimates and the higher case estimates again. And then I'll hand it over to Cristin to make a couple of remarks on the specific market trends we're observing. So for the sake of making these assumptions and developing these -- the lower end of these estimate scenarios, again, we took the assumption that 2 competitors come to market and that by the end of '27, they've been successful with their launch and take significant share. And then in the higher case estimates, and there's a range in between outcomes, of course, that includes either less competition or success with our intellectual property defense. And again, neither of those are our official forecast. We are illustrating what the revenue impact of those potential outcomes could be over time. And again, at the lower end, comfortable with consensus today. In the higher end, we can still get back to $4 billion. And again, this is excluding ROCTAVIAN. Cristin, do you want to comment on that? Cristin Hubbard: Yes Brian. And so yes, so looking at the overall trends, I just want to note what Brian, you said earlier and we said in the prepared remarks, and that is that we have continued to add patients on treatment with VOXZOGO quarter-over-quarter, and that is worldwide. Now if we dig a little bit into the U.S. market in particular, we do see that the majority of those new patient adds is for children under 2 years old. And we want to see that, right? This is patients getting on treatment early. The international guidelines also reiterate the importance of this. And what we see is our adherence rates are remaining strong. And importantly, we are expanding the prescriber base primarily or mostly in the pediatric endocrinology specialty. But what we've also seen in the U.S., and this is not unexpected for something it's fourth year into launch, we are seeing a slower rate of growth in the older patients. Now we expected this to some extent. One, many of these patients are geographically dispersed and in different parts of the country and therefore, harder to find. Not to mention, they're being managed by different specialties. But I will say that the team has been very focused on drawing out initiatives that will target these patients, and we expect that those initiatives will take a little bit of time to play out. But it's really important that we note that the U.S. is 25% of our overall revenues. And really looking to the ex U.S., which comprises 75% of the revenues, we do reiterate our guidance of $900 million to $935 million this year alone. And if we look into the future, we continue to see VOXZOGO as a strong growth engine for us. This is a product that, as Brian has said, has been first to market in achondroplasia. We expect the same in hypochondroplasia, and we have a robust life cycle management plan behind it, launching in new indications over time, not to mention our asset BMN 333. So an important growth engine for us, but it's important to note the trends and the dynamics that we're seeing in the markets today. Gregory Friberg: Thanks, Julian. This is Greg. Just if I could tackle the DMD question, if that's okay. Yes, we have set a pretty ambitious bar with the 10% level. Just to back up a little bit, of course, Duchenne's muscular dystrophy, the name of the game is opening a therapeutic window in these patients and delivering meaningful results. We've made some choices with the way we've engineered this molecule. We've chosen to use so-called phosphorothioate chemistry instead of what most exon skippers use, the morpholino approaches. That opens this opportunity, again, to open a large therapeutic window for what we think will be a potentially dramatic effect. There are some challenges associated with that as well, though. Weekly administration is required. And the reality is that steady state because of the very long tissue half-life will be out at a year or more. And so what we've done is we've set an ambitious target. We know that we're looking at biopsies at the 6-month time frame. Now as a quick reminder, if we see something between about 3% and 5% at 6 months, that will translate in our model to 10% at steady state. We chose that number because of the human genetic data that suggests dramatically improved functional outcomes in patients that reach those sorts of levels, similar more to a Becker's muscular dystrophy. And we think in the face of some of the characteristics of this molecule, we think that, that sort of doubling of dystrophin as compared to some of the data that's been produced with other exon 51 skippers would be an undeniable advance in the field. And so while we also will be looking, of course, at functional data, we'll look at the totality of the data, that 10% bar is our true north right now to deliver something meaningful for patients. Operator: The next question comes from Chris Raymond of Raymond James. Christopher Raymond: Just 2 actually for me. And Brian, I heard what you said about '27 not being guidance, just a sort of range of outcomes, but -- so I won't say it's this way. But is it safe to say you're more concerned about TransCon CNP [indiscernible]? And I guess it is -- when you talk about that FactSet number being sort of the low end, is it your assumption that Ascendis gets first cycle approval with just 1 year's worth of data when their PDUFA date comes next month? Or does that even -- does that factor into your thinking? I know it's a little bit removed from 2027, but just kind of are you getting that granular in your thinking? And then maybe an M&A question, Alexander. You guys talk about wanting assets that are under resourced and could be better served by the BioMarin infrastructure or the Inozyme asset, 401, can you maybe talk about how you have leveraged and improved upon Inozyme's efforts in terms of patient identification, outreach, other things that you've done to make that asset better? Brian Mueller: Thanks, Chris. This is Brian. I'll start. I appreciate the question. With respect to the 2 potential competitors, first, I'll say I don't think we're going to comment on them versus each other, one versus another. But I will say, this is, I think, the heart of your question, what we've assumed in those lower case estimates that I referred to in that lower end of the range, we have assumed middle-of-the-road assumptions with respect to that -- those companies communicated time lines for their approval, one of which has a PDUFA next month, as you noted. And then following those action dates and communicated approval and launch time lines by those other companies, we then model what a successful launch for those competitors could look like. And that's where we get to this point of the lower end estimate where VOXZOGO remains a growth product for us over these next 2 years. But I think that's all that we'd have to say at this time. Alexander Hardy: Chris, I'm going to -- I'll take the first part of the question and hand it over to Greg because obviously, 401 is very much in the development stage right now. But overall, what BioMarin is now is we're executing rare disease at scale. I mean we're in 80 countries with an incredible muscle. And we're confident that that's going to magnify the potential impact and ability to reach patients with these genetic conditions all around the world. Our capabilities, the ability to find patients to start them on therapy and then keep them on therapy, these are capabilities we've built over 20 years. So very confident that should this product be approved, we'll be able to leverage that and achieve significant things for 401. But right now, our focus is on the execution of the clinical program, and I'll hand it over to Greg. Gregory Friberg: Thanks, Alexander. Yes, Brian, just as a quick reminder, again, the deal closed on July 1. So we're not quite 4 months into the integration at this point. It's premature to cite, I think, too many examples of the impact that, that scale of our capabilities and resources can have on the totality of the program. It is very early days. But I will reassure you again that we're leveraging all of our capabilities, whether it's interacting with regulators around the world, whether it's looking for additional indications. And that first -- that first sign, I think, that we'll be able to talk about in future calls will be our preparation that's ongoing for an adult indication in this ENPP1 deficiency area. We're very much looking forward to taking this asset that the Inozyme team, quite frankly, did a remarkable job being able to recruit these very difficult to find patients, difficult to reach patients on to a pivotal study. And we're looking forward to turning the card over for the ENERGY-3 study in the first half of next year. Operator: The next question comes from Sean Laaman with Morgan Stanley. Sean Laaman: I just get your latest thoughts on orphan drug exclusivity, kids under 5 and what you think about the potential switching to a competitor as the first one. And the second one, if I'm getting the narrative right, without business development, BioMarin is a capital accumulator. Just to get your thoughts on what you think your balance sheet capacity is and what you see as an efficient balance sheet structure. Cristin Hubbard: Sean, this is Cristin. I'll take the first question. And I think it really comes down to that element of a patient switching. So assuming -- as we're looking at there being a potential for more therapies on the market for the treatment of achondroplasia, we do think that there's a distinct difference between patients that are new to therapy that are naive and the choices that they will make and importantly, those that are already on therapy and seeing great efficacy. So what we hear in both our market research and in our conversations with physicians and families alike, we hear that the majority of patients when they are looking at the opportunity to switch, if they are satisfied with their treatment, they will more likely than not remain on therapy. Now of course, some will choose not to, but that is irrespective of orphan drug exclusivity. That is just a decision that a physician, caregiver and patient are likely to make in that moment. We do think that the adherence rates that we see on VOXZOGO, which remain really high, are a testament to the product's efficacy and safety for that matter and the impact that patients and families are seeing. And so it really does come down to that element of a decision made between the physician and the family at that time as to whether or not a switch is appropriate, where we think that, that's going to be a different decision than for those that are naive to treatment. Brian Mueller: And I'll answer the firepower part of your question there, Sean. This is Brian. We estimate that our total firepower is between $4 billion to $5 billion. We're just reporting $2 billion of cash investments on hand, a significant portion of which is available to invest in future growth. And then with our current and growing EBITDA profile, we do have a chance to leverage our earnings and assuming a reasonable ratio, we believe that in total, we've got $4 billion to $5 billion to deploy as growth capital. Alexander Hardy: Sean, I just want to jump in. Did you -- was your question around orphan drug exclusivity as well? Sean Laaman: Sure. It was. Alexander Hardy: Okay. I apologize about that. Yes, I mean, we've submitted a petition to the FDA concerning the orphan drug exclusivity for VOXZOGO to assert that. The timing of that is we'll find that out at the time of PDUFA. So we feel evicted of the status and the importance of the incentive with regard to innovation in these orphan diseases, and that's very much in process right now. Operator: The next question comes from Akash Tewari with Jefferies. Unknown Analyst: This is [ Zakiya ] on for Akash. So you talked about how the lower end of your 2027 scenarios is basically in line with top line rev for consensus, in part due to the changing competitive environment, which includes Ascendis, which had positive data shortly after your initial guide. And now it sounds like we're kind of revising the case estimate ahead of pending Phase III data from Bridge. So number one, why not just wait until the BridgeBio data comes out first half of next year? I mean, should we assume that the lower end of your '27 case is the most conservative case that has seen superior efficacy versus for Bridge? And then in the most bullish scenario, it sounds like you're either modeling at most $4 billion or lower in rev. Just wanted to confirm that I have that correct. Brian Mueller: Thanks for the question. And yes, I tried to capture the primary takeaway from this exercise, which is that we've modeled a significant level of scenarios across all of our portfolio, across all markets and given the various key assumptions. We did that given the significant level of investor interest on the topic. We appreciate that when we gave the original $4 billion guidance at Investor Day last year, that was before seeing the first competitor data here and have made some updates along the way but really outlining the full range of outcomes and including a lower case that has 2 competitors launching successfully, but yet our revenue still landing at current consensus for '27, we thought would be useful. I am not characterizing that as a worst-case scenario nor am I characterizing the $4 billion as a best case scenario. We just decided to share with you a range of our lower case estimates and our higher case estimates. And on the upside, that would include, I mentioned as an example, intellectual property defense success, but it could also include success across the entire portfolio or competing successfully. Operator: That concludes the Q&A portion of the call. I will now turn it back to BioMarin's President and CEO, Alexander Hardy. Alexander Hardy: Thank you, operator. We are pleased with the third quarter results across the business, leading us to raise full year total revenues guidance at the midpoint and reaffirm our VOXZOGO revenue outlook for 2025. We have delivered expanding profitability and significant growth in operating cash flow, bringing our cash and investments balance to approximately $2 billion as of the end of the third quarter. Our financial performance so far this year reflects strategic investments in the Enzyme Therapies and Skeletal Conditions business units, both of which remain central to our growth strategy. Building on this momentum, we look forward to the many data readouts and potential new approvals ahead, along with new potential business development opportunities as we focus on the next stage of BioMarin's growth. Thank you for joining us today. We look forward to speaking with you all soon. Operator: This concludes today's conference call. Thank you for joining. You may now disconnect.
Shane Xie: Welcome to the Confluent Third Quarter 2025 Earnings Conference Call. I'm Shane Xie from Investor Relations, and I'm joined by Jay Kreps, Co-Founder and CEO; and Rohan Sivaram, CFO. During today's call, management will make forward-looking statements regarding our business, operations, market and product positioning, growth strategies, financial performance and future prospects, including statements regarding our financial guidance for the fiscal fourth quarter of 2025 and fiscal year 2025. These forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those anticipated by these statements. Further information on risk factors that could cause actual results to differ is included in our most recent Form 10-Q filed with the SEC. We assume no obligation to update these statements after today's call, except as required by law. Unless stated otherwise, certain financial measures used on today's call are expressed on a non-GAAP basis and all comparisons are made on a year-over-year basis. We use these non-GAAP financial measures internally to facilitate analysis of our financial and business trends and for internal planning and forecasting purposes. These non-GAAP financial measures have limitations and should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. A reconciliation between these GAAP and non-GAAP financial measures is included in our earnings press release and supplemental financials, which can be found on our IR website at investor.confluent.io. References to profitability on today's call refer to non-GAAP operating margin, unless stated otherwise. And with that, I'll hand the call over to Jay. Edward Kreps: Thanks, Shane. Good afternoon, everyone, and welcome to our third quarter earnings call. We're joining from New Orleans, where in 2 days, we'll host Current, the data streaming event where real-time data and AI come together. Turning to the quarterly results. We delivered a strong Q3, exceeding the high end of all guided metrics. Q3 subscription revenue grew 19% to $286 million. Confluent Cloud revenue grew 24% to $161 million, and non-GAAP operating margin expanded 3 percentage points to approximately 10%. This performance underscores strong consumption growth in our cloud business, the deepening commitment of our customers and our disciplined focus on driving efficient, sustainable growth. Last quarter, we outlined 2 areas of focus in our go-to-market and several areas where we were drilling down on early success, all aimed at accelerating use case expansions and supporting the long-term growth trajectory of our cloud business. I'll give a brief update on each of these. The first area of focus was tightening field alignment to drive more use cases into production. As we shared last quarter, we saw strong momentum in late-stage pipeline progression, a metric that tracks the dollar value of new use cases moving into production. That momentum continued in Q3 with more than 40% sequential growth and progressing late-stage pipeline and an accelerating pace of new use cases. This positions us for durable consumption growth and was a key driver of our cloud performance this quarter. In parallel, we continue to build momentum in expanding our large customer base, delivering the largest sequential net add in $100,000-plus ARR customer count in the past 2 years, along with continued acceleration in million dollar plus ARR customer growth. Together, these results underscore the depth of opportunity within new workloads and the continued strength of expansion among our large customers who are increasingly standardizing on our data streaming platform and relying on Confluent to meet their business needs. Our second focus area is centered on accelerating the build-out of our DSP specialist team to drive multiproduct selling. We previously highlighted Flink momentum in the first half of the year, and we're pleased to report another strong quarter with Q3 Flink ARR for Confluent Cloud growing more than 70% sequentially. Flink usage has continued to expand across our customer base. More than 1,000 customers used Flink during the quarter. Stream processing is key as it enables companies to act on data the moment it's created, turning information into real-time decisions and results. A great example of the power of our Flink offering is Siemens Healthineers, a global leader in medical technology with operations in more than 70 countries. The company develops imaging systems, lab diagnostics and connected medical devices used by hospitals and clinics around the world. Behind these life-saving technologies is a constant stream of data that determines equipment reliability, accuracy and ultimately, patient outcomes. But Siemens Healthineers was hindered by disconnected systems that isolated critical data in silos, lengthy file transfers, manual handling and periodic batch processing often delayed insights by weeks. These delays prevented timely action to improve equipment performance and product quality. So they turn to Confluent Cloud with fully managed Flink. With Confluent, Siemens Healthineers built a unified real-time data backbone that streams and processes millions of events from imaging, lab and devices daily. Flink continuously filters, joins and enriches these streams to deliver timely, trustworthy operational insights that help improve device reliability, manufacturing, quality and consistency of diagnostic data across its installed base. This foundation now gives Siemens Healthineers real-time visibility and the agility to move faster as it advances digital and AI initiatives that enhance care delivery and improve patient outcomes worldwide. Next, our partner ecosystem continues to deliver strong results. As of Q3, partners sourced well over 25% of our new business over the last 12 months. This is a clear sign of the consistency and scale we're building through our established partner relationships, which are instrumental in broadening our footprint and driving customer expansion. Confluent was named a MongoDB Partner of the Year and served as an AWS launch partner for the new AI agents and tools category in the AWS marketplace, further strengthening our position at the center of real-time data and AI. Lastly, we remain as competitive as ever replacing CSP streaming offerings. We have maintained win rates well above 90%, with average deal size, more than doubling over the past 2 quarters, all while continuing to increase our add bats. This is made possible with multi-tenant Freight Clusters, Enterprise Clusters and WarpStream, which together have delivered a 4x increase in consumption over the past 3 quarters. Because of their multi-tenant architecture, we believe adoption of these new clusters is a tailwind to subscription gross margin over time. These differentiated offerings provide superior performance and lower TCO to our customers which also helps us soak up more of the world's Kafka workloads. This includes one of the world's largest fintech companies who signed a 7-figure deal in Q3 to move their large-scale logging and telemetry workloads from open source Kafka to Confluent. Another great example of this is EVO Banco, a digital native bank in Spain serving hundreds of thousands of customers through its mobile-first platform. As transaction volume grew, its open-source Kafka clusters became increasingly difficult to scale and secure with rising operational costs and downtime during peak loads. To address this, EVO Banco migrated to Confluent Cloud as its central data backbone. The platform now streams and processes hundreds of thousands of financial events per day across payments, fraud detection and customer channels and with stream processing and fully managed connectors, EVO Banco integrated core banking systems and analytics tools in real time without managing infrastructure. Since moving to Confluent, the bank has improved reliability, lowered costs and accelerated delivery of new banking features. Q3 also marked the 1-year anniversary of our WarpStream acquisition. Over the past year, WarpStream has seen 8x growth in consumption, and we've closed multiple 6-figure deals with marquee customers across different industries, including a Fortune 5 customer. We're encouraged by WarpStream's strong first year performance and remain incredibly excited about the significant opportunity ahead. Next, I want to spend a few minutes on a key aspect of Confluent's opportunity in the AI space, providing context data for AI agents and applications. We're seeing a clear pattern across the industry. Many companies have shown they can successfully prototype AI, but fewer can get those systems into production. AI models are clearly capable, but a recent MIT study found that though enterprises are investing tens of billions of dollars in generative AI. Most of these initiatives haven't delivered the desired results. The challenge isn't building a prototype. It's being able to build reliable business systems powered by AI that makes trustworthy decisions and takes appropriate actions. There are 2 factors that fundamentally drive the quality in AI systems, the models capabilities and the data it has access to. Both of these are significant challenges, but they fall on different people to solve. Improving the quality of large-scale AI models is a challenge largely driven by a small number of LLM producing research labs. Enterprises can easily harness the results of this work by simply pointing their apps at a new model. But getting data into shape to act as context for AI is a problem every enterprise must solve with their own data. This is where Confluent can help. One of the reasons AI demos are often so successful is because they can be powered by a onetime manually curated data set. But to take an agent to production, it must have an up-to-date comprehensive view of all the inputs needed to do its work. This isn't just a matter of trying to hook the model into every source system directly. The source data is generally too messy and application specific to lead to good results. And AI Ops can't be splunking around in production databases, reading through everything and potentially leaking the wrong data to the wrong user, that would be wildly expensive, create unsustainable production workloads and be fundamentally insecure. Rather, the problem is about curating the right data for a given problem and creating a data set an agent can be tested with and evaluated against. Maintaining that live context is what determines how well an AI system performs. That's where accuracy, relevance and trust are won or lost. What businesses need is a system that can keep data in motion so it can be processed, reprocessed and served continuously as it changes. Our data streaming platform was built for exactly this problem. It works to connect data from every system application and cloud and support just these kinds of complex pipelines. With Kafka, Flink and Tableflow, teams can process in real time, combining history and live events with one unified engine. With logic changes, you can go back and reprocess data to create the new data set. Tableflow and Flink work to combine the best aspects of real-time capabilities with the long-term historical store of data in the lake. As this goes out to production, the stream of feedback data can also be captured to measure the effectiveness of each change. And in 2 days, we will host Current and unveil new capabilities that are designed to make this even easier for customers and strengthen how our platform delivers real-time government context. Confluent data streaming platform is becoming the context layer for enterprise AI as businesses move from AI experimentation to production, from static data to living context, and from analysis to intelligent action. One customer that really illustrates this is a multibillion-dollar health and fitness chain with nearly 200 clubs in a rapidly growing digital platform. As the company expanded into AI-powered wellness, its data from wearables, class bookings and mobile apps was siloed and processed in slow batches. This made it impossible to provide real-time personalized guidance through its Gen AI companion. With Confluent Cloud as a streaming backbone, this customer now continuously ingests and enriches this data in motion. Wearable metrics, work out history, purchase activity and engagement events are streamed and combined with contextual data, like recovery status or performance trends before being routed into AI systems to fuel personalized recommendations. Confluent enables them to deliver AI insights in seconds instead of ours, scaling to millions of real-time interactions while enabling security and compliance. Fully managed infrastructure frees engineers to focus on innovation, helping the company turn decades of wellness expertise into intelligent, context-to-ware experiences that deepen member engagement and fuel digital growth. As AI evolves from innovation to utilization, context will define who wins, and we are committed to making Confluent the company enabling the shift by turning data and to continuously refresh trustworthy context for AI systems everywhere. In closing, we're encouraged by the strong out consumption growth and the traction we're seeing for our complete data streaming platform, particularly with Flink. As AI becomes operational across every industry and geography we believe that the demand for real-time context powered by data streaming will only grow. It's an exciting time for Confluent and we're just getting started. With that, I'll turn it over to Rohan. Rohan Sivaram: Thanks, Jay. Good afternoon, everyone, and thank you for joining our earnings call. Our strong third quarter performance highlights the momentum of our data streaming platform and our diversified growth strategy. We delivered strong top line growth, stabilized our net retention rate, increased the adoption of new products and drove continued margin expansion. These results demonstrate our ability to drive durable, profitable growth at scale over the long term. Turning to the results. Q3 subscription revenue grew 19% to $286.3 million and represented 96% of total revenue. Confluent platform revenue grew 14% to $125.4 million, driven by healthy demand in financial services. Cloud revenue grew 24% to $161 million, representing 56% of subscription revenue compared to 54% in the year ago quarter. We are pleased with our cloud performance this quarter, which was driven by stronger consumption across core streaming and DSP, including acceleration of new use cases moving into production. Turning to the geographical mix of total revenue. Revenue from the U.S. grew 13% to $172.1 million. Revenue from outside the U.S. grew 29% to $126.4 million. Moving on to rest of the income statement. I'll be referring to non-GAAP results unless otherwise stated. While driving top line grow at scale, we continue to show significant operating leverage in our model. In Q3, subscription gross margin was 81.8%, above our long-term target threshold of 80%. Operating margin increased 340 basis points to a record of 9.7%, exceeding our guidance by 270 basis points. This was driven by revenue outperformance and improved sales and marketing leverage from continuing to streamline coverage to drive growth. Adjusted free cash flow margin increased 450 basis points to 8.2%. Net income per share was $0.13, using $370.6 million diluted weighted average shares outstanding. Fully diluted share count under treasury stock method was approximately 382.4 million. We ended the third quarter with $1.99 billion in cash, cash equivalents and marketable securities, reflecting the strength of our balance sheet. Turning now to customer metrics, $20,000 plus ARR customer count increased to 2,533, up 36 customers sequentially. $100,000-plus ARR customer count was 1,487, up 48 customers quarter-over-quarter, representing the largest sequential increase in 2 years. New $100,000-plus ARR customers include many leading AI companies such as Forbes 50 AI analytics provider, an AI-powered SIEM cyber security vendor, a next-gen AI automation platform company. Our $100,000-plus ARR customers continue to account for more than 90% of our ARR, $1 million-plus ARR customer count increased to 234, representing growth acceleration of 27%, driven by new use case expansion across cloud and platform. Additionally, more than 10 of the 15 net new $1 million-plus ARR customers increased their spend on DSP products over the previous quarter. NRR for the quarter stabilized at 114%, while GRR remained close to 90%, driven by stronger consumption growth in our cloud business. Turning to our outlook. For the fiscal fourth quarter of 2025, we expect subscription revenue to be in the range of $295.5 million to $296.5 million, representing growth of approximately 18%. Non-GAAP operating margin to be approximately 7% and non-GAAP net income per diluted share to be in the range of $0.09 to $0.10. For fiscal year 2025, we expect subscription revenue to be in the range of $1.1135 billion to $1.1145 billion, representing growth of approximately 21%. Non-GAAP operating margin to be approximately 7%, non-GAAP net income per diluted share to be in the range of $0.39 to $0.40 and adjusted free cash flow margin to be approximately 6%. For modeling purposes, we expect Q4 cloud revenue to be approximately $165 million, representing growth of approximately 20% and accounting for approximately 56% of subscription revenue based on the midpoint of our guide. Turning to the key drivers of our business. We saw strong demand in our core streaming business and good momentum across DSP, AI and our partner ecosystem. First, our continued focus on field alignment is delivering strong results. In Q3, we accelerated the pace of moving new use cases into production and sustained strong momentum in building our late-stage pipeline, which once again grew more than 40% sequentially. We're also seeing customers commit to larger and longer-term deals, reflected in RPO growth of 43%, another quarter of acceleration. Together, these trends give us greater visibility into near-term consumption revenue and increase longer-term visibility with improved RPO to revenue coverage. Second, we saw good DSP momentum across cloud and on-prem in Q3. Building on the momentum from the first half of the year, we delivered another quarter of strong performance for Flink with particular strength in cloud. Q3 Flink ARR for Confluent Cloud grew more than 70% sequentially, and we now have more than 1,000 link customers, including more than a dozen customers with greater than $100,000 in Flink ARR and 4 customers with greater than $1 million in Flink ARR. This comprehensive breadth and depth represents the foundation for scaling into a very significant Flink market opportunity ahead. Here are 2 customer examples to illustrate how Flink begins to drive ARR expansion in our customer base. These customers are spending currently north of $100,000-plus and $1 million-plus Flink ARR, respectively. Notably, in the last year alone, adoption of Flink has supported both customers to more than 6x total spend. Third, we are strongly positioned to deliver contextualized, well-governed and AI-ready data to companies. We now have more than 100 AI native customers, including 21 with $100,000-plus in ARR demonstrating Confluent's highly strategic role in the age of AI. Fourth, we are pleased with seeing continued traction in our partner ecosystem. On a trailing 12-month basis, Q3 partners sourced deals increased to more than 25% of our new business, up from more than 20% last quarter. As we grow beyond the $1 billion-plus revenue scale, we expect partners to play an even bigger role in driving growth and leverage in our business in the years ahead. Lastly, we've continued to demonstrate the effectiveness of our disciplined ROI-driven capital allocation strategy, especially in M&A. Q3 marked the 1-year anniversary of our WarpStream acquisition. And in just 1 year, WarpStream's consumption has grown nearly eightfold. Following the Immerock acquisition, we shipped our Flink product in spring of last year. And since then, we've scaled Flink into a low 8-figure ARR business. The strong financial performance underscores the successful path both products around and reinforces the strength of our overall capital allocation strategy. In closing, we delivered strong third quarter results demonstrating durable top line growth and margin expansion at scale. We are encouraged by the strong consumption growth in our cloud business and remain focused on continuing to execute on our key growth drivers across core streaming, DSP, AI and the partner ecosystem. Looking forward, we believe we are well positioned to take advantage of the large market opportunity ahead. Now Jay and I will take your questions. Shane Xie: All right. Thanks, Rohan. [Operator Instructions] We ask that you kindly keep it to one question and one follow-up. And today, our first question will come from Brad Zelnick with Deutsche Bank, followed by Morgan Stanley. Brad Zelnick: Great. And good to see the good results, especially the accelerated bookings, really impressive. Jay, I want to follow back on some of the go-to-market changes that you made last quarter. The field alignment, changes in coverage ratios. And it's great to see the momentum in late-stage pipeline continue. What are the learnings now that we're another quarter into these changes? And what conversion trends can you share on all this new pipe? And how should we think about the capacity to effectively work that much incremental pipeline? Edward Kreps: Yes, those are great questions. So yes, we put a number of things in motion heading into this year. And particularly over the last few quarters, I called out some of those, the specialization model for DSP. That's really important just to be able to take these new products to scale, and it's working really well. A number of aspects of just kind of field execution around consumption. I think that's one of the biggest drivers of that kind of progression in consumption pipeline. And on that pipeline, I think we have very high confidence in it. These are ultimately customer workloads that they have people building that are reaching production that then go drive consumption in the quarters ahead. And so it's a little bit more than just an entry in sales force. And that's why we feel that it's a very promising stat and why we track it very religiously quarter-to-quarter. So I think these are really solid improvements. I've been very impressed by the execution in the go-to-market team over the last few quarters to get this in place and do it quickly. And I think that gives us a lot more ability to help drive these consumption workloads ourselves, right, really land in the right use cases, make sure that they're using our complete product, the full DSP in the best way possible and make sure that, that gets out to production without snags and reaches its full potential. So yes, I think very promising in what we're seeing. Brad Zelnick: Great. And maybe just a quick follow-on for Rohan. RPO and CRPO, both accelerating very nicely. Why or why shouldn't we look to that as a reliable leading indicator for Confluent specifically? Rohan Sivaram: Yes. Great question, Brad. Thank you. You're right. RPO, in general, what I've shared before is when you think about our business for Confluent platform, absolutely. RPO is the single most important leading indicator with respect to the forward-looking organic growth of the business. For Confluent Cloud, it's a tad bit nuanced where over the short term, I think what we've internally focused on is the momentum of new use cases moving into production and which was a check in Q3. So overall, we feel with the short-term drivers. But over the long term, I think, coverage of RPO to revenue to cloud revenue, that has continued to increase through the year. I mean this particular quarter was the fourth consecutive quarter of accelerated RPO that we've delivered. So yes, like from the cloud business perspective, short term is new use cases moving into production and our ability to drive growth in the new business, newer products, and long term is around the RPO. So that's going well. And for Confluent platform, absolutely, it's a leading indicator. So that's how I think about it. Shane Xie: All right. Thanks, Brad. We'll take our next question from Sanjit Singh with Morgan Stanley, followed by JPMorgan. Sanjit Singh: I guess it's a very simple one, Jay, and it's with multiple sort of vectors that you guys have in play to drive growth, including with all of the sort of rejuvenation activity within the go-to-market organization. When do you think we can see growth start to bottom is the first question. Edward Kreps: Yes. Yes. I mean, look, first of all, I think we're very pleased with the results that we brought, the strength in cloud, pleased to be in a position where we're raising guidance for Q4. I think ultimately, the cloud business has been quite strong. When you look at the growth rate for Q4, there is some impact from a particular customer. We kind of talked about that dynamic last quarter. if you normalize for that, you are seeing kind of stability in the overall cloud growth rates. So overall, we feel pretty good about that. And then when we talk about kind of some of these tailwinds some of the GSP offerings, including Flink getting to scale and starting to contribute more sizably. The overall execution within the field team around consumption and the ability to drive use cases, I think, those are positive trends. Sanjit Singh: When it comes to the growth that you're seeing in the core streaming business, given the big ramp in like things like WarpStream and enterprise, that sort of kind of the cannibalization question. Are you seeing that kind of net accretive impact from the rise of those offerings? Or do you feel like there's any cannibalistic effect on some of the core streaming business? Edward Kreps: Yes. Yes. It's a very fair question as we added new offerings that were particularly cost effective. Is this going to be a tailwind or a headwind. I think it's proven to be a substantial tailwind. So we called out in the call that we've seen substantial improvement in overall deal size, which is maybe counterintuitive, but in fact, it's not because customers are leaning in with bigger workloads, bigger migrations that might have been harder or taken longer in the past. And because of the architecture of these offerings, the multi-tenant clusters with enterprise and freight, WarpStream with BYOC, they're very cost effective to run. So they are a tailwind to gross margin. So it's really good on both sides. It's good deal for customers, they're leaning in and going bigger. And it's a good deal for us. It's ultimately more profitable. Shane Xie: All right. Thanks, Sanjit. We'll take our next question from Mark Murphy with JPMorgan, followed by Barclays. Mark Murphy: Yes. Great. So Jay, you had mentioned, I think you said more than 40% sequential growth in progressing late-stage pipeline. And it sounds very promising. I'm not sure we have historical context on that metric. Can you speak to what is driving such great traction there. And then what is the normal level of sequential growth you'd see in that late-stage pipeline? Edward Kreps: Yes, yes. So yes, it's a great question. We're obviously not trying to turn that into some kind of external metric, but one of the things we set for ourselves as a benchmark of improvements in the field motion around consumption was, hey, get the new use cases, get into the new use cases, get them to production. And so we measure the dollar amount of those use cases. And we've seen that as these use cases hit production, they ramp up, they take traffic, they drive consumption in the quarters ahead. So it's a reasonable indicator to pay attention to in a forward-looking way. So yes you're asking, hey, what's the normal growth quarter over quarter? Well, over time, if you're bringing more dollars of use cases out to production, those are dollars that you're realizing in future quarters. It takes some quarters for different projects to ramp up. So it's not one is to one, but that's roughly how I would think about it. We haven't given kind of the full history of the metric, and that isn't the intention. It really is, I think, being used by us as a benchmark of execution of the field. And we felt that kind of internal metric was one of the best representations of that. We have made a number of adjustments in how folks are working these consumption projects. And I think it really has worked quite effectively. Mark Murphy: Okay. And then as a quick follow-up, Jay, how is the early response to the launch of streaming agents on Confluent Cloud? Because I think we would all agree, for sure, agents need access to real-time data. Frankly, they're going to look pretty unintelligent, right, and out of date if they don't have it. But then companies are -- they're so risk-averse, and they're struggling to give -- to get comfort giving agents free rein to all their data, right? It sort of scares them. And you laid out a nice -- very nice architectural vision for that, right, in the webinar, but I'm just wondering how is the customer readiness for that product? And just could you speak to -- I mean, if this takes off, can agents become pretty big in the mix a few years down the road? Edward Kreps: Yes, I think that they absolutely can. So there's a few opportunities around AI for Confluent. One is around making the agents real time. One is about the provisioning of real-time data sets. Both of those are actually substantial, and you can do them both together or you can do them separately. And for those who follow us closely, we -- I mentioned in the prepared remarks that we're here in New Orleans for our conference Current, and that's in a few days. So we'll have some announcements in this space that I think we'll fill out the picture a bit more. But already, the streaming agents have caught on, we talked about one of the customer use cases in the call earlier. And it makes a lot of sense. This is a really easy way that you can run the agent on the kind of historical data, kind of benchmark it, be able to play with it almost in a batch model, but then have it translate into production and run in real time against the data that's there. It makes that kind of development much easier. And I think this is going to be a critical part of the stack. One of the things, I think, software teams are realizing is that this kind of agent development is actually a bit different from traditional software. You have to do it with the data. Traditional software, you can kind of write some program, run some unit tests against it with fake data. If that all passes, it works, you're good to go, your program is good. But these AI systems are not that way. You can build some support agent and say, oh, this answers support questions really effectively. But if you haven't tried it with the actual customer data on actual customer questions, if you're not really developing that way, you're not doing anything. And so the need is to be able to work iteratively with data, but then also launch something that will run in real time in production and be able to keep those 2 in sync as the team moves. And so I think we have really foundational capabilities. Like in many ways, that is about what streaming is, which is this ability to take some of the ideas that we had off-line with batch data processing, be able to translate them into continuous processing. And so I think it's a huge opportunity for us. In many ways, it's an acceleration of what we were doing for customers anyway. Even if the intelligence was just smart rules in a production application that was driving personalization or customization or relevance, we're already doing lots of that. And I think the AI opportunity is, in many ways, a huge generalization of that of allowing not just hard rules, but broad capabilities to access the same kind of data to make data-driven decisions, take smart actions. So hopefully, that's helpful. And stay tuned for the next couple of days, we'll have a few more announcements. It's hard to always figure out the timing of these things. But since that's 2 days later, we don't get to talk about all the new products until then. Shane Xie: All right. Thanks, Mark. We'll take our next question from Raimo Lenschow with Barclays, followed by Wells Fargo. Raimo Lenschow: Perfect. Can't wait for conference then. The -- 2 quick questions, one for Jay, one for Rohan. Jay, Flink, you gave us some extra data points. At Flink, we've been waiting for -- while I don't want to call it an inflection point, but like the uptick here. What do you see there, how customers are using it and what you're seeing in the pipeline? Does that kind of increase your optimism like talk a little bit about how that kind of translates into the business going forward? And then, Rohan, one for you. You've raised the subscription by more than the beat in Q3. Obviously, that's a good sign for Q4. What drove that? Was that kind of the one AI customer maybe doing a little bit more with you? Is that overall business doing a little bit better? Can you speak to that, sort of what gave you the confidence there? Edward Kreps: Yes. I'll start with Flink that we're hugely excited. So I do think externally, this was a little bit of an unusual product development cycle because we changed our stream processing strategy and bought a Flink company, but it wasn't a Flink product. It was just the team that had built the open source. So then we were effectively starting product development with an announcement about Flink. So then we had to build the product. And I think the team has done an amazing job of that to really build a modern data -- serverless data processing layer, but do it in a way that supports high availability, real-time processing. It's a big undertaking. I think the growth of that since it's kind of reached GA and kind of got into the critical enterprise features over the last year has been spectacular. And that's absolutely as much as we could ask out of a kind of first year of selling for the product, and that trajectory remains very strong as we look ahead. So yes, we are -- I think as we've communicated as we started this effort, we think that potential for that offering over time is huge. The market for data processing is really big. There's all this stuff in these old batch jobs that needs to move into real time. And now I think we're starting to realize that opportunity. And it's an interesting intersection with the AI question as well because one of the things that actually aids these conversions is AI. So if you're converting these batch quarries to streaming queries, we have a set of capabilities to just help customers do this, just goes through and makes the little minor adjustments. I mean, largely, it's very similar. These streaming queries or SQL or similar language to the batch stuff, but of course, getting all the nuances, right? And so that's been one of the accelerants that's helped customers that are trying to go big with a lot of real-time jobs all at once, help them move faster. So yes, long story short, we're very excited about it. Rohan Sivaram: And Raimo, before you answer the question, I'll just add a quick point to what Jay said. From my lens, when some of these new products are ramping, I think, there are 2 things that I'd like to focus on, the breadth of adoption and the depth of adoption. For Flink, specifically, when you look at the breadth of option, we have over 1,000 paying customers for Flink. And on the depth side, we have about 12 customers spending over $100,000 in ARR and 4 customers spending $1 million in ARR. So that's actually a good position to be in and on the heels of 3 quarters or 9 months of very solid growth that we've seen. So just to add to what Jay said, we're excited about what lies ahead on that side of the business. So coming back to your question on subscription guidance for Q4. Yes, we are pleased to raise our Q4 subscription guide, and that's mostly coming from the Confluent Cloud side of the world. So if I take a step back and then analyze the Q3 performance, I'll call out 3 things. The first one is something that Jay called out in his prepared remarks. That's just the momentum of new use cases moving into production. And we saw 2 consecutive quarters of acceleration over there, so which is good. The second area is around -- we are seeing more normalized levels of optimization. I would actually put it in the category of healthy levels of optimization. So that's number two. And the third is continued strength in Flink and the cloud side of Flink. So these are some of the drivers and the momentum builders in Q3, and that's giving us confidence with respect to our Q4 cloud guidance. And I'll leave you with one more big picture thought that I touched on my first response that is these are short-term visibility drivers for the cloud business. When I take a step back and look at the long term, the RPO to cloud revenue coverage through the year has continued to increase and improve. And that's less of a Q4 visibility, but more of a slight long-term visibility, we feel good with that increasing coverage as well. Shane Xie: All right. Thanks, Raimo. We'll take our next question from Ryan MacWilliams with Wells Fargo, followed by Piper. Ryan MacWilliams: Jay, as enterprises continue to move from testing to production with AI use cases, are there any AI use cases that come to mind that involve Confluent that could be more likely in production in the near term, like a customer service use case or an IoT use case. Edward Kreps: Yes. Yes. We're seeing -- these tend to be quite broad, right? So there's similar patterns around customer support. There's patterns around anomalies and investigations. Many businesses have some operational side kind of looking for the bad thing and then diving into the bad thing that cuts across businesses that might be doing IoT, manufacturing, different production processes, but also things like retail. But even businesses, financial services, insurance, companies you might think of this being more risk averse. I think have very active projects in this area. And so I think for all of these, it's about whether they can really complete that connectivity and make it into production with these systems. We think that a big part of that is about data flow, data quality, the ability to actually iterate and test and get from something that kind of 99% works to something that 99.99% works. So it sounds like a small difference, but we operate already in a business where, operationally, the difference between 99% and 99.99% is actually a really big deal for our customers. And so you can totally see why on the quality side for any of these things. It's hard to get that last bit done. And I think why we think we're well positioned for it. Ryan MacWilliams: I understand it as well. I got 99 things right and 1 thing wrong, you remember which one. And then for Rohan, you mentioned last quarter that a large AI native company was moving to self-hosted after signing a self-managed deal in the third quarter. Any commentary on how much that large customer contributed in the third quarter? And as that large customer spend drops off from the cloud next quarter, could the self-managed portion step-up, contribute further? Just any commentary on the mechanics of that large customer deal could help? Rohan Sivaram: Yes, yes. Ryan, a few data points that I'll share. First, and reiterate what I said in the Q3 call, and what we said in the Q3 call was this large customer basically made this move from Confluent cloud to on-prem. And as a result of this dynamic, their spend towards Confluent would be significantly reduced. So that's the data point. And what that would do is it would have a low single-digit impact to our Q4 cloud revenue. And Jay called out earlier, when you normalize that impact of the low single digit and you compare our Q4 guidance versus Q3 actual cloud performance, you'll see somewhat flattish year-over-year growth rate. So that kind of signs of stabilization. And specifically, that large customer, obviously contributed in Q3 from a revenue perspective and the real impact, the low single-digit impact we are going to see from our cloud business is in Q4 and that's incorporated in our guidance for Q4. Shane Xie: All right. Thanks, Ryan. We'll take our next question from Rob Owens with Piper Sandler, followed by William Blair. Robbie Owens: Jay, maybe you could elaborate a little bit more on the CSP replacement opportunity? Just how big you think it is? And why do you think this is inflecting over the last couple of quarters? Edward Kreps: Yes. Yes, it's quite sizable. We also, of course, are continuing to do very large open source takeouts, and there's quite a lot of the open source. But both for the open source and the CSP offerings I think one of the -- there's really 2 things that I think are making this something customers really want to take action on right away. The first is the TCO of making the change. And that comes out of the fundamentally, the improvements we've made in Kora that enable things like Enterprise Clusters, Freight Clusters. It's just something that's kind of better, faster, cheaper. And I think that's very compelling. Secondly, I think these DSP capabilities have become just a bigger and bigger part of what customers think about when they think about streaming and what they need to do to be set up to use this technology in their organization. And I think that's really quite appealing to customers making the move. So I think those 2 things are the 2 biggest needle movers. The biggest enabler, I would say, on our side, is really working on tools around migration, making it easy. I think once you have a bunch of customers that want to do it, well, this is a big live data system migration, we want to make it as easy as pushing a button, that's ongoing work to really make that easier and easier. And as I think we continue that, I think we'll see an even faster transition of these systems, which is great. Robbie Owens: Great. And then as a follow-up, Rohan, in your contemplating guidance for the fourth quarter, you mentioned healthy levels of optimization. And I know this has been an issue in the first half of the year. When you -- I'd actually just to parse the question a little bit more on the comments a little bit more, is this healthy levels from prior optimizers or these net new optimizers that aren't to the same extent that you saw before. And so I guess within that question, maybe an update on optimization, is it still relevant as a headwind from the first half. And is this more a balancing active net new or kind of the whole thing in aggregate? Rohan Sivaram: Yes, Rob, when I think about the cloud business or rather how we manage and run the cloud business, they are typically like 3 things that are important to focus on, right? The first is, as you're entering a quarter, you're entering a quarter with a book of business and like for the existing customers, what is the growth that they are showing. And that's where optimizations generally come up. And as we've said, optimization is kind of part and parcel of every cloud business. And we want our customers to fine-tune and kind of use Confluent in a more efficient manner. That's part and parcel and that's something -- that's why I called it healthy levels of optimization. Which compares to prior historical optimizations that we've seen and which is not an outlier. So that was my comment. The second data point around how we kind of look at the business momentum is net new use cases moving into production. And the third is around adoption of new products. So when I talk about our guidance or just the momentum in Cloud business, these 3 kind of all go hand in hand. And the optimization levels to specifically answer your question, are in the ranges that we've seen historically, that is kind of more normalized and again, healthy and good optimization. Shane Xie: Thank you. We'll take our next question from Jason Ader with William Blair. Jason Ader: Yes, I know we've seen better cloud consumption trends across the vendor landscape, really over the last quarter or so. How much of the better performance that you guys saw in Q3, do you think is due to better sales execution versus overall macro tailwinds, including AI? Edward Kreps: Yes, it's a great question. It's -- obviously, it's always hard for us to pull ourselves out of the environment in which we operate in because we only get to run each quarter once, there's no counterfactual where it was a different environment. That said, I do think some of these improvements are kind of very mechanically obviously helping things. And so I do think we've made a set of structural improvements that are paying off. The new products are obviously new products, which are kind of bringing in Flink revenue or Connect revenue or governance revenue that we would not otherwise have had in those customers. So yes, I can't ascribe it between the two. I am aware that there was kind of good results in some other providers. But we do feel like we've made some pretty important structural improvements in what we're doing. Jason Ader: Okay. And then Rohan, for you. You didn't talk about U.S. Federal at all, but the shutdown here is going into week 4 or something. Did you bake that in? Did you bake in some conservatism to your Q4 outlook, especially on the Confluent platform side from potential weakness in U.S. Federal? Rohan Sivaram: Yes. For -- Jason, that's a great question. I mean, before I go into Q4, our Q3 federal performance, which is generally a big federal quarter, was in line with our expectations. So pretty much in line, no surprises there. And when you look at federal as a percentage of total revenue. I've shared this before. It is in the low single digits for us, which is good and bad, good as it's a big opportunity for us as we look ahead. And so that's great. And from a Q4 perspective, we have a couple of deals that are appropriately baked into our guidance. Shane Xie: All right. Thanks, Jason. We'll take our next question from Mike Cikos with Needham, followed by Wolfe Research. Hey, Mike, we can't hear you. You may be still on mute. All right. Why don't we go to Alex Zukin first, and we'll go back to Mike after Alex. Aleksandr Zukin: Can you hear me okay? Shane Xie: Loud and clear. Aleksandr Zukin: Perfect. Maybe just first one for Jay. Of the 21 AI native customers that you guys signed over $100,000 or that are using the product for over $100,000, is there a common pattern in how they're using Confluent? Are the AI products built around Kafka or Flink? Or are there use cases similar to what you're seeing with other companies? Because that's a really, really powerful stat. I wanted to see if you could unpack it a little bit. Edward Kreps: Yes. So first of all, AI companies or tech companies, so they have a set of usage patterns, they're exactly like every other tech company, which is they use it for a bunch of different stuff, right? But there is a set of use cases that are common in these companies, which are very specific to AI. And that's about the flow of data about the suggestions, recommendations, actions are being taken. So I kind of touched on this briefly in the script, but the big difference in these AI systems is it is not just upfront testing. You need to do this kind of ongoing evaluation, which is really looking at what are the actions that's taken, are they good? How are we going to evaluate that? You have a bunch of different ways of doing that, including just asking humans to judge it, asking the model to judge it. But the flow of that data is really kind of right at the heart of a lot of these systems, and it's a very natural kind of streaming problem. You're going to collect that in real time, it's going to flow out maybe through table flow or other mechanisms into kind of long-term storage. You're going to be able to iterate on that. It's also a very important kind of real-time analytic in terms of how well you're doing for your customers minute-to-minute, as you're out there, if you release if you take in a new model or you make changes to your system, ultimately, are you doing better or worse with your customers? That's kind of the fundamental question. So in many of these systems, that's one of the use cases. And this is not surprising. This is a similar use case we had with more traditional machine learning use cases. I think it's just now translated into the AI era. Aleksandr Zukin: Perfect. And then maybe just a quick one for you, Rohan. You gave us a lot of stats that are really encouraging. RPO accelerating and the coverage ratio is improving. You talked about I think, being past kind of a peak negative optimization headwind where it's kind of stabilizing and you're talking about more visibility longer term. And you gave guidance for cloud platform revenue -- sorry, for cloud revenue for Q4, but not guidance, sorry. You gave a modeling point of being around 20%. And as I look at a year ago when -- at least for my model versus the out year, there was about a 2-point delta in that. And so I guess I know we're not guiding to or maybe even in modeling points yet for next year. But as we look at our models and that 20% exit rate, do we -- what kind of step down given some of those dynamics that are maybe headwinds for Q4 that reversed? Should we think about as we look at next year cloud revenue? Rohan Sivaram: Yes, Alex. As we speak, we're kind of dotting the I's and crossing the T's on our fiscal year '26 plan. So I'm not going to be providing guidance either for total revenue or cloud revenue in this call. Having said that, I think, it's important to reiterate some of the data points that I shared around like, I think, you said it late-stage pipeline moving into production, the optimization levels being stabilized, normalized and which I like to call healthy, right? And the Flink driver of business, Flink has been really good. So we expect and coupled with the long-term visibility. So when you think about these and then you couple that with the low single-digit impact that we saw in Q4, which will obviously have an impact over the first half of next year, right? So those are some of the puts and takes. If I were you, I would look at as I think about fiscal year '26. But in our Q4 call, I'll be sharing a lot more color and details around our cloud revenue guidance. Shane Xie: Thank you. We will try Mike Cikos with Needham again, followed by Guggenheim. Michael Cikos: Can you guys hear me okay? Edward Kreps: Loud and clear. Michael Cikos: Sorry about that. And thanks for the second shot here, Shane. I just wanted to come back to Rohan first. On the consumption trends, can you just give us maybe a little bit more granularity on how those month-over-month trends played out in Q3? You obviously outperformed the guide here. But I don't know that we necessarily broke it down to the month-over-month trends the way that we were getting that detail in Q1 and Q2 of this year. Rohan Sivaram: Yes. For our month-over-month trends, obviously, we spoke around the performance drivers for Q3, which were 3, I just laid out. And given these drivers, our month-over-month consumption growth rates improved sequentially. And in general, going forward, I will try to avoid providing that level of detail. But specifically, we brought it up last quarter. So our month-on-month growth improved sequentially, and we were pleased with it. Michael Cikos: That's great to hear. And if I could just tack on one more, I know that you guys had the double down initiatives and some of the near-term focuses that we went through last quarter. Jay, maybe for you. But on the DSP specialization team, again, encouraging to hear some of these data points. Has the team been built out at this point? I know last quarter, we were talking about accelerating that buildout. Are the bodies in the seats? And where are we in maturing the playbooks and that team at this point? Edward Kreps: Yes. Yes. Yes, that team is built out and in full execution mode. Shane Xie: All right. Thanks, Mike. We will take our next question from Howard Ma with Guggenheim, followed by KeyBanc. Howard Ma: I appreciate all the commentary on the optimization trends. And I get that the Q3 outperformance sets the bar higher heading into Q4. But for -- I guess, one for Rohan. Does the Q4 cloud guide specifically still assume optimizations or consumption trends well below historical trends? And then when you take into consideration the large AI native customer, does it imply that NRR will be -- will decelerate versus the 114%? Rohan Sivaram: Yes. So I'd say a couple of questions, so I'll break it down, Howard, to start off like we always have optimization. And that's all quarters, there is optimization. And that's why I kind of made sure that I commented around like normalized level of optimization that we saw in Q3. So that is hopefully answering the first part of your question. And when you kind of normalize the impact of the one large customer that we called out last quarter, our Q4 guidance is when you look -- compare the year-over-year growth rates, it's roughly flattish to what we saw in Q3. And from a net retention rate perspective, obviously, we are pleased with stabilization of our net retention rates. And when you think about what are the drivers, it's primarily around our stronger consumption growth that we saw, both in core streaming and DSP, both are drivers of stabilization. And from a net retention, again, I'm not going to guide for Q4 or fiscal year '26 for net retention, but I'll leave you with 2 data points. In the short term, net retention can generally fluctuate. But over the long term, some of the opportunities that we are focused on, be it core streaming, DSP, AI partner ecosystem, these are going to be the drivers of net retention rate. And all of these drivers have had positive results in Q3. Howard Ma: Got it. And Rohan, given how important Flink is as a driver now, you gave the disclosure Flink low 8-figure ARR, Flink on cloud up 70% sequentially. I think if you triangulate it, you can get to maybe low single digit, call it, $2 million to $3 million of sequential increase in the cloud side. So is that fair? And should we expect that sort of sequential -- assuming that number is right, increase on the cloud side going forward, maybe as a baseline. Rohan Sivaram: Yes. Again, I'm going to stay away from providing guidance, but we are very pleased with our Flink performance. And from a Flink performance, again, I'll say because it's important to note both the breadth and the depth of our Flink performance is something that we should note. We have a lot of customers, over 1,000 customers using Flink and then we have 12 customers spending over $100,000, 4 customers spending over $1 million. And in Q3, we just reported greater than 70% quarter-over-quarter growth for that business. So we're very pleased with how the Flink business is progressing, and it will be a material contributor to Confluent Cloud in fiscal year '26. Shane Xie: All right. Thanks, Howard. Our last question today will come from Eric Heath with KeyBanc. Eric? Eric Heath: Great. Maybe a lot of good questions have been asked. Maybe if I could just come back to Flink for a minute here, Jay. I am just curious to hear more maybe about some of the easy wins you're seeing with Flink customers. Some of the learnings you are applying to scale that Flink adoption across the customer base. I know we talked a lot about go-to-market and the DSP team, but any color there? And Jay, maybe just lastly, any thoughts or the feedback on how we should think about competition with Databricks structured streaming product that was announced this quarter? Edward Kreps: Yes. Yes, happy to talk about both. So yes, there's actually a very broad set of use cases for Flink. If you were trying to bucket them, there's a bucket that's kind of these real-time data pipelines, getting data to some AI application or agent getting data into the analytics ecosystem, Databricks, Snowflake, cloud provider things. And then there's a set of use cases, which are acting on the data, right? Trying to predict fraud, personalize things for customers, do something smart in reaction to an event in the business. Those are the 2 kind of buckets that we see customers using. Both are actually doing quite well. And both are represented in kind of the numbers that we would overall describe. I would say some of the larger customers are customers that are kind of taking existing batch processes and converting them over. So I talked about a number of customers just doing these kind of migrations. That's obviously the most challenging to orchestrate for a new product is to really take something that's been built up over many years and kind of move it over. But we're finding that we're now at a point of maturity where we can start to do that and do it successfully with customers. So that's I think that's an exciting thing. Relative to Databricks, we remain actually very close partners working together on applications for hundreds of joint customers. We're providing a set of real-time data that often flows as their environment. There are some overlaps and capabilities in both what we're doing and what they're doing. I think in practice, we tend to serve different constituencies. We tend to have more kind of real-time operational application systems, software engineers, they would tend to have more data engineers, analytics, data scientists, type user base. But for sure, there's some things that you could do in either product. On the whole though, I think we've been pretty complementary in going to market together. And even though that kind of overlapping feature set may increase, I think that will remain the case. Ultimately, customers have chosen us for that real-time hub of integration for data and many customers have chosen Databricks as the kind of lake destination where all the data goes for historical analysis. And so ultimately, customers want those things to work together, we're happy to serve them together. Shane Xie: Great. This concludes our earnings call today. Thanks again for joining us. Have a nice evening, everyone. Take care. Edward Kreps: Thanks all.
Chethan Mallela: Good morning, and welcome, everyone. We appreciate you taking the time to join us today, both in-person in New York City and over the webcast. Before walking through the agenda, let me first draw your attention to the slide in recognition of the forward-looking statements we'll make today. Please also keep in mind that we will be citing non-GAAP financial measures throughout our remarks and in the presentation that is posted on our website. Now let's discuss what to expect during our time together. Our Chairman, Bob Gamgort, will kick off the formal presentation with welcome remarks, followed by our CEO, Tim Cofer, discussing our value creation framework and the strategic rationale for the JDE Peet's acquisition and our planned separation. Tim and Olivier Lemire, our newly appointed President of U.S. Coffee, will then walk through our future Global Coffee Co business in more detail. After a short break, Eric Gorli, our President of U.S. Refreshment Beverages, will discuss the future Beverage Co; SVP of Finance, Jane Gelfand, will provide an update on financials and capital structure; and Roger Johnson, our Chief Transformation and Supply Chain Officer, will walk through our integration and separation plans. Finally, Tim will provide an overview of Q3 earnings and share some final thoughts. In total, the prepared remarks portion of the day should take around 2.5 hours. We'll then break for 45 minutes to allow the in-person attendees to explore our product showcase, and then we'll return for a Q&A panel. We expect to conclude our event and the webcast at around 1:00 p.m. Eastern Time. We hope it will be a productive and insightful session for you. Let me kick things off by welcoming our Chairman, Bob Gamgort, to the stage, and he will introduce the rest of the Board members joining us today. Over to you, Bob. Robert Gamgort: Good morning. It's great to see everyone. Thanks for joining us here. We've got updates to provide on KDP in general on the transaction that we announced in August. We also have some great Q3 results to talk about. So we don't want to forget those either. As Chethan mentioned, we've got a number of directors here today. And what I'd like to do is just take a minute to introduce them. They are mostly are all located to our right over here. Pam Patsley is our Lead Independent Director. She chairs our Remuneration Committee. She's our longest-standing director, having been at Dr. Pepper Snapple Board prior to joining KDP. Tim Cofer, our CEO, you're going to hear a lot from him today. Juliette Hickman, right over there. Juliette serves on our Audit Committee and one of our very newest directors, Mike Van de Ven, who also serves on our Audit Committee. And the directors are going to be available to interact with you during breaks and during the product demonstration, so please engage with them. Pam and I are going to come back on stage with the management team at the end of the day and answer questions as part of the formal Q&A session. So my purpose today is really to represent the perspective of the Board, and I want to kick off today by offering five points that I think the Board would like to emphasize at the start here. And first of all, KDP has a long and consistent track record of delivering strong results. Since formation, 6% revenue CAGR, 11% EPS CAGR, and that places us in the top tier of CPG peers. But from a Board perspective, our job is not to look backwards and congratulate ourselves on good results. It's really to position the company for future success. And that's why we have conviction in this acquisition and separation. What's important is for you to have more detailed information, more insight in our thought process. And that's what we want to do today so that you can come along with us on our journey on how we came to that conclusion and why we continue to have great confidence in the value creation potential of the transactions. Having said that, we heard your feedback. We certainly noted the market reaction and they made it really clear to us that we needed a day like today to better explain the strategy and the thought process behind it, as I said. We also recognized we needed to change some of the executional elements of the transaction. You saw the press release today. Those are good developments, and we'll talk about more optionality going forward. And we really think that we're on the right track and are being very responsive to your feedback. So going from today to this future end state requires great execution. So in addition to talking about the end state, we need to give you confidence in execution. And we'll do that today by showing you our integration plans. But I think more importantly, we're going to give you exposure to more people on our management team who are actually responsible for that and for running the company and making sure that we continue to deliver great results like we just did in Q3. So you'll meet them. And then we're going to be flexible. I mean, you've seen that we've been flexible since announcement. We're going to look for other opportunities to maximize value. And we'll talk about some of the areas where we're thinking about flexibility going forward throughout this presentation. So I think there are three points that I would like to comment on before I turn it over to Tim because I'm in a unique position to do this. So, first of all, is the global coffee category. So you'll find it interesting, but the left-hand side there is my trophy from 1985. This was an on-campus competition sponsored by General Foods, and it was called the Maxwell House brand management challenge, and it was about the coffee category. And my team won it, which is why we have the trophy. It sparked my career in CPG. It also is how I entered General Foods, and it also started a 40-year relationship with the coffee category. So I've seen it over an extended period of time. So, there's no question in the post-COVID period, we saw a slowdown in the global coffee category. We also are beginning to see signs of recovery. And what typically happens is a three-year window starts to become reality. We never thought that this was anything more than temporary or cyclical. It's not structural. And if you look at the category over 40 years, you will see periods of time where the category slowed down only to accelerate rapidly afterwards. And that's exactly where we think we are right now. We're in the beginning of a recovery period. Over that 40-year period, the volume growth of coffee is a 2% CAGR. And we know that in CPG, volume growth, real growth is scarce and important. But it's undeniable when you look at a 40-year trend on coffee, the trajectory continues to be going in the right direction. Actually, Tim has a chart that will show you that very, very clearly. So let's think about this. If you believe it's cyclical, and we're in the beginning of a recovery. We have a strong business in KDP coffee anchored by Keurig. We really believe to succeed going forward in coffee, you got to be global. We'll talk a bit about that. So if you want to form a global coffee powerhouse, the best partner is JDE Peet's. This is a scarce and valuable asset. It's a high quality, and honestly, there is no alternative other than matching these two businesses together. And when you see the fit, it is striking how much each business complements each other. And we're confident that together, we will form a formidable global coffee competitor. So that gets to another question that came up from time to time in the past couple of weeks, which is what happened to the investment thesis? How has it changed? So I'll start with a real obvious comment, which is since we put the companies together seven years ago, a lot has changed in the world. Competitors, consumers, our customers in the way they think about it. Certainly, the macro environment is different. So I think it's natural and necessary to evolve our strategy as well. In 2018, the play was a really good insight at that point in time. We took two subscale beverage companies who are solely focused on North America. We brought them together to create a beverage challenger of scale, and it was wildly successful. If you take a look at what's happened over the past seven years, I gave you the aggregate financial performance. But beyond that, the strength of each individual company enhanced significantly over that time. So if we're going to put together these two companies to form a global coffee competitor, and we'll talk about why global is important later, we could run them together. It is an option to run them as one company, but we think it is optimal to separate them. One company focused on a global opportunity, which is a very different management mindset. Obviously, on one category, coffee across the entire world of all forms and the other to continue to run this very valuable North American refreshment beverage growth machine that has significant runway still in front of it. It also gives investors a choice in two different styles of running these companies. More to come on that, but it really shows that there was this natural evolution that started in 2018 and is our choice to run them separately. You're going to hear from a number of speakers. And I think the third area where I can offer unique perspective is my confidence in the management team. Tim, who you're going to hear from right after me, will run the combined businesses. And then upon separation, he will be the CEO of our stand-alone beverage company. Olivier, Eric and Roger, I have worked with since the take private of Keurig in 2016. My experience with Jane goes back further than that. Jane was at Barclays in 2012, and she was part of the team that supported the IPO of Pinnacle Foods, where I was CEO. And the reason I give you that time period of my experience is I have seen this team deliver across a wide variety of challenging situations time and time again. I have the highest level of confidence in their ability to execute, and that gives me confidence that we can get from where we are today to an outstanding end game when we separate these companies. So, with that, let me turn it over to Tim Cofer, our CEO. He'll take you through a significant amount of content along with all these other presenters. And as I said upfront, I look forward to being back up here at the end with Pam, and we'll be happy to answer your questions at that time. So, Tim? Over to you. Timothy Cofer: All right. Good morning, everyone. Great to see all of you again. I hope you've had a chance already to enjoy some of the amazing beverages that we have across these stations for those of you that are here live with us at NASDAQ. I can imagine the coffee stations were hit pretty hard it being a Monday morning and all. So, building on Bob's comments, we have strong conviction in the strategic and financial merits of this acquisition of JDE Peet's and the subsequent separation into these two pure-play companies. We are creating North America's most agile beverage challenger and a true global coffee powerhouse. At the same time, as Bob said, I have spent the last two months absorbing shareholder feedback, and of course, the initial market reaction post the announcement. And I recognize that there are a few areas of concern as well as some open questions that would benefit from more explanation. That is why we're here today. So, in my discussions with each of you, I think the questions have largely spanned these four areas. Why is JDE Peet's the right acquisition? What does the separation into Beverage Co and Global Coffee Co. uniquely enable? How will we optimize KDP's capital structure post the acquisition and establish appropriate balance sheets for each of these separate entities? And how will we ensure that KDP delivers with success throughout this process. Over the next couple of hours, we will answer these questions and more. Now before diving into these topics, let's reground you in our business and our strategy. We operate with a sole focus on beverages. I truly believe this is the best sector in CPG. It's large. It generates $1 trillion at a global level. It's growing. We expect a mid-single-digit CAGR in the coming years, supported by structural tailwinds to sustain that momentum. It's dynamic with ever-evolving consumer preferences that create endless opportunities to drive consistent growth through innovation, through mix management, through premiumization. It's financially attractive, strong profitability, compelling industry return profiles. So we understand this beverage industry very well, and we have a proven and successful value creation strategy. At the core of this, as you see on this slide, our five pillars. They serve as our blueprint for how we drive sustainable, consistent, compelling performance over time. The first three of those are commercial priorities, broadly geared around the top line. The true enterprise enablers support that growth in a profitable, efficient and high-return way. Let me touch very briefly on each one, championing consumer-obsessed brand building. This means being consumer-led, consumer-centric as we nurture and expand our iconic brands, shaping our now and next beverage portfolio to access growth accretive white spaces via our flexible build, buy or partner model, amplifying our route-to-market advantage, strengthening our multichannel leadership with differentiated distribution capabilities, generating fuel for growth by reinforcing a continuous productivity mindset and a lean overhead operating model and, of course, dynamically allocating capital to support that long-term value creation. How have we applied that to our businesses? Let's start with Refreshment Beverage. Our results speak for themselves. Our flagship Dr. Pepper, we've turned this into the CSD category's innovation and marketing leader. We've driven nearly a decade of consistent market share gains, and we've established ourselves as the #2 market share position in the category. We've thoughtfully built out meaningful incremental growth platforms in white spaces that we previously didn't compete in like energy and sports hydration. And we've strengthened our competitively advantaged route-to-market DSD network through capital-efficient territory expansions through brand partnerships and capability investments. The result of the efforts you see at the bottom of the page, a high single-digit net sales CAGR since 2018. And we're just getting started with business momentum that should support continued sustained growth into the future. What about in coffee? Look, we know the operating backdrop in U.S. Coffee has been more dynamic over the last few years, particularly in that post-COVID world and the multiple commodity cycles like the one we're in now. And yet, we've made important strides. We've reinforced Keurig's position as the #1 North American single-serve system across both brewers and pods. We've extended our portfolio into exciting growth areas like cold and super premium. We've continued to expand the number of households that brew Keurig every morning now at 47 million strong and growing. And we are preparing to catalyze the next chapter of our growth agenda with disruptive innovation. We've invested in unique assets that drive competitive advantage, including our differentiated and highly profitable direct-to-consumer e-commerce capabilities. All of these initiatives have supported a steady low single-digit sales CAGR in recent years, consistent with our go-forward expectations. So through these commercial achievements as well as robust productivity and thoughtful cash deployment, we've delivered strong results at an enterprise level. Since KDP's formation in 2018, as you see on this slide, we've grown net sales at a 6% CAGR. We've grown adjusted EPS at an 11% CAGR, while also returning meaningful cash to our shareholders. Now at the same time, both our businesses and the external environment have changed in significant ways since 2018. Just as Bob discussed earlier, the original merger thesis was really predicated on combining what at the time was two subscale businesses. We did that to create a North American beverage challenger. What's happened in the last seven years? Our refreshment beverage business is no longer subscale. In fact, it is the same size today as total KDP at merger. Our actions to evolve our ref bev portfolio to strengthen our route to market have also structurally raised the organic profile of this business relative to 2018. And in coffee, while we've made progress, we acknowledge that the category growth trend has fallen short of our expectations in recent years. And while we're the clear leader in North American single-serve, that business is arguably subscale in particular, relative to our global competitors that can leverage broader advantages in technology, in sourcing and who can participate across the entire global coffee category. So as a Board and a management team, we observed these changes since 2018. We discussed these and we reached a couple of conclusions. First, our refreshment beverage business has both the scale and the advantaged positioning to succeed, as Bob said, either as a combined company or a stand-alone. And second, while our coffee business has clear strengths, it is not yet optimized to reach its full potential in current form. And we decided as a Board that it needed further assessment, and it could benefit from potential enhancement. So the first step in that assessment was to step back and take a fresh look at the coffee category. You've heard Bob's story 40 years ago, the Maxwell House Award. I've also spent a lot of my career in coffee in a past life, different employer. We're long-term believers in the attractiveness of the global coffee category. We believe in the structural tailwinds supporting future growth, but we did the analysis once again to underwrite our confidence. Let's start with the consumer lens. Coffee remains a preferred way to address the universal human need for energy, and it's ever more important these days. Coffee is a highly emotional category. It evokes passion. It's artisanal. Craft specialization plays a key role in premiumizing the category, which is a clear growth tailwind. Coffee is habitual. Coffee has unmatched global frequency of consumption. And coffee is healthy, even as defined by regulators, both in this country and globally. Simply put, coffee is the #1 beverage American consumers cannot live without, and I am certainly one of them. And it enjoys a similar status in so many markets around the world. Now to see the evidence of this category's essential nature, look at the long-term trend on the chart. Bob mentioned this in his opening remarks. What you'll see over 40 years is a low single-digit global volume growth. And in dollar terms, recent growth trends are even faster. thanks to premiumization and innovation. Importantly, the structural factors supporting consumption growth remain as powerful as ever. And I would highlight that increased adoption, especially in emerging markets as younger generations embrace coffee culture and begin to shift versus historic tea culture is yet another growth tailwind long term. Now as with many categories, coffee goes through cycles, including most recently this post-COVID lull that we've experienced. But as Bob said, and as this chart, I think, pays off nicely, the historic pattern is that these lulls are temporary and the category recovers to its long-term growth trajectory. We're seeing signs of this -- right now in the United States, this post-COVID recovery is underway. Category volume trends bottomed out in 2022. They've been stabilizing ever since. And encouragingly, this dynamic also holds true this year, year-to-date 2025, even as this high inflation has fueled significant price increases. You see here that the elasticities on an absolute basis compare favorably to the historic trend. So that was our assessment, our step back assessment on the coffee category. With renewed confidence in the attractiveness of that global coffee category, our challenge was then to determine how do we optimize our coffee business. Our goal here was to create an even stronger business with higher growth prospects, greater resilience and improved operational efficiencies. And look, we considered all options. All options were on the table, sell the business, spin it off as a stand-alone, continue to operate it as part of KDP. But ultimately, after thorough diligence, our management team and our Board of Directors determined that the acquisition of JDE Peet's represented the most attractive and actionable path for maximizing the value of our coffee business. Here's the reality. Scale matters in coffee. The category addresses a universal need state. Common formats, common consumer trends, similar premiumization opportunities across markets. This means that consumer insights, innovation, technologies can be leveraged and reapplied across markets. And of course, in coffee, there are clear economies of scale in operations and costs. Bob said it in his opening remarks, JDE Peet's is one of the very few assets of global scale in this category, and it will step change Keurig in several ways. You see it on this chart. Our coffee net sales will more than triple to $16 billion, making us the second largest global coffee player and the largest pure play. We'll gain access to additional geographies, including many high-growth markets. We'll become a significantly larger manufacturer and the #1 coffee buyer in the world. These elements are critical to fortifying Keurig as an even stronger coffee player. In JDE Peet's, we also see a unique fit with the Keurig business. Through this combination, we can bring together the best of both companies. Keurig's North American leadership, know-how, innovation prowess and JDE Peet's global reach, leading brands and full format expertise. The resulting Global Coffee Co. will enjoy an advantaged and complementary portfolio, incremental revenue opportunities, visible, actionable, achievable cost synergies and greater resilience. Let's unpack each of these four. Starting with advantaged and complementary portfolio. The combined company will be able to benefit from global category growth, given its strong brand portfolio, including $4 billion-plus trademarks, broad participation across every coffee subsegment and geographic diversification. Moving to enhanced revenue potential. We see upside potential from scaling Keurig's system expertise and JDE Peet's format capabilities across more brands and more markets, capitalizing on the growth runway for Peet's here in the United States and extending Keurig's next-generation coffee systems beyond North America. The third is clear and actionable cost synergies. We will discuss this in more detail, but we have identified clear and actionable efficiencies that we know will generate $400 million in savings in the next three years. These synergies can fund reinvestment while also supporting earnings growth. And finally, increased resilience. Obviously, as a larger company with greater supply chain capabilities, we will be much better positioned to navigate external volatility like tariffs and commodity fluctuations. Together, the union of JD Peet's and Keurig will create a stronger business that is more efficient and more capable of delivering consistent, profitable growth. So, upon closure of the JDE Peet's acquisition, we will, for the first time, have scaled advantage platforms in both Refreshment Beverages and coffee. Through the subsequent separation, each of these businesses will become that focused pure play with attractive yet distinct profiles. Beverage Co., a growth-oriented player, supported by a leading brand portfolio, a competitively advantaged route to market. The business will be disruptive. The business will be entrepreneurial, and it will deliver an attractive growth profile with potential upside from strategic optionality over time. Global Coffee Co. will be a steady grower with strong and resilient cash flow, enhanced by near-term synergy capture opportunities. Performance will be supported by differentiated deep coffee capabilities and expertise. And as we've said earlier, while we could conceivably run these two businesses together, we believe the separation will provide clear benefits to both entities. What are those benefits? First, focus. Each company will tailor its strategy, its operating model, its capital allocation priorities to align with distinct category and geographic exposures. Culture. The respective leadership teams will have strategic clarity, and we can structure and incentivize our organizations accordingly. Strategic optionality. Each stand-alone entity can think creatively and flexibly in pursuing additional value creation opportunities. And finally, shareholder benefits. Investors will be offered the opportunity for two very attractive yet distinct investment opportunities. Now as I said at the beginning of my remarks, we have conviction in these transactions, and we have a clear view of the compelling destination once this is complete. It's now on us to execute with excellence. And that all begins with a robust plan and the right team. So we've recently established a transformation management office or a TMO. To drive this comprehensive integration program. Bob mentioned it earlier, it will be led by our newly appointed Chief Transformation and Supply Chain Officer, Roger Johnson. You'll hear more from Roger in a minute. The TMO structure is designed to establish the processes and the workflows to guide our integration teams while also importantly, freeing up the rest of the KDP organization to focus on maintaining that great base business momentum that you've seen us deliver again in Q3. The TMO will be comprised of a dedicated internal team in partnership with key advisers that will be responsible for the integration planning, the future company design for the value capture. Our Board of Directors and my executive steering committee will obviously provide support and oversight. Importantly, many of these leaders, team members, advisers, obviously have significant experience in executing complex transactions like this. As just one example, among others, I was fortunate enough to have a central role in the Kraft acquisition of Cadbury and the subsequent separation into Mondelez International and Kraft Foods Group. Many of the other leaders, including those you'll hear from today, have had similar experience with complex transactions like this. We will draw upon those collective experiences to further derisk the next steps. So one important element of executing these transactions is ensuring that we have the appropriate capital structures for KDP at acquisition close and importantly, for each independent entity upon separation. We are well aware that some investors were uncomfortable with our initially proposed post-transaction leverage. And as you've seen today in the press release, we've taken meaningful action to address those concerns. So we've announced two cost-efficient transactions, a minority investment into a newly created coffee manufacturing [ JDE ] and a private convertible investment into our future Beverage Co. These two equity-like instruments will help to shore up our balance sheet. As you see on this slide and in the release, we now expect net leverage to be below 5x when the acquisition closes, and we're also targeting initial leverage ranges for Bev Co. in a range of 3.5x to 4x and Global Coffee Co. in a range of 3.75x to 4.25x. Based on the anticipated cost of this new financing, we continue to expect very attractive returns on our JDE Peet's acquisition, including year-one EPS accretion of approximately 10%. These capital raises also have the benefit of partnering and aligning KDP with sophisticated strategic investors, including Apollo and KKR, who understand and appreciate our vision. Let me walk you through the key acquisition, integration and separation milestones from here. We said this back when we announced the deal in late August. We continue to expect that the JDE Peet's deal will close in the first half of 2026. Our path to separation will be milestone-based with a plan for us to be operationally ready by the end of 2026. But before separating, we want the following conditions to be in place. First, a quick start to synergy capture; second, balance sheet readiness for both companies. Third, an independent Board of Directors and experienced leadership team for each stand-alone company; and finally, market conditions that are conducive. But as we've said all along, we will be flexible in our approach to secure the best outcome. In that spirit, as we optimize from here, one element where we're taking a refreshed approach is to our leadership. We've made the decision to not name the leader of Global Coffee Co. at this time, and we no longer intend for Sudhanshu Priyadarshi to serve in that future role. We will name full leadership teams of both new companies at a future date closer to separation. So, before we unpack both Global Coffee Co. and Beverage Co., let me conclude with three priorities to maximize value creation. First, maintaining base business momentum. As you saw this morning, we reported strong Q3 results. In fact, we raised net sales outlook, and we reaffirmed our full year EPS guidance. You should have also seen that JDE Peet's this morning reaffirmed its full year guidance. Indeed, we are initiating this transformation from a position of strength. Second priority, integrating with excellence to achieve our key deal objectives. You'll hear more from Roger about the processes and the plans we're putting in place to underwrite successful outcomes. And third, setting up each company for success with focused strategies, tailored operating models, purposeful capital allocation. After the separation, we expect both companies will offer their shareholders quality, consistency, simplicity and be viewed as world-class leaders in their sectors. Okay. With that, let's move to Global Coffee Co. We're going to bring this new company to life in a couple of sections. First, I'll invite Olivier Lemire to stage. He's our recently appointed President of U.S. Coffee, and he'll give an overview of the attractive Keurig Coffee business. I'll then return to talk about JDE Peet's specifically and then the combined Global Coffee Co. Real quick additional intro on Olivier. He is a tremendous leader. He's been with KDP for 14 years. The last four, he was President of our KDP Canada business. And I can tell you, in that capacity, he led KDP Canada to significant coffee outperformance, consistently growing pod volume, brewer volume, net sales and operating income. Indeed, Olivier knows the coffee business. He has deep experience with integrations as well, including steering the former Keurig Canada and Canada Dry, Mott's integration. Overall, he built a very strong Canadian organization, and we're very excited for him to take this U.S. coffee desk. Olivier, over to you. Olivier Lemire: Thanks, Tim. Good morning, everyone. So after 14 years in the coffee and beverage industry, I've seen firsthand the unique power of coffee to bring people together, whether it's friends, families, colleagues, there's just no other beverage like it. And from my time in country of origin with coffee farmers to walking the floor of our different coffee labs and manufacturing facilities to building strong relationship with our many brand partners, my passion for coffee and strong conviction about the future of our coffee business has only grown. So it's a real honor to now lead our U.S. coffee business and the amazing team behind the Keurig system. And with this system, we've created and now drive a highly profitable subsegment of the coffee category. Over the last 12 months, we've driven $4.6 billion in net sales and $1.4 billion in adjusted EBITDA. We are trusted by some of the best coffee brands in the world with unmatched capability, quality and scale. Brand names like Starbucks, Lavzza, Dunkin', Peet's, McCafé, La Colombe and Tim Hortons and many more. And it goes as well for our own powerhouse coffee brands, Green Mountain Coffee, The Original Donut Shop and Van Houtte. Keurig is -- and it's all driven by the Keurig brand. Keurig is a beloved brand with 94% brand awareness. It is truly the undisputed leader in single-serve coffee. Keurig is one of those handful of businesses that have become synonymous with their categories. People don't say, I hope our vacation rental as a single-serve coffee maker. They say, I hope our Airbnb has a Keurig. And we don't take that lightly. Since 2019, we've added 13 million active households, reaching 47 million in North America by 2024. We've gone from being one in four coffee makers sold at retail to being one in three today. And the Keurig system over these years continue to gain market share in both the coffee makers but also the coffee categories, with K-Cup pods now being the largest coffee format and actually driving twice the retail sales to the next closest format. And from the start, the Keurig system was designed to offer variety and choice to our consumer. And this open system drives significant value for all of our stakeholders. Our consumer love us for quality, our convenience and the variety of brands and beverages they can enjoy. Our partners value our quality, our system expertise and coffee know-how. And the retailers would recognize that we've driven premiumization in the coffee category with single-serve and K-Cup pods driving more revenue per every cup of coffee. So this creates a very strong growth engine. More brands, more variety, appeals to more households, generating more profit to be reinvested in the system. We also have a very strong track record of building and accelerating coffee brands, starting with our very own Green Mountain Coffee, now realizing more than $800 million in retail sales annually and holding the #2 position in the Keurig system. It is part of a robust owned and licensed portfolio of brands that drives strong distribution and obviously, retail activation. Here are a few examples. McCafé was a brand in decline when it transitioned over in our system mid-2020 and has been growing share every year since. Lavazza is the fastest-growing brand since we took over the selling rights, and we see acceleration in distribution and retail activation. And finally, the original doughnut shop, we know flavored coffee is actually growing faster than black coffee and is the leader in flavored coffee growth with unique partnerships and beverage types. In addition, we have a very powerful asset in our business with keurig.com. The keurig.com consumer consumed twice the daily average and has a 5x lifetime value versus the average household. With Keurig -- while keurig.com is an excellent sales channel for our coffee business, it is also a significant driver of household penetration being the fourth largest sales channel for brewers in volume. The site enables us to have a one-on-one relationship with more than 1.5 million consumers each month. If it were to be part of our retail channels, Keurig.com would be amongst our top five with other industry giants. For those that know our brand history, know that Keurig was actually founded in the workplaces, delivering a fresh brewed solution over the dreaded still pot of office coffee. And on that foundation, we've built a very strong business in away-from-home with now 650,000 workplaces with active brewers and 1.2 million hotel rooms. And we actually see significant upside in large away-from-home areas, primarily corporate workplaces, manufacturing, health care, construction. There is a powerful synergistic relationship between our out-of-home and at-home channels. with workplaces serving as a great trial environment for both the Keurig system and our many brands in the portfolio. Our coffee business has actually delivered meaningful productivity over the last five years, averaging 4% in year-over-year cost saving through a series of initiatives ranging from tactical to strategic. These programs include brewer-direct import, [ large nested compact ], lightweight cups and meaningful reductions across process and product waste. Our productivity initiatives usually serve dual purpose of generating cost savings and advancing our sustainability agenda, reducing packaging, eliminating waste and driving a more efficient logistics. So by being cost conscious and driving a productivity mindset throughout the organization, we unlock fuel to reinvest in our business. And with that fuel, we can actually drive and accelerate our strategic imperatives. We know our business is strong, and we know we can improve. And over the last year, we've actually refined our consumer-centric strategy, and we're focused on four key areas: driving household penetration, growing premium coffee, scaling cold coffee solution and defining the future coffee system. In terms of Keurig, we're excited about our new marketing campaign hitting in Q4. It will have strong in-market presence, and we believe that with consumer insights and strong data-driven campaigns, we will be able to continue to unlock household penetration. With premium coffee, we are on the eve of launching our first-ever coffee brand with the Keurig name, the Keurig Coffee Collective. It will be our first scaled and premium owned premium brand. It features elevated packaging will -- sorry, elevated packaging. It will have 30% more coffee within each cups and will have distinctively delicious blends. And we're leaning into cold coffee solutions with innovations across brewers, pods and ready-to-drinks. We've actually recently launched new refreshers based on TikTok trends, and we found new ways to offer consumer the way to customize their favorite cold beverages. And as you would have seen in the product showcase and invite you to do so at the break, we are getting ready to disrupt once again the coffee category with the launch of a breakthrough system, Keurig Alta. Alta uses K-round plastic-free and aluminum-free pods. It is designed to offer a large range of barista-style beverages, including rich cups of coffee, authentic espresso and a variety of coffee shop style beverage, either hot or cold. We have completed multiple rounds of in-home testing with the Keurig Alta system, supported by pilot production of the K-rounds. And we are looking forward to sharing this innovative format with consumers soon. And while it's early days, we are excited to think about scaling this innovation in the future. So, with that, I'd like to welcome Tim back up to speak to JDE Peet's and how these two complementary businesses will be even stronger together. Thank you. Timothy Cofer: All right. I will put in a plug for those last two coffees that Olivier shared with you. If you've not tried our new Keurig Coffee collective, for those of you in the room, it's in that station belt back there, my favorite new K-Cup pod, outstanding cup of coffee. And then Alta, please be sure and try Alta before you go today. So I will start this next section with thoughts on JDE Peet's, including an overview of the business, why we think it's such a compelling asset and some of the recent strategic changes that are underway at that management team. Then I'll discuss Global Coffee Co. and highlight how the complementary nature of JDE Peet's and Keurig creates this attractive pure play that's truly positioned to win. So if you're wondering, what am I doing here? Why am I the guy talking about JDE Peet's? The answers are, number one, I will be responsible for it while we run for a period of time as a combined company. Number two is I do have an up close perspective on this, having spent months of diligence on this acquisition and getting to meet and interact with this leadership team. And number three is, believe it or not, I used to run some of these brands back in the past life, brands like Jacobs, Tassimo, Kenco, Gevalia and others. So I actually think I know firsthand the strength of these brands and the roles that they play in the lives of our consumers and our customers. I also want to tell you, we are very pleased that we actually have the CEO of JDE Peet's, Rafa Oliveira, in the room. Rafa, you can give a quick wave. There he is. He's in the audience. Rafa and I, as you might imagine, have gotten to know each other pretty well over the last few months, and he's actually here stateside for a couple of days. Tomorrow, he'll be at our Boston headquarters as we're advancing our integration and transformation agenda. So let's talk about JDE Peet's. JDE Peet's is a unique asset. It's large. It's profitable. It is a global pure-play coffee company, $11 billion in net sales, nearly $2 billion in adjusted EBITDA. The company holds the #1 or the #2 share position in dozens of markets around the world, reflecting an enviable portfolio of leading coffee brands. The business is anchored by billion-dollar icons like Peet's, L'OR, Jacobs, but it also boasts a sizable regional and local portfolio, brands like Pilão, Moccona and Friele, among others. JDE is also distinguished by its rich coffee heritage. This company has deep, deep coffee expertise. Its participation in coffee dates back to the 1700s with the founding of Douwe Egberts in the Netherlands, and its capabilities are quite strong. As one example, we put it on this chart, the company has the ability to produce over 1,000 distinct coffee blends. You can imagine that's a skill and capability, especially useful in times of extreme coffee inflation and the tariff volatility. For me, one of the simplest ways to understand this company's strength is by looking at a map of the world. Many countries have large and vibrant coffee categories, and JDE Peet's is present in most of those countries, often with a leading position. Coffee is a category in which the market leader is frequently a regional or local favorite, not necessarily a global brand. Consumers are fiercely loyal to their local brands, particularly in the largest and most developed coffee markets. And JDE Peet's has a portfolio aligned to that reality. So in the Netherlands and Belgium, Douwe Egberts is the category standard. In the U.K., it's Kenco. In Brazil, it's Pilão. In Germany and actually much of Central and Eastern Europe, it's Jacobs. And in France, it's L'OR. And that's just scratching the surface of their market leadership. So we recognize that this company's brands may be less familiar to an American audience. But as you can see, they're powerful equities with strong resonance in their core markets. And I'd be remiss to say that these brands also produce a very good tasting cup of coffee, each very individualized kind of taste of the nation qualities. Again, for those of you that are here, there's a station on my back left there that will give you a nice assortment of their brands, and I highly recommend, if you haven't had enough coffee already, please try it at the next break. Another hallmark of JDE Peet's is the broad category participation. The company has an offering spanning all major coffee formats, from whole bean, roast and ground, single-serve, liquid, ready-to-drink concentrate. The portfolio also captures the full price tiers from mainstream to super premium. The channel diversity is universal, including all major at-home and away-from-home channels where coffee is consumed. You can imagine there are significant strategic benefits to this broad category participation. Now given its advantaged brand portfolio and strong capabilities, it's probably no surprise that JDE Peet's is also a leading partner to retailers across the globe. I'll give you one example. This chart here of a retailer -- major retailer in France. L'OR actually holds the distinction as the #1 brand in all of CPG, driving growth for the retail trade in France over the last 10 years, ahead of even the biggest global trademarks like Coca-Cola. These photos that you see on the slide underscore the level of in-store activation that retailers support because of the power of these coffee brands and the central role that they play in building shopper basket and driving category growth. JDE Peet's Pet's brand strength also extends to the consumer. Its portfolio has beloved trademarks, obviously evidenced by those strong market shares I showed you. But what's equally important and I think encouraging for future growth prospects is the brand's particular resonance among younger consumers. In some markets, here are three examples, the sub-30-year-old demographic prefers the leading JDE Peet's brand by nearly a 2:1 margin relative to the next largest player. That type of brand loyalty among the next generation is priceless. As younger consumers grow their spending and influence in coffee as they age, JDE Peet's appeal to these groups should represent a growth tailwind. The company also has brands with a demonstrated ability to stretch. And I'll give you two examples on this chart. Take L'OR. L'OR began as a roast and ground coffee staple, but it's now expanded into basically all other consumable formats, including into appliances. And these adjacencies now account for a meaningful percent of total L'OR brand sales. The other example, Jacobs. Jacobs started as a German icon. But over the last couple of decades has successfully established #1 positions across Central and Eastern Europe, in fact, in 19 markets. Now more than half the sales of Jacobs is outside of its home country of Germany. I think this is notable because one of the incremental revenue opportunities from combining Keurig and JDE Peet's is the pairing of our technology and our innovation with JDE Peet's brands. We believe the stretch potential of these JDE Peet's trademarks can create intriguing growth opportunities down the road. Beyond the commercial success, the JDE Peet's business has also demonstrated resilient financial performance. I'm sure I don't need to tell anyone in this room. In fact, a few chats I did prior to the start reflect this, that the last few years has been marked by quite a bit of unusual level of green coffee inflation, triple-digit cumulative cost pressure on Arabica and Robusta. You see the numbers on this chart. And yet, even as a coffee pure play, this business has delivered steady and consistent gross profit growth. I think another indication of brand strength. Bringing it all together, it's clear for us that JDE Peet's has a strong structural foundation. This is a good business. It's got iconic brands. It's got significant capabilities. Yet it's also true that it's a business with significant value creation potential that has yet to be fully realized. To be clear, JDE Peet's management team recognized this, and they've already begun the important work to begin to capture that potential upside. They hosted a Capital Markets Day back in July, and they set a path to become a more agile, more focused, more commercially capable organization. I visited Amsterdam a few times with Rafa and team, and I can already see the early stages of this important cultural shift taking hold. The centerpiece of their approach is an evolved strategy, and they aptly call it reignite the amazing. Now there are many elements to the plan, but I'll just highlight a few notable points. an emphasis on fewer, bigger bets with resources and management attention going towards the largest brands, greater consumer centricity and commercial excellence and a stepped-up productivity flywheel to unlock savings, flexibility and agility. The strategy makes sense, and it's definitely aligned with CPG best practices and operating principles. And upon integrating JDE Peet's with Keurig, we would expect to continue this work and harmonize it into a combined strategic playbook for Global Coffee Co. It remains early days as they've embarked on this new strategy, but I would tell you, there's already some initial proof points showing up from this refined strategic approach. I'll give you a couple of examples. On big bets, JDE Peet's is prioritizing leveraging insights and infrastructure to launch compelling innovations and ideas across multiple brands and multiple geographies in a highly efficient and profitable way. As one example, right now, there's a hot trend out there called Dubai Chocolate. JDE Peet's was able to quickly launch a Dubai Chocolate coffee mix across multiple brands in 20 markets this year using this platforming approach. Less visibly, but no less critically, the company has also made progress in refining its marketing approach and building capabilities in key areas like revenue growth management. We certainly know from experience, the payback from these investments can be very high when you get it right. And finally, JDE Peet's is also beginning to progress its productivity program that they unveiled on their Capital Markets Day. The plan targets EUR 500 million in savings through 2032 with roughly half being reinvested in the business. Four primary areas underpinning this target. Portfolio simplification across brands and SKUs and the manufacturing and distribution footprint, simplified ways of working, which involves removing complexity and generating savings accordingly, continuous improvement in sourcing, in design and plant level productivity and driving improvements in the company's asset-light route-to-market system. As you can imagine, we carefully vetted this program as part of our diligence, and we're confident that the savings are achievable. JDE Peet's has already begun to implement this program, including some plant closures and other operating efficiencies that they announced this morning in their press release. So you've now heard Olivier talk about the strengths and our future growth plans for Keurig. You've now heard me walk through the virtues of JDE Peet's. Let's now talk about what happens when we put these businesses together. So let's start with some background. These businesses are strong in their own right. They've proven resilient, and they've delivered solid performance in a very challenging operating backdrop the last few years. You see on this chart, sales growth and adjusted EBITDA ranging in the low single digits. And importantly, each business has proven highly cash generative. For example, you see here, Keurig, we expect to deliver more than $600 million of free cash flow this year. And JDE Peet's this morning reaffirmed its outlook for the year of EUR 1 billion, about $1.2 billion. When we put these two companies together, we expect even stronger top and bottom line growth going forward. And let me take you through why we believe that. To start, Global Coffee Co. will be an advantaged market leader in the $400 billion global coffee category. And as I said previously, scale matters in coffee. This business will have it. Global Coffee Co. will be the #2 coffee player in the world by revenue and the #1 pure play operating across 100 countries. It will have a strong portfolio of brands, diversified across formats, across channels. It will have a strong financial profile, $16 billion in net sales and over $3 billion in adjusted EBITDA. The combined entity will have a broader product line than either stand-alone company had, but in particular, relative to Keurig. Prior to the combination, as you see on this first bar, our business was almost exclusively focused on the single-serve subcategory here in North America. But with the addition of JDE Peet's, you now see Global Coffee Co. will have a format mix that's far more closely aligned with the global category split and yet still with a favorable skew to the high-margin single-serve segment and other more value-add areas. What does that mean? Global Coffee Co. can then fully participate in the growth of the entire category, both in meeting existing consumer preferences and emerging growth opportunities. Similarly, as a true multinational now, Global Coffee Co. will be better positioned to capture a fair share of category growth. At the category level, coffee has two large structural growth drivers. We think both of these are evergreen. The first is per cap consumption growth. This has been and we expect will continue to be a tailwind for the category. It's supported by elements like a rising middle class and ongoing preference shifts, particularly in non-coffee legacy markets of preferences driven by youth from tea to coffee. The second is premiumization as measured by value per cup. This trend is occurring across all formats. And you see it most evident in the growth of premium solutions like single-serve, but it's occurring across brands as well with premium trademarks growing faster than mainstream and value. So while per capita consumption is a greater opportunity perhaps in less developed coffee markets and premiumization is a bigger trend than established countries, we actually see significant runway in both of these structural growth drivers. The business will also enjoy unique revenue opportunities arising from this very complementary combination. Let me quickly talk to these five formats. Given the potential to expand Keurig's brand equities now into new subcategories, leveraging JDE Peet's full segment exposure, technology, especially in brewers, Keurig is best-in-class in brewers. We've been an innovation leader. We know how to produce them at an efficient and profitable manner. We can provide insights to some of JDE Peet's systems like Senseo, Tassimo and L'OR. Channels, we can capitalize on our complementary footprints, including in away-from-home. Next generation. next-generation exciting Keurig Alta and K-rounds innovation now has the potential to think about expansion beyond North America and brands, targeting growth opportunities for specific brands in the portfolio. And one I'll call attention to is Peet's, and I'll give you more in a moment. As you see, the synergistic growth opportunities are ample and indeed global. Let me talk a little bit more about Peet's, just to bring that to life. We all know that brand, I think, pretty well here in the U.S. It has a rich heritage. It's a coffee pioneer. It's got strong brand awareness, premium coffee credentials across the U.S. But as this map shows, the map on the left, its market penetration is very much concentrated in the West Coast, and in particular, California, the home territory. And its commercial execution at point of buying meaningfully lags Keurig's. But as a combined entity, Global Coffee Co. can utilize Keurig's significant commercial scale, our very strong customer relationships to improve Peet's geographic footprint. I'll give you one example with numbers. You see that on the far right. We have the ability to achieve -- well, today, Keurig achieves almost 4x the feature and display activity of brand Peet's. We can and we will close that gap. The result can be a much larger, faster-growing Peet's premium brand over time. So we've talked about the revenue opportunities, but we also see visible cost synergies at Global Coffee Co. Our $400 million synergy target in the first three years spans several areas. In procurement, we will benefit from enhanced scale across green coffee sourcing as well as direct and indirect spend pools. In manufacturing and logistics, we have plans for network optimization for route-to-market consolidation and other go-to-market efficiencies. And for SG&A, we've already identified corporate scale efficiencies as well as IT infrastructure and other system savings. Importantly, these synergies have been scoped and we've developed concrete and actionable plans to deliver on these cost synergies, if not exceed them. Ultimately, we expect Global Coffee Co. will generate consistent, attractive profit growth. This will be driven by a few factors. First, obviously, profitable top line growth. This company will be well positioned to capture its fair share of the coffee category's volume growth, which, as you've heard a couple of times, consistently grows on a volume basis at a low single-digit rate over time. This will obviously generate fixed cost absorption, operating leverage benefits. And in addition to that, the innovation that you've heard about today, our price pack architecture and RGM work, promotional effectiveness can further translate that top line growth into nice bottom line growth. Next, Keurig and JDE Peet's each have robust productivity programs, even beyond the deal synergies I just covered. And obviously, some of these savings will be earmarked for reinvestment, but others will flow through to the bottom line. And finally, it's not built into our baseline financial outlooks, but it's our belief that current coffee prices are clearly well above the long-term trend, and they do not appear to be supported by market fundamentals. I'm not going to try to predict commodity market gyrations on this stage, but it is worth noting that any normalization in this cost would clearly drive a cyclical profit tailwind. Bringing these elements together, the business' structural advantages the potential revenue synergies, the cost synergies of the combination, the other profit levers available to the business, Global Coffee Co. will support an attractive growth algorithm. Now there certainly can be some year-to-year volatility in top line due to commodity volatility. But over time, we project low single-digit net sales growth and high single-digit adjusted EPS growth. And we would expect this business to be highly cash generative. As you see on this chart, anticipated cumulative free cash flow of more than $5 billion from '26 to '28. We are excited to create this global coffee powerhouse the world's largest coffee pure play and a stable of the best loved brands powered by advantaged capabilities. All right. I think you've earned a well-deserved break. Let's take a 15-minute break, and we will come back and talk about Beverage Co. Thank you. [Break] Chethan Mallela: We're starting in one minute. Everyone find your seats. Please welcome Eric Gorli, President of U.S. Refreshment Beverages. Eric Gorli: Right. You all hear me? Excellent. Good morning. Thrilled to be here getting to represent this great business. And most likely, I'm a new face to most of you. Believe it or not, I've actually been in this industry closing in now on 30 years. I spent the first 20 in the [ R.E.D. ] system, and I just hit my 10th year anniversary here at KDP. And look, as I've told Tim, Bob, our Board, there is absolutely no other place than I'd rather be right now than here with this collection of iconic brands and the incredible team that we've been able to assemble. So let me tell you why I feel that way. Tim hit some of this to start with, we work in a fantastic industry. It is large, over $300 billion in retail sales. And most importantly, year after year, it has demonstrated the ability to consistently grow sales dollars north of 3%. And what fuels that growth is just how dynamic the consumer and her ever-increasing demands are. Underlying megatrends, these are things we all experience in our day-to-day lives, convenience, wellness, the need for functionality. The fuel a cycle of innovation and the opportunity to continuously participate in new pockets of growth. And this landscape is way more fragmented than most people realize. We view this as an opportunity for future expansion, particularly with our unique build, buy, partner model. So let's talk a bit about Bev Co. and why we feel like we are uniquely positioned to be a formidable challenger in this industry. We have scale. We exited 2024, as you saw in Tim's slides, north of $11 billion in net sales. Our business is profitable. Our EBITDA margin is at 30%. And again, importantly, we're growing. Since 2018, we've averaged a top line growth rate of 8%. We have incredible portfolio of brands with incredible organic growth upside. That's going to be most of my presentation today, just the confidence we have in these products. We also have an advantaged commercial and route-to-market model. This includes one of only three national direct store delivery systems for nonalcoholic beverages here in the U.S. And we've invested significantly in our operations to support network expansion. And yet we still have so much room for improvement. So I'll now get into the details on why I personally have so much confidence we can maintain this momentum into the next chapter. So one of the things that is so very special about beverages is just how they are so very personal. These are products where consumers create deep lifelong relationships with their favorite brands. We have many of these brands inside our portfolio, brands that consumers love, brands that our retailers value. So a few facts and figures. On the slide, you'll see over 25 brands that have over $100 million in annual retail sales. They are led by our $3 billion trademarks, brand Dr. Pepper, fast approaching the $6 billion mark as well as category leaders like Canada Dry and Mott's. Some other key brands, you'll see icons like Snapple, A&W, 7UP, as well as a few fast-growing disruptors like Bloom, GHOST and Electrolit. Today, we believe we have a portfolio that not only provides us with exposure to growing categories, but it creates scale for us with our customers and efficiency inside of our operations. So over the past several years, we've done a really nice job of being very thoughtful in how we want to evolve our portfolio. As you heard Tim mention, we employ a flexible but disciplined model that's really centered around building, buying or partnering. It all starts with build. And you can see on the slide where we have demonstrated a really strong track record of bringing innovation. No better example of this than inside of our CSD portfolio. Here, we are repeatedly recognized by our retailers for our market-leading innovation. We've also been very purposeful in our approach to utilizing different ways to go expand the portfolio, particularly our partnership model. Our approach to partnerships is very, very unique in the industry. We work hard to ensure that there is a win-win in the relationship that we have aligned incentives and that both partners are in it for the long term. These partnerships are able to go leverage our DSD network and allow us to rapidly participate in growth pockets with a very capital-efficient model. And in a number of cases, they provide us with a superior risk-adjusted return that we likely could achieve on our own through a build model. So we'll start now with the portfolio with my favorite brand, our flagship brand Dr. Pepper. I literally could speak for an hour to some brand Dr. Pepper alone. It is a brand that has had incredible success, and yet we still believe tremendous headroom for growth. A couple of years ago, you heard Tim say, Dr. Pepper became the #2 most consumed soft drink brand. This year, 2025, we will complete our ninth consecutive year of share growth. This is all built upon a consumer obsession for the brand. You can see that demonstrated in category-leading household penetration growth as well as industry recognition for our marketing campaigns. We believe we have a repeatable playbook that works. It starts with Dr. Pepper's unique flavor, its distinct positioning. It plays firmly and wins in what we call the treat demand space. We're able to take that positioning and then make meaningful connections with what consumers really care about and where their passions are. Right now, you can see that on Any Given Saturday come to life in season 8 of our highly successful Fansville campaign. We also leverage winning innovation, innovation that creates excitement not only with our consumers, with our retailers and our distributors. That drives some of the scale retail activation you'll see in market for the full trademark. Importantly, not only for the innovation, this also attracts new households into our base flavor, we execute this well. So this is great, but what excites me the most is the runway we still have ahead of us. Let me talk about Dr. Pepper Zero Sugar, still very much in its early days. You'll see in your scan data, it's already the #2 Zero Sugar CSD, but still has significant opportunity in terms of distribution, display presence, even consumer awareness. As a percentage of the trademarks mix, we're still only about 60% of the development of the #1 Zero Sugar CSD. Point number two, Dr. Pepper is Gen Z's most popular beverage brand, and we've rapidly been adding households within this cohort. If you are like myself, a student of our industry, you know that this type of trend is highly encouraging for longer-term consumption growth. And then finally, we have outsized growth opportunities in specific geographies. While we're currently approaching a 13% share nationally, however, in any given local market, we could be as high as the mid-20s in our heartlands or mid-single digits on the coast. What's really encouraging right now is we are growing share across all market types. In lower share markets, our innovation has been the most impactful in actually bringing new households into the trademark. And then final point, as good as the marketing has been on Brand Dr. Pepper, we honestly believe we can get even better. This year, we've begun to leverage some of our new capabilities in precision and personalized marketing. This is now allowing us to go reach target consumers with relevant content in a hyper-efficient approach. We'll speak a little bit more about that in a couple of minutes. So this playbook, we think it's a repeatable model that we can go apply to other parts of our portfolio. And let me just give you two quick examples of work in flight today. So Canada Dry, #1 ginger ale, a long track record of growth. Canada Dry plays in the relaxed man space. It also has a unique and ownable position. Here, we've seen innovation also play an important role. Back in 2024, we launched what we call our fruit splash platform. That year, it was recognized as the #1 CSD innovation. We're bringing the second flavor in for 2026. And much like brand Dr. Pepper, Canada Dry also has geographic opportunities. While it's a 3 share nationally, it's as high as a 12 share here in parts of the Northeast. And let's take a minute to talk about Mott's. Mott's, #1 apple juice and sauce brand, a staple for moms, incredible equity and health. Here, though, we still have potential for growth. Great example you see on the slide is in our sauce portfolio. Inserted formats like cup and jars, we're north of a 50% share, but we have been a relatively small player in the growing pouch segment. Over the past year, with a focused marketing and commercial activation plan specifically against pouch, we've been able to unlock significant growth. So I'll let you see on the right-hand side of the slide. You can see a host of other iconic brands within our portfolio that we think we can deploy the same playbook to unlock organic growth. For those of you, probably most of the audience here, local to New York City, you may have noticed Snapple has both a new campaign, and just last week, the return of its iconic glass packaging in five classic flavors, honoring the city where it was born and its five boroughs. So let me shift gears here. Another space I probably consume too much of, but we're excited about as a company, the energy category. Energy now, the third largest category in beverages, $28 billion. If you look at the standard data growing rapidly. What's really remarkable about energy is just how over the past two decades, this category has continued to reinvent itself. It's been able to leverage different product profiles, whether it be ingredients, caffeine amounts, serving sizes, brand positionings. The category has been able to continually unlock additional occasions and bring in new households. Right now, we're really seeing the latest iteration of this with the female-targeted product lines. Three years ago, we rounded honestly to a zero share in energy. We knew this was a big opportunity, so we set out to go create a portfolio to win where we saw the growth occurring, products with great taste, products that played in the zero sugar space, products that we could target against distinct demand spaces with unique authentic brands. Today, we believe we have a complementary portfolio of brands that can win within their respective segments, especially when you couple that with our commercial approach and our national distribution network. You'll see in your scanner data over the past four weeks, we've now surpassed the 7.5% share, and we have line of sight to our stated goal of the 10% share in the next few years. So aside from energy, we've also established platforms in several other high-growth categories over the past two years. Through our long-term distribution partnership with Electrolit, we now have a strong play in sports hydration. Specifically, we are the #1 player in the rapid hydration segment. This is a $2 billion segment that is growing at a blistering pace. This summer, we entered the prebiotic CSD space with Bloom Pop, building on Bloom's incredible success to date in energy. In its launch retailer, velocity per SKU was on par with the market leaders. We're really excited about Bloom Pop's potential, and we just began scaling this nationally at the end of Q3 through our DSD network. And then finally, earlier this summer, we had an acquisition, a company called Dyla brands, which has allowed us to go play in the drink mix space. Dyla is bringing both brands as well as capabilities. Additionally, it's going to let our broader portfolio to instantly access this high-growth and attractive functional powder segment. So a lot of effort has gone into building this portfolio. However, entering a category is one thing. The bigger question, can you effectively sustain the success? And you can see on the slide across a variety of time horizons in a spectrum of categories, how we have been able to significantly increase our market share relative to pre-KDP distribution. This reinforces that access to our network, it's more than distribution. It's our ability to step change the selling and activation for a brand all the way from the national buying desk down to the outlet level. So, part of the secret, whether it's successful innovation or some of the partnership scaling I just spoke about are some of the top-tier capabilities that we've been able to create in our marketing and commercial functions. I mentioned earlier with brand Dr. Pepper, my excitement around our new capabilities to go amplify what we already believe is world-class marketing. This is all grounded in new abilities to go leverage AI-powered data and analytics to go create a deeper understanding of the consumer. This helps us guide our innovation. It's helping us set brand strategy. And now it's also allowing us to create highly relevant personalized content and creative. Our marketing and communication platforms are increasingly connected across both channels and platforms. This is going to let us unlock precision media capabilities, allowing us to go target the individual and drive efficiency and effectiveness in how we fight our marketing investments. Right now, at KDP, we think we have access to the right data, the right systems and most importantly, the right talent, underpinned by an agile operating model to measure and react almost real time to ensure we're driving the best returns for our marketing investments. This fall, we started to go deploy this with our Fansville campaign. You're going to hear us talk a lot more about this in the future. And then an area that I've spent a great deal of my time helping to go build out is the middle part of the slide is what we call our commercial engine. So this is the function which really serves as the critical link between our brands and ultimately our routes to market. So inside the gears of the engine, you see some of the best-in-breed capabilities we've created. It could be omni marketing, revenue management, category management, how we show up with our customers. These are capabilities that allow us to effectively represent our products with our customers with a high degree of confidence in the ability to go create value. The advantage of us doing this well, so regardless of the brand owner or the route to market is we can create a seamless experience for our retailers, bring them meaningful commercial solutions that can fully take advantage of the breadth of what our portfolio has to offer. And then final point on the slide, we all know it, strong national distribution, absolutely critical to go win in beverages. Right now, we have six different options that we can go use and it really depends on what is the right fit for the product or what is the need of the retailer. So let me speak a bit more about those options. So I'll talk more about company-owned DSD. We have it both here in the U.S. and in Mexico. But we also are able to go leverage some leading bottlers that complement our company-owned DSD footprint in specific geographies. For some products, we still utilize the effect of warehouse direct model, particularly for categories that have lower velocities or where there's a real preference by the retailer for that mode. Fountain foodservice and on-premise, extremely important. These channels provide access to high-value away-from-home occasions. These are critical for building brands. Notable, brand Dr. Pepper is the most pervasively available fountain beverage. This allows us to go have direct relationships with most major operators and customers in the foodservice space. And finally, winning in e-com has become increasingly important. By our measures today, roughly one in eight cold beverages, the purchases are occurring in a digitally oriented means. And in many categories and retailers, it's providing over 100% of the growth. We are making the right investments to ensure we've got the specialized capabilities to effectively partner for growth, whether it's a pure play or our omnichannel retailers. So let's talk a bit more about DSD. Why does it matter so much for beverages? Well, when you get into it, great DSD execution is more than just a replenishment model. Done well is a powerful competitive advantage that allows you to build brands over time. DSD provides access to outlets that are not serviced by warehouse direct. Most of the convenience retail channel, most of on-premise cannot get there with that DSD. And even within retail channels, it allows a local selling associate to build a meaningful relationship with decision-makers at the outlet level. These relationships, coupled with the merchandising resources we provide can translate into a superior retail presence for our brands as well as getting you critical access to cold drink equipment and other means of trial. Scale is what makes a DSD system work. To generate the local brand-building benefits, there is significant labor and fixed costs. Scale drives a virtuous cycle that benefits from the leverage on that infrastructure and done well, it enables further reinvestment and growth. So let me orient you to our DSD network. These are the trucks that carry the majority of our portfolio. Again, we have one of only three systems that can cover the entirety of the U.S. footprint. Our company-owned trucks, they're depicted in the maroon on the slide. They cover roughly 80% of the population base. And for the balance of the country, we have long-standing strong strategic relationships with leading independent distributors who operate with scale in their own respective geographies. Look, I've had the chance over the past few years to spend a great deal of time with some of the 13,000 DSD employees that we have. When you get a chance to experience the passion these team members have for our brands, the expertise they bring to our customers every day, hitting almost 200,000 outlets, you can see firsthand why this is such a powerful competitive advantage. So we're really proud over the past six years of the work we've done to go strengthen our DSD network. Look, we're improving every day in terms of both the service, the capabilities that we're providing our retailers. So let me talk about each of these vectors, we'll start with territories. Since 2019, as Tim mentioned, we've made over 30 acquisitions, some relatively modest, a few rather large. What's universal though is where we made these investments, we've been very satisfied with the returns that they've generated. That said, there is not a one-size-fits-all model here. Our primary goal is to have a scaled and relevant DSD operation that puts the right focus on our brands, whether it's a partner or something we own, access is what is key. Let me shift the portfolio. One of the goals of our portfolio expansion has actually to go help us generate additional scale for our company-owned DSD operations, meaningful participation in categories like energy or sports hydration, they've had a material impact within specific channels. No better example than inside of convenience retail. Here, we've been able to improve our drop sizes close to 70% and in some instances, have had the opportunity to go revisit our service frequency to go map better to some of our customers' needs. Again, a great example of that virtuous flywheel I spoke about a moment ago and how it can strengthen our ability to go capture growth, particularly in C-stores, which is an extremely profitable space. So final point on the slide is going to reference some of our digital capabilities. These here are really focused on our frontline selling. We're rolling these out recently in the market, really pleased with the results. The one I'll highlight is our perfect daughter. This is an application that's leveraging algorithms based on outlet-specific data to help pre-generate the order for the next delivery. And just to bring this home, if you think about a big box store, generally a couple of hundred thousand square feet, we may have 250 different SKUs spread across that store that a sales associate is responsible for writing the next delivery order for. Where we've been able to deploy this application, we are seeing meaningful improvement in in-stock rates as well as a significant reduction in the time it takes spent on lower-value activities, and counting walking around the outlet. So with that additional time, we can enable these same individuals to shift their focus to local selling activities. Here, we're also implementing real-time access to outlet-specific data. We're starting to enable it with AI to help generate specific insights, that's going to help aid in their ability to work with the local customer decision-maker to unlock growth inside of that outlet. Extremely excited about where this is going to go. So shift gears a minute. Let's talk about Mexico. We also have a fast-growing profitable $1 billion-plus business in Mexico. Though it's at an earlier stage, we think the same model that has driven success in the U.S. also can be leveraged here. We have a leading brand. It starts with our flagship brand Peñafiel. If you are not familiar with Brand Peñafiel, is a 100-year-old locally sourced icon that is the #1 mineral water in Mexico. We're now seeing that brand have success moving into some adjacent spaces. We also believe some of our U.S. trademarks can play a much bigger role in the Mexican market, particularly Brand Dr. Pepper. Finally, like the U.S., we continue to make meaningful investments in expanding our DSD network. Much like the U.S., for Mexico, a critical enabler of brand development, particularly in a market where the traditional trade is still thriving. Today, our company-owned footprint, we reach about half of the marketplace. We cover population centers in the central and northern part of the country. All this together is why we feel great about our ability to generate strong returns from Mexico for many years to come. So spoken a lot about growth. I also want to emphasize, though, we are focused on the right kind of growth, growth that's going to allow us to go expand our margins over time. Pricing, critical lever. We are very well positioned to drive sustained net price realization across our major categories. Another key thing is our largest category, CSDs, we still believe has a very, very attractive price-to-value ratio, particularly when you compare that to other beverage options for purchase. Let's talk about mix management. We have very strong revenue management capabilities. Done well, we're able to go meet both some affordability requirements, but also identify different levers to improve our unit economics, whether it's through promotional optimization or package and product mix. I highlighted the virtuous cycle in convenience stores. The ability to continue to grow immediate consumption soft drink occasions as well as energy, these are really profitable levers to continue to go get great margin accretive mix in your portfolio. And then finally, I'll touch on productivity. We all know productivity, it supports reinvestment back into the brands, ideally can help expand margins. Annually, we target 3 to 4 points of productivity, and we've been able to consistently deliver in that range over the past few years. Specific focus areas where we have made and will continue to make investments are in our network, both within our manufacturing and our distribution facilities, we've got opportunities to further leverage automation and optimize our footprint. Digital, I spoke a lot about frontline a few moments ago. We also have digital initiatives in flight to help step change our demand and supply planning visibility across the vast network. And then finally, operating model. We're continuing to strengthen how we manage this productivity pipeline, increasingly driving accountability down to our local orbits. So when you bring it all together, Bev Co. has delivered consistent strong financial results. Since 2018, on a compounded annual basis, top line growth approaching 8%, EBITDA growth almost 12%. And look, we've achieved these outcomes through what I covered today, strong base business momentum and share gains, deliberate capital-efficient portfolio reshaping initiatives and targeted actions, which we were able to mitigate inflation and help us go reinvest back against the core tenets of our business. And we expect to sustain this momentum. That supports the algorithm you'll see up on the page, mid-single-digit net sales growth and high single-digit adjusted EPS growth. Additionally, we expect to generate significant free cash flow, which will, as Tim mentioned, provide optionality for us to either invest against organic or potentially inorganic additional growth levers. So a few points to reiterate as I close here. This is a powerful platform in a fantastic industry. Over the past six years, this team has proven its ability to consistently deliver attractive financial returns. We now head into the future. We're equipped with a fortified portfolio, the right brands, the exposure to high-growth demand spaces, which we believe can meet our growth goals organically. Additionally, we're poised to benefit from a step change in our new digitally enabled marketing capabilities. We have a model against our portfolio that creates optionality against how we can add to the portfolio in a very capital-efficient manner. We are strengthening our network, and we're going to continue to recognize the benefits of improved execution. These improvements will drive growth in margin-accretive categories, packages and channels. And then finally, we have demonstrated the ability to unlock meaningful productivity, and we believe we have a robust pipeline of opportunities to come. So as you assess some of these efforts, I think now, hopefully, you can understand why I have so much confidence in this team. And as we head into the next chapter for Bev Co., confidence about our future and our ability to go deliver this very attractive algorithm we have up on the page. Thank you guys so much for your attention this morning. I'm now going to turn the podium over to Jane. Jane Gelfand: [Audio Gap] Each independent company remain the same as we outlined in August. For Beverage Co., that includes an outlook of mid-single-digit net sales growth and high single-digit adjusted EPS growth. And for Global Coffee Co, we envision an outlook and long-term targets consistent with low single-digit net sales growth and high single-digit EPS growth. These will be strongly cash flow generative businesses with Bev Co. projected to generate over $6 billion of cash flow -- free cash flow over the next three years and Global Coffee Co. set to produce more than $5 billion. While the exact dividend at each company will be determined closer to separation, what we can commit to you today is that across the two, we'll maintain the level of our current dividend to start. And we also come to you today with a clear view of starting net leverage for each stand-alone company. Upon separation, we expect Beverage Co. to have net leverage between 3.5x and 4x, with Global Coffee Co targeted between 3.75x and 4.25x. Of course, both companies will continue to delever and strengthen their balance sheets following the separation as we keep to a commitment to strong investment-grade profile. Let's zoom in on each company in a little bit more detail, and this will build on the remarks of my colleagues. For Beverage Co., the financial algorithm and capital structure that we've laid out are carefully designed to enable its growth potential, its growth strategy and continued outperformance. As you just heard from Eric, our Refreshment Beverages business has already proven itself to be an agile challenger in North American beverages, and we fully intend to build on this standing with long-term targets that reflect that. Multiple factors are expected to contribute to mid-single-digit net sales growth. Over the last several years, we have worked really hard to evolve our portfolio mix towards a faster-growing weighted category average, which now features a well-balanced set of volume, mix and price drivers. On top of that, we layer a proven track record of market share gains supported by strong innovation and commercial capabilities. And in addition, our ability to enter white spaces and activate capital-efficient partnerships now and in the future, they're attacked, which means further growth optionality as we move through this period of integration and then afterwards during -- after the separation. So combined with operating margin upside and some below-the-line leverage, what becomes clear is the path to high single-digit EPS growth for the Beverage Co. And to facilitate this, we expect the capital structure at separation will be only modestly above where KDP's would have been prior to the deal with cash flow to delever quickly thereafter. Separately, we will optimize Global Coffee Co. for more resilient growth and strong cash flows. What that means is our vision remains to create a pure-play cash-generative global coffee company. How does that manifest financially? A combination of low single-digit net sales growth over time with some volatility up and down over the course of commodity cycles due to pricing pass-through dynamics and high single-digit EPS growth, thanks to a combination of actionable cost synergies, continuous productivity and below-the-line leverage. This combination should drive more steadily growing cash flow with upward potential should the coffee price normalize from here. And for Global Coffee Co. too, what we want is a balanced capital structure out of the gate, which means net leverage likely between 3.75x and 4.25x at separation. So you now kind of better understand the financial vision, and I'd like to shift the discussion to how we get there. Over the last several weeks, we set out to optimize our acquisition financing mix with two objectives. The first was to lower leverage at acquisition close. And the second was to establish a clear line of sight to solid capital structures for each of the individual separated companies. That process successfully culminated in today's announcement of a combined $7 billion strategic equity investment anchored by two leading global investment firms, Apollo and KKR. I would highlight several benefits to the revised financing package. One, we will, in fact, reinforce our investment-grade profile as a combined company with net leverage at close now approximately a turn lower than our original plan entailed. Secondly, we will have greater visibility to investment-grade worthy capital structures for each independent company akin to what I just described. And even though the new capital is equity-like, it comes with a reasonable cost while pairing us up with world-class investors who see the strength of the opportunity at KDP and its successor companies. All in, against the backdrop of more comfortable leverage and attractive year-one EPS accretion of approximately 10%, we hope this update will allow the strategic logic and value of the deal to take center stage in your evaluation. I'll take a closer look at the structure of the deal. Under our previously announced plan, assuming a June 2026 close, net leverage at 2026 year-end was projected in the low 5s. What that meant was a starting point at close that would have been at approximately 5.6x. After today, we expect initial leverage at close to be in the mid-4s. And from there, we plan to delever at roughly 0.5 turn a year, thanks to a strong focus on cash flow. The new investments will allow us to replace the full balance of junior subordinated notes and a smaller portion of senior debt that were originally intended to be part of the financing package. And all in, the weighted average cost of capital of the deal is expected to be only modestly higher than original plan. The new instruments we've stood up take two forms. Let's start with the creation of a new Global Coffee Co. joint venture with a consortium of investors led by Apollo and KKR. The JV will focus on single-serve manufacturing in North America with the earnings from pod manufacturing to be split among the partners, including KDP. In fact, KDP will retain a controlling interest in the JV as well as operational control of the assets. And in establishing the JV, we'll receive $4 billion in total proceeds at a cost of capital of just above 7% in a 7.3% to 7.4% range, an addition projected. In addition, KKR and Apollo have made a strategic investment into KDP and ultimately, the Beverage Co., yielding $3 billion of incremental capital. The second instrument is an attractively priced convertible security. It features a preferred dividend of 4.75% to be netted against any common dividends and the conversion price is $37.25. That's a 6% premium to where KDP last traded prior to the announcement of the acquisition, an outcome that speaks to the upside potential we all see here. I should mention that we plan to offer our shareholder partners an opportunity to participate in this financing. To help with your modeling, you'll find a page in the appendix that outlines the accounting implications of each instrument. And when you run your models, what you'll see is that we've been able to effectively drive leverage lower while making a manageable trade-off in terms of accretion and cost of capital. Based on your feedback, which informed our decisions over the last several weeks, we believe this is a more optimal balance to strike. As Tim said, ensuring solid balance sheet for each company is one of the critical milestones towards a successful separation, and we expect to be operationally ready to go by year-end 2026. In the meantime, our job will be to focus on EBITDA growth and cash flow generation to facilitate that time line. However, should we want to further accelerate the deleveraging path, there are other levers that we could employ to raise additional capital. For instance, we might consider monetizing select noncore minority stakes and nonstrategic brand assets. And we may also evaluate a partial IPO of Beverage Co. to begin the separation process, which could raise additional primary proceeds. To be clear, these are simply options for us to consider. The only concrete commitment on this page and on this stage is the strong free cash flow generation to support our transformational vision of the future. And speaking of commitments, we recognize we have come to you with quite a bit of news today, and we're focused on supporting your full understanding. So of all the messages I hope you'll take away from my presentation, it's the following: we will ensure an appropriate capital structure for KDP at transaction close as well as each individual company at separation and beyond. Our focus is on strong cash flow to support deleveraging as well as maintaining our competitive and attractive dividend. Through all of this, our unwavering goal is to set Beverage Co. and Global Coffee Co. up for financial success and operational success. And as we do so, we will stay consistent and transparent in our financial communications to help build and maintain your confidence. With that, thank you very much, and I'll pass it on to Roger Johnson. Roger Johnson: Good. Okay. My name is Roger Johnson, and I have the privilege of being the Chief Transformation Officer and Chief Supply Chain Officer here at Keurig Dr. Pepper. And in my capacity of Chief Transformation Officer, I am responsible for the integration of JDE Peet's into KDP and then the subsequent separation into Global Coffee Company and beverage company. So I'd like to take a few minutes today to just walk through our approach and the execution of the transformation and maybe give you some more details of how we're approaching the work in front of us. First off, we are genuinely excited about the opportunities ahead for both stand-alone companies. And as Bob and Tim mentioned earlier, we have strong support and oversight from our Board of Directors and the specially created transaction committee. To guide this transformation, we've established an executive steering committee that meets weekly to provide critical oversight and timely strategic direction. We've also added rigor through a transformation management office or our TMO, which is focused on capturing synergies and driving growth opportunities. To keep everyone focused, we've named a dedicated internal TMO team to lead these initiatives, allowing most of our teams to continue driving base business momentum. This process is fostering strong communication between JDE Peet's and KDP leadership as well as our both internal functional experts. And to ensure success, we've partnered with outside advisers who bring deep experience in integrations and complex transactions, and they are long-standing relationships, both for us and JDE Peet's, which means we can leverage their detailed knowledge of our collective businesses and their proven expertise from hundreds of similar processes across industries worldwide. Let me add some more context in the scope of our transformation management office. We fully stood up critical work streams focused on objectives of integration planning, future company designs, separation, synergy value capture and spin readiness. For both Global Coffee Company and beverage company, these efforts have been mobilized in collaborative but discrete work streams. We've organized these objectives into three primary focus areas for execution. First and foremost, change management. We're engaging the hearts and minds of our organizations, showcasing future opportunities and creating that winning culture as we move towards stand-alone success. In commercial and supply chain, we're leveraging this unique moment to optimize and unlock growth and the potential across marketing, selling organizations and key go-to-market opportunities. And then finally, for enterprise functions, we are focused on building fit-for-purpose teams calibrated to each company's unique needs and scale, ensuring both organizations have the strength and agility to succeed. As we fully mobilize the TMO, I've seen fantastic collaboration across our teams in these early days. It's really inspiring to watch our leaders really lean in to the road ahead. Together, we've shifted into the next gear and planning against key milestones. First of all, I'd say we're focused on integration planning following the acquisition close with detailed action plans to capture synergies. And we're also accelerating readiness work, developing future company operating models for both global coffee company and beverage company and getting into the functional-specific preparation required for success. Secondly, we're deep into separation planning to ensure clean operational readiness for two world-class public companies. Our goal is to be ready to separate by year-end 2026. And that means everything within our control will be stood up and ready by then. As Tim mentioned earlier, the actual timing will depend on achievement of multiple milestones, including our own. But our commitment is clear, secure operational readiness as early and as robustly as possible while actively capturing cost synergies. And our goal is clear to build a global coffee powerhouse and the most agile North American beverage leader. This transformation approach will make that vision a reality. To make sure both stand-alone organizations reach their full potential, we placed a heavy focus on communications and change management. Recently, we had the chance to spend meaningful time with the JDE Peet's team on International Coffee Day, very fitting. And it was a fantastic event in Amsterdam, where we shared our vision, answered questions and amplified the excitement across both teams. The shared love of coffee brought the teams together and really gave everyone, including myself, a glimpse of what a true coffee powerhouse could feel like. At the same time, we launched aligned communications approaches, high-frequency town halls, feedback loops, multichannel digital outreach, both internally and externally. And this really ensures we're reaching every employee and engaging top leadership, including our director and above populations. For many, this is the first time in their careers, they've experienced a transformation of this scale and enrolling them in the journey is an exciting opportunity. To reinforce collaboration, we've shared clear guiding principles and leadership commitments on how we will work together for the outstanding outcomes we expect. We believe a consistent drumbeat of communication is critical to a seamless integration and eventual separation without missing a beat. So far, employee feedback has been very positive, especially around leadership transparency, communication depth and the opportunities ahead of us. And I can tell you firsthand from Amsterdam, Frisco, Burlington, all over, our colleagues are energized about the future potential of these two great companies. As mentioned earlier, our Coffee company value capture plan, about $400 million is well underway with opportunities across procurement, manufacturing and SG&A and IT. This target has been validated through both top-down and detailed bottoms-up planning, and we see it as highly actionable. As Tim highlighted, these efficiencies are balanced across the three major buckets of procurement, manufacturing and logistics, SG&A and IT. And ahead of close, we've established clean teams to ensure that work can happen outside the day-to-day business so we can move quickly once the acquisition closes. Immediately after close, we'll activate each functional focus area to deliver on our three-year synergy capture plan. And we're confident these cost synergies, combined with future growth opportunities will set Global Coffee Company up for long-term success. And our job is to do the same for beverage company, minimizing dis-synergies before and after separation. We expect that impact to be approximately $75 million, and we largely plan to offset it. That means we got to redesign organizations and spend structures with agility in mind, keeping any leakage manageable within the beverage company's overall P&L. I hope you can see and feel my excitement and confidence in our ability to land the right structure, build two successful companies and create value for everyone throughout this transformation. So thank you for your time and engagement. And I'm going to turn it over back to Tim to give a Q3 earnings update. Thank you. Timothy Cofer: We are coming down the home stretch. Thank you, Roger. Look, one of the main objectives, obviously, in establishing that TMO is not only to do the hard work around separation -- integration separation, but importantly, to minimize the disruption of that activity so that our core teams can focus and deliver on the base business quarter after quarter. And I think our Q3 results that you've probably already seen in the press release are a testament to this approach. We continue to operate with focus, with discipline. We delivered another strong quarter here in Q3, even with that tough macroeconomic backdrop. So let me share some highlights on the quarter. Net sales accelerated in Q3. They accelerated sequentially, they increased at a double-digit rate with strengthening performance across all three of our reported segments. We gained market share in key categories like CSDs and energy. We successfully implemented another round of pricing on our coffee business. And in international, we drove healthy relative trends among challenging macro conditions. So as you've heard throughout the morning, we are advancing a lot of exciting initiatives right now at KDP across both Refreshment Beverage and coffee. And these are, as evidenced in the results, really contributing to this near-term performance and I think continued momentum. Having said that, as expected, inflationary pressures ramped during Q3. And even despite this, we delivered solid bottom line growth and generated meaningful cash flow in the third quarter. So with one quarter remaining in the year, as you've heard, we are raising our constant currency net sales outlook and reaffirming our EPS growth guidance. We're confident that our robust commercial plans, our innovation plans, our operating rigor will help us achieve these updated targets and finish 2025 on a strong note. So let's move to the consolidated results. You see it on this slide. Net sales specifically grew 10.6%, led by about a 6.5% increase in volume mix with strong results in U.S. ref bev and international. The GHOST integration continues to perform very well. It's meeting all of our key metrics that we set out and delivering on year-one of our investment thesis. It's contributed 4.4 points to the top line. Net price increased 4.2% primarily, that's reflecting the pricing actions we took on our coffee business. in response to obviously, sea price inflation. On the bottom line, operating income increased roughly 4% net sales growth, productivity savings were partially offset by that inflationary pressure I referenced. All in, EPS grew 6% to $0.54, and that included a modest below-the-line benefit from a minority partnership gain. Okay. Let's do a quick tour of the three reported segments, starting with Refreshment Beverage. We maintained what I characterize as exceptional momentum on this business with net sales growing 14.5%, driven by volume/mix increase of over 11% Net price was also a driver. It added about 3 points to net sales. GHOST clearly was a strong contributor to our growth, but also our base business. In fact, our base business accelerated in Q3, increasing in the high single digits, led by CSDs, energy, sports hydration. Overall, the segment results in ref bev were prepared by that growth playbook that Eric took you through just a few minutes ago, brand building, innovation, commercial execution, each contributing to the strong performance you see. And we see significant runway for future growth in ref bev, and we have strong plans in place going into '26 to ensure we deliver on that momentum. What about segment operating income? You see it grew 10% with net sales gains and ongoing productivity savings more than offsetting the impacts of inflation as well as lapping earned equity gains that were larger in the prior year. Let's shift to U.S. Coffee. In U.S. Coffee, we continued our recovery trend. We drove modest growth in both the top and bottom line. Net sales increased 1.5%. Net price realization was 5.5% as we implemented additional pricing actions on our pods business and our brewers business in response to inflation. This was obviously partially offset by a volume mix decline of about 4 points, primarily driven by lower brewer shipments. And I will tell you, during the quarter, retailers are continuing to manage brewer inventory very tightly, and there's some adjustment to the recent price increases by consumers. Pod shipments also declined, but more modestly and the elasticities are remaining quite manageable and within our overall expectation. Overall, the coffee category remains resilient in our view relative to the significant increase in input costs, and we're also seeing improvements in our own business. Admittedly, the commodity backdrop is difficult and price overall is driving our top line. Olivier told you earlier, we're actively advancing robust innovation plans. He covered many of them, marketing plans, driving more brewer sales, some exciting news going into '26 with Keurig Coffee Collective and beyond. And overall, we would say, while pod shipments declined, we feel good about what we're seeing from an elasticity standpoint. Let's talk about segment operating income. It grew about 2.5% with pricing and cost savings more than offsetting inflationary pressures. We're improved by -- we're -- sorry, we're encouraged by the improved trajectory on the bottom line, but we do expect impact from green coffee inflation and tariffs to build into the fourth quarter. All right. Now international. Net sales grew 10% in constant currency. That's a 6% increase in net price, a 4% increase in volume mix. Results reflected strong relative performance in Mexico despite what you know are widely reported macro challenges as well as the pricing-led growth in our Canadian coffee business. International operating income declined about 4%, primarily reflecting the impact of inflationary pressures as well as a tough year ago comparison. This was partially offset by the strong top line growth that I referenced in productivity savings. Overall, in international, I would tell you, we continue to see significant potential for this segment to have outsized top and bottom line contribution over time. These Q3 results also underscored the cash generative nature of our business. Free cash flow was more than $500 million in the quarter, bringing that year-to-date total to $955 million. But importantly, and you see it in this box, this year-to-date figure includes the unfavorable onetime impact of the $225 million GHOST distribution payment that we made in Q1 as we acquired this business and took over distribution. Obviously, excluding the impact of this one-timer, we would have generated more than $1.1 billion in free cash flow on a year-to-date basis, representing obviously a sizable step-up from last year. Looking ahead, you've heard us say it, and Jane mentioned it, we expect strong cash generation, both in Q4, obviously, on a full year basis and in the years to come, which will help support those deleveraging goals that Jane shared with you earlier. All right. Let's move to guidance. Three quarters of the year behind us, we are raising our constant currency net sales outlook to high single digit from mid-single digit previously. We're also reaffirming and remain on track to deliver HSD EPS growth guidance. We recognize that the environment remains dynamic, especially when you think about tariffs, the building inflationary impacts, but we've got the innovation. We've got the commercial plans. We've got execution in a great place as well as disciplined expense management and all of that for us means we can continue to deliver on our guidance and for our shareholders. All right. Let's wrap this up, and then we'll go to a break before Q&A. So we've reviewed the strong Q3 results. I want to now come back to the four questions I put up right when I took the stage this morning. And I think over the last couple of hours, I hope you'd agree, we provided meaningful updates and further details on our transformative value creation plans. Let's go back to these four questions. First, why the acquisition? Because after careful consideration, we concluded that the acquisition of JD Peet's is a unique opportunity to strengthen our coffee business by adding substantial complementary global scale. This combination will catalyze meaningful revenue opportunities, cost synergies and in turn, drive strong financial delivery and sustainable competitive advantage. Second question, why separate it all? You have the option to run it as a combined company? Because we believe in the power of focus. We believe strong and distinct cultural identities at Global Coffee Co. and Beverage Co. can create even greater alignment and more purposeful action. And we believe that strategic optionality should be more available and accessible to each business as a stand-alone. Third question, how do we tailor our capital structures to enable these outcomes by making revisions. We've solved for a more comfortable leverage at acquisition close with a different and attractive financing mix. And we've enhanced visibility to two properly calibrated balance sheets for each of these independent companies. And finally, how do we ensure success, by focusing on milestones rather than dates, by putting the right processes in place to achieve those milestones and by appointing the right leaders with the right experience to drive towards those goals. All right. Let me wrap it up by stating the obvious, and it's on this slide. We are truly just getting started. The market reaction after August 25 was not what we hoped for. But I can tell you the reaction from our other stakeholders, including commercial partners, customers, KDP employees and future colleagues at JDE Peet's have all been strongly positive. We've given folks a very inspiring destination and they're ready to go. We're excited about this future transformation as well. But I also want to be clear, we're not in a rush. We are making a big bet because we see enormous potential. And we're going to be highly deliberate in how we go about unlocking it. I hope you sense that after today. Our management team, our Board of Directors see a tremendous amount of value creation opportunity from this two-step transaction, and we will not rest until we get that done. So as you heard today, this was a slide Bob started with. We do have a consistent and proven track record of creating value in beverages. We create vibrant businesses through a playbook that works. We have deep insights that underpin our conviction in this deal, and we have a clear plan to deliver on its promise. At the same time, we're listening and we are adjusting as and when needed. And this leadership team has the confidence, it has the experience to successfully carry out this transaction. But we also have the wisdom, we have the willingness to stay flexible in our approach. Again, I hope you've seen that today, and you will continue to see that as we chart our course to establishing North America's most agile beverage challenger and a true global coffee powerhouse. Thank you for your time. Those of you that are here with us at NASDAQ, we're going to take a break before we come back for Q&A. I again encourage you to take full advantage of these fabulous beverage stations. And those that are joining verbally, we are going to -- or sorry, virtually, we are going to come back at 12:15 East Time. Thank you very much. [Break] Operator: Ladies and gentlemen, please welcome members of Keurig Dr. Pepper's Board of Directors and management team to the stage. Chethan Mallela: Thank you. I hope you enjoyed that break. We're able to try some of our great beverages. I will now move to a Q&A session with the panel. So we're happy to take your questions. Dara? Timothy Cofer: Dara, right here in the front row, okay. Dara Mohsenian: So, Tim, it's been a couple of months now since you announced the transaction. Just can you give us an update as you've done more detailed work and look more under the hood at any incremental opportunities as you see it on the JDE side as you've looked at the business the last couple of months? And specifically on the cost synergy side, potential maybe for upside there, level of visibility that you can deliver the savings you outlined? And then just secondly, on the base KDP business today, can you just give us an update on the tariff situation, what's embedded in '26 guidance, how we should think about incrementality in '27, but also really wanted to understand how you're managing pricing on both the coffee side as well as the CSD side, given what we're seeing with tariffs and the volatility there. Timothy Cofer: Yes. Thanks, Dara. I'll start. And Roger, I might kick it to you on cost synergies and then I come back on the tariff and cost outlook. Look, over the last eight weeks, as I said, I've spent a lot of time with our colleagues at JDE Peet's multiple trips into Amsterdam, et cetera. You can imagine we did a great deal of due diligence prior to announcing this acquisition. But at some point, that's kind of public company due diligence. So now being able to really get underneath the hood, meet the leadership team, review things like brand plans, early thoughts on innovation and so on. What I'm seeing is, number one, this is a good business. These are good bones, the brands, the positions, et cetera. And you saw a lot of supporting evidence on stage earlier today. I think the other is improved confidence in our synergies, both on a revenue basis in terms of the growth opportunities everything from what we can do on the brewer side, one of many towering strengths of legacy Keurig is our brewer know-how, our brewer innovation, our brewer cost structure and our brewer economics. And having seen the other side brewers and having run one of those businesses in my past life, I think there's real benefits there. I think a lot of the -- take Keurig legacy brands, think of Green Mountain and The Donut Shop and take it across all formats now in a more profitable way, that's an opportunity for us. Then we start talking about things like Alta, et cetera. So I'm -- the more that I learn, the more excited I am on the base business itself, the early stages of the reignite the amazing strategy that, that team is embarking upon as well as the synergies. You want to talk a little more on cost, Roger? Roger Johnson: Yes. So in the remarks that I had, we talked about from a cost side, procurement, manufacturing, logistics and SG&A and IT. And after the diligence work concluded, kind of had a chance to dive in deeper and really start to underpin that, right, learn more about the reignite the amazing and then see what's complementary. And I'd echo what Tim said around maybe more obvious things, brewers or otherwise. But then things about manufacturing footprint, routes to market and associated IT systems that I would -- I have confidence as we're building out the plans as best we can as two separate companies that I'm confident in it. And then we'll get into the clean rooms a little more detail over the next couple of weeks to substantially underpin those more. Timothy Cofer: And then on tariff, lastly and then next, Kevin, looks like is -- look, first of all, unique to U.S., right? So it's not a global impact here for the others. No doubt that cost pressure is a back half '25, early '26 phenomenon. So that pressure will continue into that. As part of your phrasing the question, what's built into '26 guidance, there is no '26 guidance. That's not the purpose of today. You guys know we have an algorithm. That's an algorithm that we feel strongly about. But today is not the day for '26 guidance. I will tell you, cost pressure will continue to mount in Q4 and carry over into the front half of next year. Kevin Grundy: Great. Kevin Grundy, BNP Paribas. Two questions, just kind of taking a step back. Strategically with respect to the deal, maybe just spend a moment on the structure of the deal and why the Board believed it made more sense than potentially a spin or sale of the coffee business. where you still get sort of the strategic focus that, that sort of transaction would lend itself to? And then relatedly, what learnings does the Board take from this and the market reaction in terms of the way you think about capital allocation, communication with your large shareholders and things of that nature? I'd appreciate your thoughts. Robert Gamgort: Okay. I'll start off on there. Yes. I think -- I mean, Kevin, I think we were incredibly transparent in one of the slides that Tim had today that said we contemplated all potential alternatives, status quo, selling, spinning and then this combination here. And we analyzed each one of those and looked at the potential value creation from that. The problem with selling it is that you need a party on the other side who's willing to buy it and buy it at a price that you think is fair. And this is a really large asset. Spinning it off on its own does nothing. It weakens the business. It's -- I talked about before about creating a scale player on a global basis. Spinning off Keurig on its own is one that we thought would have destroyed value, and we would have lost a lot of the synergies and the scale that we get as a combined company. Theoretically, to one of the questions, I think we were talking at a break that you could spin it and then merge it at some point in time. Well, that's an unknown. You're not actually not allowed to spin it tax-free and have a prenegotiated deal, so we couldn't do that. And then you're left with a lot of uncertainty. And some of these spin, sale conversations are because there are a group of investors, and I understand it, who think that coffee is a problem. They don't like the coffee business. We actually do like the coffee business. And we, as a Board, are responsible for creating value across our portfolio. So separating it so that people could come in and buy the refreshment beverage business and then let the coffee business language out there is not the Board's responsibility. And so when we took a look at all of the possibilities, we firmly believe, and you see that today, that the combination of KDP's coffee business anchored by Keurig and JDE Peet's is a perfect match. These are complementary businesses that create a real global leader in coffee. And this was the way that we chose to get there. I don't know, Pam, to take the second part in terms of lessons from the Board or build on that one before I take this over too much. Pamela Patsley: No, that's okay. I'll take the easy part. We did learn a lot. And otherwise, we wouldn't be here again today. almost just two months after some of us spoke to you all the first time. And I think taking time and we did have a lot of outside advisers, as you would expect, all summer long, spring, summer. We solicited other input, other advisers. And certainly, everyone in this room also was listened to and was heard. And so I think I'm not sure there'll ever be another one of just this thing again. But so that part is definitely a learning. I will emphasize what Bob said that -- and you heard it both from Bob and Tim in the more formal remarks that we did consider a lot of alternatives. And along that way, because we've heard feedback about JAB and question marks about that, when we were doing some of that strategic analysis, survey of the market, survey of alternatives, whenever it involved JDE Pets or something, we had a separate committee of the Board of disinterested and independent directors. So that feedback and survey part of the market always went to just that group. So I feel very good about our governance, our rigor around governance and our respect of independence and competing interest. I think we've done a very good job. But there's no question, maybe just taking our time a little bit would -- slowing a few decisions down would be the biggest takeaway in terms of learnings. I hope that was helpful. Christopher Carey: Chris Carey, Wells Fargo. Two questions, please. First, on the free cash flow outlook, 2026 to 2028. Is this a view on free cash flow conversion? Or are you implicitly giving any expectations for net income growth in that time frame? I'm conscious that the algorithms that you've laid out today are longer term, but are you also underwriting high single digits over 2026 to 2028 for those two businesses from an earnings growth perspective. So perhaps you can give any context on that. I mean, obviously, we've gotten concrete expectations for 2026 to 2028 free cash flow. That's why I'm kind of testing that. The second thing would be, in what backdrops would you tap into these additional financing paths, if you will, right, beverage IPO, selling of minority stakes, green coffee inflation is going to carry into the front half of next year. Potentially that has EBITDA risks, okay, if EBITDA comes in a bit lower, now we finance -- or we tap into these financings. What are the thresholds by which those become near-term realities, so the free cash flow and then the financing? Timothy Cofer: I think most of you in this room know Jane and know her well. She's our Head of IR and CFO International. But in addition, over the last few months, Jane has jumped into an expanded role as SVP of Strategic Finance and Capital Markets. And Jane, you're well placed to answer Chris' two questions. Jane Gelfand: Thanks for teeing me up the questions, Chris. So first on free cash flow. What -- our goal and objective for today is to give you more clarity, more data points against which to plan and model and just understand better what we mean by the vision for Beverage Co. and Global Coffee Co. In doing so, we thought it would be prudent to give you a view of what we think the cash generation potential of each of those businesses is over the next several years rather than pinning you down to any particular year. And so what I would interpret the over $6 billion for Bev Co. and over $5 billion for Global Coffee Co. in free cash flow generation to be is truly a three-year view, and we will unpack that as we go forward, as we give you more perspective on 2026 specifically. But I think what you're hearing us do is try and give you a view as we operate as a combined company into each of the pieces because we know ultimately, that will be what you are -- we're all marching towards. Then anyone else want to chime in on alternatives. Otherwise, I'll take it. So look, what we've done here over the last several weeks is take a fresh look at the financing, right, and make sure that we're solving for the things that we know are important for the company and for shareholders, which is a balance sheet that is solid and visibility to balance sheets that are appropriate for the individual pieces. I think we've done that very successfully today, moving your point of view from 5.6x to 4.6x at transaction close, assuming June 2026. You also have a view of what the deleveraging potential is of the business, right, at about 0.5 turn a year. So very quickly, you see that particularly with a muscle that we already have proven over time around emphasizing cash flow generation, we can get to a blended point for net leverage that gives us real visibility to that separation. Now businesses naturally are variable, markets are variable, conditions change. And so what you should expect us to do is to evaluate all of our options, right? To build on what Pam said, like the lesson is you got to be flexible. You know where you're marching. You got to get there in a value-maximizing way. And what you're hearing from us is that there is a set of potential options and levers we could pursue, but we will only pursue those if we believe they unlock maximum value and better outcomes for the business. Chethan Mallela: Andrea? Andrea Teixeira: So, Andrea Teixeira, JPMorgan. So my question is on the synergies. I understand that the $400 million is on top of the EUR 500 million from the JDEP, and we have the details for the JDEP. Obviously, there is a lot of kind of optimization of the brands and facilities as well. So I was hoping to see out of that $400 million, I understand, Tim, you said a lot of this is SG&A. But thinking of like how the hedging of the commodities and procurement can be with to all of these. And then I understand JDEP has a very strong capability for hedging. So thinking of how that can be linked and how conservative were you setting that guidance of $400 million and how to think as investors? Timothy Cofer: Thanks, Andrea. Let's -- first, I want to just clarify the baseline here, and then I'll ask Roger to build from his unique position, both as Head of Supply Chain and Procurement and Chief Transformation Officer. For clarity to Andrea's question, the JDE Peet's cost-out program is EUR 500 million over seven years, half of which will be reinvested in the business. The acquisition integration synergies are $400 million over three years as a result of the combination. And we have spent a great deal of time leading up to the acquisition announcement first at a high level. And in the last eight weeks at a far more detailed level as we've kicked off this transformation management office and with external advisers as well who have worked with both our company and JDE Peet's company to comfort ourselves that those two numbers over those two time frames are incremental. Roger, what else would you say on Andreas, double-click? Roger Johnson: Yes. So from a building the -- to the extent we can, right, understanding the -- each of the programs, right, and independent programs, I think we've arrived at a good place where we have confidence in the underpinnings. We always preserve the right to get smarter, but one of the principles we have is best of both, right? And really bringing that to light as we're really underpinning the plans. Again, the next step is to get into the clean room and understand detailed policies and what have you. The coffee market is a fairly efficient market on its own. And I think there's other opportunities there as we look at the capabilities, whether it's technology, whether it's development or what have you, to really bring some flexibility to unlock further places to look, specifically around coffee formulation and what have you. And so I'm looking forward to the next couple of weeks of getting into that. I'll be in Amsterdam next week to start that process of going into the next click of it. But to date, what we've seen is underpinning the numbers in a way that we feel confident, and we reserve the right to accelerate that more and drive where we see opportunities. We know we have to phase it. We know we have to make choices, right? We can't do everything all at once. But sitting here today, I have confidence in that number. And then as we learn more about policies and how to action those numbers, we'll come back to you with the schedules after we build them. Chethan Mallela: Peter Grom, and then Filippo. Peter Grom: Peter Grom from UBS. So, two coffee questions, just maybe a follow-up on that. So the long-term algorithm of low single-digit top line growth into high single-digit EPS growth. Is that inclusive of the synergies? Or are there other factors that drive that degree of operating leverage? And then just on the business itself, so just ball mix for coffee this quarter, it didn't really change that much sequentially despite pricing stepping higher. So how much of that is actually the mix component versus shipments actually holding stable? And then just on elasticities, how are you thinking about that through the balance of the year? Timothy Cofer: Yes. I can start. I think the first answer is inclusive. Obviously, that's near term. That's a long-term algorithm. -- near term, that's an enabler for that. On the coffee quarter, the second question, do you want to take that, Jane, Olivier? Jane Gelfand: I'll start, Olivier, if you want to add. I had a conversation with some of you offline about, hey, what gives you confidence in the coffee category recovery. And I think if you zoom out, right, we've had a couple of years now of sequential volume improvement. We're not where we expect to be longer term. But this year and the year-to-date experience, I think, would be very supportive of this trend, right? There is record pricing in the market because we have record sea prices. And yet despite that, what we are seeing is very manageable elasticity. So to answer your question specifically, Peter, you did see some volume trade-off as more pricing was enacted in the market. At the same time, you had favorable mix. within that sort of U.S. coffee segment. I will say that pods are quite resilient. You are seeing more elasticity on the brewers, but that would have been expected. Chethan Mallela: Filippo, go ahead. Filippo Falorni: Filippo Falorni, Citi. So going back to the coffee category more long term. Bob and Tim, you talked both about the attractiveness of the category. Maybe can you expand a little bit more on the rationale of the deal? Why was coffee the best category to double down compared to maybe some of the fastest growth categories within beverages? And even from a long-term standpoint, like we've seen some of the categories taking some share in terms of caffeine consumption like energy drinks. So what gives you the confidence that, that 2% 40-year CAGR is still kind of the right trajectory? Robert Gamgort: Given that I've been around for 40 years, I'll start with the last one. I seem to be an expert on that, and then Tim can talk about the piece about the second -- the first part of the question. So I'm going to go back to 1985 in that case study. You know what the case study was, how do you fix the coffee category given that everyone at below a certain age is switching to diet Coke. That was the case that was on campus in 1985. And so the point is there are always the short-term trends where categories are challenged by new formats, new varieties. But that's why it's always important, I think, in CPG to step back and take a long-term view. And I could give you 25 examples of short-term trends that never panned out. What's really interesting about coffee and the reason that it is so powerful over the long term is what Tim said in his section. There's an emotional element to it. There's a premiumization element to it. There's a comfort element to it. And also, it is one of the few food and beverage products I have worked on in my 40-year career where it is deemed healthy. Other than water, I haven't worked on one that the government wasn't trying to limit some version of consumption. And so this is a rare situation where it's energy and it has all the other attributes, and it has a health tailwind to it. And that's why there is no suggestion over the long term that it's going to change. And all of the diagnostics that we were doing, even post-COVID when it was slowing down, there's nothing negative we could find about coffee. If you do some analysis, you'll always find something on the fringe. If you did in 1985, you would have saw the diet Coke coming in was replacing some of the occasions for a period of time. You see the same thing now to a degree on energy, but we have 0 belief that, that is something that is a long-term structural change in the category. Timothy Cofer: You said it well. Chethan Mallela: Okay. Rob? Robert Moskow: Rob Moskow, TD Cowen. I wanted to know about the high single-digit EPS growth target for coffee. There's a lot of leverage there implied because the net sales target is only low single digit. And what gives you confidence that there's enough leverage to bridge those two? And if I could also come back to your 40 years of experience, the volume growth, I know it's in the USDA chart, shows volume growth over the last five years in coffee. Volume has grown over the past five years, but KDP's volume is down and JDE's volume is down, too. So who's taking all that coffee? Like who -- where is all that volume going, if not to the European leader and the single-serve leader here? Timothy Cofer: You want to take the first one on HSD? Jane Gelfand: Sure. Look, I mean, what we're laying out for you are very identifiable actionable cost synergies that we're going after in short order and then longer-term opportunities, both in terms of top line and kind of continuous productivity and the reignite the amazing target through 2032 is a part of that. All of which is to say, when we think about HSD, certainly in the first years out of the gate, that's very visible from a cost synergy standpoint, right? But -- and also deleveraging can help bridge that. As you go forward, you're going to have that much more traction on the various opportunities that Tim unpacked for you and you'll also drive a more resilient business such that you can get more ongoing operating -- but we'll have to prove it to you, right? Again, out of the gate, you have a lot of visibility between below-the-line leverage and the cost synergies, and you heard Roger talk about his confidence there. Olivier Lemire: Yes. Maybe from a total at-home consumption, obviously, last four years, we saw a spike in consumption in at-home through COVID and then decline in in-home as people return to normal life and work. This has been stabilized over the last few years. And we're coming from a very strong foundation with 47 million households and very good intel that we've got tens of millions of high-value households that have yet to convert into the Keurig system. So with strong marketing campaigns coming up hitting in Q4 with good promise to consumer, great coffee without the grind and a series of innovation, and we saw new coffee system, we're very confident that we'll be able to return to growth from a volume standpoint. Chethan Mallela: Lauren, and then Steve Powers. Lauren Lieberman: Lauren Lieberman from Barclays. So I think I sensed a change potentially on time line to separation is sort of like at or before by year-end '26 or we'll be ready to go. So at the risk of word-sniffing, like confirm if that's right or not. But notwithstanding the comments on like lessons learned and we should go more slowly, I'm just curious why, like what the determining factors would be to decide to move more slowly or to do it right away? What you'd be looking to achieve or benefit from going more slowly? And then secondly, I feel like we're spending a lot of time talking about coffee, why coffee, coffee, coffee. What changes, if anything, for Bev Co. going forward? And I'd love to hear about that. Timothy Cofer: Great. I'll take the first one. And Eric, why don't you take a shot at the second? Lauren, I would say I'm not sure you heard a definitive change in time line. What we said on August 25 was we anticipated that this could close by the mid of next year and separate by the end of next year. You heard something similar today, but there was a shift around we still expect mid of next year for the close and that we will be ready to separate year-end. So those times are the same. The difference is in that nuance. And I think what you heard from us today is it will be milestone-based. We are not going to commit to a hard date to you today. And recall what those milestones are, right? We want to be sure that our business is continuing to perform well. Guess what, you saw it again today, it is, and we're committed to that. We want to be sure that we have the right capital structures in place. And you heard us make big steps today towards that in terms of improved leverage at close and stated targets at separation. You also heard us say we need to be sure we've got world-class independent Boards of Directors and proven, experienced, high-caliber leadership teams. And you heard even an update on one of those points today around leadership of Global Coffee Co., which we're beginning a process to find that right leader. And then you also heard, let's make sure from a market condition standpoint that we've got the right conditions that could support a potential option, not yet a firm decision. We'll stay flexible and agile, and Jane covered that in her section. So I think the broad time line, Lauren, and group here is similar to what we said on 825, but with an important nuance where we'll be milestone-based and we'll do it at the right time when we're ready to get the right outcome for our shareholders. Do you want to talk about Bev Co. and what an independent Bev Co. looks like? Eric Gorli: I was able to talk to you guys for about 25 minutes on kind of our playbook, playbook that has been driving success. We really feel like that playbook is going to work in the future as well, and I gave a number of examples. I think the separation, Tim hit on it, the focus on the Bev Co. entity from the management team, from our supporting functions, from the Board, I think that's probably going to be the biggest benefit. There is definitely a different culture for a fast-moving soft drink-centric, DSD-centric organization versus a warehouse model. I think the amplification of that and just how we go about creating the company's culture, coupled with the management team's focus will probably be the biggest underpinnings. That said, we've got a playbook that's working, and I would expect you're going to see more of the same. Timothy Cofer: No doubt. And the only build on Eric's point, for sure, around focus and culture. I think there are upside benefits to a stand-alone pure-play rev business. The other that I briefly mentioned in my remarks was around strategic optionality. And certainly, today, I'm not going to give you the list of here are the five5 things. But I would say, as you continue to advance a scaled strong brand portfolio, many different categories of participation, strengthen that DSD muscle, there could be options down the road that present themselves around ownership in different levers of the business, brands, distribution, et cetera. So we'll take a step at a time. But I do think an option like that longer term is enhanced. It's more accessible, more available, more actionable, should we choose that that's in the best interest of the shareholder as a stand-alone ref bev company. Chethan Mallela: Steve? Stephen Robert Powers: I was actually going to ask along a similar line, which shocking. We have a habit of doing that. So, it's Steve Powers from Deutsche Bank. So I get the -- that future focus and optionality post transaction. But as you assess this initiative today going out and kind of doubling down on coffee and separating coffee, that's a big project that wasn't envision. So just the opportunity -- how do you get comfortable with the risk and opportunity costs of pursuing that and maintaining all the good that you've been doing on refresh and beverages? How do you handicap that? And how big of a consideration was that really my main question. I do have a secondary question, which probably is for Jane. Just on the separation, I think the base case is to spin coffee. But then earlier, when you talked about the different optionalities, you talked about partial IPO of beverages. Just what that means for the existing debt that KDP has? Does that stay with Beverage Co.? Does that go to Coffee code? Do we know? Timothy Cofer: I'll start with the first one, and Jane can take the second one. Look, Steve, it is all about execution. This is not something that's unique in the world. We would agree that it's a big undertaking and has complexity to it. That's not daunting for us. As I shared on stage, many of us on this stage right now have experience in large acquisitions, integrations, separations, right? We've done it before. Many of these people on stage. And then it's really about do you have a great plan, set of processes. That's why we elected today to also ask Roger to unpack our transformation management office and our approach to that, obviously, external advisers, et cetera, carving off a group of individuals who are focused on that to then allow the vast majority of our 29,000 colleagues at KDP to deliver their mission day after day after day. And I think Q3, quite honestly, is an early proof point. This was a challenging quarter. One might argue a quarter where there were some distractions, right? And look, we put up a pretty good quarter here that we're proud of. And so it is just about the right plan, the right governance around it, the right people with the right experience executing well. Jane Gelfand: Steve, good question on separation plans. You're right that we've now named a couple of options to pursue a separation. The common element across those is it's a tax-free separation, and that piece is sacrosanct, and we're going to solve for that first and foremost. Secondarily, we got to think about, well, what's the optimal separation mechanism, and that depends on the circumstances in the market. And again, what we think will create the most value, right, for our shareholders. And so one potential is a tax-free spin. Another is this partial IPO concept, which would allow all of our shareholders to participate as we could consider floating a small portion of Bev Co. as well as bring in additional participants, right, and raise primary proceeds, which can be used to accelerate deleveraging. We haven't made a decision. I think what you should expect us to do is to solve for optionality as long as possible and then think about, to your point, the debt structure, how we raise the debt, how we think about those moving pieces to maximize our flexibility. Not all of that has been decided yet, but that is something that we are very actively considering. Chethan Mallela: Michael? Michael Lavery: Michael Lavery, Piper Sandler. Just wanted to come back to some of the milestones you laid out, one of which is operational performance. Would that include both businesses running on the algo targets? And then second question, just on the pace of delevering. Originally, you had expected about a 5.6x at close and 5.2x at the end of the year, around half a year, obviously, around 0.4 turn. Now you're calling out about 0.5 turn on a full year. But did anything change? Or is that conservative? How do we think about the half turn? Timothy Cofer: Again, I'll take the first. Jamie can take the second. Look, our expectation is we continue to perform at a high level at both KDP and JDE Peet's. You've seen us do it so far this year, and that's the expectation going forward. And yes, we do believe, I said it on stage earlier, we're doing this transformational next step from a position of strength, and we think that's the best position to launch two new companies. Jane Gelfand: As it relates to the leverage, right? So just to clarify because there are a bunch of numbers that we've thrown around, and I want to ground us in what we're talking about. The original plan, as was announced in late August, would have contemplated a net leverage at acquisition close, assuming June 2026 at 5.6x. We've made a set of announcements today that give us visibility to about 4.6x on the same time frame. You're also right that we've talked about pace of deleveraging, right? And there is a little bit of delta between what we're seeing today, which we feel very, very good about, right, the half a turn a year and some of the assumptions that were built into the 5.2x, which would have included some synergy capture in year one. And so look, I think what you're hearing from us is the commitment to maximize, right, cash flow and get to a very quick pace on deleveraging. I wouldn't read too much into exactly this number versus this number, the half a turn and then the commitment to see if we can accelerate that responsibly is what you should anchor to from here. Chethan Mallela: Kaumil? Kaumil Gajrawala: Kaumil Gajrawala from Jefferies. I guess a couple of things as you responded to the market reaction and you were thinking about all of your options. Why was the Apollo, KKR option? Why were they the best partners? I believe they have a Board member coming on. Will that Board member be on both sides of future co, just one of the sides? And then when we think about -- we only had five hours to think about this, but when we think about the new structure, you've talked about all the benefits, why it should work, everything that's -- how everything is intended to go. But what were the risks that you considered under this new structure on what if things don't go right, how much flexibility do we have to be able to get to where we're looking to go? Timothy Cofer: I think Pam will take the Board member question. Do you want to take the two new investors, KKR, Apollo? Jane Gelfand: Yes. Look, we're extremely excited to partner with Apollo and KKR. Obviously, there is real strategic merit in the investments that they've underwritten, right? You see an expressed conviction in each of the future successor companies, right, and the value of the assets there and the upside opportunity, particularly as you think about Bev Co. and all of the optionality that we've talked about here, but also in terms of the single-serve prospects in North America and in the JV. Beyond just the sort of economic profile of all of that, we get the benefit of some of the smartest minds in the financial world with a ton of experience in transactions, complicated transactions across industries, across the world. And we're excited to partner together and leverage that insight. I will pass it on to Pam in terms of the Board member and all of those Board dynamics. But I'll just say all of the work that we've done over the last several weeks have absolutely been confirmatory of that partnership and the mindset with which we're walking into these strategic investments and partnerships, and we're excited. Pamela Patsley: Great. With regard to what was in the press release this morning about it would be our intent to name Brian Driscoll as put him forward in the proxy for election to our Board of Directors. I believe the press release said in conjunction with the transactions, which we were outlining in that press release. However, we are initiating and have a very robust process using an outside search firm to help us because at the end of the day, whenever separation comes, we will have to stand up, as you've heard, two fully independent boards able to field the requisite committees, and it is our goal to make those best-in-class. While we may have some supposition and ideas in our head as to who might go where, we are way not at that point to begin to talk about that because we don't have enough people to field both. So it's going to be an iterative process, and we will use someone from the outside, and we have an internal committee that will be doing a lot of the leg work on behalf of the full Board, but of independent directors and of course, Tim and Bob participating as we go through the interview process and looking at candidates. We always look for diversity of background, diversity of skills and filling in gaps in terms of capabilities as we look around the Board table. And we have to keep that in mind now for two Boards ultimately. So, hopefully, that answers your question. Chethan Mallela: Great. I think that's about all the time we have today. So I just want to thank everybody joining us in person and on the webcast for your interest in KDP. I think you've heard very clearly about our conviction in the acquisition of JDE Peet's and the planned separation into two pure-play companies, and we hope you share our excitement about the future for KDP. Thank you.
Operator: Thank you for standing by, and welcome to the Syrah Resources Q3 Quarterly Report Update. [Operator Instructions] I would now like to hand the conference over to Mr. Shaun Verner, Managing Director and CEO. Please go ahead. Shaun Verner: Thank you. Good morning, and thanks to everyone for joining us on the call today. With me is our CFO, Steve Wells; and our EGM of Strategy and Business Development, Viren Hira. So after a very challenging 12 months, it's great to be able to report on a more productive quarter with a positive Balama natural graphite ramp-up of operations following restart, sales, strengthening market conditions for Balama fines and supportive policy and market tailwinds for the Vidalia business. This morning, we'll work through the presentation provided with the quarterly report to update you on the important developments in the quarter, and then we'll be happy to answer any questions at the end. So turning to Slide 3, and I wanted to first remind everyone of our clear and differentiated investment proposition. Syrah is the leading integrated natural graphite and active anode material producer outside China with the hard one investment and capability in place, providing a lead time [indiscernible]. Vertical integration from mine to end customer offers a secure source of high-quality critical mineral supply outside China. Our unique asset base is OpEx cost competitive with China and leading ex China and well placed to generate strong margins over the longer term. Our leading sustainability position, including external assessment provides full auditability and traceability from raw material through to finished products. And finally, in response to expected continued strong growth in our end markets, we have clear expansion opportunities that we can execute in line with the needs of our customers and government stakeholders. Moving on to Slide 4, and let me spend a moment now talking about our most important values of safety and sustainability. As we continue to develop a position as a leading critical minerals producer, we're guided by 3 core objectives: being positive for the communities in which we operate, being sustainable for the environment and providing secure supply for our customers. I'm pleased to say that in the quarter, our performance on key metrics measuring safety and sustainability were very strong. Our people and our local communities are critical to our success and the resolution of community and national issues impacting Balama in Q2 this year continued to progress positively through Q3. The health, safety and security of employees and contractors will always remain Syrah's highest priority. As we strive for zero harm in our operations, I'm pleased to report that our total recordable injury frequency rate remains very low at 1.1 incidents per million hours worked across the group, a result which any operation globally could be proud of. During the quarter, I also had the opportunity to meet with President Chapo of Mozambique and Minister Pale of Mineral Resources and Energy Portfolio, who both reaffirmed the importance of Balama to Mozambique and their support for the operation. And we also note in recent days that Total has removed its force majeure notice for its $20 billion LNG project in Cabo Delgado, demonstrating increased confidence in the new government's ability to manage security and developments following the election. Our safety focus is underpinned by our work on critical risk hazard management and in-field leadership interactions. Syrah's operations are clearly aligned with leading global sustainability standards. Last year, Balama became the first graphite operation globally and the first mining operation in Mozambique to achieve the Initiative for Responsible Mining Assurance or IRMA 50 level of performance for sustainability. This achievement highlights nearly a decade of strengthening our differentiated performance, including a strong safety record, investment in training and developing a highly skilled workforce, ongoing community development and human rights due diligence. Along with our ISO certification and external auditing required under our U.S. government funding arrangements, we continue to prioritize health and safety and environmental management systems, confirming our commitment to operating sustainably and driving continuous improvement in this area. A final point I wanted to reiterate on sustainability is the global warming potential of our integrated natural graphite anode product relative to other suppliers. The independent life cycle assessment, or LCA, completed on Syrah's integrated operations by Minviro from Balama origin to Vidalia customer gate estimated 7.3 kilograms of CO2 equivalent per kilogram of anode material produced, which is around 50% lower than equivalent natural graphite anode material from a benchmark supply route in Heilongjiang province in China and 70% below synthetic graphite benchmarks from China. We believe that these efforts give Syrah a competitive advantage as the most sustainable source of integrated natural graphite anode material available at scale today. On Slide 5 and turning now to a more detailed look at our performance and highlights in the third quarter. As we previously reported, after restarting operations in mid-June, in July, we recommenced shipments from Balama and removed the force majeure declaration that had been in place since December 2024. We ran a 6-week production campaign throughout the quarter and produced 26,000 tonnes of natural graphite. Difficult to make clear comparisons with prior periods given that we were ramping up operations after an extended outage, but comparisons will be more relevant in future quarters. Recovery of 68% was below our target as we restarted and worked through some initial maintenance requirements and utilization of older ore feed stockpiled through the outage. But the team focused heavily on quality and volume to meet the 2 initial break box sales in line with customer expectations. Given the outage period had depleted finished product inventory completely, we essentially sold everything we produced in the quarter with approximately 24,000 tonnes sold. With the breakbulk shipments [indiscernible] to Indonesia and our first ever bulk shipment to the U.S., we were pleased to be able to meet some of the pent-up demand resulting from the production outage in this first campaign. Our weighted average sales price for the quarter was USD 625 per tonne, CIF delivered. Our C1 operating cost during the operating period was USD 585 FOB per tonne and the freight averaged $92 a tonne. Importantly, this provides strong indications of better than historical pricing and a good basis for lower C1 costs as we can increase volumes, indicating positive future cash flow opportunity. At Vidalia, as we previously announced, the business claimed and received a $12 million cash paid Section 45X tax credit for the 2024 calendar year in connection with the operations of the anode material facility. Ongoing tax credits are expected in line with the relevant legislation annually, subject to the phasedown period from the start of the next decade. We continue to work through highly detailed and extensive qualification requirements at Vidalia and are making positive progress, albeit slower than we would like. Our product quality and performance are excellent, and we continue to deal constructively with a highly complex mix of policy, commercial and technical factors. We're focused on achieving sales as early as possible, but expect that material sales volumes will only occur in 2026. But we emphasize that our work here will pay off with our investment and development experience demonstrating the considerable time required for others to follow. Our cash flow from operations of negative USD 3 million includes receipts from sales of natural graphite shipments of $12 million, along with the $12 million tax credit I just mentioned. Excluding the tax credit, our cash outflow from operations reduced markedly from the prior quarter with production and sales ramp-up and inventory availability to facilitate further improvement in the quarters ahead. We're highly focused on getting Balama to operational cash flow breakeven as quickly as possible. Finally, the company had a strong cash balance of $87 million following the equity raising that was completed in Q3, noting that there are restrictions on use under our funding arrangements. I'll now hand over to Steve to provide some further detail on our financials and cash flow movements in the quarter. Stephen Wells: Thanks, Shaun, and good morning, everybody. I'll turn your attention to the waterfall chart on Slide 6, which shows our cash flow through the quarter. As Shaun mentioned, our cash outflow from operations in the quarter was $3 million and reflects revenue, operating costs and the positive benefit of the $12 million Section 45X tax credit, which is an operating cost tax credit and can be received as a direct cash payment rather than a credit against future tax liabilities. While we won't have this benefit every quarter, as we noted in our ASX release at the time, we received this credit. We estimate Section 45X credits to be roughly $7 million to $9 million per annum prior to phase down of the credit in accordance with current legislation. In terms of timing, it is likely that direct payments for further 45X credits will be ordinarily received in the second half of the following calendar year. Other movements to call out in this quarter were the equity raising that was launched at the end of July and completed in August and delivered net proceeds of $44 million. The company also received a $6.5 million disbursement from its loan with the DFC, which net of USD 2.2 million of refinancing repayments led to a $4 million net proceeds from borrowings. While operating cash flow was marginally negative as articulated, we also had a net cash inflow from borrowings so that excluding the net proceeds from the equity raise, the group was cash flow neutral for the quarter. In all, we closed the quarter with a cash balance of USD 87 million, which is made up of $27 million of unrestricted cash and $60 million of restricted cash for lender reserves and for use in each of our operating assets. We also have further liquidity available under the DFC facility, which is part of the ongoing DFC loan restructuring discussions. With that, I'll hand it back to Shaun. Shaun Verner: Thanks, Steve, and I'll spend some time now providing an update and our perspectives on various market developments and the government policy backdrop. On Slide 7, you can see on the left-hand chart that the global EV demand picture remains strong, though volatile month-to-month. Over the first 9 months of the year, global EV sales were up 28% on a year ago with strongest growth in China, positive developments in Europe and the spike in demand in the U.S. in Q3 prior to the expiry of the Section 30D consumer tax credit rebate. Anode production growth in China continues to increase strongly, reflecting not only the EV market, but also the rise of energy storage system requirements for data centers and other stationary storage applications. But of course, on the supply side of the picture, synthetic graphite anode material production overcapacity in China has resulted in intense competition for market share and destructive pricing behavior in the domestic market. Prices for synthetic graphite anode material, especially lower-grade products remain below estimated production costs in many cases. Anode margins are also impacted by higher coke feedstock costs and low capacity utilization, which industry observers estimate to be around 40% on average across the Chinese industry. In natural graphite anode material production, finished anode material producers have driven precursor margins and upstream feedstock margins lower over successive spherical graphite purchasing cycles in China. Although a few of the larger anode material producers remain profitable, many Chinese feedstock and precursor suppliers are not currently operating due to poor margins and low demand driven by domestic market price substitution. In the ex-China market, natural graphite anode material demand remains positive and a significant structural shift is underway driven by policy. China export controls and U.S. government tariffs and the anti-dumping and countervailing duty implementation are seeing a shift to lower Chinese exports evident in the charts on the right-hand side of the slide. And that's being replaced by supply from Indonesia for anode material into the U.S. This is positive for both Balama supplying Indonesia and Vidalia, where increasing demand for ex-China supply for commercial and policy reasons is becoming evident for coming years supply. There are continuing deep market challenges and financial pressures across the global battery and input materials sector arising from the dominance of incumbent Chinese producers in both cell production and feedstock and precursor supply. Policy actions are key to the evolution of both demand and pricing for ex-China supply, and we're seeing positive developments in this area. On Slide 8, encouragingly, government policy settings are delivering material potential support to Syrah's strategy to become the leading ex-China integrated natural graphite and anode material producer. Over the course of 2025, we've seen key U.S. government policy changes, in particular, the anti-dumping and countervailing duties investigation and combined preliminary tariff imposition of at least 105% and various other additive import tariffs and policy instruments, including the definition of prohibited foreign entities impacting future availability of the 45X tax credit to battery and auto manufacturers in the U.S., a credit which is hugely important to their profitability. On the supply side, increasing concern arising from China's further export license controls announced in the last few weeks on graphite anode and processing equipment similar to those imposed on rare earth exports are also driving ex-China purchasing diversification decisions from our customers. The combination of these factors is leveling the playing field for ex-China supply and Syrah's major investment and capability build will allow us to capitalize on both the competitiveness and value of Balama feedstock and our anode material from Vidalia for OEM and lithium-ion battery manufacturers in the U.S. Turning now to Slide 9 and a summary of our key strategic priorities and milestones for the coming 6 to 12 months. In this current final quarter of 2025, we'll drive further campaign production to support increasing natural graphite shipments to ex-China customers with a particular target on further breakbulk shipments into the anode material supply chain. This will generate important revenue for the company as we continue to progress our technical qualification steps with Vidalia customers and drive towards sales there, in line with evolving commercial and policy conditions. At an industry level, we're awaiting the final determinations for the anti-dumping and countervailing duties investigation in the U.S., which are due before the end of the year. However, we understand that this timing may be impacted by the U.S. government shutdown. The preliminary duties are finalized. They will be in place for a minimum of 5 years, providing important stability and a mass leveling of the competitive position for Syrah relative to Chinese imports into the U.S. Geopolitical developments, vulnerabilities caused by a concentrated structure of graphite supply and anticipated demand growth, particularly outside China, led to higher strategic interest and transactions being announced in the graphite and battery sector globally. Taking advantage of these conditions, Syrah has commenced a process advised by Macquarie to review strategic partnering options to enable strengthened position from which to pursue opportunities. At Vidalia, we're making strong progress in technical qualification with high-quality product, but immediate customer purchasing intent remains uncertain given the complex policy and market interactions, and we do not expect commencement of material commercial sales volumes from Vidalia this quarter, but rather from 2026. Concurrent with moving our Vidalia operations to commercial sales volumes, we're also targeting additional customer and financing commitments ahead of a potential expansion investment decision, hopefully in 2026. We're optimistic that there are both improving market and policy fundamentals now and a number of clear positive catalysts ahead that have the potential to deliver significant value to shareholders. Our asset and corporate teams are working very hard to deliver against these objectives safely, and we look forward to communicating further progress. I'm now happy to move to any questions. Operator: [Operator Instructions] Your first question comes from Mark Fichera with Foster Stockbroking. Mark Fichera: Just a question on the partnering process. Just can you give maybe an indication or flavor for what types of companies in terms of industry participants or people or companies potentially outside the industry that could be considered. Shaun Verner: Thanks, Mark. So we've previously talked about potential interest in downstream partnering for expansion of Vidalia. And given the fairly significant policy and market developments that we're seeing at the moment, we're seeing increased interest across the supply chain that's prompted us to, I think, more broadly view what options might be out there. And that's the genesis of the process with Macquarie. We have an open mind around the types of potential partners. But clearly, within the supply chain and across the broader battery and auto supply chain, there is significant interest. And the government policy developments have, I think, prompted broader interest from a wider range of financial investors. So we are keeping an open mind. We're at the early stages of that process. We're not communicating any sort of time line or milestones at this point. But our objectives are clearly to identify high-quality aligned partners and get to a position that will strengthen the balance sheet and derisk our growth options. Operator: [Operator Instructions] Your next question comes from Ben Lyons with Jarden Securities Limited. Ben Lyons: Apologies, I haven't had a chance to go through all of the detailed disclosure yet. However, previously, we've talked about advanced conversations with potential customers for Vidalia getting near to actually signing formal offtake agreements. Just wondering if you can possibly give us an update on any materially advanced conversations that are close to finalization. Shaun Verner: Yes. Thanks, Ben. We haven't made any specific disclosure around that in this quarter. What I would say is that our Phase 3 project remains very high on the list of potential suppliers to a number of key customers. We are progressing with technical qualification with a number of customers outside our offtakes with Tesla and Lucid. The key issues at the moment really revolves around the uncertain policy environment. And I think customers are no doubt looking to understand the outcomes of the anti-dumping and countervailing duties investigation and also considering the potential issues around the 45X prohibited foreign entity material cost ratio requirements for non-Chinese purchasing over the coming years as well. So there are a number of uncertainties, not least of which also the export controls and whether those are implemented more stringently out of China. And I think final decisions on further offtakes from customers are really pending greater visibility on some of those key items. And as I said in the call, we expect the anti-dumping and countervailing duty outcomes, which were expected in December, probably to move into January, but that will be absolutely key to Phase 3 offtakes. Ben Lyons: Okay. I completely understand, supportive policy backdrop, but it would be good to get greater certainty to really get those customers to sign up. Shaun Verner: Thanks, Ben. Operator: Thank you. There are no further questions at this time, and that does conclude our conference for today. Thank you for participating. You may now disconnect.
Operator: Good afternoon, and welcome to the F5 Fourth Quarter Fiscal 2025 Financial Results Conference Call. [Operator Instructions] Also, today's conference is being recorded. If anyone has any objections, please disconnect at this time. I'll now turn the call over to Ms. Suzanne DuLong. Ma'am, you may begin. Suzanne DuLong: Hello, and welcome. I'm Suzanne DuLong, F5's Vice President of Investor Relations. We're here with you today to discuss our fourth quarter and fiscal year 2025 financial results. François Locoh-Donou, F5's President and CEO; and Cooper Werner, F5's Executive Vice President and CFO, will be making prepared remarks on today's call. Other members of the F5 executive team are also here to answer questions during the Q&A session. Today's press release is available on our website at f5.com where an archived version of today's audio will be available through January 27, 2026. We will post the slide deck accompanying today's webcast to our IR site following this call. To access the replay of today's webcast by phone, dial (877) 660-6853 or (201) 612-7415 and use meeting ID 13756255. The telephonic replay will be available through midnight Pacific Time, October 28, 2025. For additional information or follow-up questions, please reach out to me directly at s.dulong@f5.com. Our discussion today will contain forward-looking statements which include words such as believe, anticipate, expect and target. These forward-looking statements involve uncertainties and risks that may cause our actual results to differ materially from those expressed or implied by these statements. We have summarized factors that may affect our results in the press release announcing our financial results and in detail in our SEC filings. In addition, we will reference non-GAAP metrics during today's discussion. Please see our full GAAP to non-GAAP reconciliation in today's press release and in the appendix of our earnings slide deck. Please note that F5 has no duty to update any information presented in this call. I'll now turn the call over to François. François Locoh-Donou: Thank you, Suzanne, and hello, everyone. We delivered exceptional fiscal year 2025 results exceeding $3 billion in revenue and $1 billion in operating profit for the first time. Revenue grew 10% while earnings per share grew 18%. Our growth was driven by data center reinvestment, hybrid cloud adoption and enterprise AI infrastructure demand. Our product refresh cycle, competitive takeouts and the maturation of our software model and go-to-market motions also contributed to growth. In FY '25, we maintained our strong profitability, delivering gross margins of 83.6%, up 80 basis points over FY '24, an operating margin of 35.2%, up 160 basis points over FY '24. This performance resulted in record free cash flow of $906 million, up 19% compared to FY '24 underscoring the strength of our financial model and execution. Our FY '25 results demonstrate the power of our platform and our strategic role in the marketplace. They also strengthen our confidence in our vision and road map for the future. Our immediate focus, however, has been on our incident response and I will speak to our priorities and offer an update on where we are now. Upon identifying the threat on August 9, our team immediately activated our incident response process. Our priorities were clear. First, contain the threat actor, initiate a thorough investigation and take immediate and urgent action to strengthen F5's security posture. While the investigation will continue and the work of bolstering our security posture will expand, our initial steps have been successful. Second, we prioritized delivering reliable software releases to address all undisclosed high vulnerabilities in BIG-IP code as quickly as possible. Through the exceptional efforts of our engineering and support teams, we achieved this, enabling thousands of customers to promptly deploy critical updates upon disclosure. Our customers are moving quickly to update their BIG-IP environment, and a significant number of our largest customers have completed their updates with minimal disruption. As an example, a North American technology provider completed updates to 814 devices in a 6-hour window in the first weekend. Customers have expressed appreciation for our transparency, the thoroughness of the information we provided and the clarity in the steps they need to take to improve the security of their environment. Our third priority is raising the bar on security across all aspects of our business. We are acutely aware of the increasing sophistication of attackers and the fact that the threat surface is expanding rapidly. Each year, over the last several years, we have aggressively increased our investment in security, and we are making further significant investment this year and beyond. To further this work, Michael Montoya, a recognized cybersecurity expert and former member of our Board, has joined F5 as Chief Technology Operations Officer. Michael brings deep operational expertise and will drive the execution of a robust road map to further enhance security across our internal processes, environments and products. Our goal across all these actions is to better protect our customers and we believe F5 will be a stronger partner to customers because of it. We know customers will judge us by how we respond to this incident. Throughout this process, we have been committed to transparent customer communication at every step, reflecting lessons learned from how others have navigated similar challenges. We acknowledge that we may see some near-term impact to our business. We are fully focused on mitigating that impact while doubling down on the value we deliver to our customers. Stepping back, it is evident that advanced nation-state threat actors are targeting technology companies and most recently perimeter security companies. We are committed to learning from this incident, sharing our insights with customers and peers, and driving collaborative innovation to collectively strengthen the protection of critical infrastructure across the industry. Now I will turn the call over to Cooper, who will walk you through our Q4 results and our outlook. Following his remarks, I will return to discuss the broader business trends and some key customer highlights. Cooper? Cooper Werner: Thank you, François, and hello, everyone. I will review our Q4 results and some selected full fiscal '25 results before I elaborate on our outlook for FY '26 and Q1. We delivered a strong Q4 growing revenue 8% to $810 million with a mix of 49% global services revenue and 51% product revenue. Global services revenue of $396 million grew 2% year-over-year while product revenue totaled $414 million, increasing 16% year-over-year. Systems revenue totaled $186 million, up 42% over Q4 of FY '24, driven by tech refresh and data center modernization, direct and indirect AI use cases as well as competitive takeouts. Our software revenue of $229 million was up slightly against an exceptionally strong Q4 of FY '24. Perpetual license software totaled $30 million, up 25% year-over-year. Subscription-based software declined 3% year-over-year to $198 million, reflecting the transition of our legacy SaaS and managed service revenue offerings and to a lesser extent customers' preference for hardware-based solutions for certain use cases, a trend which emerged over the course of FY '25. Revenue from recurring sources contributed 72% of our Q4 revenue. Our recurring revenue consists of our subscription-based revenue and the maintenance portion of our global services revenue. Shifting to revenue distribution by region. Our teams drove growth across all theaters. Revenue from the Americas grew 7% year-over-year, representing 57% of total revenue. EMEA delivered 7% growth, representing 26% of revenue and APAC grew 19%, representing 17% of revenue. Looking at our major verticals. Enterprise customers represented 73% of Q4's product bookings. Government customers represented 19% of product bookings including 6% from U.S. Federal. Finally, service providers represented 8% of Q4 product bookings. Our continued financial discipline contributed to our strong Q4 operating results. GAAP gross margin was 82.2%. Non-GAAP gross margin was 84.3%, an increase of 138 basis points from Q4 FY '24. Our GAAP operating expenses were $461 million. Our non-GAAP operating expenses were $384 million. Our GAAP operating margin was 25.4%. Our non-GAAP operating margin was 37.0%, an improvement of 255 basis points year-over-year. Our GAAP effective tax rate for the quarter was 11.4%. Our non-GAAP effective tax rate was 16.9%. Our GAAP net income for the quarter was $190 million or $3.26 per share. Our non-GAAP net income was $257 million or $4.39 per share, reflecting 20% EPS growth from the year-ago period. I will now turn to cash flow and balance sheet metrics, all of which were very strong. We generated $208 million in cash flow from operations in Q4. CapEx was $16 million. DSO for the quarter was 46 days. Cash and investments totaled approximately $1.36 billion at quarter end. Deferred revenue was $2.0 billion, up 11% from the year-ago period. We generated $906 million in free cash flow for all of FY '25, up 19% from FY '24, resulting in a free cash flow margin of 29%, highlighting the strength of our business fundamentals. In Q4, we repurchased $125 million worth of F5 shares at an average price of $297 per share. For the year, we repurchased shares equivalent to 55% of our annual free cash flow. We ended the quarter with approximately 6,580 employees. François recapped our high-level FY '25 results at the start of the call. I will elaborate on our annual software and security revenue results. Software grew 9% year-over-year totaling $803 million, with software subscriptions representing 85% of FY '25 software revenue. Our software revenue is comprised of perpetual software licenses, term-based subscriptions and SaaS and managed services. Perpetual software licenses contributed $120 million in software revenue, up 7% year-over-year. Term-based subscriptions contributed $508 million to our software revenue, up 18% year-over-year, driven by continued strong renewals and expansions. SaaS and managed services contributed $176 million in revenue, down 9% year-over-year, reflecting growth from F5 Distributed Cloud Services offset by the transition of our legacy offerings. Total annualized recurring revenue for our SaaS and managed services offerings ended the year at $185 million, up slightly from FY '24, including 21% growth in ARR for our core SaaS and managed services solutions. ARR from legacy offerings declined to $15 million as we wound down legacy SaaS and managed service offerings and transitioned customers to F5 Distributed Cloud Services. We expect to complete any remaining transitions in the first half of FY '26. Several years ago, we began breaking out our security-related revenue annually. This year, our total security revenue, which includes standalone security, attached security and maintenance revenue related to security, grew 6% to approximately $1.2 billion, or 39% of total revenue. Standalone security revenue totaled $463 million, representing 31% of product revenue. Let me now address our outlook beginning with FY '26. Unless otherwise noted, our guidance references non-GAAP metrics. We delivered an exceptional FY '25 exceeding expectations with stronger-than-expected systems demand and continued healthy expansion in our software subscription business. As we enter FY '26, we see several persistent demand drivers, including hybrid multicloud adoption driving expansion across our platform, the continuing strong systems refresh opportunity with more than half of our installed base on legacy systems nearing end of software support, growing systems demand beyond tech refresh for data sovereignty and AI readiness use cases and a return to growth in revenue from our SaaS and managed services with the transition of legacy offerings largely completed in FY '25. These drivers in our current pipeline support mid-single-digit revenue growth in FY '26 against our exceptional 10% growth in FY '25. However, we also anticipate some near-term disruption to sales cycles as customers focus on assessing and remediating their environments. Taking this into account, we are guiding FY '26 revenue growth in the range of 0% to 4% with any demand impacts expected to be more pronounced in the first half, before normalizing in the second half. Moving to our operating model. We recognize the revenue guide may lead to a modest impact to our operating margin near term. We are committed to driving continued operating margin leverage and believe any demand impact is likely to be short term and therefore any effect on our operating model would also be temporary. With that context, we estimate FY '26 gross margin in a range of 83% to 83.5%. We estimate FY '26 non-GAAP operating margin to be in the range of 33.5% to 34.5% with operating margins lowest in our fiscal Q2 due to payroll tax resets in January and costs associated with our large customer event in March. We expect our FY '26 non-GAAP effective tax rate will be in a range of 21% to 22%. And we expect FY '26 EPS in a range of $14.50 to $15.50. Finally, we intend to continue to use at least 50% of our free cash flow towards share repurchases in FY '26. Turning to our Q1 outlook. We expect Q1 revenue in a range of $730 million to $780 million. This is the wider range than we would typically guide, reflecting the potential for some near-term disruption to sales cycles. While we are not guiding revenue mix, we expect Q1 software to be down year-over-year given the strong growth in the year-ago period. We expect non-GAAP gross margin in a range of 82.5% to 83.5%. We estimate Q1 non-GAAP operating expenses of $360 million to $376 million. We expect Q1 share-based compensation expense of approximately $61 million to $63 million. We anticipate Q1 non-GAAP EPS in a range of $3.35 to $3.85 per share. I will now pass the call back to François. François Locoh-Donou: Thank you, Cooper. Our immediate priority remains supporting customers as they evaluate and safeguard their environments. As we help our customers navigate this period, market dynamics are moving in a direction where F5 solutions are more essential than ever. The accelerated adoption of hybrid multicloud architectures and AI-driven infrastructure is driving demand for advanced application delivery and security solutions, areas where F5 is uniquely positioned to address our customers most complex challenges. The industry has platforms for endpoints, network access and for cloud workloads, but the F5 application delivery and security platform is the first to unify high-performance traffic management with advanced application and API security across hybrid and multicloud environments at scale. Unlike fragmented point solutions, the ADSP is purpose-built to simplify hybrid multicloud complexity. It integrates security, scalability and operational efficiency while enabling valuable XOps capabilities like policy management, analytics and automation. By the end of Q4, nearly 900 customers were leveraging F5 XOps capabilities, up from just 20 in 2024. Innovations like our AI Assistant and Application Study Tool have been instrumental in driving this growth, which underscores the power and potential of the ADSP. Over the last several years, we also have been evolving our go-to-market strategy focusing on landing, adoption, expansion and renewals within our solutions portfolio. This approach has delivered results. 26% of our top 1,000 customers are now using F5 Distributed Cloud Services, up from 17% in 2024. By delivering integrated solutions and accelerating customer outcomes, F5 is uniquely positioned to lead in a rapidly growing and dynamic market. I will speak to a few customer highlights from Q4 that demonstrate the power and the benefit of our holistic platform approach. An APAC-based bank is driving secure and scalable digital transformation with F5's comprehensive application delivery and security solutions. Leveraging F5 BIG-IP, NGINX and Distributed Cloud Services, the bank is modernizing its critical infrastructure to enable 24/7 internet banking and mobile application access while meeting strict regulatory requirements for service resilience and disaster recovery. F5 ensures business continuity and robust security, protecting against DDoS attacks and API vulnerabilities. By enabling seamless migration to containerized applications, F5 is positioning the bank for hybrid multicloud success. The leading North American investment manager partnered with F5 to modernize its infrastructure, enhance resilience and ensure uninterrupted operations. By migrating from legacy iSeries platforms to BIG-IP rSeries ahead of end of software support dates, the customer avoided compliance risks and ensured seamless operational continuity. The customer also deployed F5 for secondary DNS services to reduce reliance on a single provider and deliver critical redundancy to prevent outages. F5's lightweight platforms and cloud solutions help the customer optimize performance within existing budgets. Finally, a major energy and gas company partnered with F5 to modernize its critical infrastructure and drive its cloud migration while ensuring seamless security across hybrid and multicloud environments. F5's BIG-IP and Distributed Cloud Services extend application delivery, security and identity management into hybrid multicloud environments, ensuring seamless operations and operational continuity. The customer is also leveraging F5's Advanced WAF to strengthen the protection of revenue-generating B2B applications and business critical platforms. With F5, the customer simplified operations, achieved cost savings and accelerated the modernization efforts. These examples highlight the strong impact F5's ADSP approach is having for our customers. While we continue to work toward realizing the platform's full potential, we are confident that our commitment to innovation will drive even more value and outcomes for our customers. Before closing, I will highlight the traction we are building in AI use cases. We are seeing clear evidence that AI-related demand is contributing to our growth. AI is prompting a wave of data center refreshes as enterprises prepare for increased network capacity and services to support AI workloads, agentic AI and inferencing demands. Beyond benefiting from broader AI-driven trends, F5 is directly powering key AI use cases. In FY '25, we secured AI use case wins with more than 30 customers who are leveraging F5 to enable seamless, scalable and secure AI workflows. These wins represent net new insertion points and growth opportunities built on decades of expertise. Today, we are actively supporting 3 critical AI use cases. Number one, AI data delivery. F5 secures and accelerates high-throughput data ingestion for AI training and inferencing, enforcing policies and protecting sensitive data while eliminating bottlenecks. Number two, AI runtime security. F5 safeguards AI applications, APIs and models from abuse, data leakage and attacks like prompt injection, ensuring visibility and control. And number three, AI factory load balancing. F5 optimizes traffic and GPU utilization in AI factories to increase token throughput, reduce time to first token and lower cost per token. In Q4, we secured several new AI wins across these use cases. In an AI data delivery use case, an asset manager in EMEA partnered with F5 to overcome challenges in managing their AI workloads and ensuring reliable data performance. Their existing server could not handle high levels of demand causing outages that disrupted operations. F5 provided a customized solution with advanced technology to improve systems reliability, efficiently manage data traffic and seamlessly work with their existing infrastructure. The Government Ministry in EMEA chose F5 to secure and scale AI security runtime operations for its AI-driven weather prediction platform. Expanding on a prior AI data delivery project, the Ministry required a comprehensive solution to ensure real-time access to AI-driven data with robust security for sensitive operations. F5 delivered a comprehensive solution suite, including AWAF for application security, SSLO for traffic inspection, APM for access control and LTM for reliable data delivery. With F5, the Ministry transitioned from manual inefficient forecasting to a secure real-time AI-powered platform improving performance, accuracy and operational efficiency. In an AI factory load balancing use case, a North American service provider specializing in providing high-performance computing solutions for AI and machine learning workloads, needed a high-performance solution to manage and scale AI workloads. They required enhanced scalability, reliability and accessibility for GPU-driven workloads as well as a proxy for container functions to optimize AI data pipeline performance. F5 provided an integrated solution featuring container ingress services with BIG-IP virtual editions delivering a critical control layer for performance, scalability and reliability across AI data pipelines. F5's ease of installation and ability to address the customer's specific needs set it apart from competing open-source alternatives. In Q4, we've strengthened our AI runtime security capabilities with the acquisition of CalypsoAI. Their cutting-edge technology enhances our offerings with real-time threat defense and red teaming at scale, addressing critical needs for enterprises deploying generative and agentic AI. We are integrating these capabilities into our ADSP, creating the most comprehensive solution for securing AI inference. In fact, we launched 2 new offerings in Q4 leveraging Calypso's technology. F5 AI Guardrails establishes and monitors how AI models and agents interact with users and data while defending against attackers. And F5 AI Red Team identifies threats and informs exactly where and how urgently guardrails should be implemented. Wasting no time, our team secured wins for these offerings with a top-tier investment bank and a global AI compute platform leader. Collectively, our Q4 successes underscore F5's growing leadership in the hybrid multicloud landscape and the real value our platform approach delivers to customers, empowering them to simplify operations, enhance security and accelerate innovation across their environments. I want to express my deepest gratitude to our customers and partners. Your urgency, collaboration and trust through every step of our incident response have been invaluable. We are truly honored to work alongside you and remain steadfast in our commitment to earn your confidence every single day. I also want to extend my heartfelt thanks to all F5ers who came together with incredible focus and dedication to drive a strong and effective response. Looking ahead, we are resolute in our commitment to emerge stronger from this experience and to working across the security community to build a better and safer digital world. In closing, I am deeply honored by the Board's appointment as Chair effective with Al Higginson's retirement in March 2026. As a Director for nearly 30 years and Chair for 20, Al's leadership has been essential to F5's growth and transformation. He has provided outstanding stewardship and tone at the top that has shaped the F5 we are today. I am humbled by the Board's trust and confidence in me to help lead F5 through its next chapter. I look forward to working alongside this talented management team and the Board to continue F5's trajectory of creating long-term value for shareholders. Operator, please open the call to questions. Operator: [Operator Instructions] Our first question comes from the line of Meta Marshall with Morgan Stanley. Meta Marshall: Can you hear me? Suzanne DuLong: We can. Meta Marshall: Sorry, there was music for a second. Just a question in terms of what form of kind of conservatism have you put into the estimates? I guess I'm just trying to get a sense of are you accommodating customers through discounting? Is this you're pushing off -- maybe people are pushing off purchasing decisions while they're handling kind of servicing or upgrading incidents? Or are you having to give other incentives to kind of upgrade boxes? Just trying to get a sense of kind of what form that kind of customer conservatism is taking? And then maybe just a second question. Just as you think about kind of the underlying growth of the systems business, like any way to contextualize how much of fiscal '25 growth was kind of due to the product upgrade cycle that was happening? François Locoh-Donou: It's François. Let me start with the first part of your question. I think Cooper will take the second question. Let me just start from -- you saw that we delivered a very strong quarter and, in fact, a very strong fiscal 2025. And the momentum in the business has been very, very strong. And that is driven increasingly by the secular trends that we've talked about, specifically hybrid multicloud and AI, and I can come back to that a little bit later. Based on these trends, we felt the trajectory of the business going into 2026 was more in the mid-single-digit growth. But we said we are guiding to 0% to 4% growth for 2026 based on what we see as potential near-term impact related to the security incident. And when I say near-term impact, we think we would see probably the majority of the impact in the first half of the year with trends kind of normalizing in the second half of the year. So let's double click on this near-term impact for your question. What we have in there, Meta, is really 3 categories of things that could create near-term disruption. The first is that we have our own resources, our field resources and sales resources over the last few couple of weeks, and I think that will go on for a few more weeks, have really been focused on attending customers, helping them upgrade their environments, remediate issues, answer any questions, et cetera. And inevitably that takes time away from normal sales cycles. And the same is true for customers who are putting a lot of resources on upgrading their BIG-IPs, ensuring their environment is in the right place and that takes time away from considering the next project. So that is a short-term disruption around allocation of resources both at F5 and with our customers. There's a second potential disruption that we have considered in our guidance which is that given the visibility that this security incident has had, it would be natural that in some of our customers at an executive level, we may see some delays of approvals or delays of deals or additional approval as customers across a complex organization make sure that they want to be reassured that their project should move forward and they have no further interrogation around that. That's the second consideration. And then the third one is that potentially for some of our customers there may be some projects that they were going to move forward with, and they end up deciding not to do that. And we have considered that as a third potential impact. Now, I want to be clear, the -- everything I've just talked about, as you know, Meta, more than 70% of our revenues are recurring. Everything I've just talked about with the impact that would be mostly with new projects or new footprint acquisition. And so far, it is very early days because this was disclosed only 2 weeks ago. We haven't seen any of the impacts that I'm talking about, but we are very prudent about this because we are very, very early after the disclosure and the interaction with customers. Cooper? Cooper Werner: Thanks. Yes. And then in terms of the systems business, we're seeing strength in both the product or tech refresh and capacity expansion. The growth has been pretty balanced actually across both. Roughly 2/3 of our systems business in FY '25 was tech refresh, with about 1/3 coming from what we call data center, increasing capacity, data sovereignty, use cases. A lot of it is really driven by AI that can be both direct and indirect. So it's just been a trend that we continue to see over the course of the year where we're seeing growth for both the refresh motion as well as some of these newer use cases. And then on the refresh motion, I would also note that I think we're still relatively early days on that refresh cycle with more than half of our installed base currently still on the legacy product families that would be going into software support. Operator: Our next question comes from the line of George Notter with Wolfe Research. George Notter: Just continuing on that line of discussion, I guess I'm curious about how you actually size the potential impact from the security breach. I would imagine it's probably a complex exercise, but I'm curious if you could just kind of walk us through like the logic here. And then maybe related to that, can you give us a sense for how many customers were affected where there was configuration information taken or are there specific customer issues that you can point to? Cooper Werner: Yes. Sure, George. This is Cooper. I'll take the first part, and then François can address the second question. So François kind of touched at it a little bit at a high level when he kind of referenced the percentage of our business that is recurring in nature. But as we went through this process, we really took a fairly granular approach at kind of profiling our revenue base across all the different revenue streams and kind of taking a look at which of these revenue streams could be more impacted and which ones would be more resilient in the near term. So if you think about our revenue base, a lot of the revenue that we recognize comes straight off the balance sheet. So our service revenue -- that maintenance revenue is mostly coming off of deferred revenue. We've got our -- this is, for example, our SaaS revenue is coming out of beginning ARR and then we've got a lot of our software businesses coming through in the form of subscription renewals. So those are revenue streams that are highly resilient, and we wouldn't expect to have much of a near-term impact. And then if you look at kind of newer use cases, whether that's competitive takeout or new software projects, that's where there potentially could be more of a near-term impact. And so we kind of looked at these different cohorts of our revenue base and just kind of made a judgment as to what the potential impact could be in the near term as customers are kind of going through some of their operational activities around the incident. And then we also kind of balance that just looking at other peers historically that have gone through similar incidents and what revenue impacts they saw. And then, of course, we've spent a lot of time with our sales teams, just kind of assessing at the outset what their view was as to what impact, if any, they might see and then continuing those conversations as they've engaged with their customers in the field. And I think we're very encouraged by some of the early feedback we've gotten from those conversations. They've been very healthy discussions with customers in helping them kind of address some of these early concerns. And I think we're feeling pretty good about our relationship and how those interactions are going with our customers. François Locoh-Donou: And I'll take the second part of your question, George, on customer impact. First of all, I do want to take this opportunity to say that, of course, we are disappointed that this happened and very aware as a team and as a company of the burden that this has placed in our customers who have had to work long hours to upgrade their BIG-IPs and secure their environment. And we're continuing to work with all of our customers in ensuring that they are in the place they want to be. With that said, the customers who were impacted, so we shared that there was no evidence of access to F5 Distributed Cloud Services environment or NGINX environmental. So it was essentially BIG-IP customers that were impacted. There were really 2 categories of impact. All of our BIG-IP customers, we recommended strongly to all of them that they upgrade their BIG-IP to the latest releases that we worked very hard to make available on the day of disclosure. And we were very impressed frankly, with the speed with which our customers have mobilized resources to be able to make these upgrades and put them in production fairly rapidly. So the impact really on them was having to mobilize resources to do that work shortly after our disclosure. And we are actually pleased that a lot of customers are through that work. It will continue, but we're very pleased to see the speed with which customers have upgraded their BIG-IP. The second category of impact was related to data exfiltration. That impacted a small percentage of our customers for -- and we will continue to go through the sort of e-discovery process around what specific data with the customer -- but from the first body of work that we have done on that, we have already identified the customers that were impacted and we have sent them their information, their data package for the data that might have been exfiltrated. And the most common feedback from customers so far has been that, that data is not sensitive, and they're not concerned about it. There was no impact to our CRM or our support system. Operator: Our next question comes from the line of Michael Ng with Goldman Sachs. Michael Ng: I just have two. First, just on OpEx, it seems like the implied OpEx growth for fiscal '26 is about 4% at the midpoint. Just wondering if you're seeing any additional costs as a result of the data breach, other investments in systems internally or costs related to offering free Falcon EDR subscription to affected customers. And then second, certainly encouraging to hear that it was just BIG-IP that was impacted, not NGINX or DCS. Could you just tell us what percentage of the revenue comes from BIG-IP? Cooper Werner: Yes. So I'll start with the latter. We don't break out our product by revenue line. We're a single-segment company, but it's -- BIG-IP is the highest revenue product, of course, but we don't actually break out what the contribution is. And then in terms of investment security and the OpEx, so yes, we actually have been investing aggressively in secured -- cybersecurity over the last several years. We've more than doubled our investment in cybersecurity just in the last 3 years alone. And we had already accounted for continued investment in our planning for this year even before we learned of this incident. And of course, we've learned a lot in the last several weeks, and so there's some additional investments incorporated into our planning, but that was among the highest priority areas of investment in our plan going into the... Michael Ng: And any costs related to the Falcon EDR subscription? Cooper Werner: Yes. So there are a number of costs related to the incident remediation and in the offering that you're referencing as part of that, those are either going to be accounted for in our -- with our cyber insurance or they would be remediation costs that are accounted for separately as a onetime expense. Operator: Our next question comes from the line of Tal Liani with Bank of America. Tal Liani: By the way, the sound quality is bad on your end, hard to understand you. I have two sets of questions on software revenues and system revenues. On systems, if I look at the dollar revenue for this year and you started the year with $160 million, but then it accelerated to $180 million a quarter, give or take, $181 million, $186 million, but $180 million a quarter, do you think you can further grow from this level? Or is the growth rate going to decline substantially because this level reflects kind of the level of the refresh going forward, kind of steady-state refresh going forward? Or what are maybe different drivers? I'm just trying to understand if the increase from $130 million to $140 million last year to about $180 million this year, if there is further growth from this level or we stabilize at this level? And on software, I have the same question almost that if I look at the quarterly level of revenues this year and I average it out, there was a step-up in this year versus last year, but we stayed at the level of about $210 million. I mean, some quarters are below, some quarters are above, but there is kind of a straight line, and this is on the heels of refresh, of renewals. So the question is what drives software to growth from here if that's the growth we're seeing with renewals and all the -- we spoke about it previous quarters and all the accounting treatment of renewals. So bottom line is what drives software and system growth from here versus the temporary items that are impacting it right now. Cooper Werner: Okay. I will start with hardware. So I think you're right, we saw a significant growth here, of course, this year. I think that that -- you referenced the -- where hardware revenues were at in FY '24 and then that really is the kind of the starting point. That was a low watermark, we had talked about customers were in a period of sweating assets where they had not been investing in the data center and a lot of that was tied to the macro at the time in customer budgets. And what we've been seeing is a bit of a catch-up period over the last year with some of that deferred investment, and that's what's driving -- has driven a lot of the growth just in FY '25. But we are still early in the refresh cycle, so we think there is still ability to grow that business. And then as I said on an earlier question, we're also seeing kind of a new vector of growth, and this is kind of more of an emerging growth category which is in some of the data center capacity expansion that we've been seeing. And we think a lot of that is tied to AI readiness. And so that one, it's still relatively early, but that's kind of a newer growth trend that we don't think is cyclical that it could potentially have growth for years to come. And so from the refresh perspective, we believe that this year should be a strong year of refresh because of how early we are in the cycle. And then on the new -- the performance and data center capacity expansion that could continue to have growth as well. Now having said all of that, this is all kind of looking back at our view that the business was pointing to mid-single-digit growth for this year. So there's still the near-term impact that you could see related to the security incident. So we'll see how that plays out. François Locoh-Donou: And Tal, I'll take the second part of your question. So let me just be clear. We strongly believe that our software is going to continue to grow at a healthy clip and that's driven in the trends. I make that statement on the trends that we're seeing in the business. So if you look at this year, the multiyear software agreements that we have that are active, just this year, grew 20% year-on-year and we expect that to continue to grow. Our motion of the flexible consumption agreement that allow customers to consume over multiple years and consume over multiple parts of our portfolios are growing because customers are embracing these hybrid multicloud architectures more and more and need multiple form factors, including software and Software-as-a-Service. A manifestation of that is, I'll give you kind of 2 manifestations of that. One is in our SaaS adoption. We -- the number of SaaS customers this year grew almost 60%. I think they grew 57%. We have over 1,300 distributed cloud customers today, and we have a little more than 800 a year ago. So that adoption -- and that adoption is growing, including in our largest customers. So our top 1,000 customers, we're seeing that now over 26% of them are consuming F5 distributed cloud. As you know, in the SaaS part of the business we have been going through some transitions, we are largely through these transitions, and we expect the SaaS and managed services line to contribute to growth in software going forward. The second dynamic is that customers are seeing the benefits of our entire portfolio and we're seeing that in the number of customers that are consuming multiple product families on F5. If you go back 4 years ago, we had about 30% of F5 customers that were consuming multiple product families from F5 amongst our top 1000 customers. That's now up to 70%. And we're seeing the ADSP, our application delivery and security platform, the capabilities in that platform, including software capabilities, especially in our XOps capabilities, we're seeing rapidly and growing adoption around that. And so when you combine all of this, you combine what we expect to see with the growth of our flexible consumption agreements that has continued to happen. What we expect to see in SaaS adoption, which we have already seen this year and the approach we've taken with application delivery and security platform and the adoption we're seeing of that, all of these are catalysts for continued growth of the software business going forward. Tal Liani: But François, if that's the case, and I know you reduced the guidance a little bit because of the breach -- because of the cybersecurity issue, but even before that you only guided growth to 5%. So if that's the case, why don't we see a faster growth rate? Cooper Werner: Correct. So Tal, I mean we've talked about this, and François talked about this on several calls. There is a timing nature because of these 3-year cycles on the renewals. And so the subscription business that we sold in FY '23 had a lower growth rate because new projects were under pressure. This was 3 years ago. And so that's what's coming up for renewal in FY '26. And so the base with which we're starting doesn't have as much growth in FY '26 and that's what was behind what we said was a mid-single-digit growth opportunity when we talked in July. That same base has much more growth in FY '27 and we don't have the headwind related to our SaaS and managed service business because we're through the transition. So we tried to lay out that there are going to be some ups and downs in the annual growth rates tied to the timing of those renewal motions. But we've given that look ahead beyond the current year into '27 to give that visibility that we expect a reacceleration in software growth rate. The underlying trends are very healthy. François laid out several metrics to point to the underlying health of the software business and we saw that last year. If you look at our term license business, that was up 18%. We have the headwind related to SaaS where our SaaS and managed service was down 9%. But again, that's going to be behind us and so it points to a very healthy software view beyond FY '26. Operator: Our next question comes from the line of Tim Long with Barclays. Timothy Long: Two quicker ones, if I could. I just wanted to follow up, François, on Distributed Cloud Services. Part of my question was about multiproducts. I think you just answered that there. But could you talk about some of the other economics that you see as you transition to DCS, things like deal sizes, win rates, maybe when we get to it, dollar retention or add-ons on top of that, number one? And then number two, if you could just quickly touch on a few of the verticals at least on a bookings basis, we're a little out of band. Enterprise was really strong year-over-year and service provider was pretty weak, all for pretty weak numbers. So anything that's driving kind of a little bit of out-of-band performance on those 2 verticals, that'd be great. Operator: Please hold. We're experiencing some technical difficulties. François Locoh-Donou: Tim, let me start again. Can you hear me? Operator: Yes, we can hear you now. François Locoh-Donou: Okay, great. I was starting with your question, Tim, on distributed cloud, I would say this is a land-and-expand motion. So typically the deals would start rather small in the multiple kinds of case and expand after that. I'll give you a data point on that. We have 1/3 of our distributed cloud customers that have expanded their ARR with us and they've expanded -- their expansion has been 90% for those of whom who have expanded. So it can be pretty significant growth in a customer after we sign them and that will continue to grow as we add more services onto F5 distributed cloud and we're continuing to add services as part of building this application delivery and security platform. We're adding more and more of the services that customers have enjoyed on BIG-IP onto F5 distributed cloud. To the second part of your question on the verticals, the -- generally, what we're seeing is kind of the most important enterprise verticals are all embracing hybrid multicloud postures for different reasons. But in the end, it all points to F5. So financial services, for example, in a lot of cases are keeping their core banking data on-premise, but are also having to build sort of disaster recovery to comply with operational resilience regulations. And so they're leveraging public cloud for that. And anytime a customer is using both on-prem environment and public cloud environment, it creates a strong case for F5. The same is true in health care. We're seeing the same in manufacturing, in retail and even in public sector environments. So these verticals embracing hybrid multicloud really allow us to grow our share of wallet into these verticals, and that's what's driving this cross-sell of our portfolio. The service provider space, Tim, that you mentioned, it's true that generally that segment has been, I would say, rather tepid in part because 5G has not really taken off in the way that we all expected a couple of years ago. And there hasn't been a real growth driver frankly, for service providers, either in ARPU or 5G services adoption. So we have seen stability there, but not significant growth to date. Operator: Our next question comes from the line of Simon Leopold with Raymond James. Simon Leopold: A couple things I wanted to check on. One, hopefully easy is, what are you seeing in terms of U.S. federal in light of the government shutdown? Is that an aspect that's affecting the outlook for your December quarter? And the other thing I wanted to get a better sense of is you've given us some commentary around the mix of software and hardware for the December quarter, but what's baked in for software versus hardware growth in that full year 0% to 4% guidance? François Locoh-Donou: Let me start with the -- in terms of the U.S. federal government, we have, in our guidance, assumed some level of disruption in that segment of our business, especially in the first quarter with the government shutdown that clearly is having an impact on project being delayed or approval being delayed. We -- it is our hope that this normalizes over the course of the year. But certainly, in Q1, we have assumed that the numbers that we would see from the federal sector would not be what we have seen historically in that part of the business because of the government shutdown. Cooper Werner: Yes. Thanks, Simon. We're not guiding mix at this point, just given that we're 12 days since the announcement of the incident and we've done a lot of work to provide a range on the growth outlook which, as we said, we've discounted some risk of short-term disruption to demand. We expect the demand to normalize in the second half of the year and I think as we see demand start to normalize, we'll look to give an update of what software and hardware growth can look like for the rest of the year. Simon Leopold: Just maybe you could clarify because you've got BIG-IP as the appliance system business, but you have virtual editions of BIG-IP. So when you talked about the breach, you said it affected BIG-IP. Does that mean that the breach affects both software and hardware equally? François Locoh-Donou: Yes, it does. Operator: Our next question comes from the line of Samik Chatterjee with JPMorgan Chase. Samik Chatterjee: François, just curious to hear your thoughts in terms of how the market share dynamics change on account of the potential impact that you're outlining for the first half. Because I'm just wondering if sort of we should expect to see some of the spend from your customers if it does get delayed from first half to see some catch-up in the second half, particularly when it comes to potentially the systems part of your business. And I have a quick follow-up after that, sorry. François Locoh-Donou: Yes. So we cannot know if on a 1- or 2-quarter basis that's hopefully enough of a runway to see substantial change in market share. So if I speak more on an annual basis and what I expect going forward, my expectation is that we continue to gain share in the app delivery and security market. The reason I say that is relative to other players in the space, we are investing more in our road map. We have been very aggressive at investing in security, and I think through the conversations with our customers around what we are doing to secure our environment, build trust centers to allow customers to come and do penetration testing of our code. All of the work that we are doing with partners to continue to look for any vulnerabilities and secure our code, that our customers are going to continue to see that F5 is really the right partner, is 100% committed to maximum security in our products and in their environments. And that will pay in terms of over time, customers, of course, continuing to partner with F5 and where possible, consolidate spend on our application delivery and security platform in their environment. And we have a world-class road map for our customers to continue to deliver functionality in delivery and security. So I think you have to look at it over a period of time. There may be a short-term blip in the first half of our year because of the factors that I described earlier. But in terms of our market share, our market position, our relationship with customers, I think if anything, over time, it will continue to strengthen. Samik Chatterjee: Got it. Got it. And for my follow-up, I was just looking at the disclosure that you had on standalone security revenues. I think you said $463 million for this year. Looks like it's been fairly consistent for the last couple of years without material growth, like I have $458 million for fiscal '24, $475 million for the year before. Any sort of more details you can provide in terms of what you're seeing on the standalone security side and why hasn't there been more significant growth on that front? Cooper Werner: Yes, I'll take that. So our overall security business grew about 6% last year. So I think what you're seeing is this is going back to the trend that we've talked about with customers preferring to consume via the platform and consolidate multiple functions onto a single platform. And so you're seeing less -- maybe less growth coming from standalone solutions and more of a preference to consume through our flexible consumption program where they're adding additional modules and attaching more security onto existing footprint. And so that growth is really coming through more in a platform form factor. And then the other thing to consider also is just there's a little bit of an impact on the standalone security from the SaaS transition that we've done with some of the legacy offerings, which, again, that'll be kind of behind us as we look ahead. Operator: Our next question comes from the line of Amit Daryanani with Evercore ISI. Amit Daryanani: I have two as well. I guess, Cooper, maybe just to start with you, can you just walk through the operating margin for the year? I think you're implying 34% margins for fiscal '26, but it's also the same, I think, for fiscal Q1. So I'd love to just get a sense on why aren't we seeing leverage in the back half of the year versus the front half. And then if you just quantify what the OpEx uptick in the March quarter will be for some of the events you talked about, that would be helpful. Cooper Werner: Yes. And we talked -- I had in my prepared remarks that the low watermark for operating margins would be Q2. That's typically the case, just seasonality with payroll tax resets and our large customer event in March. And so you actually would expect to see some leverage in the back half of the year coming off of the lower operating margins in Q2. And we're not going to guide Q2's operating expense today, but you could look at kind of seasonal trends to get a feel for what that uptick in the operating expense typically is in Q2. Amit Daryanani: Got it. And then François, just on the breach side and the challenges you're having, can you just -- maybe just help us understand if the source code is compromised, how do you give customers the confidence that there's no zero-day threat that's kind of hiding in there over time? Just maybe walk through that. And then does this also dampen your ability to implement price increases when it comes to the hardware side, really to reflect what Citrix has been doing to some extent in that space. So I'd love to just understand kind of the zero-day risk and the potential for price increases maybe being a bit more muted there as you go forward. François Locoh-Donou: Thank you. Well, let me start with the code and then let's come back to price increase as a separate topic. Look, I said earlier that I think customers will continue to choose F5 because we provide best-in-class app delivery and security capabilities for our customer. Now when you look at the code, I shared earlier some of the things that we are doing to ensure that we remain vigilant about potential vulnerabilities in our code. And so we have engaged partners that are scanning our code and will continue to do so to ensure that if there are any vulnerabilities that we remediate them immediately. I shared with you that we are setting up a trust center that will be there to allow our customers to come and do penetration testing with our code. We are going to leverage AI for hunting for penetration as well in our code. We are enhancing our bug bounty program. So there are a number of things that we are putting in place, all designed to ensure we remain hypervigilant about this, and we give customers maximum comfort around the security of our code going forward. And I think in our industry we really intend to be best-in-class in doing this. And I think as we have these conversations and frankly, as we have shared these plans and these road maps around the things we're going to do with our customers, they have been very pleased with our response and I think are getting a lot of comfort that we are doing all the right things to ensure that their -- the product they get from F5 continue to be safe and free of potential vulnerabilities or zero days. I would also say that we have taken this further, and you may have seen in our disclosure that we are working with CrowdStrike to implement EDR capabilities on BIG-IP. And that's an extra layer of protection that we are offering customers to have way more observability, monitoring into their BIG-IPs which is something that hasn't been done in the industry. You haven't seen perimeter devices really enabled with EDR. And so it's just one example of where we are innovating with other industry partners to raise the game on security for our customers. I think the issue of price increases is a separate issue. As you know, you mentioned one of our competitors earlier, we have taken an approach here that is to have durable relationship with our customers and to really show the value of what we're doing for them over time. We don't intend to change our policy and our approach. I think we're going to be very consistent with that. And frankly, we can be consistent with our approach because customers recognize all the investments that we're making, the road map that I just talked about in terms of security, but also the world-class road map we have in terms of building delivery and security and having the best delivery and security platform for hybrid multicloud environment. We're the only company today that can serve them in hardware, software and SaaS and serve their traditional apps, their modern apps and their AI applications. And we're continuing to make these investments, both organically in our portfolio and inorganically. You probably just saw this quarter we made the acquisition of CalypsoAI. We did that to add capabilities to our platform specifically tailored for AI applications, securing AI applications in our application delivery and security platform. So customers will continue to see these investments from F5, and I think based on that we can justify the value that we're getting in the interactions with our customers. Operator: Our next question comes from the line of Ryan Koontz with Needham & Company. Ryan Koontz: Most of my questions have been answered, but just a quick clarification. When you talked about the migration of your end-of-life products out there today, kind of where are you now in that migration? How do you think about that going forward? Are you seeing some pushouts? Are you giving customers any kind of time frame breaks because of the breach to migrate those products going end of life? Cooper Werner: Yes. So we have said that we're still pretty early days in the refresh motion just in terms of the percentage of the installed base being well over 50%. That's on those 2 platforms. There's -- no, we haven't adjusted the end of software support dates. Those have been public for a long time and we're working with customers to ensure they have an orderly path to make those refreshes across our estate. Ryan Koontz: Got it. Helpful. And maybe circling back to your comments on the telecom segment. Obviously, yes, 5G has been disappointing there in terms of kind of the deployment of virtualization, but are you seeing any new activities in the telecom domain around the new 5G core, maybe picking up momentum or anything else to call out on the telecom front here? François Locoh-Donou: Yes, look, I think what we're seeing is the sort of 4G to 5G transition continue with some geographies ahead of others. Those customers who have implemented 5G were seeing growth inside of these environments, capacity, in some cases, growing fairly rapidly. But generally this transition from 4G to 5G and frankly the revenues that telecom operators expected from that transition have not really materialized and that, in turn, has put pressure on their CapEx spend. So we are continuing to find new use cases inside of our service provider customers, but it hasn't been significant enough to drive a substantial uptick in the overall segment for F5. Operator: I would now like to pass the call back over to Ms. Suzanne DuLong for any closing remarks. Suzanne DuLong: Thank you, everybody, for being with us today. We look forward to seeing many of you during the quarter. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Greetings, and welcome to the Simpson Manufacturing Co. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Kim Orlando of Investor Relations. Thank you. You may begin. Kimberly Orlando: Good afternoon, ladies and gentlemen, and welcome to Simpson Manufacturing Co.'s Third Quarter 2025 Earnings Conference Call. Any statements made on this call that are not statements of historical fact are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual future results may vary materially from those expressed or implied by the forward-looking statements. We encourage you to read the risks described in the company's public filings and reports, which are available on the SEC's or the company's corporate website. Except to the extent required by applicable securities laws, we undertake no obligation to update or publicly revise any of the forward-looking statements that we make here today, whether as a result of new information, future events or otherwise. On this call, we will also refer to non-GAAP measures such as adjusted EBITDA, which is reconciled to the most comparable GAAP measure of net income in the company's earnings press release. Please note that the earnings press release was issued today at approximately 4:15 p.m. Eastern Time. The earnings press release is available on the Investor Relations page of the company's website at ir.simpsonmfg.com. Today's call is being webcast, and a replay will also be available on the Investor Relations page of the company's website. Now I would like to turn the conference over to Mike Olosky, Simpson's President and Chief Executive Officer. Michael Olosky: Thanks, Kim. Good afternoon, everyone, and thank you for joining today's call. I'm joined by Matt Dunn, our Chief Financial Officer. Today, I'll share highlights from our third quarter performance, key developments across our end markets and progress on our strategic initiatives. Matt will then walk through the financials and our updated fiscal 2025 outlook. We are pleased to report net sales of $623.5 million, a 6.2% increase year-over-year, primarily driven by our June 2nd price increase and a positive impact from foreign exchange. This growth reflects the ability of our business model to navigate a challenging macroeconomic environment even as residential housing markets in the U.S. and Europe remains soft. In North America, net sales rose to $483.6 million, up 4.8% from the prior year. This includes an estimated $30 million contribution from our June price increase. North American volumes were modestly lower. This reflects broader market conditions, including significantly lower housing starts, both in the southern and western regions of the United States, where we have more content per unit as a result of stronger building codes. As a reminder, our volume calculations exclude contributions from software, services and equipment. While comparative data versus U.S. housing starts was unavailable for Q3 and due to the government shutdown, we remain confident in our ability to outperform the market over the long term. Our focus on innovation, customer service and operational excellence continues to drive solid results. Highlighting some developments from our key end markets, our volume performance was mixed, though we're seeing positive momentum across several key areas. The OEM business delivered high single-digit volume growth led by mass timber solutions and new product introductions. Direct sales to manufacturers of material handling and data center equipment also posted solid gains. In the component manufacturer business, we achieved low single-digit volume growth supported by our new customer wins and expanded product offerings. We recently launched CS Producer. It's our first cloud-based truss production management software. CS producer gives floor and roof truss manufacturers powerful ways to schedule and manage daily operations. It's also a major milestone in our software road map and received enthusiastic feedback at the Building Component Manufacturers Conference. In our national retail business, volume was slightly down, while point-of-sale performance improved mid-single digits. We saw continued strength in Outdoor Accents, fastener solutions, e-commerce and Pro initiatives with our two largest retail partners. Expanded shelf space and new products introduced last year are contributing positively. In the residential business, volumes declined slightly. However, we secured new business through dealer conversions and growth in outdoor living solutions. Multifamily demand remains a bright spot, especially in the northwest, northeast and Canada. In the commercial business, volumes declined mid-single digits, reflecting an overall weak commercial market, but we saw growth in cold-formed steel connectors and adhesive anchor lines driven by strong field engagement and specification efforts. I'm also proud to highlight that our commitment to customer service was recognized with two supplier awards from Do it Best and SouthernCarlson during the third quarter. In Europe, net sales reached $134.4 million, up 10.9% year-over-year or a solid 4.3% on a local currency basis. Growth was driven by increased volumes, resulting in performance that outpaced the market. As we look ahead, we are undertaking proactive strategic cost savings initiatives to align our operations with evolving market demand and position the company for long-term success. This is in response to a downturn in the housing market that started in 2022. While these decisions are not easy, we are committed to supporting our team and ensuring we do not compromise on what we're known for, which is delivering best-in-class service to our customers. These actions are designed to drive efficiencies, preserve profitability and unlock future growth opportunities in what's expected to be a continued soft market. As a result of these actions, we expect to generate annualized cost savings of at least $30 million with onetime charges of approximately $9 million to $12 million that will be realized in fiscal 2025. We remain committed to supporting our team in delivering exceptional customer service. Matt will provide further detail on the financial impact shortly. Turning to consolidated gross margin, which was 46.4% and slightly below last year. This reflects higher input costs, including tariffs and labor costs. Our June price increase helped partially offset rising costs, and we've taken further pricing actions, effective October 15, to address additional tariffs announced subsequent to our prior price increase. These increases are expected to contribute approximately $100 million in annualized sales. We expect continued deceleration in our gross margins as the impact of tariffs flow through our inventory. Third quarter operating margin was 22.6%, up 130 basis points year-over-year including a $12.9 million gain from the sale of our Gallatin, Tennessee facility and approximately $3 million in restructuring costs. Adjusted EBITDA totaled $155.3 million, a 4.5% increase year-over-year. Next, I'd like to highlight progress on our financial ambitions. First, continuing above-market volume growth relative to U.S. housing starts. We're updating our 2025 outlook for U.S. housing starts. We now expect them to decline mid-single digits compared to 2024. In Europe, housing starts in 2025 are expected to remain relatively consistent with 2024. We remain focused on growing above the market. Second, maintaining an operating income margin at or above 20%. Considering the cost savings initiatives we are taking in a growing market, we remain confident in our ability to deliver 20-plus percent operating margins. And third, as a growth-focused company with industry-leading margins, we believe we can consistently drive EPS growth ahead of net sales growth. Year-to-date EPS has increased approximately 510 basis points above revenue growth, demonstrating our ability to deliver shareholder value. In summary, we delivered solid results in a challenging housing environment. Our pricing actions, cost savings initiatives and market share gains are positioning us for continued success. We're optimistic about the future and believe in our ability to drive growth, improve profitability and capitalize on a market recovery. Thank you to our incredible team for their dedication, resilience and relentless customer focus. With that, I'd like to turn the call over to Matt, who will discuss our financial results and outlook in greater detail. Matt Dunn: Good afternoon, everyone. Thank you for joining us on our earnings call today. Before I begin, I'd like to mention that unless otherwise stated, all financial measures discussed in my prepared remarks refer to the third quarter of 2025, and all comparisons will be year-over-year comparisons versus the third quarter of 2024. Now turning to our results, our consolidated net sales increased 6.2% year-over-year to $623.5 million. Within the North America segment, net sales increased 4.8% to $483.6 million. In Europe, net sales increased 10.9% to $134.4 million due to increased sales volumes as well as the positive effect of approximately $8.1 million in foreign currency translation. Globally, Wood Construction products sales were up 5% and Concrete Construction product sales were up 12.8%. Consolidated gross profit increased 5.2% to $289.3 million resulting in a gross margin of 46.4%, down 40 basis points from the third quarter of 2024. On a segment basis, our gross margin in North America was 49%, slightly lower than the 49.5% reported in the prior year due to factory and overhead as well as higher warehouse costs as a percentage of net sales. Our gross margin in Europe increased to 37.9% from 36.6%, primarily due to lower material costs as a percentage of net sales. From a product perspective, our third quarter gross margin was 46.2% for wood products compared to 46.3% in the prior-year period. For concrete products, gross margin was 48% compared to 49.7% a year ago, with the reduction partly due to increased tariffs on imports. Now turning to expenses, while SG&A head count is down over 4% year-over-year, total Q3 operating expenses increased 9% to $162.3 million, primarily driven by higher variable compensation on improved profitability, severance costs related to our strategic cost savings initiatives, foreign exchange and employee health care costs. As a percentage of net sales, Q3 operating expenses were 26% compared to 25.4% last year. Our third quarter operating expenses included approximately $3 million in severance-related costs associated with our strategic cost savings initiatives, which we anticipate will deliver annualized cost savings of at least $30 million. To further detail our third quarter SG&A, our research and development and engineering expenses increased by 1.2% to $20.8 million. Selling expenses increased by 5.9% to $56.1 million, primarily due to higher variable compensation and commissions, personnel and severance costs related to our strategic cost savings initiatives, partially offset by a decrease in travel-related costs. On a segment basis, selling expenses in North America were up 6.8%, and in Europe, they were up 2.8%. General and administrative expenses increased by 13.3% to $85.4 million due to increases in variable compensation, software costs, including development for our component manufacturing business as well as negative foreign exchange effect. As a result, our third quarter consolidated income from operations totaled $140.7 million, an increase of 12.7% from $124.9 million. Our consolidated operating income margin was 22.6%, up from 21.3% last year. Income from operations included a $12.9 million gain on the sale of the existing Gallatin, Tennessee facility. In North America, income from operations increased 1.6% to $125.2 million, driven by an increase in gross profit, partly offset by higher variable incentive compensation, personnel costs, severance costs related to our strategic cost savings initiatives and software-related costs. Our third quarter operating income margin in North America was 25.9% compared to 26.7% last year. In Europe, income from operations increased 27.6% to $16.1 million due to an increase in gross profit, partly offset by increases in operating expenses due to the negative effect of approximately $2.1 million in foreign currency translation. Our third quarter operating income margin in Europe was 12% compared to 10.4% last year. Our third quarter effective tax rate was 25.3%, approximately 80 basis points below the prior-year period. Accordingly, net income totaled $107.4 million or $2.58 per fully diluted share, compared to $93.5 million or $2.21 per fully diluted share. Adjusted EBITDA for the third quarter was $155.3 million, an increase of 4.5%, resulting in a margin of 24.9%. Now turning to our balance sheet and cash flow. Our balance sheet remained healthy with cash and cash equivalents totaling $297.3 million at September 30, 2025, up $106.9 million from June 30, 2025. Our debt balance was approximately $369.2 million, net of capitalized finance cost, and our net debt position was $71.9 million. We have $450 million remaining available for borrowing on our primary line of credit. Our inventory position as of September 30, 2025, was $591.9 million which was up $5.3 million compared to June 30, 2025, with lower pounds of inventory on hand. Our disciplined approach to capital allocation keeps our investments aligned with evolving market conditions and focused on driving sustainable value. We generated strong cash flow from operations of $169.5 million for the third quarter. This enabled us to invest $35.9 million for capital expenditures, pay $12.1 million in dividends to our stockholders and pay down $5.6 million of our term loan. In addition, we repurchased 158,865 shares common stock at an average price of $188.84 per share for a total of $30 million. On October 23, our Board amended our share repurchase program, authorizing an additional $20 million of our common stock for repurchases through year-end, resulting in $30 million remaining under our authorization. In addition, the Board authorized a new share repurchase program for 2026 to repurchase up to $150 million worth of our shares through year-end 2026. This reflects our confidence in the long-term prospects of the business and our commitment to returning capital to shareholders. In regard to our investments, our new Gallatin, Tennessee facility opened during the third quarter. As a reminder, this facility will play a critical role in helping to support growth and enhance operational efficiency across our fastener product lines. Next, I'll turn to our 2025 financial outlook. Based on business trends and conditions as of today, October 27, we are updating our guidance for the full year ending December 31, 2025, as follows: we expect our operating margin to now be in the range of 19% to 20%. Additional key assumptions include: our expectation for U.S. housing starts to be down in the mid-single-digit range from 2024 levels, a slightly lower overall gross margin based on the addition of new facilities as well as the recently imposed tariffs, which we anticipate will be partly offset by the price increases that went into effect on June 2 and October 15. Our outlook also assumes nonrecurring severance costs from our strategic cost savings initiatives in North America and Europe of approximately $9 million to $12 million. And finally, our margin guidance includes the benefit of $12.9 million from the gain on the sale of our existing Gallatin, Tennessee property. Next, interest expense on our term loan, which had borrowings of $369.2 million as of September 30, 2025, is expected to be approximately $5 million. The benefits from interest rate and cross-currency swaps and interest income on our cash and money markets are expected to substantially offset the expense. Our effective tax rate is estimated to be in the range of 25.5% to 26.5%, including both federal and state income tax rates based on current loss. And finally, our capital expenditures outlook is expected to be in the range of $150 million to $160 million, which includes approximately $75 million to $80 million for the completion of both the Columbus facility expansion and the recently opened Gallatin fastener facility. In summary, despite a challenging market backdrop, we delivered solid third quarter results and continue to execute with discipline. Our pricing actions helped offset rising costs from tariffs, helping our margins remain resilient even as we navigate cost headwinds. While SG&A was elevated this quarter, the strategic cost savings initiatives we implemented in late September and early October will drive meaningful efficiencies and support future earnings growth. Gains on asset sales also contributed positively to operating income and EPS. Looking ahead, we remain focused on disciplined capital deployment and returning value to stockholders through our expanded share repurchase authorization and our commitment to return at least 35% of our free cash flow. With that, I will now turn the call over to the operator to begin the Q&A session. Operator: [Operator Instructions] Our first question comes from the line of Dan Moore with CJS Securities. Dan Moore: To start with, 6% revenue growth in Q3, certainly very solid in light of the current housing environment. Obviously, it was mostly pricing strategic actions. Just give us a flavor for kind of the organic volume declines in North America and what did volume growth look like in Europe? Matt Dunn: Sure. Dan, this is Matt. Let's break it down on a global basis first. So the 6.2% sales growth for the quarter, a little more than 5 points of that was from pricing, a little more than 1 point from foreign exchange, less than 0.5 point of help from acquisitions that were acquired in 2024 that had not anniversaried yet. And then volume was down 1 point. So that's on a global basis. If you look at volume on a North America basis in the quarter. Yes. I think... Michael Olosky: Dan, Year-to-date volume growth is down 1.4% versus prior year. Matt Dunn: Yes. North America. Michael Olosky: North America. Dan Moore: Got it. That's really helpful. Obviously, just sticking with kind of the macro housing demand proving to be more tepid this year than perhaps we had hoped or expected when we started the year. The rental rates coming down, affordability remaining challenged, you're taking some meaningful cost actions, and that will be my follow-up question. But do you see any catalysts that could kind of stem the tide and give a trajectory next year? Do you foresee continued declines in the housing market, and that's why you're taking the actions? I know it's early to be crystal balling '26, but just kind of beyond the next -- where do you see things going? Michael Olosky: Dan, when we look at this year, again, probably down mid-single digits. And I think that's a bit of a surprise for a lot of people. When we were coming into the year, we were thinking it was going to be up low single digits. And it does look like it's certainly decelerating in the second half of the year. When we look at all of the various market forecasts and not getting specific to market, most of them are coming in on the flat range. And when I talk with our customers, affordability is certainly an issue, but a lot of the bigger builders are already subsidizing mortgage rates. So a lot of people that are going to these big production builders are already getting a 4% loan. So certainly, lower interest rates will help the small- to medium-sized builders that really can't subsidize things, the way the bigger builders are. But I guess we're focusing on the things within our scope of control. We're absolutely committed to being in that 20% operating income level, and that's why we had to make the really difficult decision to make the strategic cost savings initiatives and get our cost structure in line with what we think is going to be a little bit more of an extended slow market. Matt Dunn: Yes, Dan, I would just add, as Mike said, tough decisions looking ahead toward what looks like is going to be a flattish market next year. We took these actions to stay on track against our financial ambitions. We believe that they'll deliver at least $30 million of annualized cost savings in 2026, really through a combination of workforce reduction and portfolio management. And then as we mentioned on the call, we expect $9 million to $12 million of onetime costs during 2025, of which $3 million are already in the Q3 results, but the full $9 million to $12 million is included in our updated outlook for the year. Dan Moore: Really helpful. And then I was -- I think you just touched on it, but I was going to dig a little deeper into the targeted cost savings. Any kind of general breakdown between North America and Europe? And then it sounds like you've already incurred $3 million, the $9 million to $12 million is not incremental to that. But I assume the balance is likely going to be in Q4. Is that the right way to think about it from a modeling perspective? Matt Dunn: Let's take the second part first. Yes, from a modeling perspective, you could assume that the $6 million to $9 million is going to come in Q4 and then the $3 million we already had in Q3 would get you to that $9 million to $12 million. In terms of the breakdown, regionally, I'm not going to provide all that, as you can assume. Not all of it's done yet, certainly given some of it still to come in Q4. Dan Moore: Got it. Last one, and I'll jump back in queue. But that entire $30 million cost savings earmarked for bottom line improvement or at least is sort of bottom line maintenance and getting back to that 20% operating margin target? Is it the right way to think about it versus reinvesting back into the business? Michael Olosky: Yes. We're not guiding yet, Dan, obviously, for 2026. But our assumption in the market is going to be flattish from everything we've heard and we are committed to making sure we get back to that 20% operating income level. Operator: Our next question comes from the line of Tim Wojs with Baird. Timothy Wojs: Maybe just on that last point, Mike, is basically what's changing on the cost side, the expectation that the market is just going to stay slower? I mean if we look back a year ago when you guys had that question or 2 years ago when you had that question, it was kind of like, hey, the market is going to get better and we'll lever those costs. Is it basically that, or is there something kind of worse happening in the market? I just kind of want to make sure I understand the drivers of the cost reductions. Michael Olosky: Yes. Good question, Tim. It's pretty much in line with what you're hearing about the market. So the census data came through August, which is the last report we had basically said that housing starts were up 1%, which was a little inconsistent with some of the results we've seen in the industry. We've definitely seen things slow down in the second half. We've certainly heard that from our customers. I believe they're all feeling the same thing. You're probably hearing that from other clients as well. And then we think that, that's just going to carry over into a flat year next year. Matt Dunn: Yes. I think, Tim, we just wanted to make sure that we could see our way to delivering our financial ambition on the operating margin side of 20%, even if the market is flattish or a little bit down next year. Again, I'm not giving the formal guide yet, but just need to take some cost choices to make sure we can get there next year. Timothy Wojs: Okay. Okay. No, that's helpful. I guess on gross margins, when do you -- I guess, two questions on the trajectory. So when do you fully kind of expect the tariffs to kind of flow through the gross margin line? And then is there a noticeable impact in gross margins from turning on the Gallatin facility? Or are there other cost offsets? Matt Dunn: Yes, I'll take the second part first, not a noticeable impact on turning on the Gallatin facility on gross margin, certainly in the short term or even the next year or so. I think some of that will depend on what happens with tariffs and what we do with sourcing and are we in-sourcing more maybe than we thought from the start. A lot of that depends on where we net out on tariffs. In terms of gross margin impact of tariffs, if you look at our product segment breakdown on gross margin that we talked about, you can see the gross margin on concrete construction products is down quite a bit more than wood construction products. That's largely where the anchor business falls, which is subject to the most tariffs and some of our fastener business falls there as well. I would say that from a gross margin standpoint, we continue to see erosion over the next quarter or so, a couple of quarters as the tariffs are fully rolled in, but you're seeing an impact in Q3 certainly. And so incrementally, a little bit more in Q4 and then maybe a little bit in Q1, but from that standpoint, then they should essentially be rolled in everywhere. But I would say -- if I had to pick a percentage on it now, I would say 80% rolled in already in what you see in the Q3 results. Michael Olosky: Tim, remember, we're talking about Gallatin, we're also in-sourcing coding and heat treating processes. So it's not just moving production and adding additional cold-forming equipment. It's ramping up kind of a full end-to-end process. So that's why it's going to take us a little bit of time to get that fully going. Timothy Wojs: Okay. Okay. No, that's helpful. And then I guess just to kind of put a finer point on the volume trajectory. So I think we were down a little bit in North America in Q2. I think we're down a little bit again in Q3. Is -- are you seeing things even out? Or would you expect your volume performance to get weaker in the first quarter and into early next year? Matt Dunn: So if you just look at Q3, Tim, volume was down 2.7% versus prior quarter. And if you look year-to-date, as I mentioned, down 1.4% for the full year. So definitely trajectory-wise getting a little bit worse. Again, a lot of things can happen over the next couple of months. So let's see how the rest of the year plays out before we talk about 2026 too much. Timothy Wojs: Okay. And you should still outperform the mid-single digits. That would be the expectation, right? Michael Olosky: I mean our ambition is to drive above-market growth. As you know, historically, we've been about 300 basis points above that. Now, it's not always been a straight line over the last 9, 10 years. We've had a couple of years of volume growth was below the market, but we certainly want to grow above the market and ideally above that long-term average. Operator: Our next question comes from the line of Kurt Yinger with D.A. Davidson. Kurt Yinger: Great. Just wanted to follow up on the cost savings target. I apologize if I missed this, but is that $30 million expected to be kind of achieved on a run rate basis, I guess, in early 2026 there? And I guess as we think about the sources of savings, how would you kind of have us split that between the cost of goods and kind of the operating expense segments? Matt Dunn: Yes, Kurt, the $30 million would be a realized number in 2026 kind of throughout the course of the year. We are going to see a little bit of savings in 2025, but it's more than offset by the severance costs. So from an incremental savings standpoint, net-net, the full $30 million should show up in 2026. So in terms of how that splits versus SG&A and COGS, I would say 90-plus percent of it is in SG&A. There's a little bit in the COGS side, but the bulk of it is SG&A. Kurt Yinger: Okay. Okay. That makes sense. And then I believe, Mike, you had mentioned kind of the residential market was down low single digit for you guys this quarter, which, in light of some of the pressures in Florida and California and other parts of your business that are maybe more exposed or higher content per start seems pretty good still. I guess, has that performance surprised you at all? Do you feel like you're actually potentially gaining some share there relative to the impacts of certain regions? How would you just kind of frame that for us? Michael Olosky: So Kurt, just to be clear, the volume for the total North American business was down 2.7% for the year. Our residential... Matt Dunn: For the quarter. Michael Olosky: For the quarter. For the residential business, it is down mid-single digits for the quarter. We do believe that -- and we see this with our customers, and we continue to pick up share at some of our lumber yards and pro dealers. We tend to -- we're still getting more shelf space that we think eventually leads to more positive sell-out. So we continue to feel good about our ability to grow above market. If you look at the digital mix, so the regional mix is a big deal for us. So the south and the west, when you look at the census data through August, they're down mid-single digits. If you look at the Midwest and Northeast, again look at the housing data -- census housing data, they're up double digits. And remember, a house built in a seismic or a hurricane area can have 10x the content of a house built in the middle of the U.S. with a pretty standard building code. So that definitely has a mix. We don't have great visibility all the way to the end builder, as you know, because we're going through a bunch of lumber yards and pro dealers and contractor distributors. So it's hard to say exactly how that's impacting us, but that's definitely a headwind. Kurt Yinger: Okay. Okay. Perfect. And then just thinking about the guide at a higher level, your starts assumption for the year ticked down a little bit. The outlook kind of now contemplates the onetime cost to achieve the targeted reductions. Is there anything beyond the October price increase that's been better than expected? Or is it maybe kind of incremental on the positive side, just thinking about the operating margin guide moving up to the higher end? Matt Dunn: Yes. I think we narrowed up the guide to a 100 basis point range from a 200 basis point range. We've included the onetime costs. I think the -- our volume development has been maybe better than what you hear if you listen to some of the market forecast, whether it's a Zonda or a John Burns. If you look at our volume, year-to-date down -- or sorry, in the quarter, down 2.7%. I think there's a lot worse numbers out there from the folks that are forecasting the market, although there hasn't been official census data published. So I think holding steady on volume, doing what we can on the cost front. And then obviously, we had the onetime gain that was known, but certainly, just still felt needed to take these actions on cost savings to ensure we can get where we want to go in 2026. Operator: Our next question comes from the line of Dan Moore with CJS Securities. Dan Moore: Yes. Just a quick follow-up, and I appreciate the color on the gains you're making in some of those targeted end markets that are a key focus for growth and continuing to outpace. When you look to '26 and beyond, if not rank ordering, just kind of maybe would you call out two or three that you see a little bit more opportunity here in the near term that could help you to continue to outpace those end markets if we do remain a little bit softer? Michael Olosky: Yes, Dan, so we -- let me start with Europe because we're very pleased with the development that Europe has made over the last 2 quarters, profitability improving, we believe above market growth. So -- and we expect the growth there to continue. And Dan, we think, literally, we have plenty of opportunities in all five of our market segments. We've got very specific plans in each segment to try to gain share. When you kind of add all that up, there are a lot of singles and doubles, meaning a lot of small applications, digital self space, shelf space, new products that we're launching and small games with customers that we do think will add all up and help us continue to drive above-market growth. If you talk about the bigger ones, we continue to think all things component manufacturing is a good opportunity for us. That has been one of our strongest growth drivers in the last couple of years. And then we think ramping up the new product innovation activities, we are making good progress there, and we expect to continue to make good progress on that going forward. Dan Moore: Very helpful. And then lastly, obviously, you've been aggressively returning cash to shareholders and very consistently. Just the language around 2026 share repurchases up to $150 million, absent meaningful M&A opportunities? Is it how we should sort of think of that as kind of a target, just balancing, especially given CapEx probably starts to wind down a little bit after some of these projects? Matt Dunn: Yes. I think as we've talked before, we've been in a pretty heavy CapEx cycle with the two facility expansions in Gallatin and Columbus, and that's going to normalize quite a bit next year, and we'll issue that formal guidance in January, but definitely going to free up some capital and certainly want to be continuing to return cash to shareholders. So I would plan on, barring unforeseen events or significant M&A or something like that, that's a good target number for 2026 on share repurchase. Dan Moore: Perfect. I look forward to seeing you down in McKinney in a couple of weeks. Michael Olosky: Yes, looking forward to it. Operator: Our next question comes from Tim Wojs with Baird. Timothy Wojs: I just had a couple of follow-ups. On pricing, can you -- how much of carryover pricing would you have next year? I think you mentioned $30 million you saw this quarter. I guess what would you expect in the fourth quarter? And how much carries into '26? Michael Olosky: Yes. So big picture, Tim, tariff story, roughly $100 million. Price increases specific to tariffs, a little bit over $50 million. Both of those are on an annualized level. We also implemented our first price increase in roughly 4 years on our U.S.-made products, roughly $52 million impact on an annualized level. Matt Dunn: Yes. And then just if you recall from Q2's release, Tim, we had a little bit of pricing in Q2 from the June price increase, about $30 million in Q3, as we've said, based on volume, probably another $25 million or so in Q4. And then so that leaves you with probably about, doing the math in my head, $30 million, $35 million of carryover pricing in 2026. Timothy Wojs: Okay. Okay. Great. And then just on the fourth quarter, like the 100 basis points is still pretty wide for the year for the EBIT margin guide, and it is a seasonally weaker quarter. So just any -- would you put any finer point on that? Or just kind of how we're thinking about the fourth quarter because that could be up a couple of hundred, down a couple of hundred basis points in that specific quarter. So just anything that could help us there? Matt Dunn: Yes, I mean I think the biggest variable is volume, right? I think if you look at market forecasters on what fourth quarter is going to look like from a housing start standpoint, there's some pretty dire forecasts out there to get to the numbers that they're saying on an annual basis based on where we are year-to-date. So that's probably the single biggest variable. And then from the cost savings initiative, just in terms of exactly how much we're able to execute on which timing in Q4, we have a little bit of a read there. But I think it really comes down just to volume. I think the rest of it is largely locked in, but volume is a big enough variable in this case, given what's happening and what is already a pretty low volume seasonal quarter for us, which is Q4, typically. Timothy Wojs: Okay. And then just a last clarification. The $30 million of annualized savings, is that in addition to the severance costs? So it's not $10 million of severance and $20 million of savings, it's $30 million of actual savings. Matt Dunn: Yes. Michael Olosky: Yes. Matt Dunn: At least $30 million. Operator: And we have reached the end of the question-and-answer session. And this also concludes today's conference, and you may disconnect your lines at this time. Thank you, and have a great day.
Operator: Thank you for standing by. My name is Jeannie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2025 Bed Bath & Beyond, Inc. Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Melissa Smith, General Counsel and Corporate Secretary. You may begin. Melissa Smith: Thank you, operator. Good afternoon, and welcome to Bed Bath & Beyond, Inc.'s Third Quarter 2025 earnings conference call. Joining me on the call today are Executive Chairman and Principal Executive Officer, Marcus Lemonis; and President and Chief Financial Officer, Adrianne Lee. I'm also joined by Alex Thomas, Chief Operating Officer. Today's discussion and our responses to your questions reflect management's views as of today, October 27, 2025, and may include forward-looking statements, including, without limitation, statements regarding our quarterly earnings reporting, forecast of and plans for our growth, revenue improvement, profitability or sustained profitability, business strategy, including plans for enhancing customer and shopping experience, our long-term goal of becoming the Everything Home company, margin consistency, improved conversion, expected conversions of retail locations, planned expense reductions, value and monetization of our intellectual property, future strategic ventures, including in PropTech solutions, improved financial performance, progress of and plans for the platforms we invest in, plans for improved efficiencies and technology-based solutions, including AI-driven strategies, and timing of any of the foregoing. Actual results could differ materially from such statements. Additional information about risks, uncertainties and other important factors that could potentially impact our financial results is included in our Form 10-K for the year ended December 31, 2024, our Form 10-Q for the fiscal period ended September 30, 2025, and in our subsequent filings with the SEC. During this call, we'll discuss certain non-GAAP financial measures. Our filings with the SEC, including our third quarter earnings release, which is available on our Investor Relations website at investors.beyond.com contain important additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the most comparable GAAP measures. Following management's prepared remarks, we will open the call for questions. A slide presentation with supporting data is available for download on our Investor Relations website. Please review the important forward-looking statements disclosure on Slide 2 of that presentation. With that, let me turn the call over to you, Marcus. Marcus Lemonis: Thanks, Melissa. Geez, I feel like we took the whole time to do the disclosures. But good afternoon, everyone, and thank you for joining us for the third quarter call. As many are aware, consumer confidence in spending patterns, they remain uneven, but we continue to outperform our own expectations by staying disciplined, focused and very customer-centric. During the quarter, we completed our name change back to Bed Bath & Beyond, a brand that continues to hold deep connection and trust with consumers across homes. The third quarter marked another strong step forward for Bed Bath & Beyond, our seventh consecutive quarter of measurable improvement towards achieving profitability. We've stabilized the business and are positioned it for growth. Year-over-year, we delivered a 93% improvement in net loss and an 85% improvement in adjusted EBITDA, a 420 basis point increase in gross margin, driven by disciplined execution, sharper focus and much smarter spending. We know what's working, and we also know what still needs improvement. Ahead, we'll place greater emphasis on data-driven decisions, faster technology and customer-focused solution-based experiences. As we enhance our technology and analytics team, we're combining top internal talent with external experts and auditing every part of the customer journey to ensure personalized solicitation, discovery, checkout and post-purchase experiences to deliver the conversion and retention our financial model requires. During the quarter, we strengthened our foundation. We invested an additional $3 million in GrainChain, our blockchain-based supply chain platform; acquired the Kirkland's home intellectual property for $10 million adding another trusted home brand to our family; and raised approximately $113 million through our ATM. We're using this liquidity to strengthen the balance sheet, expand existing investments and pursue strategic investments or acquisitions in non-retail, home-centric technology, data, products, services and select PropTech solutions, all aim at building out our 'Everything Home' business. Homeowners today need simple, innovative technology to help them maintain their homes, manage products, projects and realize the full potential of their property, including a personalized, frictionless shopping experience. Over time, we see PropTech playing a growing role in how consumers maintain, finance, and optimize their homes and how we help them unlock more value from where they live. Across the business, execution is improving, and the results reflect it. We've also continued to invest in the platform shaping our future. Both tZERO and GrainChain are making steady progress. At tZERO, over the last several months, we've driven the kind of change we expect new leadership, a sharper outlook and as of today, an acknowledgment that pursuing a public market listing could unlock new value. While tZERO has multiple growth paths, our focus is on its ability to unlock value for asset managers and homeowners. Fractional ownership, digital transparency and verified title records can reshape how people access and invest in property, directly supporting our Everything Home mission. GrainChain continues to advance as a blockchain platform modernizing supply chains tied to home-related commerce. It improves transparency and efficiency across materials, logistics and finished goods, strengthening trust across the ecosystem that builds and furnishes the home. Together tZERO and GrainChain connect the digital and physical worlds, enhancing transparency, ownership and value creation. Alongside these efforts, PropTech will help integrate the home itself into this ecosystem, linking ownership, supply chain and consumer experience in a way that's unique to Bed Bath & Beyond. With that, I'll turn the call over to Adrianne to review the results. Adrianne Lee: Thank you, Marcus. We are proud of the progress this quarter. Our focus on execution, efficiency and balance sheet strength continues to deliver results. Net revenue was $257 million for the third quarter, down 17% year-over-year or 13% excluding the impact from our exit from Canada. Average order value improved 3% driven by our continued focus on assortment, removing unproductive SKUs and leaning into better best offerings. This was partially offset by orders. However, I'm pleased orders were nearly flat versus the second quarter, highlighting business stability. Gross margin was 25.3%, up 420 basis points year-over-year, driven by lower fulfillment and returns costs and tighter promotions. Sales and marketing expense improved by 260 basis points to 14% of revenue reflecting a more efficient channel allocation and improved return on spend. Notably, our efficiency has been relatively consistent throughout 2025, which makes it a good place to take additional steps towards improved efficiencies. This month, we launched a new private label credit card and an important retention tool step. Technology and G&A expense declined by $13 million year-over-year as we rightsized our org structure, streamlined vendors, and automated key functions. All in, net loss narrowed by -- to $4.5 million, a 93% improvement year-over-year and adjusted EBITDA loss of $4.9 million improved 85%. We ended the quarter with $202 million in cash equivalents and inventory, plus [$36] million from ATM settlements post quarter end. We believe our improved balance sheet provides stability and flexibility for the future. Operationally versus a year ago, average order value is up. Fulfillment costs and returns are down. Marketing is more efficient with owned channels performing better and fixed costs are down, all early signs that our digital and operational work is paying off. With that, I'll turn it back to Marcus for closing remarks and our view on 2026. Marcus Lemonis: Great. Thanks, Adrianne. While we're encouraged by our progress, the footing we found isn't enough. We're not satisfied. Our sales and marketing expense remains higher than we want, and conversion is key. The shopping experience is improving but still requires more focus on the customer experience, improved cart conversion, suggested card building, increased personalization and site speed are at the top of our list. We're integrating AI-driven strategies to improve both the customer experience and platform efficiency, predicting intent, personalizing recommendations and streamlining operations. Look, the groundwork is being laid for lasting improvement in engagement and conversion. Our goal is to deliver a simple user-centric experience that earns confidence and trust. Over the next several quarters, we intend to broaden our connection with customers by focusing on how they live, how they manage and how they create value around their home, whether through the tools that help them create value, manage products or unlock the value in their homes, Bed Bath & Beyond will not be purely a retail play. Transactions, both online and in-store, are meant to build relationships, and those take time to nurture. Our omnichannel transformation is progressing, and we expect all 250 locations converted by mid-2026. Together with our local franchise model, this creates an asset-light network of local operators using our brand, our infrastructure and assortment to reach more markets efficiently. We've also identified $20 million in additional operating expense efficiencies that we expect to realize over 2026, reinforcing that spend discipline remains a priority, specifically targeting a 2026 goal of 12% around our marketing expense. As we look forward to 2026, our focus is clear. expand the Everything Home ecosystem, connecting retail, services and digital innovation, deepen AI and data integration to drive smarter marketing, better conversion and stronger retention, maintain margin discipline, while driving top line [Technical Difficulty] and continue to deliver consecutive quarters of bottom line improvement on a year-over-year basis. The combination of retail scale, technology innovation and asset management makes Bed Bath & Beyond uniquely positioned in the home category. Through our marketplaces, our brands, technology platforms and emerging PropTech capabilities we're building a connected ecosystem that creates long-term value for our shareholders and most importantly, our customers alike. The majority of the heavy lifting is behind us. Now it's time to accelerate, to be more accountable and to have consistent execution. To our team, thank you for your focus and resilience. To our partners and Board, thank you for your trust and support. And to our shareholders, thank you for your long-standing confidence. We're building something enduring and we're doing it the right way. We'll now open up the call for questions. Operator: [Operator Instructions] Your first question comes from the line of Steven Forbes with Guggenheim Securities. Steven Forbes: Marcus, I was curious if you could maybe expand on a comment you just made around targeting the 12% sales and marketing expense ratio in 2026? As we think about that in conjunction with this return to growth narrative that you had within the press release, maybe you could just expand on the conviction there, right? Like where are the efficiencies coming from as you see it? And is the return to growth narrative also indicative of you seeing stability in the active customer base on the horizon? Marcus Lemonis: Let me break that down, Steven, into 2 sections. From a growth mindset standpoint, we believe that we have found the bottom and that we intentionally landed the plane quarter after quarter after quarter in the '25 calendar year in the same range of revenue to prove out that we can take the individual KPIs that built the financial statement and saw improvements in those. And whether that's margin, sales and marketing, et cetera, we knew we needed to do that on a consistent basis, not a flash in the pan. And we felt like the revenue being all over the place big highs and big lows wouldn't give us that really uncontaminated view of where we needed to be. Through that process, though, it also uncovered a number of inefficiencies in our business. And where we really have not delivered from an expectation standpoint is around conversion. And any time you look at driving revenue and improving conversion, the one toggle that's inside of there aside from site sales and overly -- being overly promotional, is how much money are you spending to bring people to the party. And over the last couple of years, I think when the company bought the intellectual property out of Bed Bath in 2023 made the great misstep or miscalculation of assuming that the data that it acquired was going to translate into e-commerce revenue. And what we learned is that we needed to spend a considerable amount of time and money augmenting and segmenting the data to really understand who those customers were, where they originally came from, what their propensity was to do business with us and how are we going to reattract them to our business and more importantly, convert them into the second sale. If you go back and you look at the financial statement at the end of '23 and quite frankly, most of '24, we were just adding as many people to the file with no real logic behind the lifetime value calculation inside of them. It became buy a PLA ad, sell a couch, lose a couple of hundred bucks and then not really worry about how we're going to retain them. What's really been instrumental in 2025 is we've started to see retention start to pick up. And while we're not disclosing those numbers just yet until we know that they're pure and not contaminated, we have started to see return buyers come back on it, quite frankly, more repetitive basis than we had originally anticipated. When we look at the target of 12% for 2026, we know there's a multitude of factors. And I'll start with us making sure that the data set that we have both from our omnichannel partner, our different brands, legacy data is clean, pure, de-duped and really in a condition that can be monetized. I think the second thing that we learned is that one size doesn't fits all. And in 2024 and even the first part of '25 it was like a ready, aim, fire. We would just send e-mails out to everybody. There was no personalization. And we've started testing a high level of personalization using the overstock platform first, largely because the risk wasn't as severe if we made a mistake. We're seeing site speed increase, conversion increase, but more importantly, we're seeing consumers who are served up a personalized experience start to convert better, start to engage better and start to return at a better rate. I think additionally, as we think about it, we have work to do in our performance marketing. Our performance marketing over the previous 12 months has been good. It's been good enough for '25. It is not good enough for '26 and whether that's continuing to cleanse the site, continuing to work on different strategies, we know that between adding internal talent and partnering with external talent, we think there is a ton of money left on the table. Could be as much as $10 million of inefficient spend still existing in our business today. I look at inefficient spend as a [low] [Technical Difficulty] margin transaction with a low propensity to return. That's what I consider inefficient. It's not, did we have a positive ROAS of some amount. We have a finite amount of capital. We want to make sure that we're chasing that capital, chasing that customer with a high contribution margin. 6%, 7%, 8% contribution margin with a high AOV and a high likelihood to return again. That's ultimately the stack that we think we need to build. So there is a lot of conviction and there's a lot of work to get there at the same time. But I wanted to put that number out there both for external purposes and to lay the gauntlet down that in our side of business, [Technical Difficulty] is the mandate. Steven Forbes: That was super helpful. And then maybe a quick follow-up. Nice to see the gross margin progression in the quarter. I don't think you updated but you haven't, right in the presentation, sort of that medium-term target of 25%. So I just wanted to sort of ask the question, if the third quarter has informed sort of your medium-term or long-term gross margin targets or if this is just a more accelerated recapture pace? Marcus Lemonis: I'm going to look at the margin on a transaction basis first, just to kind of give you my holistic view of how I'm thinking about the overall transaction margin. And I'm going to separate it from the product margin specifically inside of that transaction. We have set a short-term to medium-term goal of a product margin between 24% and 26%. And I will tell you that in some cases, we've been very successful at avoiding tariff price increases and getting caught up in that overly promotional, call it, tariff black hole. We do have to recognize, though, that as we start to add our omnichannel business, particularly on the textile side, bedding and towels, they're going to come with a, call it, in-stock margin of 55% to 57%, giving us the ability to get some margin accretion on the soft side of things, on the textiles. Conversely, on the other side, we believe there are a number of categories where we're not as competitive as we need to be. You look at some of the upholstered furniture and some of the patio business and we could be missing out on some market share. Rather than just pulling the ripcord and going for it, we knew that we needed to augment that or sort of mitigate whatever risk would exist in going after market share for those higher AOV transactions with higher gross dollars by supplementing it with the textile margins at 55%, 60% just define that balance. We believe that we'll be prepared and in-stock in the spring of 2026 with that full assortment in our partners' warehouse in Jackson, Tennessee, giving us the ability to be more competitive, far more competitive and far more margin accretive on that side giving us permission to be more aggressive on the furniture side. That's partially what's giving me the confidence that we will be able to maintain that margin range while growing revenue. We just need that offset to help. And then as part of that, the other piece that we noticed in the overall transaction is our product protection warranties have started to really accelerate. And so as we continue to improve attachment on that, we'll look at that overall transaction profitability. As we start to see the private label credit card integrate the transaction, we'll look at the money we make on that. And so we need these other little attachments to more than just the product, whether that's shipping insurance or whether that's product warranties or whether that's using our credit card or something else, we need that whole blend to come together so that the overall transaction is more profitable in '24 to '26. Operator: Your next question comes from the line of Tom Forte, Maxim Group. Unknown Analyst: This is [ Francesco Marmo ] filling in for Tom. Just one quick question for me. Could you please elaborate on your comments of the expected revenue growth on a year-over-year basis expected for 2026? If you can give us some color around what particular initiative you think is going to drive that? And what kind of shape that growth profile should we expect? Marcus Lemonis: Yes. Thank you. As a reminder, we don't provide guidance on either revenue or bottom line, but we are committing today to have positive revenue growth in 2026. Part of that revenue growth is really much of what I said to Steve a minute ago, which is really understanding how we can balance being an asset-light company and utilizing the supply chain and the store footprint of our omnichannel partner to really bring in overall revenue and overall margin increases. I expect that to be -- I wouldn't call it material, but I expect conservatively for it to be positive. I think additionally, we need to continue to explore new categories. And if you look at what we did at Overstock in 2025, we could potentially end up generating anywhere between $15 million and $20 million in Overstock.com alone that came from categories that did not exist for almost half a decade, and that is in the luxury space, in the jewelry space and in some of those other categories, a little bit of apparel as well. And we never want to use those 3 things as foundation builders for our overall business, but we do want to use those things as value anchoring around the rest of the products that we sell. Overstock will and probably always will be largely driven by rugs number #1, patio #2 and upholstered furniture #3. And we're trying to find the balance of how we can coexist with brands and certain values and not contaminate our Bed Bath & Beyond business. On the Bed Bath & Beyond side, what we expect to happen in '26 is the collaboration of the merchandising organizations between our omnichannel partner and our existing marketplace merchandising team. And it's no crack on anybody one way or the other. But I think that the current merchandising team that we have at bedbathandbeyond.com is really just Overstock people reskinned and rebranded. They knew patio, rug and furniture. What we're finding and seeing on the omnichannel side is that, that group, our subject matter expertise in kitchen, housewares, textiles, decor and a variety of other things that our current group doesn't either possess the relationships with or the know-how. And so as we merge those 2 merchant organizations full stop in 2026, you'll see better category segmentation, whether it's in the bedding, bath, kitchen, furniture, patio categories and a deeper and broader knowledge of how to drive more vendors to the site, how to drive increased penetration to the site, and how to present the product in a way that we think is going to ultimately help conversion. Last thing and maybe the most important thing, if conversion improves, revenue will also improve because it is literally spend a certain amount on a day, get a certain amount of traffic and then get a certain amount of conversion. We need at least -- we're operating in the 1.1 range, 1.2 range. We need to be north of 1.3 in the short term. That doesn't sound like a lot. It's probably $27 million to $35 million of revenue with a good contribution margin in the 6% to 8% range, all falling to the bottom line without any incremental expense. So when we start thinking about revenue growth, we -- it's not really a hope to, it's a have to. Operator: Your next question comes from the line of Jonathan Matuszewski with Jefferies. Jonathan Matuszewski: Marcus, my first one was just on what you're hearing from conversations with your suppliers as it relates to their willingness to pass along price on your marketplace, maybe last quarter relative to maybe the first half and whether you're picking up on any change in behavior on their behalf with the more recent tariff noise. Obviously, AOV is moving in the right direction for you guys. I think some of it is idiosyncratic with initiatives to reduce markdowns. But just wanted to get a sense of maybe what you're seeing maybe on a like-for-like basis on your platform. Marcus Lemonis: Yes. There's a -- as you would imagine, and a lot of credit goes out to the suppliers that feed our company, but there has been a lot of pressure on them for longer than just a quarter in dealing with the tariffs and the -- quite frankly, the lack of predictability around them. And I'd like to tell you that I could have a crystal ball on what's going to happen today, tomorrow, next week and next year, and I do not. And what we've told our team internally is we want to really be thoughtful to ensure that the relationship that vendors have with us is a profitable relationship. And we have to find ways to take other frictions out of our own business to mitigate some of the costs that we believe that they should pass on. Now the question is, how do we pass those on? And what's happened in the last quarter is there's been a perfect blend in my opinion, between understanding where the elasticity curve is, understanding how much the vendor can take on and us accepting the willingness to take it on as well. And we believe that as Bed Bath & Beyond rebuilds its credibility in the marketplace, both in-store and online, vendors need to feel like this is a profitable, risk-free relationship. So as we look forward to 2026, we understand that there could be more pricing pressure that could be presented both to the vendors, then to us, then to the consumer. What we have landed on is that, that's probably going to happen. We're almost operating under the assumption as we built out our '26 forecast that that's probably going to happen. What we need to do and what we are doing now is continuing to eliminate those unprofitable SKUs or vendors who aren't giving us a profitable transaction and doubling down with those vendors who we can generate some profitability with. And then as we accept that pressure, coming back around to them and looking for volume targets and rebates associated with them to make the 365-day margin profile look as healthy as we need it to. But I don't know that vendors could absorb much more today, particularly on the upholstered furniture side. And it seems like every time we turn around, the sourcing of origin is shifting. One week, it's China, the next week, it's India, the next week, it's somewhere else, then it's back to China. So it's been difficult to say the least. I think part of the benefit of being an asset-light retailer is that we don't have a ton of risk in our inventory. And even as we think about our huge investment in the omnichannel business, we're not talking about hundreds of millions of dollars sitting in warehouses. We're talking about $150 to $175 per store and enough safety stock in the warehouse. So for us, it's a perfect blend of sourcing and good margin management. Jonathan Matuszewski: That's helpful. And then a quick follow-up. You mentioned removing costs in your own business to kind of soften the blow for vendors. We've been picking up on more and more AI automation in the customer service function as of late, a number of examples in home furnishings -- how do you think about a potential cost savings opportunity for Bed Bath if you were able to increasingly automate a chunk of your potential chat inquiries? And is that something you're exploring? Marcus Lemonis: Well, everybody should assume that AI is an absolute mandate inside of our company as it is in almost every company. I think we're in a unique position where we have a pretty blank canvas, and we don't have a lot of, I would call it, technical debt from a legacy standpoint. Sure, we need to improve our unified code structure and our base of how we're operating. We probably have some work to do in our PIM. And we think that we're at this really interesting tipping point where when we decide to make new investments into a PIM or into a POS in our omnichannel business, we have a clean slate of paper and not a lot of historical contracts are kind of deadweight dragging us down. I've said this internally and externally. AI will solve really 2 problems for our company. One, it will create staffing efficiency. What does that mean in plain English? We will be able to operate with less people and have greater efficiency. That isn't a maybe or I would like to, that's a, it's going to happen in '26. #2, we believe that AI will create a better customer experience. Again, I'm going to tie it back to conversion. Can we find the customers in a more personalized way, communicate to them what they want, when they want it, how they want it and be able to get better conversion in the moment and retention in the long haul. We are, though, however, for the first time in history, not acting like we're the company that can build everything. And you always hear this buy it, build it mentality. And one of things that I did establish during the quarter is that we created a special committee at the Board of Directors level that sits side-by-side with audit and with compensation with governance, in the tech committee. And the Chairperson of that tech committee is quite frankly, a very, very astute person. And we have started to engage in third parties, having people come in and tell us what we need to do in our business and not assuming that this company has to build everything that it does. So I would expect a big bright future. It will happen fast. And we're happy to be on that road map. Operator: Your next question comes from the line of Bernie McTernan with Needham. Bernard McTernan: Great. Maybe just a follow-up from one of the previous questions. Talking about the personalization tools and how they're working on Overstock right now. What's the time line to think about those coming to Bed Bath? And does that inform maybe the quarterly cadence of revenue expecting next year? Obviously, on a full year basis, expecting it to be positive, but how should we expect it to trend throughout the year, acknowledging doing that provide guidance so we might be overreaching here, but figured that would try. Marcus Lemonis: During the third quarter, unbeknownst to probably anybody we moved on to a new unified tech stack at Overstock. And it was a big risk for us. So we chose to do it there because we knew that there were conversion contaminants that can hurt our business. And to be candid with you, we believe that we probably, through the quarter, because of the swap over from Shopify, which is a great system in itself, but didn't give us all the marketplace tools we were looking for. We feel like that transition along with a slow and delayed Shop Pay and Apple Pay integration into Overstock, probably cost us $7 million of top line in the quarter. I could be probably more specific, $6.2 million, if you look at what we lost, 30,000 orders at an average of $210 for the quarter. We feel very good because since we launched it, the revenue has not only bounced back, but the conversion has started to accelerate. And we're going to take one solid more quarter at a minimum to ensure that as we add Apple Pay, as we add Shop Pay, as we add other features and benefits to that platform that we know that we have built it. Now the way that Overstock unified code structure was built is that we put a top layer on top of it. We layered Versal on top of it, which really gave us the ability to speak to each consumer in a very specific way, meaning that customer X and customer Y may, in some cases, see something totally different. One of the byproducts of that stack was that the site moves faster. But again, until we see a 1.3% or better conversion, until we start to see 10%, 15% quarter-over-quarter growth for Overstock, I don't want to tinker or risk the massive revenue that bedbathandbeyond.com does today. I will tell you, however, that we are learning things. So whether it's the cart checkout process and how do we improve the process there, we aren't waiting to bring over certain portable ideas that don't require a whole new evolution. It would be my hope that by midyear maybe middle of third quarter, we will have modified the code structure at Bed Bath & Beyond, and there are 2 simple reasons. One, we hope to have all the Bed Bath & Beyond version stores open by mid-2026. And we hope to be able to have a consumer experience that ties the POS and a new unified code structure together so that the customer can transact however they want, buy online, pick up in store, buy online, ship from store or be in-store and add something to my order that comes from the dot-com business. We've been spending the last couple of months architecting what we think that could look like. We are bringing on some new talent to be announced shortly and some new vendor partners to be announced shortly that we think tie all of that together. And it won't be tied together with one single company. It will be tied together with multiple subject matter experts that integrate properly into something like that. So time, testing and proof is what we are running this business with, which is why you see 7 quarters of material improvement, and we want that to continue. Operator: Due to time constraints, this concludes today's question-and-answer session. I will now turn the call back over to Marcus for closing remarks. Marcus Lemonis: Great. Thank you so much. As we mentioned earlier, the most important thing for us is to have people be comfortable. As the company prepares for 2026, we expect year-over-year revenue trends to turn positive. We believe this upward trajectory, combined with margin consistency, an additional $20 million in operating expense efficiencies and improved site conversion position the company to achieve its profitability objectives. Thank you, and we'll see you next quarter. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Ladies and gentlemen, good afternoon. My name is Abby, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Cadence Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Thank you. And I will now turn the call over to Richard Gu, Vice President of Investor Relations for Cadence. Please go ahead. Richard Gu: Thank you, operator. I would like to welcome everyone to our third quarter of 2025 earnings conference call. I'm joined today by Anirudh Devgan, President and Chief Executive Officer; and John Wall, Senior Vice President and Chief Financial Officer. The webcast of this call and a copy of today's prepared remarks will be available on our website, cadence.com. Today's discussion will contain forward-looking statements, including our outlook on future business and operating results. Due to risks and uncertainties, actual results may differ materially from those projected or implied in today's discussion. For information on factors that could cause actual results to differ, please refer to our SEC filings, including our most recent Forms 10-K and 10-Q, CFO commentary and today's earnings release. All forward-looking statements during this call are based on estimates and information available to us as of today, and we disclaim any obligation to update them. In addition, all financial measures discussed on this call are non-GAAP unless otherwise specified. The non-GAAP measures should not be considered in isolation from or as a substitute for GAAP results. Reconciliations of GAAP to non-GAAP measures are included in today's earnings release. [Operator Instructions] Now I'll turn the call over to Anirudh. Anirudh Devgan: Thank you, Richard. Good afternoon, everyone, and thank you for joining us today. Cadence delivered excellent results for the third quarter of 2025, with strong operational and financial performance across all product categories and geographies as we continued the disciplined execution of our strategy. Bookings exceeded our expectations with backlog growing to over $7 billion, underscoring our continued technology leadership and reaffirming Cadence as the trusted partner enabling customer success. Given the ongoing strength of our business, we are raising our full year outlook to approximately 14% revenue growth and 18% EPS growth. John will provide more details on our financials shortly. The accelerating AI megatrend is fueling an unprecedented wave of design activity across industries ranging from hyperscaler infrastructure to fast-growing physical AI realm of autonomous driving, drones and robotics to the emerging domain of sciences AI. As AI drives exponential design complexity and new system architectures, Cadence is uniquely positioned to capture this generational opportunity with a differentiated and comprehensive portfolio spanning EDA, IP, 3D-IC, PCB and system analysis. The Cadence.Ai portfolio embodies our strategy of design for AI and AI for design, empowering customers to build out the global AI infrastructure, while we infuse AI into our own products to deliver breakthrough automation and productivity. With deep partnerships across AI innovators, foundries and system leaders and a comprehensive chip-to-systems portfolio, Cadence is driving transformative PPA and productivity gains, positioning us well for sustained growth in the AI era. In Q3, we meaningfully expanded our partnership with Samsung through a wide-ranging proliferation of our core EDA software as well our system software across PCB, advanced packaging and system analysis. We also deepened our long-standing partnership with a leading semiconductor company in Q3 through a broad proliferation of our core EDA, IP and systems portfolio and are closely collaborating on next-generation agentic AI EDA solutions. We expanded our long-standing partnership with TSMC to power next-gen AI flows supporting TSMC's N2 and A16 technologies. Our Integrity 3D-IC solution provides comprehensive support for the latest TSMC 3DFabric die-stacking configurations. And our design-in-ready IP, including HBM4 and LPDDR6 on N3P-enabled next-generation AI infrastructure. At TSMC's OIP conference, Broadcom highlighted Integrity 3D-IC full flow deployment success for hyperscaler high-capacity ASICs. Our IP business maintained strong momentum in Q3, driven by global accelerating IP demand and increasing customer proliferation of our expanding IP portfolio. Our profitable, scalable IP strategy focused on AI, HPC and automotive verticals positions us well for continued growth. Increasing complexity of interconnect protocols driven by AI and chiplet architectures, along with new foundry opportunities are providing strong tailwinds to our IP business. Bookings were strong and tracked ahead of our expectations. Our design IP portfolio secured several competitive wins at top AI and memory customers. For instance, we won a highly competitive engagement at a marquee memory company that embraced our HBM4 and DDR5 IP for its new AI design. The recently completed acquisition of the Arm Artisan Foundation IP further augments our design IP portfolio with standard cell libraries, memory compilers and IOs optimized for advanced node at the leading foundries. Our Tensilica audio and vision DSPs and Neo AI accelerator NPUs scored multiple design wins with leading customers in U.S. and Asia for mobile, automotive and data center verticals. Our core EDA business delivered strong results, driven by growing adoption of our AI-driven design and verification solutions. In digital, Cadence Cerebrus AI Studio, the industry's first agentic AI, multi-block, multiuser design platform continues to deliver unparalleled PPA and productivity benefits. Samsung U.S. taped out a SF2 design using Cadence Cerebrus AI Studio to achieve a 4x productivity improvement. In another instance, Samsung used Cadence Certus, Tempus and Innovus to rapidly close and sign off a multibillion instance AI design on SF4, with 22% power reduction and first-pass silicon success. Our Virtuoso Studio and Spectre platforms saw strong momentum, with their AI-driven features and workflows gaining rapid traction as the customers leverage the automated design migration and optimization capabilities. Our hardware verification platforms have become the de facto choice for AI designs, offering industry-leading performance, capacity and scalability. Hardware had a record Q3 with several significant expansions, especially at AI and HPC customers. We deepened our overall collaboration with OpenAI, as they expanded their commitment to our Palladium emulation platform in Q3. Verisium SimAI saw growing adoption as it delivered dramatic debug productivity, test bench efficiency and accelerated coverage closure. NVIDIA, Samsung and Qualcomm, all presented SimAI success stories at CadenceLIVE India, highlighting 5x to 10x improvement in verification throughput. Our system design and analysis business achieved another solid quarter, driven by expanding set of innovative solutions and growing adoption across a broadening customer base. In Q3, we significantly expanded our Cadence Reality Digital Twin Platform library, with NVIDIA DGX SuperPOD model and DGXGB200 systems to accelerate AI data center deployment and operations. Three major memory providers significantly increased their clarity and security usage as they transition to a full Cadence flow for advanced IC packaging, displacing competitive solutions. BETA CAE continued its momentum with multiple competitive displacements, underscoring its accuracy and performance advantages, including a significant competitive win at a large Tier 1 automotive company in China. In Q3, Infineon Technologies standardized its PCB design workflow on the Cadence AI-driven Allegro X platform for their future designs. Last month, we signed a definitive agreement to acquire Hexagon's D&E business, including its MSC software business to bring industry-leading structural analysis and multi-body dynamics technologies to Cadence. Complementing our multiphysics portfolio, this will accelerate our expansion in SDA and put us at the forefront in unlocking new opportunities across automotive, aerospace, industrial and the rapidly emerging world of physical AI. In summary, I'm pleased with our Q3 results and the strong momentum across our businesses. The AI era offers massive market opportunities and through the co-optimization of our entire portfolio with AI and accelerated computing, Cadence is uniquely positioned to be the trusted partner to deliver AI-centric transformational solutions across multiple industries. Now I will turn it over to John to provide more details on the Q3 results and our updated 2025 outlook. John Wall: Thanks, Anirudh, and good afternoon, everyone. I'm pleased to report that Cadence delivered strong results for the third quarter of 2025 with broad-based momentum across all our businesses. We exceeded our guidance for Q3 revenue, operating margin and EPS and are raising the full year outlook across these key metrics. With the updated outlook and at the midpoint, we now expect our 2025 revenue to grow approximately 14% year-over-year on track to achieve double-digit growth across all our product categories for the year. Third quarter bookings were strong, resulting in a backlog of $7 billion. Here are some of the financial highlights from the third quarter, starting with the P&L. Total revenue was $1.339 billion. GAAP operating margin was 31.8% and non-GAAP operating margin was 47.6%. And GAAP EPS was $1.05, with non-GAAP EPS $1.93. Next, turning to the balance sheet and cash flow. Cash balance at quarter end was $2.753 billion, while the principal value of debt outstanding was $2.5 billion. Operating cash flow was $311 million. DSOs were 55 days, and we used $200 million to repurchase Cadence shares. Before I provide our updated outlook, I'd like to highlight that it contains the usual assumption that export control regulations that exist today remain substantially similar for the remainder of the year. With that in mind, for Q4, we now expect revenue in the range of $1.405 billion to $1.435 billion, GAAP operating margin in the range of 32.5% to 33.5%, non-GAAP operating margin in the range of 44.5% to 45.5%, GAAP EPS in the range of $1.17 to $1.23 and non-GAAP EPS in the range of $1.88 to $1.94. As a result, our updated outlook for 2025 is revenue in the range of $5.262 billion and $5.292 billion, GAAP operating margin in the range of 27.9% to 28.9%, non-GAAP operating margin in the range of 43.9% to 44.9%, GAAP EPS in the range of $3.80 to $3.86, non-GAAP EPS in the range of $7.02 to $7.08, operating cash flow in the range of $1.65 billion to $1.75 billion, and we expect to use at least 50% of our annual free cash flow to repurchase Cadence shares. As usual, we published a CFO commentary document on our Investor Relations website, which includes our outlook for additional items as well as further analysis and GAAP to non-GAAP reconciliations. In conclusion, I'm pleased with our Q3 results, strong 2025 as we continue to deepen strategic partnerships across the ecosystem. As always, I'd like to close by thanking our customers, partners and our employees for their continued support. And with that, operator, we will now take questions. Operator: [Operator Instructions] And our first question comes from the line of Vivek Arya with Bank of America Securities. Vivek Arya: Your IP business is now, I think, tracking to over 20% growth for the second year. Anirudh, I was just hoping you would give us some sense for what's driving this growth because your competitor expressed a lot of concerns about their IP business, whether it is in China or at Intel or just IP visibility in general. And I think they were talking about a new business model. So how do we square that with the growth you are seeing? How sustainable is this growth? And what is your visibility in your IP business? Anirudh Devgan: Yes. Thanks, Vivek, for the question. I'm actually quite pleased with the performance of our IP business. And we don't look at any one quarter. But even if you look how we performed last year, of course, this quarter was exceptional, but overall, how we performed this year and what we see backlog and activity going into next year, overall IP business is performing quite well. And there are multiple reasons for it. First, our IP business is different. I think it's much more profitable, even though the profitability is less than our EDA business, but I think it's more profitable than general IP business because we also have Tensilica, which is almost like software-like profitability. But a lot of the growth is coming in design IP. And the reason for that is our IP business is focused on AI and HPC at the most advanced nodes. Since we got started later in the IP business, we focused it where the future is going, which is AI, HPC and chiplet-based architecture. So a lot of the -- like SerDes and PCIe and HBM4 IPs. And that part of the market is doing well actually across the world. And then the second reason is, as you know, there is more and more foundries entering and especially at advanced nodes. And we have a long-standing partnership with TSMC, but also Samsung, Intel and now Rapidus. So there are at least 4 major foundries now at leading nodes. So that's, I think, a second reason for our IP business to be well positioned. And as the performance of our IP business has improved, the PPA and we are -- our PPA is comparatively better in design IP and a lot of customers want to shift over to Cadence. So the customer demand, I think, is the third reason as our IP business strengthened that we are seeing strength in the IP business. So I think for these 3 main reasons, I'm pretty optimistic about the IP business. And going to next year, we're not getting into next year, but just to give an indication, I would be surprised if our IP business does not grow better than Cadence average, which it should, given the profitability profile. We want that to happen. If the profitability is slightly lower than EDA, then the growth should be higher than Cadence average. So overall, I think that would make like 3 years trend. And overall, I'm pleased by our IP performance. Operator: And our next question comes from the line of Jason Celino with KeyBanc Capital Markets. Jason Celino: Great. Last quarter, I think you mentioned the second half having good renewal opportunity with some of your large customers. With the uptick in backlog, I imagine some of that strength was from some of these renewals. But as we think about Q4, do you still have renewals on the docket? Anirudh Devgan: Yes. Thanks for the question. I'll let John comment on the timing of the renewals. But overall, I do think that our performance in Q3 is much -- is better than we expected. And the primary reason -- and this is true in all geographies. But I think the primary reason is that the AI infrastructure build-out, as you know, is accelerating, okay? And we are essential to the design and build-out of the AI infrastructure. Of course, we -- I have said publicly, there are 3 big phases of AI in my mind, AI infrastructure being the first one, physical AI being the second one and sciences AI being the third one. But most of our focus and investment is, of course, on the first one. And as you see in the last 6 months, it is accelerating. And also the -- we are privileged to work with all the Mag 7s and also investment in internal chip design is accelerating along with, of course, the big merchant silicon companies like NVIDIA and Broadcom and AMD. So I think that is coming through in our booking activity in Q3. And so far, we see that strong demand continuing in the future. John Wall: Yes, Jason, I would just like to add that the mix as well is healthy across EDA, IP, hardware and SDA. And the core EDA and IP backlog is weighted towards multiyear recurring arrangements, and that supports durable double-digit growth. Operator: And our next question comes from the line of Joe Vruwink with Baird. Joseph Vruwink: Great. I guess I'm struck by the number of times the word acceleration has already been used on the call so far. And I guess the third quarter bookings much stronger than we were expecting, and it would support a future acceleration. I know it's atypical to kind of get 2026 comments, but Anirudh already did for the IP business. I'm just wondering if you can maybe start to frame expectations for next year based on what you have in hand and it certainly seems like things are setting up well. Do you have the type of visibility at this point to maybe comment on it? Anirudh Devgan: Yes. I think what I would like to say is that we always look at our business in terms of how well our products are doing, okay? And we report like 5 lines of businesses, as you know. And I would say, at this point, all 5 lines of business are performing very well. And you can see that in this year, I think we will grow double digits in all 5 lines of business. And also, we are performing well in all geographies. So in terms of products and geographies, which is our main focus, are we aligned with the leading companies? Are we trusted partner of the market-shaping companies? So if you look at products, geographies and customer alignment, I think we are well positioned. Of course, as you know, as we enter a new year, we are always prudent in our outlook, and we will give you update about next year when we come to January, February time frame. But I think Cadence is very well positioned -- better positioned than it has been, I think, for last -- compared to the last several years, and we look forward to working with our customers in the future. John Wall: Yes. Joe, we won't guide FY '26 today. But exiting FY '25 with probably record backlog and broad-based momentum from deepening strategic and trusted partnerships across the ecosystem positions us well for next year. You can expect our framework will remain disciplined. We typically aim for double-digit top line ambition, continued operating leverage and balanced capital allocation. And that's all underpinned by secular AI demand across chip to systems. Operator: And our next question comes from the line of Lee Simpson with Morgan Stanley. Lee Simpson: Great. Congratulations on another great quarter. I just wanted to ask around about China, really. The -- it looks as though you're up about 53% year-on-year, doing well in the mix, up to 18%. That feels more than just a sort of return of business post the restrictions on the BIS letter last quarter. It feels though there's genuine momentum there. So I wonder if you can talk me through what is driving this. Is it IP? Is it hardware? Is it core EDA? What are the vectors here? John Wall: Thanks for the question, Lee. Yes, I mean, we saw broad-based strength and China design activity remains very strong. The region returned to business as usual for us in the second half that with the lifting of the export regulations that changed for EDA in early July. But Q3 really was only slightly better than we expected, and we now expect China to be up year-over-year for fiscal '25. Anirudh, do you want to add anything to what's happening in China? Anirudh Devgan: Yes, Lee, that's a good question on China. I mean, overall, I would say the behavior in China, from what I can tell, is back to normal. Of course, there was a disruption in Q2 for obvious reasons, given the policy in Q2. But the behavior that we are seeing is back to normal in Q3. And a lot of it was driven by like us prioritizing hardware deliveries that we could not do in Q2 into Q3. But overall, design activity is strong in China across -- I mean, semiconductors are essentials to every country, and China continues to invest in semis. But overall, I would say our strength is broad-based, not particularly tied to any one geography. And there was some makeup from Q2 to Q3. Now it's difficult to predict the future, but what I see, I don't see any unusual activity in China. Like question may be like is there any pull-in from future quarters. We don't see that in terms of what we see, and we see overall broad-based strength in other geographies as well. Operator: And our next question comes from the line of Siti Panigrahi with Mizuho. Sitikantha Panigrahi: Great. Congratulations on another strong execution. Anirudh, I want to ask you about on your system design, mainly the simulation analysis market. Help us understand your strategy. You made acquisition last year, BETA CAE and this year, again, you've announced MSC software. Help us understand how you're going to position yourself against your competitor in that market. This is definitely a growing market. I would appreciate any color on that. Anirudh Devgan: Yes, Siti, thanks for that question. I mean, I'm pretty pleased with the overall performance of SD&A. And I mean, just to remind everybody, Cadence is the one started this whole thing in 2017, 2018. Now it is considered obvious that silicon and systems are going to come together. I mean we have been talking about this for a very long time. Now I think what the acquisition that we did this quarter is more forward-looking in the sense that, like I mentioned, these 3 horizon technologies, horizon 1 being infrastructure AI, horizon 2 being physical AI, horizon 3 being sciences AI. And that's how we are focused. Most of our investment in horizon 1, but of course, like maybe 70%, 80% is horizon 1, about 20% horizon 2 and a few percent horizon 3. But horizon 2 of cars, drones and robots can be a very, very big market in the future. And what happens is AI is going to change also for horizon 2. As you see, there's a lot of reports that the world is going to move from LLM-based AI to a word model-based AI, in which robots, you have to -- it's no longer the text data that trains the robot, it is the physical movement and all that. And one of the key challenges in training robots or cars is that there is not enough data that is available. When you train an LLM model, basically, the data is available on the Internet and as well -- language data is available, whereas training a robot, the data is not available, okay? So the data either has to be generated manually, like they put sensors on a human and the person picks up the object, that could be data. But that's a very slow form of getting data. The best way to generate data for a word model is through simulation. And this is what we have talked about also for a very long time of the 3-layer cake. So then the fundamental simulation of multi-body dynamics becomes essential in horizon 2 physical AI. And Hexagon had a leading simulator for multibody dynamics along with structured simulation, which helps in all kinds of electronics and automotive. So I think I'm pretty optimistic that this can position us well for the second horizon, which is physical AI. And so what that will do for our SD&A business, the way I look at it, our SDA business, once we complete this acquisition, we will have 2 strong pillars. And it will -- actually, the run rate should cross $1 billion in 2026 if the acquisition closes. And one pillar will be driven by 3D-IC and chiplets. Allegro is in our SD&A business. Allegro is a de facto standard for package design in the world. And so if you take Allegro, combine Sigrity and Clarity and Celsius, our kind of electromagnetics and electrothermal tools, that's one key area of this merger of silicon and system. And we will be very, very strong in that. And our partnership with TSMC, our partnership with all the leading AI players like NVIDIA positions us very well with Allegro and 3D-IC. So that will be roughly 1/2 of our SD&A business, because there's going to be a lot of growth in this chiplet-based architecture. And the second part will be this physical AI, structural analysis and the combination of BETA, which was the leader in pre-post processing with Hexagon, which has a lot of solvers like multibody dynamics structural. And then we acquired a great new CFD solver from Stanford a couple of years ago. So if you put all the solvers together with BETA, that will be roughly half of our SD&A business and really well positioned for the physical AI. So if you put it all together, the benefit of Hexagon is that it will give us 2 strong pillars in SD&A in the areas that are going to grow the most in the future, one is 3D-IC and HPC, the other is physical AI and connected technologies. Operator: And our next question comes from the line of Jim Schneider with Goldman Sachs. James Schneider: I was wondering if you can maybe frame for us some of the tailwinds you expect you might see over the next couple of years as a result of inclusion of AI features into your products on the core EDA side. Maybe talk about any kind of productivity metrics you can give us in terms of time to market or developer productivity and how that might translate into either revenue or adoption rates of that technology and features. Anirudh Devgan: Absolutely. Great question. As we have said before, there are 2 parts to our AI strategy, which we call design for AI and then AI for design, okay? I think the first part is the build-out of the AI ecosystem, whether it's infrastructure or physical AI. And that we are very well positioned with all the leading players, all the Mag 7 companies. And now I think your question is on the second one, which is, of course, applying AI to design. So even this time, we highlighted several examples. So we have at least 5 major platforms. And some of the big examples are, for example, SimAI, which is using AI to accelerate verification. Verification is almost an exponential task in chip design. And we are seeing with SimAI, 5 to 10x improvement in logic simulation efficiency and coverage, which is one of the mostly heavily used tools in verification. And even in CadenceLIVE, Samsung and Qualcomm and NVIDIA highlighted this. So these are demonstrated benefits at customer sites being highlighted by the customer themselves, okay? The other area is in physical design, the back-end physical design with Cerebrus AI Studio. Again, we had Samsung code 4x improvement in productivity and also 22% improvement in PPA. By the way, this is huge numbers because when you go from like 5- to 3-nanometer, 3-nanometer to 2-nanometer, typically, a node migration, which the industry is spending like billions and billions of dollars, will give like 10% to 20% PPA improvement. And if we can get that with better optimization, with better AI, that's a huge value for our customers. So the good news is that I think the adoption of AI tools is almost taken as a de facto. All the big customers are adopting our AI tools. And I've said even before that the monetization of that takes some time. It always takes 2 contract cycles. And I think we should be able to do that or slightly better. So -- but the productivity is huge by applying AI to EDA. And the reason I think it is different in EDA than other things is, first of all, there are multiple reasons. One is we have done automation for 30 years. The chip design process is highly automated. About 80%, 90% of it is already automated. So we have a lot of history of automation and then AI is the next 10x that automation that can happen. I mean we have probably improved chip design 100x in the last 20 years, and AI can give the next 10x. And the other thing that is different in chip design versus other industries, I believe, is because the workload is exponential. The chips in 5 years from now will be like 5, 10x bigger. The complexity will be 20, 30x more, given software and chiplet. So AI productivity is needed just to keep up. So our workload is exponential. It's very different than a workload is not exponential. So the customers are expecting us to deliver more productivity and are accepting of deploying that in their designs. Operator: And our next question comes from the line of Harlan Sur with JPMorgan. Harlan Sur: Great job on the quarterly execution as always. On the third-generation upgrade cycle on your emulation and prototyping platforms, you're about 5 quarters into the upgrade cycle, drove record revenues in Q3. If I rewind back to your second-generation launch, right, the team drove 3 years of record revenues post launch. You still have the same drivers in place, right, design, software complexity increasing exponentially, the Cadence of new chip program introductions, accelerating addition of new customers like OpenAI, as you mentioned on the call today, and proliferation of all of these challenges into new markets like automotive and software-defined vehicle. Given the lead times for your Protium and Palladium systems, I assume you're already booking into next year. What's the demand curve look like? And do you anticipate continued momentum and growth in 2026 for the hardware platform? Anirudh Devgan: Yes, Harlan, as always, you're always very perceptive in the overall trends in the market. Yes, hardware is doing phenomenally well, and I expect the trend to continue. So will '26 be better than 25%? That's what we would think. Now how much better? We are always prudent in that because hardware, you don't have like a full year visibility like we would have in the software business. So when we go into any given year, we only have a 6-month visibility. So we are always prudent in our hardware guide. And then if the business comes in as expected, just like this year, we can improve our guide for the rest of the year. But that's on the -- that's more on the guiding discipline, which we want to be -- we want to derisk our guide for our investors. Now in terms of fundamental technology trends and market trends, I mean, this is a great setup for hardware because, first of all, we are the only company that builds our own systems. We build our own chips at TSMC that are full reticle chips. You should see these things. These racks have 144 liquid cooled chips connected by InfiniBand and optical and the customers will connect like 16 racks together. That can emulate like 1 trillion transistor designs. I mean there is no other platform that can compete with that. And also the demand for hardware is increasing not just because of there are more AI designs, but as we go from 3-nanometer to 2-nanometer to 1.4 to 1, which will take next 7, 10 years, the size of the chips only increases, and so there is more and more demand for hardware. So overall, competitively and market trend-wise, I think we are well positioned in hardware. But of course, for any given year, we are prudent in the guide. John, I don't know if you want to add. John Wall: Yes, yes. Harlan, what I'd add there is demand remains very strong, particularly across AI, HPC and auto markets. We've seen scaling -- we've been scaling manufacturing capacity and trying to improve lead times. We've also had hardware gross margins become more healthy. We remain focused on throughput to meet the elevated need from AI designs. And if you look at our financials this quarter, you'll see that we've been building inventory to try and meet the demand that's reflected in the pipeline for the next 6 months. Operator: And our next question comes from the line of Jay Vleeschhouwer with Griffin Securities. Jay Vleeschhouwer: Anirudh, you gave several examples of customer activity, customer engagements and so forth. And I would like to ask you about the recent announcement of the joint work that NVIDIA and Intel are going to be doing. Would it be fair to presume that combined GPU and CPU work would necessarily lift up demand and capacity requirements for multiple types of EDA tools, also IP, probably hardware as well. So there would be a general uplift as a result of that combined work. But at the same time, would it also necessitate your increasing your investments, for example, in AEs as you did when you had that breakthrough with Intel several years ago? Anirudh Devgan: Yes. Jay, that's a good observation in terms of CPU, GPU together. By the way, I've said this for almost 15, 20 years that the CPU, GPUs need to work together because EDA is a very well-optimized workload. And it is computational software, mathematical software, which is very similar to AI. And what happened in the history of EDA is that, of course, there are a lot of SIMD tasks like which can be done in a GPU kind of machine, but there are also a lot of conditional tasks which need to be done on a CPU kind of machine. So we always wanted both CPU and GPU. And we also wanted CPU and GPU to be close to each other. And actually, to NVIDIA's credit and Jensen's credit of Grace Hopper and then Grace Blackwell, I mean, they are one of the first people to track to kind of watch this trend. And now if you look at all the major designs from other companies, too, there is a combination of CPU and GPU together. And that's the reason for the last several years, we are already working on porting our workload to CPU plus GPU. And a perfect example was when we announced Millennium earlier in the year, so we are moving not just system analysis workload, which are more GPU friendly, but also EDA workload, which are critical for accelerating EDA and 3D-IC to CPU, GPU combination. So what I would like to say is I'm actually very pleased to see that the whole industry now is going towards this combination of CPU plus GPU, whether you look at Apple's chips or AMD chips and of course, NVIDIA, amazing platform. And this partnership with NVIDIA and Intel is good for us in terms of gives us a new kind of x86 plus GPU. And also, we have a long-standing partnership with NVIDIA. And then as Intel does more work with NVIDIA, it's also good for our overall discussions with Intel, which I think are proceeding well. And I think Intel has to invest both in its ecosystem for foundry and also its own products. And I think Lip-Bu knows that, and it's good to see the investment on both sides. Jay Vleeschhouwer: Just to be clear, aside from the porting that you have to do internally for your own tools, you are presuming that in terms of demand that this customer activity would necessarily increase the consumption of EDA. Anirudh Devgan: The customer activity should -- I mean, I think, first of all, if the EDA tools get better because of CPU, GPU system being optimized, typically, the customers will adopt. We are always looking at ways to improve our tools, and this gives another vehicle to improve the performance of our tools. So that's good for all customers. And then I think in this particular partnership, there are specific design activity that needs to be done without getting into too much details, NVLink-based IP. And so yes, we are working with the particular companies on design to make this design happen, just like we would work with any of the leading designs. So yes, there is a specific customer activity connected to NVIDIA and Intel. And in general, there is customer benefit if our tools are optimized better on this platform. Operator: And our next question comes from the line of Gianmarco Conti with Deutsche Bank. Gianmarco Conti: Congrats on another great quarter. Maybe just going back towards China, especially given the amazing quarter you guys have had, of course, part of it was recouped from Q2. But how should we think about a sustainable growth rate in the region beyond what was recouped last quarter? And potentially, if you could give some color on if there's any real risk from yet another ban in the region. Obviously, there was some news flow going on. And I think investors want to be a bit wary about like what was real in terms of potential risk to EDA or what is sort of like a broader macro level impact? Any commentary there would be great. Anirudh Devgan: Yes. I think China, like I said, the design activity seems back to normal to me. And I think we mentioned -- of course, when we started the year, we were very prudent because I said before, when I went to China last year, I mean, they were expecting very tough kind of macro environment -- geopolitical environment, which turned out to be true in '25. So we were very prudent in our guide of China in the beginning of the year, which turned out to be correct. Now I think at this point, like John also mentioned last time and this time, we expect China to grow. How much it grows will depend. We'll have a better idea. It's very difficult to predict. We'll have better idea end of the year. But I do expect China to grow this year. And then it's good to see -- I mean, it's very difficult to predict the geopolitical environment, and I definitely don't want to do that. But it's good to see that there is a lot of discussions between the 2 presidents and through big economies. So any stability there and certainty is good for our business. So we look forward to that. But I do expect that design activity is strong. And if there is no unforeseen development and the environment is stable, it should help our business. And I just want to remind you that our strength in Q3 is helped by performance in China, but it's very broad-based, given like all the reasons we mentioned of the build-out of the AI infrastructure, the emerging design of physical AI, the overall AI megatrend. So we are pleased. So we are not indexed to any particular country, but it's good to see that the environment is improving in China. John Wall: Yes. And Gian, I'd like to remind you that our Q4 and full year outlook assumes today's export regime remains substantially similar. And we always incorporate prudence for regulatory variability. And we'll continue to comply rigorously with -- while supporting customers globally. And as Anirudh says, we're seeing strength right across all businesses and across all geographies. Operator: And our next question comes from the line of Joe Quatrochi with Wells Fargo. Joseph Quatrochi: I was wondering if you could just maybe help us understand like the OpEx dynamics. I think 3Q is a bit better than expected, but 4Q is a bit worse than expected. Is that related to just the Artisan deal timing of closing that? Or just any sort of help there would be helpful. John Wall: Sure. Yes. But yes, I mean it's really just the timing of some hardware delivery shifting between Q3 and Q4. But overall, the year is slightly ahead of what we were expecting, and we're pleased by the broad-based execution, strong demand across all product categories. Core EDA software is performing very well. Hardware continues to be strong. We're continuing to make progress in SDA, and we've continued IP momentum and healthy renewals set up for Q4. Joseph Quatrochi: I guess maybe just a question on the OpEx... John Wall: Sorry, can you repeat the question? Joseph Quatrochi: The question was on the OpEx side, like the OpEx timing? John Wall: Yes. So on the OpEx side, we did a small restructure that benefited Q3. The hardware gross margins were very healthy in Q3. And then it's offset a little in Q4 by some new expenses we're picking up from new acquisitions. Operator: And our next question comes from the line of Charles Shi with Needham. Yu Shi: Anirudh, congrats on the nice results, and John, similarly here. The question, I look at your growth rate for the overall company for the last 3 years, it has been maintaining around that 40%-ish plus/minus range, truly remarkable. Look feels like you didn't really skip a bit at all. But when I look under the hood, there are lots of moving parts, right? Like let's compare last year versus this year. Last year, China was bad. Hardware was kind of decelerating. I think that was largely due to your hardware transition into the Z3, X3. I mean I'm looking at the upfront revenue as to inform me about your hardware growth. But this year, both things kind of turned much more net positive, like your upfront revenue is probably going to grow somewhere closer to 50%. China looks like at least it's going to grow above the corporate average. So I wonder, when we look at -- think about next year, do you think both hardware and China can maintain the current momentum? Maybe especially on hardware, based on the observation of the Z2, X2 cycle, I believe that was somewhere in between '21 and '24. When you go into like a third year-ish, the growth rate in the Z2, X2 cycle, it kind of decelerated a little bit. So my question is, is this time can be a little bit different in terms of the hardware growth rate going forward? And could any fear from your customers regarding hardware transition to, let's say, Z4, X4 in the maybe the next 1 to 2 years causing some of the deceleration of hardware revenue? I know this is a long question, but I think that this is the most important when we think about the Cadence outperformance going into next year. John Wall: Thanks for the question, Charles. We're trying to unpack it. So I think I wouldn't focus too much on any one quarter or even any one half in terms of results. If you recall last year, the shape of the revenue curve was kind of back-end loaded. And Q3 over Q3 comps can be a bit skewed, particularly as well with China, given that we had that temporary restriction in China from May to early July. But generally, when you're talking about hardware, demand is very, very strong, but -- and we're seeing a secular trend in hardware demand for many years now because the growth in complexity continues unabated. But we're seeing a very strong pipeline for the next 6 months. And we're ramping up on inventory for some large orders that we have to fill in the next couple of quarters. But -- so we're seeing lots of momentum. And we expect to -- I mean if I go back, I think the last 5, 6 years, and it's typical of Cadence, Q4 bookings would exceed Q4 revenue. So we just finished with $7 billion of backlog at the end of Q3, which is a new record for us. Given renewal timing in Q4 and the visibility we have, we'd expect to end '25 at a fresh high. And with that mix being so healthy across all of the different businesses, I think it bodes well for next year. Yu Shi: So maybe a quick follow-up. So Anirudh, from your perspective, the current hardware Z3, X3 enough to support 1 trillion transistors, but with AI really like moving really fast, do you foresee like when you probably need to like do another hardware refresh? And is there any light you can shed on this? Anirudh Devgan: Charles, yes, I'm very confident in our hardware position. We talked about Palladium. We're the only company that designs our own chips and also Protium with FPGA systems, and that's also doing well with the Dynamic Duo. And like John said, we see good demand. Now I just want to remind you that when we guide, we always are prudent given hardware is not as predictable as software, but it has almost -- even though we reported kind of upfront revenue, but what has happened is that all these big customers are almost buying every year. It's not that they're buying -- so the buying behavior is different than 4, 5 years ago because they're doing so much design that all the really big customers, it has almost become like an annual kind of subscription, even though financially, it is reported, of course, as upfront. So now will the hardware trend continue? I mean, right now, I don't see any reason that it won't. And so I think '26 will be stronger than '25. How much stronger, we'll have a better idea. Now in terms of our next generation, we are always investing in R&D. We have a huge investment in R&D, as you know, 35% of our revenue is invested in R&D. And -- but if you look at our expense side, almost 65% of our expense is invested in R&D and about 25% is invested in application engineering. So more than 90% of our investment and headcount is in engineering, customer support and R&D. And that's true for hardware. So we are -- we don't want to get into all the details, but you can assume we are well in our way designing the next generation of hardware systems, and they will come in time. One thing, good thing is about our current systems already support 1 trillion transistor designs, and that is supposed to happen by 2030. But before 2030, we will have a next generation of hardware, which will support it for next 5 years. So I think I'm pretty confident in our hardware road map. And the demand itself, I think because, Harlan, you know all this area well, I mean, AI, the chips are only getting bigger. And also what's happening is like even with like Blackwell, it's not just one chip now, you have multiple chips and then Grace together. So the customers are also not emulating just one chip, which is growing 2x every node. They're emulating systems of chips like Grace and Blackwell together or if you have chiplet architectures. So the demand for hardware may move faster than just Moore's Law or technology scaling because of this 3D-IC. But again, we will see that. We are well positioned. We'll see how it progresses. But systemically, there is no issue in demand for hardware and our competitive position. John Wall: Charles, there was a lot in your question. I think you referred to upfront recurring revenue as well. I mean we continue to frame '25 around 80-20 recurring to upfront on a rolling 4-quarter basis. And I think as you mentioned in your question, the variability quarter-to-quarter is driven mainly by strong upfront businesses like hardware and IP and the timing of China ratable revenue earlier in the year. But with core EDA growing so well, we're comfortable that 80-20 is probably the right kind of mix of business for the foreseeable future. Operator: And our next question comes from the line of Gary Mobley with Loop Capital. Gary Mobley: Let me extend my congratulations. I really just had a clarification or a question to get to a clarification. So if I recall correctly, given the timing of the export control repeal, which I believe is July 2, your China backlog was not in your June quarter ending backlog, but I presume now that it is. So given that $600 million revenue or $600 million delta in your backlog, how much of that was a function of the inclusion of China backlog versus the prior quarter? Anirudh Devgan: Yes. Let me take a crack at it and then -- I think you're right, our backlog grew from $6.4 billion to $7 billion. So there's a growth of $600 million. So I think about -- I would say, about 25% of that about $150 million is catch-up from Q2 to Q3, and the rest growth is growth strength across our business. John? John Wall: Yes, that's right. No, that's exactly right. Operator: And our next question comes from the line of Clarke Jeffries with Piper Sandler. Clarke Jeffries: Anirudh, I appreciate the comments on the mechanics of the strength in the IP business and specifically the demand for design IP you're seeing for AI projects. I wanted to follow up with just how the wallet opportunity is changing with those AI projects. Specifically, do you see any potential for growing pains or lower profitability to serve the industry as they make more customer bespoke technologies with chiplet or custom memory designs incorporated into those AI and HPC designs. Has Cadence changed its investment plan or selling motion to serve that more custom nature required by the industry? Or is that even needed at all? Anirudh Devgan: Yes. Great question. I mean this is a big trend, right, design of custom silicon. I mean, we have talked about it for years, system companies doing silicon. And as you know, about 45% of our business is coming from system companies and 55% is coming from semi companies. And so with this -- especially with AI, there is acceleration of custom silicon. And I think one different from 6 months ago or 1 year ago to now is when I look at these big system companies, they are more and more committed to custom silicon. And of course, we have great partnership with NVIDIA and NVIDIA is going to do phenomenally well, but so will custom silicon, and we can see from Broadcom results, and we also work very closely with Broadcom and the customers themselves. So -- and there's opportunities because the demand is so high in terms of -- if you look at all these big customers, they're projecting AI compute demand to grow like 2x every year for next several years. So I think there is growth for everyone involved in that. And the benefit of doing custom silicon, at least for the inference part, can be so high that they are willing to invest in EDA internal chip design. So I think the financial and the customization benefit for our customers, and these are, of course, the biggest companies in the world is significant doing custom silicon. You can look at all the big ones like Google and Meta and all the others like Microsoft, Amazon, Tesla. So I think there's going to be acceleration of that. And as they do more internal design, of course, they need to invest in EDA and IP and hardware. So I think the trend is healthy there. Profitability questions are similar. We want to have discipline on our pricing. So our profitability is similar, but the benefit to our system companies is high as they do their own chips. Operator: And our next question comes from the line of Ruben Roy with Stifel. Ruben Roy: Anirudh, I had a quick question, I hope on a comment you made during your prepared remarks about collaborating with a customer on next-generation agentic AI solutions. I'm wondering, is that something that you're seeing across a wide swath of your end customers? And if so, just wondering if you could walk through maybe some of the implications of that, whether it's how some of those collaborative efforts on that type of solution might be monetized longer term? And how you're thinking about agentic AI overall relative to specific -- it almost sounds like custom solutions by customer versus a broader agentic AI solution set that cadence might offer to the broader ecosystem. Anirudh Devgan: It's a great question. We could talk for a while on this one. And we are privileged to have the partnership with several companies on AI. I mean not just the design of AI, but AI for design in our solutions and especially on agentic AI because this is a new emerging area. We have like 5 major AI platforms. But what is unique about agentic AI is, of course, all the gen AI stuff. And if you look at even one of the biggest applications of AI is kind of vibe coding or software development. Well, if you look at it, part of the chip design is also coding. We have automated, like I mentioned earlier, 90% of the workflow for chip design. But one part of workflow, which is not automated is the customers still have to write RTL. RTL is like a language, register transfer language that describes the chip. And this happens in the very beginning part of the chip design process. So that process is still manual. But the algorithm that is helping wipe coding or C++ coding for general software development, kind of these agenting methods can also help for RTL development, okay? And it can provide a lot of benefit to this 10% of the workflow that is not automated. So therefore, we have a massive investment in agentic AI, which you will see as we announce more products going forward. And we already have several partnerships in there, and we are highlighting one of them. And the way we are going to market there is, this is longer -- is through JedAI. I've talked about JedAI before. So JedAI is joint enterprise data and AI platform. So it does have some standardized components. The database is standard. All the models are available. AI models has interface to all our AI tools. So part of JedAI is standard across all customers, and we work with foundries and all to kind of train our models. Now part of it could be customer-specific, okay? And in that case, the data is held at the customer site. And that's where we architected JedAI from the very beginning to be both on-prem and cloud-based, because sometimes the customers want it cloud-based, but sometimes if they want data to be localized, they want it on-prem. So that's why for years, we have invested in this kind of unique platform, JedAI that allows us not just to build unique solutions like RTL development and verification plan development, but also deploy it either in a general way or more specialized to a particular big customer. But I'm pretty optimistic in how agentic AI can automate the remaining kind of part that was manual and again, focus our customers to do higher-level tasks and remove some of the mundane task of RTL coding, verification plan generation, things like that. Operator: And our final question comes from the line of Joshua Tilton with Wolfe Research. Joshua Tilton: Congrats on a very strong quarter. Given the time, I'm just going to actually ask a pretty direct clarification question. John, I think it's pretty much for you. In the event that you do see some impacts in the China region, given the ongoing tariff negotiations this coming quarter, do you feel or can you help us understand how you kind of handicap the updated guidance for some, if any, potential negativity in the region? John Wall: Josh, I mean, that's a great question. I'd love to be able to tell the future. The -- I mean, as always, we incorporate prudence for all kinds of regulatory variability. And we base our guidance assuming that today's export regime remains substantially similar going forward through the end of 2025. But it's very, very hard to predict what's going to happen. But by all reports that we've heard that we believe that geopolitical tensions are lower than people expect. Operator: And I will now turn the call back to Anirudh Devgan for closing remarks. Anirudh Devgan: Thank you all for joining us this afternoon. It's an exciting time for Cadence with strong business momentum and growing opportunities with semiconductor and system customers. With a world-class employee base, we continue delivering to our innovation road map and working hard to delight our customers and partners. On behalf of our Board of Directors, we thank our customers, partners and investors for their continued trust and confidence in Cadence. Operator: And ladies and gentlemen, thank you for participating in today's Cadence Third Quarter 2025 Earnings Conference Call. This concludes today's call, and you may now disconnect.
Simon Hinsley: Good morning, and welcome to ikeGPS First Half Financial Year 2026 Performance Update as released on the NZX and ASX this morning. [Operator Instructions] Glenn Mills, Managing Director and CEO's presentation. But with that, Glenn, I might just hand it over to you for the performance. Thanks. Glenn Milnes: Great. Thanks, Simon, and thank you, everyone, for taking the time to meet today. We want to be very efficient with your time. First thing, though, I'm pleased to introduce Paul Cardosi. Paul is based in our Colorado headquarters alongside the leadership team. So introducing Paul, he started right at the end of September. Paul Cardosi: Hello, everyone. It's good to meet everyone today. Thanks, Glenn. Glenn Milnes: Great. So look, what we'll do for today's session is go through the performance and the numbers themselves. It's been a very strong quarter for the business, which has been pleasing. I want to talk about the market because market timing is everything in terms of, I think, our growth prospects and where we're sitting and also introduce some of the go-to-market and also the new product functionality that we've introduced that we think should materially impact our subscription revenue base. So please take note of this important notice for this presentation. It's the agenda we just talked to. I won't -- Paul will take you through the numbers in terms of the following charts. Just covering those last 3 points, I think it's important for our shareholders to understand that we've maintained our cash operating expenses are materially flat versus the prior calendar period. So we've been able to grow the business and scale without adding additional people costs, in particular. We've got a strong balance sheet now with $34 million on the balance sheet. We've got no debt. We are fortunate to be very well supported through a capital raise process in the second quarter, both institutional -- new and existing institutional support and also a high level of support from our retail investors. And the last point is tied to the ASX All Ordinaries Index. We were promoted there towards the end of September, which tracks the 500 largest companies on the ASX by market cap. So with that, I'll hand over to Paul, and he'll take you through some of the headline numbers. I think actually, before we transition there, we are reiterating guidance in terms of platform subscription revenue. This is going to be at approximately 35% or greater through this year. We're in good shape to deliver that. We're still committed to EBITDA breakeven on a run rate basis within the second half of this year, which we're now into -- well into October. Paul, over to you. Paul Cardosi: Thanks, Glenn. I'm going to start with the exit annualized run rate of our platform subscription revenue. We're very pleased at the 47% growth rate that you see on the slide. Key takeaways around our platform subscription revenue growth are really the strength and the continued growth we see around our IKE Office Pro and IKE PoleForeman subscription products. So great growth there. You can see here on the 47% growth for the latest subscription revenue. If you go to the next slide, Glenn, the next slide represents our 6-month year-to-date subscription revenues, and this has given you a look at our first half performance. You can see on a compounded annual growth rate, we're at 30%. But faster than that, you can see our year-over-year growth year-to-date versus the year-to-date prior calendar period was a 35% growth rate. So really reiterating that guidance Glenn mentioned earlier, continuing to see 35% plus growth rates across our subscription business. If we go to the next slide, Glenn, I'll talk a bit about seat growth. These are the user seats that we sell for our subscription products. 55% growth over prior calendar period. I would say as we continue launching products as well as the products we have launched, we do sell on a per seat basis, a per user basis. So you can see -- really, I see this as seat adoption, user adoption and really strength in the number of users we have across our subscription products. So 55% growth rate there for our subscription business. Moving to the next slide, Glenn. This is our transactions revenue. This is a services business that's heavily influenced by the number of poles that we manage for customers. Our customers perform themselves. This business is down. It's a lower-margin business for us. You can see that the 32% decline in transaction revenue. There's volatility in this business. There's a lot going on with the new U.S. administration around fiber or high-speed communication in rural networks. I would say there's some volatility in this market right now in terms of the timing of the funding. We do expect this to rebound. The time line is, I would say, in the medium term. But again, a lot can happen that's really in the macro U.S. economy. So overall, this business is down. It is impacting our overall revenue growth. But again, we expect as legislation moves through, we'll see a rebound at some point in the, I would say, the medium term here. I don't know, Glenn, if you want to comment on this or you want to just keep going. Glenn Milnes: Yes. No, that's a good summary. We're seeing the Tier 2 fiber and Tier 3 fiber folks have been asked by the new government administration to rebid for the contracts that they had been awarded. And that's created some uncertainty, but this infrastructure has to be built. So we're confident it comes back. It's just -- it's difficult for us to predict when we stay in very close contact with our core customers here. Again, this business has generated just under $3 million of revenue through the first half of the year, and we're able to adjust our cost base and make sure it stays profitable and has a good margin profile. Paul Cardosi: This is a revenue mix slide. So again, looking at the different sections of this chart, you can see that we're now at 90% of our revenue coming from both our recurring revenue streams and reoccurring revenue streams. And I would highlight that the subscription portion of this hit 69% of our revenue. So you can see the purple -- hopefully, you can see it on the screen. The subscription makes up a much larger portion of our revenue. It's a very highly profitable portion. We're around about 93% margin on that subscription revenue. Again, that is the focus that the business has had and has, and you can see it's really taking effect with the amount of subscription revenue that's really dominating the mix of our revenue. So it's nice to see that. If I move on, Glenn to the next one. I'll wrap up with -- these are the key metrics we typically show. It's really a summary table for you to digest comparing our first half this year versus last year. One thing I would note is the third line down, the subscription customer count. It grew only 2%. But I would point out that we had about 40 very small customers that didn't convert yet to PoleForeman. So we've counted those as temporarily lost. But if you compare the 2% subscription customer growth with a 35% revenue growth, the takeaway from that is the customers we are adding are higher annual contract value customers. So again, a small customer count really leading to that 2% growth. But overall, with the customers we are adding and the price we're getting per customer is really growing significantly well. And I think with that, Glenn, I'll hand it over for the update. Glenn Milnes: Great. Yes. And I think just on that number of subscription customers, you see prior year actually dropped down when we took out those tiny little legacy PoleForeman products. So it's going to bounce right back in terms of that percent change. What I wanted to do is we've got quite a number of slides here, and I do want to be respectful of time and get to Q&A quickly. But there's just some new market data that I think matters looking at what's happening across the North American electric utility space and communications market, which I wanted to touch on. Again, just the size of the market opportunity over the next decade is enormous, more than $2 trillion of capital coming into grid modernization. And to do this successfully with an aging workforce, aging infrastructure, it does require technology and digital grid intelligence. That's what IKE focuses on as a business. So there's some data here to absorb as appropriate. And again, the numbers are quite staggering, more than 130 million wooden distribution assets getting to almost 50 years and at failure thresholds. And again, we help design and engineer and maintain these distribution assets. So it's a really interesting time and a pretty monumental engineering task to achieve what the U.S. has to achieve over the next decade or 2. And a lot of the -- it's not just -- there's a lot of private capital coming into this market for grid resilience. There's a lot of federal funding coming in, and it is focused heavily on distribution network capacity, more power on the network and capacity and hardening, which is where IKE plays. Again, the broadband industry has had this slowdown with regulatory uncertainty where the Trump administration was looking to make some of these decisions technology neutral was potentially going to favor Musk and the satellite industry. I think that's reversing pretty fast just because of performance for customers. But again, a lot of capital coming in -- these fiber and small cell attachments go on to distribution networks. And again, we help that process go much faster and more efficiently. And this is what we're, in essence, building in terms of capability as a company. So looking to be able to engineer a network right through its life cycle. So to go out and digitize and to see what matters in a power network, then to assess what's at risk, how vulnerable is your network, how can you make sure you meet code compliance and keep the network safe for your customers and for the environment and then to be able to design and engineer with confidence. And that's the way that we're building our product portfolio today. I think everyone knows about some of the macro factors just the power requirements from having to charge electric vehicles, AI data centers, et cetera, just so much engineering that needs to be achieved. And then with climate change, we've got wildfires, storms. These things are happening just much, much, much more regularly. And so you need a hard power network that doesn't fail and cause the next wildfire or takes a city out from a power supply perspective. And the market in North America, we've published this slide previously. The market is really large. If you just look at our top 8 customers, it's almost 4x the size of the Australian market in terms of the number of homes and businesses that these groups are delivering to. So it is a really profoundly large market opportunity in terms of the networks that we're supporting and starting to get alongside as a partner for these customers. Again, maps that we've published previously, there's 106 investor-owned utilities across the country. These are the really big networks that are all interconnected, but they serve their own service territory. They're generally publicly traded companies. And then more than 2,800 municipality and cooperative electric companies, but they all represent quite large customer opportunities for us, and they deal with the same problems. So we've just started to really scratch the surface in terms of customer penetration and also new logo acquisition. Again, I'll go fast through here because I think many of you are familiar with much of this information. Again, how do you help a customer follow the bouncing ball in terms of engineering a network through its life cycle, go and assess the asset, design the asset, be able to -- at really high scale, be able to assess your entire network using technology, so you understand where your vulnerabilities are. And then we have our IKE Analyze service just to help customers get some scale. And we focus a lot also on training and education, not because we want to be a services training and education business, but it lets us get in front of our target customers, and we get in front of hundreds and hundreds and thousands of engineers and help teach them around best practice for the distribution grid. So we really, I think, understand where we're going. We're extremely focused on North America and distribution grid assets. And we've got some clear goals in terms of being the most trusted company delivering software solutions into the distribution grid over the next 10 years. And what is interesting, this is actually a global private equity firm went and surveyed 40 of our customers. They didn't actually ask us to do it, but they came back and gave us the results. Our NPS score is 91%. It goes from minus 100 to plus 100. It's a Boston Consulting framework that's pretty common these days. So it's working in terms of our go-to-market process. We focus very hard on customer experience and leading with people and process as well as obviously, technology. We're winning and of the 10 largest investor-owned utilities. We're adding new logos consistently. We've got 5 of the 10 largest communications companies at different stages of adoption on the communications side. We're now -- our software is in every state in the United States in terms of its use. And we're managing more than 20 million overhead assets now in our system. And that doesn't mean there's 200 million distribution assets. It doesn't mean 10% of the market is done. These assets get engineered over and over and over again for different purposes and different requirements. So again, we're sort of early in terms of market development. And growth is going to come from winning new logos. We've got about 6% of the logos in North America today. And we think we're about 20% penetrated in the 6% we've got. So it's account development and it's new logo acquisition. Just some examples here around how we're getting to market. And we focused heavily on education and training. We've got a program that looks at the National Electric Safety Code and how customers can make sure that they're applying best practice. And we've trained more than 800 organizations over the last 1.5 years, more than 3,000 attendees. We run other webinars, and we IKE certify engineers across utilities. So I think more than 1,700, it's close to 2,000 attendees have been IKE certified in terms of OSHA training and National Electric safety training. And again, the natural conversation leads to, well, how do you do this work with technology? And that's obviously how we cross-sell the software part of what we're doing. Again, I'll go fast because I think there was a separate release that covered this topic quite well. But we're really excited in the second quarter to introduce some new AI-enabled capability inside of IKE Office Pro. So that's our core product. And simplistically, if you look at that photograph on the right, that's a pretty complicated power asset. That's all the communications infrastructure at the bottom, it's all the power assets at the top and there's a street light. There's a transformer and there's a whole bunch of drop points, et cetera. And this -- when an engineer is assessing this asset and they're trying to build more capacity on a line or whatever it might be or they're trying to figure out if it meets the National Electric Safety Code for compliance, it's a very manual process typically. And we've built this automation capability that a computer with a click of a button, it's able to find and identify everything on that asset. So the level of productivity gain for these very expensive engineers that are sitting in the back office is quite profound. And so we're really excited to get this into market. It's been well received by customers that have, a, went through the trial process with us to make sure we sort of had product market fit correctly. But also now that we've got it -- it's embedded in the product. It's not an opt-in option. This is additional ARPU and it's compulsory if you're using IKE Office Pro. So yes, just into market towards the end of September, but we think really exciting, and we're going to add more and more capability in and around this product. IKE PoleForeman continues to expand extremely positively. Again, it's been in market about 18 months. I know that there are questions around what's the ARR driving to for PoleForeman for this year. It will be something close to 10 million by the end of this year, which is that's 20x the level from when we rebuilt the product a couple of years ago. So that's traveling really well. I think we're going to keep winning some big and important customers. We're going to add more capability and increase pricing. So I will pause there. I know there's a lot of slides, but I think it's some important items. And Simon, I can hand over to you for -- if there's any questions. Simon Hinsley: Thanks for that, Glenn. First up, we've got a question from James Lindsay at Forsyth Barr. If we can get to it. I might just pause on that one. But the submitted question, Glenn, that we've got how much more penetration can you get out of existing customers? Glenn Milnes: Yes, about -- we think we're about 20% penetrated inside of the customer footprint if we take a holistic view. So there's probably another 80% potential. We're not saying we're going to get all of it, but that's the potential. Simon Hinsley: And James Lindsay at Forsyth Barr should be able to talk, please go ahead. James Lindsay: Well done on the update. I was just wondering, I know it's sort of still early birds with regard to the R&D progress on the new products. Just keen if there's any sort of change in your timing. I think you mentioned it was about sort of 12 months away for the first of the 2 products to come into a trial. Would that still be in place? Glenn Milnes: Yes. We're making really strong progress, James, on essentially the bolt-on module for IKE PoleForeman can be sold stand-alone to any participant in the market, but also we will integrate with PoleForeman. -- and that's progressing well. James Lindsay: Okay. Cool. And then just with regard to the sort of continuation of net adds in the quarter, which I think was about 12 or so, so good progress there. Just interested in where it's coming from, if it's sort of in the core IKE Office product or in PoleForeman itself specifically? Glenn Milnes: Yes. PoleForeman is going faster in terms of adds. And it's actually -- it's an important item. We focused initially on winning the biggest investor-owned utilities in the country. And the interesting ecosystem effect now is they're mandating IKE PoleForeman to anyone that touches their network. So if you're an engineering firm doing work for the utility or if you're a communications company coming in and putting fiber on their assets, they're requiring PoleForeman. So we start -- we're really seeing that kind of ecosystem flow through. And next quarter, because I know it's something folks are asking for is just more visibility into the latest pro forma numbers, ARR, total contract value, et cetera. So we'll provide that in 3Q. James Lindsay: And then obviously, with the capital raise business in a lot better financial position, I was wondering if sort of an increase in sales and marketing sort of number of people on the ground with regard to sales is likely in the next quarter or 2? Glenn Milnes: Yes. there will be over time, but we're very committed to the EBITDA target. And we've got a very efficient sales and marketing team at the moment. We're growing at these kind of rates in terms of subscription level, spending less than 30% on sales and marketing. So those metrics are tracking well for us. So we're in quite a scalable position. We're also -- like every other company in the world at the moment, we're working really hard on being AI-enabled, not just putting AI inside of your products, but driving important business processes with some of these pretty remarkable tools. So we've got a whole of company training and education program tied to AI enablement as well from an operations perspective. James Lindsay: And then good to have the PolePilot new product out there. Can you just add a little bit more maybe just to the pricing constructs. You talked about it being as part of Office Pro. Is it going to be done on a subscription basis or a seat basis and potential for sort of ARPU uplift once sort of as it goes through the network? Glenn Milnes: Yes. The launch pricing is adding $200 per seat per annum. And as I say, it's not an opt-in item. It just is inserted into the pricing model. And as we add more capability and as we get better fuller data on productivity benefits for customers, that price point will go up in terms of the ARPU uplift. James Lindsay: And then obviously, on the transactional side, probably a little disappointing, but hard on the politics to get that working. Can you just give us an update when you think the recontracting will sort of get firmed up and potential for later in the year? Or is it likely next year or the year after that transactions recover? Glenn Milnes: Look, James, I'd just get it precisely wrong, but I do -- I mean we do have a view, and we're talking to our customers a lot actually and talking to some of the bigger industry participants as well. And again, what the federal government has required is they froze every rural fiber contract that was in place across the country and asked market participants to rebid. And it's tough for them to land on some hard dates. We haven't lost any of those customers. They're just waiting to get working again. And then I believe that will pick back up. What we have been able to do, though, is we have really adjusted the associated OpEx costs with that business. So it's generating positive margin at the levels it's operating at now. And it adds value for our customers. They love having the additional capacity when they require it. So yes, it remains something that we'll continue to pursue. Simon Hinsley: Next up, we've got James Bisinella from Unified Capital Partners. James Bisinella: On the result and welcome, Paul, to the group as well. Maybe just a couple for me. Just looking at subscription ARR, if I back out FX, just on my numbers, it looked like kind of a record quarter, around a couple of million bucks of net adds. So I guess, firstly, can you confirm that I'm directionally accurate there? And then secondly, just confirm, was there any like larger wins or anything as part of that number, just given it was a pretty strong result? Glenn Milnes: No, you're right. That's almost exactly correct, James, in terms of the numbers. it was across a whole range of customers. There wasn't -- there were some really interesting ads for groups like Exelon. So Exelon run 5 investor-owned utilities they delivered power to all of Chicago and Illinois and various other states. And they had been an early adopter of IKE PoleForeman and then they added another 130 licenses just as they get it more embedded across the business. Really interesting because, again, these guys are signing up for 3-year or 5-year terms. So it is really sort of long-term partnership business. But mostly, it was just a consistent flow of sort of similar level contracts versus any single big item. James Bisinella: Okay. Excellent. And maybe just one more on PolePilot, the AI product sounds really exciting. You mentioned that being a driver of platform adoption. So I guess, can you just confirm, is this more than an add-on? Like are you getting inbounds from potential new logos on the back of it? Or is it more just an upsell to existing customers? Glenn Milnes: No. It has caused a bit of a stir. If you can make an engineer fully loaded cost maybe $100 an hour, you can make these folks go, say, 20%, 25% faster and better. And really -- and it's amazing how you can remove the training burden to bring on new engineers to do this work when a computer gets you 30% of the way through an engineering task. Some of those benefits are quite compelling. So yes, we're excited. And we're going to do more in terms of detections and automation, et cetera. So it's going to become more and more powerful over time. And then if you fast forward and we're processing bulk data captured from Google Street View or whatever it might be, then all of a sudden, you're really sort of shifting the needle on some of this workflow, which I think is going to matter a lot. Simon Hinsley: Next up, we have Jules Cooper from Shaw Partners. Jules Cooper: Glenn and Paul, well done on a great result. So just sort of following up on James' question there. In U.S. dollar terms, the ARR added in the period was a record. I just wondered, when we look back over the last year, Glenn, we saw like the fourth quarter was particularly strong. Now we've got a strong sort of 2Q. How do we -- how should we think about seasonality? And you've obviously said here that the sales pipeline remains robust. But as you look into 3Q and 4Q, when you're cycling some stronger numbers from last year, how do you see it sort of landing maybe relative to this year -- sorry, this quarter, is this a sort of new level for the business? Or just want to get your perspective on how you see the third and fourth quarter shaping up and seasonality? Glenn Milnes: Yes, it's a good question. There's a little seasonality in our business, and it's because of the winter. So some parts of the U.S. up on the East Coast or in the North, there's a lot of bad weather, snow and ice and you can't get outside and engineer and build in some of those conditions. It doesn't tend to have a huge impact. And then Q4 for us, which is from January through to the end of March, tends to be very strong because all of our customers, their financial year end is the end of the year. So they're budgeting to deploy new technology and new tools from the start of the next year, which is why we typically see that lift if that helps. Jules Cooper: Okay. No, no, that does. Good perspective. And if we just sort of pick up on PolePilot, you sort of mentioned, I think it was $200 a seat incremental. I just wanted to sort of catch what you said around how your customers can adopt it. Is it just there and they can turn it on themselves? Or is there a selling motion behind it? Just if you could just go through that again, how they actually sort of pick up the product and start using it? Glenn Milnes: Yes. It's just delivered into IKE Office Pro and pricing has increased automatically. And we spend a lot of time running educational programs. And for anyone interested, if you subscribe to our LinkedIn channel like GPS, you'll just see the velocity and volume of training and education. So one of the programs at the moment is a lot of PolePilot education in terms of best practice and best use. So yes, it goes straight into the product. And we're just measuring at the moment elasticity just to understand the level of acceptance of higher price points or b, where you potentially can have churn if people don't see the value. So we're literally a couple of weeks into that pricing optimization assessment. Jules Cooper: Okay. No, that's good color. And then just lastly, cash operating expenses, you said, materially the same as the PCP. When should we expect that to start increasing as you sort of put the investment into the new products? When should we start to see that running through the business? Glenn Milnes: We do. We've got 2, I think, extremely compelling new subscription product modules that we're building. Much of that investment will be capitalizable. So it won't be as visible from an OpEx perspective, but we will be investing, obviously, in the process to build these new product modules. And then I think the go-to-market investment will flow just on the back of continued revenue growth. And as we hit these certain capacity breakpoints, if you keep adding dozens and dozens, dozens of new large infrastructure companies, you do have to have the people to be able to service those folks because we serve the market directly, which I think is a really important part of competitive advantage and why we've got those kind of NPS scores, et cetera. It's people and process, not just tech. So yes, it will happen through Q3, Q4 into the following year. But we're -- obviously, we're very well positioned balance sheet-wise to do that. Jules Cooper: Yes, absolutely. And just lastly, on those NPS numbers, some of the highest I've ever seen. So well done to you and the whole team. Glenn Milnes: Yes. Thanks. It was a surprise to us as well, Jules, to be honest. But it's good to see, and it's just one data point. We measure it internally ourselves, and we don't ever publish it because it's an internally measured thing. But we typically see 45% to 60%, which again is exceptionally good in our industry. But it was -- yes, it was great to see that sort of independent set of numbers. Simon Hinsley: We've got a couple more submitted questions that we'll churn through, Glenn. What's the expected timing for existing customers to further penetrate? How long will it take you to access the 80% you don't have? And what are some of the unlocks that would get you to that access? Glenn Milnes: I think the cross-sell component of what we do is very important. I think some of these automation tools that we're introducing matters a lot to these customers. And then if we think about next-generation products, which we are building is having a fully integrated stack. Again, it's an extremely exciting time to be a software growth company without extensive legacy products, and that's the opportunity for us. All of our products can be to be sold separately, but integrated in a platform with a thin UX layer sitting over the top in terms of these AI tools. I mean that's the big opportunity, I think, and that's what we're pursuing. And I think that will help a huge amount with cross-selling. Simon Hinsley: And just last question from Sinclair Currie at MA Australia. Thinking about growth opportunities as either from ARPU growth or winning new customers, is one a greater opportunity than the other? Glenn Milnes: The biggest dollar opportunity is new logos. We've got 94%, 93% of the market still go get. So we have focused on the largest in terms of the biggest network operators. But there's another 85 investor-owned utilities that we're not in today. And yes, it does take time to develop them, but that's the biggest opportunity. We've got teams -- I mean, go-to-market, we've got teams. One is focused on account development and expanding inside the customers we're in another group that's focused on new logos. So it's sort of a separate process. Simon Hinsley: Thanks, Glenn. Thanks, Paul. I just hand it back to you for closing remarks, Glenn, and we'll finish up there. Glenn Milnes: No, thank you. No further closing remarks. Paul and I are available always for e-mail questions or calls. So happy to pick anything up as useful. Simon Hinsley: Perfect. Thanks very much all for attending, and thanks, Glenn and Paul. Have a good day. Glenn Milnes: Thanks.
Simon Hinsley: Good morning, and welcome to ikeGPS First Half Financial Year 2026 Performance Update as released on the NZX and ASX this morning. [Operator Instructions] Glenn Mills, Managing Director and CEO's presentation. But with that, Glenn, I might just hand it over to you for the performance. Thanks. Glenn Milnes: Great. Thanks, Simon, and thank you, everyone, for taking the time to meet today. We want to be very efficient with your time. First thing, though, I'm pleased to introduce Paul Cardosi. Paul is based in our Colorado headquarters alongside the leadership team. So introducing Paul, he started right at the end of September. Paul Cardosi: Hello, everyone. It's good to meet everyone today. Thanks, Glenn. Glenn Milnes: Great. So look, what we'll do for today's session is go through the performance and the numbers themselves. It's been a very strong quarter for the business, which has been pleasing. I want to talk about the market because market timing is everything in terms of, I think, our growth prospects and where we're sitting and also introduce some of the go-to-market and also the new product functionality that we've introduced that we think should materially impact our subscription revenue base. So please take note of this important notice for this presentation. It's the agenda we just talked to. I won't -- Paul will take you through the numbers in terms of the following charts. Just covering those last 3 points, I think it's important for our shareholders to understand that we've maintained our cash operating expenses are materially flat versus the prior calendar period. So we've been able to grow the business and scale without adding additional people costs, in particular. We've got a strong balance sheet now with $34 million on the balance sheet. We've got no debt. We are fortunate to be very well supported through a capital raise process in the second quarter, both institutional -- new and existing institutional support and also a high level of support from our retail investors. And the last point is tied to the ASX All Ordinaries Index. We were promoted there towards the end of September, which tracks the 500 largest companies on the ASX by market cap. So with that, I'll hand over to Paul, and he'll take you through some of the headline numbers. I think actually, before we transition there, we are reiterating guidance in terms of platform subscription revenue. This is going to be at approximately 35% or greater through this year. We're in good shape to deliver that. We're still committed to EBITDA breakeven on a run rate basis within the second half of this year, which we're now into -- well into October. Paul, over to you. Paul Cardosi: Thanks, Glenn. I'm going to start with the exit annualized run rate of our platform subscription revenue. We're very pleased at the 47% growth rate that you see on the slide. Key takeaways around our platform subscription revenue growth are really the strength and the continued growth we see around our IKE Office Pro and IKE PoleForeman subscription products. So great growth there. You can see here on the 47% growth for the latest subscription revenue. If you go to the next slide, Glenn, the next slide represents our 6-month year-to-date subscription revenues, and this has given you a look at our first half performance. You can see on a compounded annual growth rate, we're at 30%. But faster than that, you can see our year-over-year growth year-to-date versus the year-to-date prior calendar period was a 35% growth rate. So really reiterating that guidance Glenn mentioned earlier, continuing to see 35% plus growth rates across our subscription business. If we go to the next slide, Glenn, I'll talk a bit about seat growth. These are the user seats that we sell for our subscription products. 55% growth over prior calendar period. I would say as we continue launching products as well as the products we have launched, we do sell on a per seat basis, a per user basis. So you can see -- really, I see this as seat adoption, user adoption and really strength in the number of users we have across our subscription products. So 55% growth rate there for our subscription business. Moving to the next slide, Glenn. This is our transactions revenue. This is a services business that's heavily influenced by the number of poles that we manage for customers. Our customers perform themselves. This business is down. It's a lower-margin business for us. You can see that the 32% decline in transaction revenue. There's volatility in this business. There's a lot going on with the new U.S. administration around fiber or high-speed communication in rural networks. I would say there's some volatility in this market right now in terms of the timing of the funding. We do expect this to rebound. The time line is, I would say, in the medium term. But again, a lot can happen that's really in the macro U.S. economy. So overall, this business is down. It is impacting our overall revenue growth. But again, we expect as legislation moves through, we'll see a rebound at some point in the, I would say, the medium term here. I don't know, Glenn, if you want to comment on this or you want to just keep going. Glenn Milnes: Yes. No, that's a good summary. We're seeing the Tier 2 fiber and Tier 3 fiber folks have been asked by the new government administration to rebid for the contracts that they had been awarded. And that's created some uncertainty, but this infrastructure has to be built. So we're confident it comes back. It's just -- it's difficult for us to predict when we stay in very close contact with our core customers here. Again, this business has generated just under $3 million of revenue through the first half of the year, and we're able to adjust our cost base and make sure it stays profitable and has a good margin profile. Paul Cardosi: This is a revenue mix slide. So again, looking at the different sections of this chart, you can see that we're now at 90% of our revenue coming from both our recurring revenue streams and reoccurring revenue streams. And I would highlight that the subscription portion of this hit 69% of our revenue. So you can see the purple -- hopefully, you can see it on the screen. The subscription makes up a much larger portion of our revenue. It's a very highly profitable portion. We're around about 93% margin on that subscription revenue. Again, that is the focus that the business has had and has, and you can see it's really taking effect with the amount of subscription revenue that's really dominating the mix of our revenue. So it's nice to see that. If I move on, Glenn to the next one. I'll wrap up with -- these are the key metrics we typically show. It's really a summary table for you to digest comparing our first half this year versus last year. One thing I would note is the third line down, the subscription customer count. It grew only 2%. But I would point out that we had about 40 very small customers that didn't convert yet to PoleForeman. So we've counted those as temporarily lost. But if you compare the 2% subscription customer growth with a 35% revenue growth, the takeaway from that is the customers we are adding are higher annual contract value customers. So again, a small customer count really leading to that 2% growth. But overall, with the customers we are adding and the price we're getting per customer is really growing significantly well. And I think with that, Glenn, I'll hand it over for the update. Glenn Milnes: Great. Yes. And I think just on that number of subscription customers, you see prior year actually dropped down when we took out those tiny little legacy PoleForeman products. So it's going to bounce right back in terms of that percent change. What I wanted to do is we've got quite a number of slides here, and I do want to be respectful of time and get to Q&A quickly. But there's just some new market data that I think matters looking at what's happening across the North American electric utility space and communications market, which I wanted to touch on. Again, just the size of the market opportunity over the next decade is enormous, more than $2 trillion of capital coming into grid modernization. And to do this successfully with an aging workforce, aging infrastructure, it does require technology and digital grid intelligence. That's what IKE focuses on as a business. So there's some data here to absorb as appropriate. And again, the numbers are quite staggering, more than 130 million wooden distribution assets getting to almost 50 years and at failure thresholds. And again, we help design and engineer and maintain these distribution assets. So it's a really interesting time and a pretty monumental engineering task to achieve what the U.S. has to achieve over the next decade or 2. And a lot of the -- it's not just -- there's a lot of private capital coming into this market for grid resilience. There's a lot of federal funding coming in, and it is focused heavily on distribution network capacity, more power on the network and capacity and hardening, which is where IKE plays. Again, the broadband industry has had this slowdown with regulatory uncertainty where the Trump administration was looking to make some of these decisions technology neutral was potentially going to favor Musk and the satellite industry. I think that's reversing pretty fast just because of performance for customers. But again, a lot of capital coming in -- these fiber and small cell attachments go on to distribution networks. And again, we help that process go much faster and more efficiently. And this is what we're, in essence, building in terms of capability as a company. So looking to be able to engineer a network right through its life cycle. So to go out and digitize and to see what matters in a power network, then to assess what's at risk, how vulnerable is your network, how can you make sure you meet code compliance and keep the network safe for your customers and for the environment and then to be able to design and engineer with confidence. And that's the way that we're building our product portfolio today. I think everyone knows about some of the macro factors just the power requirements from having to charge electric vehicles, AI data centers, et cetera, just so much engineering that needs to be achieved. And then with climate change, we've got wildfires, storms. These things are happening just much, much, much more regularly. And so you need a hard power network that doesn't fail and cause the next wildfire or takes a city out from a power supply perspective. And the market in North America, we've published this slide previously. The market is really large. If you just look at our top 8 customers, it's almost 4x the size of the Australian market in terms of the number of homes and businesses that these groups are delivering to. So it is a really profoundly large market opportunity in terms of the networks that we're supporting and starting to get alongside as a partner for these customers. Again, maps that we've published previously, there's 106 investor-owned utilities across the country. These are the really big networks that are all interconnected, but they serve their own service territory. They're generally publicly traded companies. And then more than 2,800 municipality and cooperative electric companies, but they all represent quite large customer opportunities for us, and they deal with the same problems. So we've just started to really scratch the surface in terms of customer penetration and also new logo acquisition. Again, I'll go fast through here because I think many of you are familiar with much of this information. Again, how do you help a customer follow the bouncing ball in terms of engineering a network through its life cycle, go and assess the asset, design the asset, be able to -- at really high scale, be able to assess your entire network using technology, so you understand where your vulnerabilities are. And then we have our IKE Analyze service just to help customers get some scale. And we focus a lot also on training and education, not because we want to be a services training and education business, but it lets us get in front of our target customers, and we get in front of hundreds and hundreds and thousands of engineers and help teach them around best practice for the distribution grid. So we really, I think, understand where we're going. We're extremely focused on North America and distribution grid assets. And we've got some clear goals in terms of being the most trusted company delivering software solutions into the distribution grid over the next 10 years. And what is interesting, this is actually a global private equity firm went and surveyed 40 of our customers. They didn't actually ask us to do it, but they came back and gave us the results. Our NPS score is 91%. It goes from minus 100 to plus 100. It's a Boston Consulting framework that's pretty common these days. So it's working in terms of our go-to-market process. We focus very hard on customer experience and leading with people and process as well as obviously, technology. We're winning and of the 10 largest investor-owned utilities. We're adding new logos consistently. We've got 5 of the 10 largest communications companies at different stages of adoption on the communications side. We're now -- our software is in every state in the United States in terms of its use. And we're managing more than 20 million overhead assets now in our system. And that doesn't mean there's 200 million distribution assets. It doesn't mean 10% of the market is done. These assets get engineered over and over and over again for different purposes and different requirements. So again, we're sort of early in terms of market development. And growth is going to come from winning new logos. We've got about 6% of the logos in North America today. And we think we're about 20% penetrated in the 6% we've got. So it's account development and it's new logo acquisition. Just some examples here around how we're getting to market. And we focused heavily on education and training. We've got a program that looks at the National Electric Safety Code and how customers can make sure that they're applying best practice. And we've trained more than 800 organizations over the last 1.5 years, more than 3,000 attendees. We run other webinars, and we IKE certify engineers across utilities. So I think more than 1,700, it's close to 2,000 attendees have been IKE certified in terms of OSHA training and National Electric safety training. And again, the natural conversation leads to, well, how do you do this work with technology? And that's obviously how we cross-sell the software part of what we're doing. Again, I'll go fast because I think there was a separate release that covered this topic quite well. But we're really excited in the second quarter to introduce some new AI-enabled capability inside of IKE Office Pro. So that's our core product. And simplistically, if you look at that photograph on the right, that's a pretty complicated power asset. That's all the communications infrastructure at the bottom, it's all the power assets at the top and there's a street light. There's a transformer and there's a whole bunch of drop points, et cetera. And this -- when an engineer is assessing this asset and they're trying to build more capacity on a line or whatever it might be or they're trying to figure out if it meets the National Electric Safety Code for compliance, it's a very manual process typically. And we've built this automation capability that a computer with a click of a button, it's able to find and identify everything on that asset. So the level of productivity gain for these very expensive engineers that are sitting in the back office is quite profound. And so we're really excited to get this into market. It's been well received by customers that have, a, went through the trial process with us to make sure we sort of had product market fit correctly. But also now that we've got it -- it's embedded in the product. It's not an opt-in option. This is additional ARPU and it's compulsory if you're using IKE Office Pro. So yes, just into market towards the end of September, but we think really exciting, and we're going to add more and more capability in and around this product. IKE PoleForeman continues to expand extremely positively. Again, it's been in market about 18 months. I know that there are questions around what's the ARR driving to for PoleForeman for this year. It will be something close to 10 million by the end of this year, which is that's 20x the level from when we rebuilt the product a couple of years ago. So that's traveling really well. I think we're going to keep winning some big and important customers. We're going to add more capability and increase pricing. So I will pause there. I know there's a lot of slides, but I think it's some important items. And Simon, I can hand over to you for -- if there's any questions. Simon Hinsley: Thanks for that, Glenn. First up, we've got a question from James Lindsay at Forsyth Barr. If we can get to it. I might just pause on that one. But the submitted question, Glenn, that we've got how much more penetration can you get out of existing customers? Glenn Milnes: Yes, about -- we think we're about 20% penetrated inside of the customer footprint if we take a holistic view. So there's probably another 80% potential. We're not saying we're going to get all of it, but that's the potential. Simon Hinsley: And James Lindsay at Forsyth Barr should be able to talk, please go ahead. James Lindsay: Well done on the update. I was just wondering, I know it's sort of still early birds with regard to the R&D progress on the new products. Just keen if there's any sort of change in your timing. I think you mentioned it was about sort of 12 months away for the first of the 2 products to come into a trial. Would that still be in place? Glenn Milnes: Yes. We're making really strong progress, James, on essentially the bolt-on module for IKE PoleForeman can be sold stand-alone to any participant in the market, but also we will integrate with PoleForeman. -- and that's progressing well. James Lindsay: Okay. Cool. And then just with regard to the sort of continuation of net adds in the quarter, which I think was about 12 or so, so good progress there. Just interested in where it's coming from, if it's sort of in the core IKE Office product or in PoleForeman itself specifically? Glenn Milnes: Yes. PoleForeman is going faster in terms of adds. And it's actually -- it's an important item. We focused initially on winning the biggest investor-owned utilities in the country. And the interesting ecosystem effect now is they're mandating IKE PoleForeman to anyone that touches their network. So if you're an engineering firm doing work for the utility or if you're a communications company coming in and putting fiber on their assets, they're requiring PoleForeman. So we start -- we're really seeing that kind of ecosystem flow through. And next quarter, because I know it's something folks are asking for is just more visibility into the latest pro forma numbers, ARR, total contract value, et cetera. So we'll provide that in 3Q. James Lindsay: And then obviously, with the capital raise business in a lot better financial position, I was wondering if sort of an increase in sales and marketing sort of number of people on the ground with regard to sales is likely in the next quarter or 2? Glenn Milnes: Yes. there will be over time, but we're very committed to the EBITDA target. And we've got a very efficient sales and marketing team at the moment. We're growing at these kind of rates in terms of subscription level, spending less than 30% on sales and marketing. So those metrics are tracking well for us. So we're in quite a scalable position. We're also -- like every other company in the world at the moment, we're working really hard on being AI-enabled, not just putting AI inside of your products, but driving important business processes with some of these pretty remarkable tools. So we've got a whole of company training and education program tied to AI enablement as well from an operations perspective. James Lindsay: And then good to have the PolePilot new product out there. Can you just add a little bit more maybe just to the pricing constructs. You talked about it being as part of Office Pro. Is it going to be done on a subscription basis or a seat basis and potential for sort of ARPU uplift once sort of as it goes through the network? Glenn Milnes: Yes. The launch pricing is adding $200 per seat per annum. And as I say, it's not an opt-in item. It just is inserted into the pricing model. And as we add more capability and as we get better fuller data on productivity benefits for customers, that price point will go up in terms of the ARPU uplift. James Lindsay: And then obviously, on the transactional side, probably a little disappointing, but hard on the politics to get that working. Can you just give us an update when you think the recontracting will sort of get firmed up and potential for later in the year? Or is it likely next year or the year after that transactions recover? Glenn Milnes: Look, James, I'd just get it precisely wrong, but I do -- I mean we do have a view, and we're talking to our customers a lot actually and talking to some of the bigger industry participants as well. And again, what the federal government has required is they froze every rural fiber contract that was in place across the country and asked market participants to rebid. And it's tough for them to land on some hard dates. We haven't lost any of those customers. They're just waiting to get working again. And then I believe that will pick back up. What we have been able to do, though, is we have really adjusted the associated OpEx costs with that business. So it's generating positive margin at the levels it's operating at now. And it adds value for our customers. They love having the additional capacity when they require it. So yes, it remains something that we'll continue to pursue. Simon Hinsley: Next up, we've got James Bisinella from Unified Capital Partners. James Bisinella: On the result and welcome, Paul, to the group as well. Maybe just a couple for me. Just looking at subscription ARR, if I back out FX, just on my numbers, it looked like kind of a record quarter, around a couple of million bucks of net adds. So I guess, firstly, can you confirm that I'm directionally accurate there? And then secondly, just confirm, was there any like larger wins or anything as part of that number, just given it was a pretty strong result? Glenn Milnes: No, you're right. That's almost exactly correct, James, in terms of the numbers. it was across a whole range of customers. There wasn't -- there were some really interesting ads for groups like Exelon. So Exelon run 5 investor-owned utilities they delivered power to all of Chicago and Illinois and various other states. And they had been an early adopter of IKE PoleForeman and then they added another 130 licenses just as they get it more embedded across the business. Really interesting because, again, these guys are signing up for 3-year or 5-year terms. So it is really sort of long-term partnership business. But mostly, it was just a consistent flow of sort of similar level contracts versus any single big item. James Bisinella: Okay. Excellent. And maybe just one more on PolePilot, the AI product sounds really exciting. You mentioned that being a driver of platform adoption. So I guess, can you just confirm, is this more than an add-on? Like are you getting inbounds from potential new logos on the back of it? Or is it more just an upsell to existing customers? Glenn Milnes: No. It has caused a bit of a stir. If you can make an engineer fully loaded cost maybe $100 an hour, you can make these folks go, say, 20%, 25% faster and better. And really -- and it's amazing how you can remove the training burden to bring on new engineers to do this work when a computer gets you 30% of the way through an engineering task. Some of those benefits are quite compelling. So yes, we're excited. And we're going to do more in terms of detections and automation, et cetera. So it's going to become more and more powerful over time. And then if you fast forward and we're processing bulk data captured from Google Street View or whatever it might be, then all of a sudden, you're really sort of shifting the needle on some of this workflow, which I think is going to matter a lot. Simon Hinsley: Next up, we have Jules Cooper from Shaw Partners. Jules Cooper: Glenn and Paul, well done on a great result. So just sort of following up on James' question there. In U.S. dollar terms, the ARR added in the period was a record. I just wondered, when we look back over the last year, Glenn, we saw like the fourth quarter was particularly strong. Now we've got a strong sort of 2Q. How do we -- how should we think about seasonality? And you've obviously said here that the sales pipeline remains robust. But as you look into 3Q and 4Q, when you're cycling some stronger numbers from last year, how do you see it sort of landing maybe relative to this year -- sorry, this quarter, is this a sort of new level for the business? Or just want to get your perspective on how you see the third and fourth quarter shaping up and seasonality? Glenn Milnes: Yes, it's a good question. There's a little seasonality in our business, and it's because of the winter. So some parts of the U.S. up on the East Coast or in the North, there's a lot of bad weather, snow and ice and you can't get outside and engineer and build in some of those conditions. It doesn't tend to have a huge impact. And then Q4 for us, which is from January through to the end of March, tends to be very strong because all of our customers, their financial year end is the end of the year. So they're budgeting to deploy new technology and new tools from the start of the next year, which is why we typically see that lift if that helps. Jules Cooper: Okay. No, no, that does. Good perspective. And if we just sort of pick up on PolePilot, you sort of mentioned, I think it was $200 a seat incremental. I just wanted to sort of catch what you said around how your customers can adopt it. Is it just there and they can turn it on themselves? Or is there a selling motion behind it? Just if you could just go through that again, how they actually sort of pick up the product and start using it? Glenn Milnes: Yes. It's just delivered into IKE Office Pro and pricing has increased automatically. And we spend a lot of time running educational programs. And for anyone interested, if you subscribe to our LinkedIn channel like GPS, you'll just see the velocity and volume of training and education. So one of the programs at the moment is a lot of PolePilot education in terms of best practice and best use. So yes, it goes straight into the product. And we're just measuring at the moment elasticity just to understand the level of acceptance of higher price points or b, where you potentially can have churn if people don't see the value. So we're literally a couple of weeks into that pricing optimization assessment. Jules Cooper: Okay. No, that's good color. And then just lastly, cash operating expenses, you said, materially the same as the PCP. When should we expect that to start increasing as you sort of put the investment into the new products? When should we start to see that running through the business? Glenn Milnes: We do. We've got 2, I think, extremely compelling new subscription product modules that we're building. Much of that investment will be capitalizable. So it won't be as visible from an OpEx perspective, but we will be investing, obviously, in the process to build these new product modules. And then I think the go-to-market investment will flow just on the back of continued revenue growth. And as we hit these certain capacity breakpoints, if you keep adding dozens and dozens, dozens of new large infrastructure companies, you do have to have the people to be able to service those folks because we serve the market directly, which I think is a really important part of competitive advantage and why we've got those kind of NPS scores, et cetera. It's people and process, not just tech. So yes, it will happen through Q3, Q4 into the following year. But we're -- obviously, we're very well positioned balance sheet-wise to do that. Jules Cooper: Yes, absolutely. And just lastly, on those NPS numbers, some of the highest I've ever seen. So well done to you and the whole team. Glenn Milnes: Yes. Thanks. It was a surprise to us as well, Jules, to be honest. But it's good to see, and it's just one data point. We measure it internally ourselves, and we don't ever publish it because it's an internally measured thing. But we typically see 45% to 60%, which again is exceptionally good in our industry. But it was -- yes, it was great to see that sort of independent set of numbers. Simon Hinsley: We've got a couple more submitted questions that we'll churn through, Glenn. What's the expected timing for existing customers to further penetrate? How long will it take you to access the 80% you don't have? And what are some of the unlocks that would get you to that access? Glenn Milnes: I think the cross-sell component of what we do is very important. I think some of these automation tools that we're introducing matters a lot to these customers. And then if we think about next-generation products, which we are building is having a fully integrated stack. Again, it's an extremely exciting time to be a software growth company without extensive legacy products, and that's the opportunity for us. All of our products can be to be sold separately, but integrated in a platform with a thin UX layer sitting over the top in terms of these AI tools. I mean that's the big opportunity, I think, and that's what we're pursuing. And I think that will help a huge amount with cross-selling. Simon Hinsley: And just last question from Sinclair Currie at MA Australia. Thinking about growth opportunities as either from ARPU growth or winning new customers, is one a greater opportunity than the other? Glenn Milnes: The biggest dollar opportunity is new logos. We've got 94%, 93% of the market still go get. So we have focused on the largest in terms of the biggest network operators. But there's another 85 investor-owned utilities that we're not in today. And yes, it does take time to develop them, but that's the biggest opportunity. We've got teams -- I mean, go-to-market, we've got teams. One is focused on account development and expanding inside the customers we're in another group that's focused on new logos. So it's sort of a separate process. Simon Hinsley: Thanks, Glenn. Thanks, Paul. I just hand it back to you for closing remarks, Glenn, and we'll finish up there. Glenn Milnes: No, thank you. No further closing remarks. Paul and I are available always for e-mail questions or calls. So happy to pick anything up as useful. Simon Hinsley: Perfect. Thanks very much all for attending, and thanks, Glenn and Paul. Have a good day. Glenn Milnes: Thanks.
Operator: Good morning, everyone, and welcome to the Westgold Resources Q1 FY '26 Quarterly Results Investor Update Webcast. Your first speaker for today is Wayne Bramwell, Managing Director and CEO. I'll now hand you over to Wayne. Wayne Bramwell: Thank you, Shane, and welcome, everyone, joining us today. On the call today, I have Aaron Rankine, our Chief Operating Officer; and Tommy Heng, our Chief Financial Officer. Today, I'll provide a quick overview of the Q1 FY '26 results. After that, Aaron and Tommy will each share an overview of their areas, and then we'll open the webinar up for questions. Let's jump straight in. Slide 4. Q1 marks a strong start to the new financial year. We delivered 83,937 ounces of gold at an all-in sustaining cost of $2,861 an ounce. which is in line with our guidance. Importantly, we generated an underlying cash build of $180 million and closed the quarter with $472 million in cash, bullion and liquid investments. This quarter also saw the release of our 3-year outlook, which outlines a clear pathway to 470,000 ounces of annual production by FY '28, while reducing our cost profile. This outlook is supported by a 24% increase in mineral resources to 16.3 million ounces and a 5% increase in ore reserves to 3.5 million ounces, reinforcing the long-term strength of our portfolio. Key to our value proposition is increasing returns to our shareholders. During the quarter, we declared a $0.03 per share final dividend for FY '25, upgraded our dividend policy for FY '26 and launched a 5% on-market share buyback program. All in all, Q1 FY '26 sets a solid foundation for the year ahead. With strong financials, growing reserves and a clear growth strategy, Westgold is well positioned to deliver its organic growth plans. Let's move to the next slide, Slide 5. Our total recordable injury frequency rate, TRIFR, improved to 5.04 this quarter, down from 5.67 in the previous quarter. This is a positive step and reflects the continued focus across our sites on embedding safer work practices and improving hazard awareness. Slide 6. We are building momentum. We've now delivered 3 consecutive quarters of cash builds, culminating in a $108 million increase this quarter for a total of $472 million in cash, bullion and liquid investments. Slide 7, FY '26 guidance maintained. We're off to a solid start in FY '26 with 83,937 ounces produced at an ASIC of $2,861 an ounce, both in line with guidance. As we flagged within our guidance, production is back ended in FY '26, and we're well poised to ramp up in H2 as planned. Slide 8. Resource and reserves continue to grow. During the quarter, we released updated resources and reserve statement. Encouragingly, we've again built upon our mineral resource base, growing it to 16.3 million ounces and lifting ore reserves to 3.5 million ounces. representing a 24% and 5% growth, respectively, over the last 12 months after depletion. Slide 9, the 3-year outlook. This quarter, we released our 3-year outlook, a high confidence, executable plan that sees Westgold grow from 326,000 ounces in FY '25 to 470,000 ounces by FY '28, while reducing our all-in sustaining cost to circa $2,500 an ounce. Importantly, this growth is organic and fully funded, underpinned by our existing portfolio of assets, 3.5 million ounces in ore reserves and circa 6 million tonnes per annum of processing capacity. Key, we're not relying on new discoveries or external deals. This is about maximizing performance from what we already have, higher-grade ore, better infrastructure and smarter capital allocation. We've built the foundation. Now we're focused on consistent execution. Slide 10. The 3-year outlook sets the baseline for what we're aiming to achieve, but it's important to note that there's plenty of upside not included in the plan. I won't go through all those listed on the slide here, but some key opportunities we're actively progressing to bring value forward include Bluebird South Junction Underground. The 3-year outlook assumes we reach 1.2 million tonnes per annum by FY '28, but we are targeting this rate by the start of FY '27. Higginsville mill expansion beyond 2.6 million tonnes per annum. Feasibility study work includes options up to 4 million tonnes per annum of capacity and also operational improvements. We have made substantial gains in this space, which have not been baked into the plan and is becoming more operationally efficient is a key focus during FY '26. These represent material upsides to our base case and reinforce the strength and flexibility of our portfolio. With that, I'll hand over to Aaron to talk in more detail about operations. Aaron Rankine: Thank you, Wayne, and welcome to all on the call today. Slide 13. Q1 was a quarter of planned consolidation, setting the foundations to accelerate production. Key milestones in the quarter include updated mine design and commencement of paste fill at Bluebird South Junction, completion of infrastructure upgrades at Beta Hunt, completion of scheduled processing maintenance shuts at all plants and first ore from the Crown Prince OPA. Whilst our production quarter-on-quarter was marginally down, we delivered to our plan. And it should be noted that whilst this was a consolidating quarter, it was the second highest gold production in the history of Westgold. Looking ahead, we see clear tangible opportunities to drive our production up and cost down with continued improvement in operational performance, the introduction of higher-grade Great Fingall ore, continued ramp-up at Blue Bird South Junction and optimizing Beta Hunt on the back of the improved infrastructure. Slide 14. Slide 14 gives us a closer look at the Murchison, where we produced 53,140 ounces, about 1,700 ounces lower than the last quarter. All 3 Murchison plants had major shuts scheduled in Q1, which was the main driver for the quarter-on-quarter reduction. The mining of slightly lower grade areas compared to Q4 also contributed to Fortnum's lower production in Q1. At the Bluebird South Junction mine, part of the Meekatharra Hub, we implemented paste fill and ramped up development of the finalized mine design on which I'll provide more detail on the next slide. This resulted in reduced mine tonnes compared to the prior quarter. This was, however, offset by higher grades from the mine, which contributed to a modest quarter-on-quarter improvement from the hub. The other contributor to improved production at Meekatharra was the early commencement of ore from Crown Prince via the ore purchase agreement with NMG. We had anticipated first ore from Crown Prince in November. However, we received 33,000 tonnes in September, of which we processed 24,000 tonnes during the quarter at 3.5 grams for 2,601 ounces. This had around a $13 million impact on our all-in sustaining costs. At Great Fingall, [indiscernible] mobilized seamlessly in September, and we're on track to deliver the first ore from virgin stopes in Q2. The total AISC for the Murchison was $163 million, about $25 million higher than the prior quarter. This cost increase was due mainly to the OPA and higher processing maintenance costs as part of the planned shutdown. Slide 15. Now I'd like to cover Bluebird South Junction in some more detail. Some great work has been done by our engineering teams to create the updated mine design you see on the slide for South Junction Zone. The new design mitigates the ground control issues that have delayed development to date, whilst enabling the productivity benefits of transverse mining by creating up to 10 active work areas per level and enabling continuous mining in the levels with segregation from paste fill exclusion zones. Paste filling for the South Junction zone has commenced without a hitch. Introducing paste supports large, highly productive stope shapes and allows full extraction of the South Junction ore body. Whilst the commencement had short-term impacts in Q1, we will start to see the benefits as production ramps up over the financial year. Let's jump to the Southern Gold Fields. Slide 18 summarizes the performance of our Southern Gold Fields operations. Production performance was consistent quarter-on-quarter on a mine-by-mine basis. We produced 30,797 ounces for the quarter. Whilst 2,400 ounces lower than the prior quarter, the main contributor for this was the opportunistic take-up of additional Lakewood tolling in Q4. 61,000 tonnes of stockpile were built in the Southern Gold Fields in the quarter. The stockpile buildup and a onetime noncash adjustment in relation to the Karora transaction resulted in a lower total all-in sustaining cost quarter-on-quarter. Critical for the outlook at Beta Hunt, several key infrastructure projects are now complete. These upgrades will nearly double the ventilation flows when operated at full capacity, circulate freshwater in and out of the mine and provide consistent and reliable power, supporting the mine production ramp-up toward a run rate of more than 2 million tonnes per annum. With that, I'll hand over to Tommy to talk to the financials. Su Heng: Thanks, Aaron, and hello to everyone on the call today. On to Slide 21. This slide quickly summarizes the strength of our financial performance in Q1 FY '26. We delivered a strong net mine cash flow of $133 million in the quarter, which can be characterized as one of consolidation and setup. This was driven by a combination of solid gold production and a realized gold price of $5,296 per ounce, which was $2,435 per ounce above our all-in sustaining cost of $2,861 per ounce. The gold sold figure of 94,913 ounces and therefore, monetizing the bullion buildup we had due to the timing of gold sales in the prior quarter. Westgold remains fully unhedged, giving us full exposure to the rising gold price. We closed the quarter with $472 million in cash. During the quarter, a $200 million credit facility we established back in October last year expired, leaving us with $100 million credit facility remaining, of which $50 million remains drawn. This positions us exceptionally well to fund growth, absorb volatility and continue delivering strong returns to shareholders. On to the cash flow waterfall graph on Slide 22. We built $108 million in cash, bullion and liquid investments this quarter, closing with $472 million on hand. Underlying cash build was $180 million before growth and exploration spend. This was driven by positive operating cash flows and supported by strong margins. On capital allocation, we invested $60 million on nonsustaining capital, comprising $39 million in growth projects, primarily at Blue Bird, South Junction and Great Fingall and a further $21 million in plant and equipment upgrades across the portfolio. These investments are aligned with our strategy to lift mine productivity and reducing our operating cost base. We continued our investment in exploration and resource definition, investing $12 million over the quarter. Overall, we're in a strong position. Our balance sheet is robust. Our investments are targeted, and we're well funded to execute our growth strategy. Slide 23. Before I hand back to Wayne to wrap up, I would like to touch on the shareholder returns. Westgold continues to deliver on its commitment to shareholder returns. We declared a $0.03 per share final dividend for FY '25 and have upgraded our dividend policy for FY '26 to reflect our growing confidence in the business. In addition, we launched a 5% on-market share buyback program, a clear signal of our belief in the value of our shares and our disciplined approach to capital management. These initiatives are underpinned by strong cash generation and robust balance sheet, positioning us to continue rewarding shareholders while investing in growth. With that, I'll hand back to Wayne. Wayne Bramwell: Thank you, Tommy. Let's jump to Slide 25, divesting noncore assets. Westgold's strategy is to focus on our larger operating assets. Consistent with this plan, this quarter, we commenced the divestment process of our noncore Peak Hill, Mt Henry Celine and Chalice assets, all of which do not feature in the 3-year outlook or longer-term production plans. Slide 26. Q1 was a solid start to FY '26. In the Murchison, our Meekatharra Hub continues to produce cash as grades lift from the Bluebird South Junction underground and Crown Prince open pits. In the Southern Gold Fields, the key mine infrastructure upgrades are complete, setting the Beta Hunt mine up for higher outputs from Q2 onwards. Importantly, we built cash again this quarter, closing the quarter with $472 million in cash, bullion and liquid investments. With that, I will close the formal presentation and open the webinar up for questions. Operator: Thank you, Wayne. [Operator Instructions]. Your first question, Wayne, comes from Kyle, and it is what triggers the buybacks to kick in? Wayne Bramwell: Thanks for that, Kyle. This facility, the share buyback facility was set up last quarter. But for the large part of it, we were in blackout periods and couldn't buy the stock. We have a view of value in this business. And once the price gets to under that value, we'll buy. Operator: Next question comes from Larry. Wayne and team, can I understand Lakewood's tolling better? Is it 50 kilotonnes per annum per quarter as you mine 87 kilotonnes per annum more than processed? So will this present as a potential risk being short mill capacity as Beta Hunt ramps up? Aaron Rankine: Aaron here. So yes, with Lakewood, the locked-in tolling capacity is 50,000 tonnes a quarter. In Q4, we opportunistically took up a gap in the Lakewood schedule that Black Cat offered us. So 50,000 tonnes a quarter going forward. In terms of mill capacity, no, we're basically set up in our mine plans and milling capacity to be able to build a stockpile, and that's what we've considered in our guidance. Operator: There's no further questions at this time. So if you'd like to make any concluding remarks. Wayne Bramwell: Just in closing, I would like to make one statement. the cash don't lie. We built cash again this quarter, and this is the third quarter in a row past sort of the integration of the Karora assets that we've done that. The business is gaining momentum. We've started to see an inflection point at Meekatharra. And now with the capital projects completed at Beta Hunt, we expect the outputs from the Southern Gold Fields to lift. Thanks for everyone for patching in today. We're back to work.
Operator: Welcome to the Rambus Third Quarter Fiscal Year 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Desmond Lynch, Chief Financial Officer. You may proceed. Desmond Lynch: Thank you, operator, and welcome to the Rambus Third Quarter 2025 Results Conference Call. I am Desmond Lynch, Chief Financial Officer at Rambus. And on the call with me today is Luc Seraphin, our CEO. The press release for the results that we will be discussing today has been filed with the SEC on Form 8-K. We are webcasting this call along with the slides that we will reference during portions of today's call. A replay of this call can be accessed on our website beginning today at 5:00 p.m. Pacific Time. Our discussion today will contain forward-looking statements, including our expectations regarding projected financial results, financial prospects, market growth, demand for our solutions, other market factors, including reflections of the geopolitical and macroeconomic environment and the effects of ASC 606 on reported revenue amongst other items. These statements are subject to risks and uncertainties that may be discussed during this call and are more fully described in the documents we file with the SEC, including our 8-Ks, 10-Qs and 10-Ks. These forward-looking statements may differ materially from our actual results, and we are under no obligation to update these statements. In an effort to provide greater clarity in the financials, we are using both GAAP and non-GAAP financial presentations in both our press release and on this call. A reconciliation of these non-GAAP financials to the most directly comparable GAAP measures has been included in our press release, in our slide presentation and on our website at rambus.com on the Investor Relations page under Financial Releases. In addition, we will continue to provide operational metrics such as licensing billings to give our investors better insight into our operational performance. The order of our call today will be as follows: Luc will start with an overview of the business. I will discuss our financial results, and then we will end with Q&A. I'll now turn the call over to Luc to provide an overview of the quarter. Luc? Luc Seraphin: Thank you, Des. Good afternoon, everyone, and thank you for joining us. Rambus delivered a very strong third quarter with solid sequential growth and revenue above expectations. Product revenue led the way with a double-digit increase and growth that outpaced the market. This was driven by sustained market leadership in DDR5 products coupled with ramping contributions from our suite of new products. We also delivered another quarter of excellent cash from operations, highlighting the strength of our balanced business model, while we continue to execute on our strategic road map. Leveraging our core expertise in signal and power integrity, our strategic focus on delivering complete solutions for high-performance memory subsystems positions us well amid strong secular trends in data center and AI markets. Turning to our businesses. I'm extremely pleased with the performance of our chip business. In Q3, we delivered another product revenue record at $93 million and marked our sixth consecutive quarter of growth. As a cornerstone of our success, our DDR5 RCD leadership and ongoing market share gains continue to fuel our top line growth. In addition, customer adoption of new products is progressing well, with initial production shipments now in motion. Looking forward, we expect our continued RCD market share leadership and increasing contributions from new products to drive full year product revenue growth of over 40%. Our broad product offering, including chips for all JEDEC standard DDR5 and LPDDR5 modules supports the full spectrum of high-performance computing platforms in servers and client systems. Our full chipset solutions offer customers, not only the ease of one-stop shopping, but also the greater assurance of interoperability, which becomes ever more critical as the complexity of design raises alongside data rates. Through ongoing leadership in RCDs and growing traction across our portfolio of new products, we expect continued momentum and long-term growth. Turning to silicon IP. AI continues to drive design win momentum. The increasing pace and diversity of AI accelerator and networking IC designs is driving demand for our high-speed memory interconnect and security IP. Led by our best-in-class HBM4, GDDR7, and PCIe 7.0 solutions, our IP is critical to enabling the performance and security required by AI training and inference workloads. Focused on providing our customers with differentiated features and performance for the most challenging applications, we see momentum across our portfolio of cutting-edge solutions, and we remain on track for our long-term growth targets. As we look ahead, the rapidly rising adoption of AI is driving continued server growth. Training and inference require massive compute infrastructure to support increasingly complex and diverse workloads. Notably, Agentic AI is emerging as a major catalyst for server demand, particularly for traditional CPU-based systems. This is helping to fuel the ongoing hyperscaler and enterprise refresh cycle, amplifying the growth in server unit shipments. In addition, the amount of memory per server continues to grow. AI workloads demand unprecedented levels of compute performance, driving increasing core counts and the need for more memory bandwidth and capacity. This translates to more DIMMs per server, at higher data rates as well as the need for novel high-performance memory solutions and enabling technologies. MRDIMM is a great example of this as it leverages an innovative architecture to double the capacity and bandwidth versus standard RDIMMs. Scaling the amount of memory per server also creates demand for increasingly sophisticated power management solutions that optimize the efficiency and quality of power delivery. We solve these complex problems for our customers with leading-edge products and are pleased to be on track to intercept compatible, future generation systems with our complete industry standard MRDIMM and RDIMM chipsets. Going beyond servers, the release of each new client platform continues the trend of server class technologies waterfalling into AI PCs as performance targets continue to rise. This drives demand for faster memory and more module chip content. Leveraging our fundamental signal and power integrity building blocks, our client chipsets are progressing well with growing customer traction, and we look forward to meeting this rising market need. The secular growth trend in data center as well as the rising performance requirements across the computing landscape driven by AI are highly favorable to Rambus and align directly with our long-term strategy. Our groundbreaking memory connectivity and power management solutions are foundational to enabling the next generation of AI and HPC platforms by advancing system memory bandwidth and capacity capabilities. Having identified the increasing technical demands of data-intensive applications as opportunities, we have developed a road map that builds on our leadership in signal and power integrity to enable robust high-performance memory subsystems. In closing, Q3 was a very strong quarter with solid financial results. Our continued product leadership in DDR5 and increasing momentum in new products are underpinned by the company's strong alignment with positive secular trends in data center and AI. This gives us great confidence in our ongoing success and our ability to deliver long-term profitable growth. As always, I want to thank our customers, partners and employees for their continued support. And with that, I'll turn the call over to Des to walk us through the financials. Des? Desmond Lynch: Thank you, Luc. I'd like to begin with a summary of our financial results for the third quarter on Slide 3. We are pleased with our strong Q3 financial results as we continue to execute on our strategic initiatives. As Luc mentioned earlier, we continued our market leadership position in DDR5 products and have started to see increasing contributions from our suite of new products. Our diversified portfolio continues to deliver strong results, which led to outstanding cash generation in the quarter of $88 million, which further strengthened our balance sheet. Our consistent ability to generate cash allows us to strategically invest in our product road map to drive our long-term growth. Let me now provide you a summary of our non-GAAP income statement on Slide 5. Revenue for the third quarter was $178.5 million, which was above our expectations. Royalty revenue was $65.1 million, while licensing billings were $66.1 million. The difference between licensing billings and royalty revenue mainly relates to timing as we do not always recognize revenue in the same quarter as we bill our customers. Product revenue was $93.3 million as we delivered another quarter of record product revenue. This represents a 15% sequential increase and a 41% year-over-year growth driven by continued strength in DDR5 products and ramping new product contributions. Contract and other revenue was $20.1 million, consisting predominantly of silicon IP. As a reminder, only a portion of our silicon IP revenue is reflected in contract and other revenue and the remaining portion is reported in royalty revenue as well as in licensing billings. Total operating costs, including cost of goods sold for the quarter were $99.3 million. Operating expenses were $64.6 million as we continue to invest in our growth opportunities in a disciplined manner. Interest and other income for the third quarter was $6 million. Using an assumed flat tax rate of 20% for non-GAAP pretax income, non-GAAP net income for the quarter was $68.2 million. Now let me turn to the balance sheet details on Slide 6. We ended the quarter with cash, cash equivalents and marketable securities totaling $673.3 million, up from Q2, primarily driven by strong cash from operations of $88.4 million. Third quarter capital expenditures were $8.4 million, while depreciation expense was $8 million. We delivered $80 million of free cash flow in the quarter. Let me now review our non-GAAP outlook for the fourth quarter on Slide 7. As a reminder, the forward-looking guidance reflects our current best estimates at this time, and our actual results could differ materially from what I'm about to review. The economic environment remains a dynamic environment, and we continue to actively monitor this situation. In addition to the non-GAAP financial outlook under ASC 606, we also provide information on licensing billings, which is an operational metric that reflects amounts invoiced to our licensing customers during the period adjusted for certain differences. We expect revenue in the fourth quarter to be between $184 million and $190 million. We expect royalty revenue to be between $59 million and $65 million and licensing billings between $60 million and $66 million. We expect Q4 non-GAAP total operating costs, which includes COGS to be between $103 million and $99 million. We expect Q4 capital expenditures to be approximately $10 million. Non-GAAP operating results for the fourth quarter is expected to be between a profit of $81 million and $91 million. For non-GAAP interest and other income and expense, we expect $6 million of interest income. We expect the pro forma tax rate to be 20%, with non-GAAP tax expenses to be between $17.4 million and $19.4 million in Q4. We expect Q4 share count to be 109.5 million diluted shares outstanding. Overall, we anticipate the Q4 non-GAAP earnings per share range between $0.64 and $0.71. Let me finish with a summary on Slide 8. In closing, our team delivered strong third quarter financial results, setting another record for product revenue and continued strong cash generation. Our robust balance sheet continues to allow us to invest in market expansion opportunities. Our product portfolio, including silicon IP and chip solutions is strategically aligned to capitalize on the growing opportunities in data center and AI. Before I open up the call to Q&A, I would like to thank our employees for their continued teamwork and execution. With that, I'll turn the call back to our operator to begin Q&A. Could we have our first question? Operator: The first question comes from Tristan Gerra with Baird. Tristan Gerra: You recently quantified the MRDIMM TAM opportunity. Is it fair to assume you can replicate the market share with MRDIMM that you have currently in DDR5? And also, when do you think you can fully realize the TAM that you quantified for MRDIMM? Is that something that we could envision for '28? Luc Seraphin: Tristan, thank you for your question. We're very pleased with the progress we're making with the MRDIMM development. We do believe that with time in the long run, we can reach similar market share as we have with the DDR market share we currently have on DDR5. The timing of that really depends on the rollout of platforms from our main partners on the CPU side, Intel and AMD. But to the extent that they roll out their platform, I think it's fair to say that we're going to ramp in large volumes towards the very end of '26 and probably '27. So '28 is probably a good time to look at this type of market share. But the other thing I would add regarding MRDIMM is that it's a much more complex system. And because of the system requirements, we will need a tight coupling of the chips on that MRDIMM. So there's an opportunity for us to have more content as the interoperability of all those chips on that MRDIMM is going to become very critical. Tristan Gerra: Great. And then as a quick follow-up regarding the recently announced Ethernet scale-up networking architecture at OCP, does that provide opportunities for Rambus on the licensing side? Luc Seraphin: Thank you, Tristan. Our SIP portfolio is very focused on high-speed memory and high-speed interconnect and security. Certainly, with our networking customers and our memory customers, we are on the leading edge of technology, whether it is on GDDR and HBM on the memory side or PCIe 7.0 on the networking side. What we've seen recently is an acceleration of demand for the latest technology. The transition from PCIe 5.0 to PCIe 7.0 is moving very, very fast, and that's certainly an opportunity for us. Operator: The next question comes from Aaron Rakers with Wells Fargo. Aaron Rakers: I've got a couple as well. I guess, first, kind of sticking on the technology evolution of what we're seeing in some of these processors. There's a lot of news recently around the move towards SOCAMMs and SOCAMM2, in particular, is getting JEDEC standardization. Can you help us maybe think about Rambus' opportunity set in SOCAMM2 modules and when maybe you would expect to see that? And any kind of framing of kind of the dollar content opportunity on those modules? Luc Seraphin: Thank you, Aaron. The first thing I would say is that we are excited to see the emergence of these new architectures that actually play on our strength and focus in signal integrity and power integrity. As you know, the first attempt at SOCAMM didn't work that well. And as a reminder, the attempt was actually to take benefit of the low power and high bandwidth of LPDDR, but to put this on modules. And when you put this on modules, you actually break the signal integrity and the reliability of the system. So we are pleased to see those efforts going into JEDEC because I think the industry is eventually going to resolve those issues. And as a reminder, as we said in our remarks, we currently have solutions for all JEDEC module systems, both for LPDDR and DDR and both for clients and servers. So the fact that it's going through JEDEC is actually a good news for us. There will be opportunity for us, certainly opportunity for the SPD Hub chip. There's going to be some development on voltage regulators. But as we said, power management is also something we're focusing on. So we see this as an opportunity. We don't expect the volumes to be very high. These things actually go into system-on-chip solutions, very tight systems where the volumes are not necessarily very, very high. It's early to say what the content is going to be. But that's certainly an area we're going to play and given that the company focuses on both the signal integrity and power integrity. And the fact that it's moving to JEDEC is good news for us. Aaron Rakers: Yes. Very good. And then maybe as a follow-up to that answer is on the PMIC side, your product chipset business did really well this quarter, growing over 40%. And it looks like that appears to be sustainable as we look forward. How do we think about the opportunity of PMIC? How much does that represent of your product chipset business today? And maybe unpack of how quickly you're seeing that ramp looking forward? Luc Seraphin: Thank you, Aaron. The way we look at these products is we have a whole suite of new products, including the PMICs and the PMIC is actually a suite of products. If you remember the product announcements we've made over the last few years, we have the first generation of PMIC family announced in Q2 of last year. The clock driver announced in Q3. Then we have the second generation of PMIC announced in Q4 as well as Gen 2 RCDs and MRDIMMs. And this year, in Q2, we announced the family of PMICs for the client space. So what you see is we do have a whole suite of products that are not -- that are companion chips. We're pleased with the progress this year. In Q2, these chips represented low single-digit contribution to our product revenue. As we indicated, Q3 was on track with mid-single digit. And in Q4, it's going to be mid- to high single digits. So in aggregate, we're pleased with the momentum. But it's not going to be a step function. We have different stages of qualification and preproduction on different modules on different platforms, current platforms and future platforms. We have products that are in early qualification. We have products that are in preproduction, and we have products that are in full production now. But there's a strong momentum. And as these products percolate through the ecosystem, we do believe that we're going to continue to see growth. Now specifically to PMIC, what we have observed is that we have lots of success with a very high-end PMICs. There's a lot of excitement there. They are the most complex PMICs to make, but they're also the ones that are showing the best performance compared to our competition. So that's exciting for us. These very high-end PMICs are going to be linked to next-generation platforms with AMD and Intel, but we certainly have the early generation of PMICs also rolling out in the market. So difficult to separate PMIC from the rest. As I said, we have many products at many stages of development with our customers. But what we see is very strong momentum to grow that revenue quarter-over-quarter given the progress we're making. Operator: The following comes from Gary Mobley with Loop Capital. Gary Mobley: Let me extend my congratulations to the solid results. And I want to start asking about any sort of supply chain considerations first on your side. Do you see any extension of the order lead times that your customers are seeing as they place an order with you given any sort of constraints that TSMC may have? And then away from you, are you seeing any sort of impact on the market any sort of constraints on high-capacity server DIMMs or the DRAM to support that market, considering most of the memory IDMs are prioritizing HBM at this point? Desmond Lynch: Gary, it's Des here. Thanks for your question. Like others within the industry, we are carefully monitoring the supply situation. With regards to Rambus, I was pleased that we were able to grow our inventory in the third quarter. We grew inventory by about $6 million, which will support our growth in Q4. In addition, I would highlight that we've not seen any notable buildup of customer inventory in the sort of third quarter. Really looking at our own supply chain and manufacturing, in terms of front-end manufacturing, it is important to note that we are not on leading-edge technology nodes. And on the back end, we continue to have strong long-term relationships with our manufacturing partners. And we do see some pockets of tightness, and we continue to work with our partners to improve the lead times there. And looking at Q4, I would expect to see a slight increase in our own internal inventory to support customers' Q1 2026 demand. I would say, overall, we have a robust supply chain, which has enabled our strong product revenue growth, and we'll continue to work with our manufacturing partners to support our growth objectives going forward. Gary Mobley: Got it. That's helpful. In the RCD market specifically, I would assume that you're running about or above 40% market share. Do you see a natural cap there given that this is more or less sort of a 3-supplier market, maybe 2 additional suppliers in sort of the nascent stages of their development. Do you see that as a natural cap? Or do we see maybe 45%, 50% market share on the horizon? Luc Seraphin: Thanks, Gary. What we said last year in 2024 is that on the DDR5 generation, we were in the early 40% market share. We actually disclose market shares once a year because of some fluctuations we have every quarter. But if you look at the current outlook for this year, it looks like we're going to continue to grow share. The market for servers or DIMMs has increased mid- to high single digit. And as Des indicated in his prepared remarks, we grew 40% year-over-year. So we have certainly gained share this year on this market. And we still believe we can continue to gain share. We always have the objective of 40% to 50%. So there's room to gain share. We're also early in the DDR5 cycles. It's been 3 years in, and we expect the DDR5 cycle to last about 7 years. So we do expect to continue to have the possibility of winning share. The other thing is I think that when the products become more complex and the interoperability becomes more complex as well, because we have a complete chipset that's going to help us continue to gain share. Certainly, there's going to be a cap, but we don't see the cap in the near future at this point in time. Operator: The next question comes from Mehdi Hosseini with Susquehanna. Mehdi Hosseini: This is for the team. I think it would be very helpful if you could remind us how to think about different TAM and give us an update. In the past, we have talked about the buffer chip companion, CXL HBM IP. Perhaps with the diversification in the DRAM with the inclusion of MRDIMM, there are some changes there. And in that context, it would be great if you could give us what the TAM will look like, let's say, 2 or 3 years from now? And I have a follow-up. Luc Seraphin: Yes. Thank you, Mehdi. So we'd like to separate the, I would say, the product from the silicon IP. On the product side, we estimate the TAM for the RCD market to be around $800 million. Then you add to this $600 million of companion chips, half of it being power management chips and the other half being the other companion chips. And then -- and you can think about the market growing mid- to high single digits in aggregate. There's additional, I would say, tailwinds in to this with the increase of number of channels and the increase of number of DIMMs per channel. But this will translate into -- not into a step function, but some tailwinds to that TAM. Then in addition to that, we see a TAM of about $600 million for the MRDIMM itself, which adds to this. But the MRDIMM as we discussed earlier, is not going to hit the market before very late in 2026, '27, depending on the rollout of the platform from AMD and Intel primarily. Now if you turn to the Silicon IP business, it's hard to have a TAM number for the Silicon IP business. What I would say is that as part of our portfolio, we are at the center of what matters for AI. Our portfolio is focused on PCIe 7.0 and the future generations on HBM4 and future generations and on GDDR and future generation. So there's a pool for design staff on all of these IP. But it's hard given the type of business model on the licensing side, it's hard to estimate a SAM for this. But what I would say is that we are on track to meet our growth targets for that business of double-digit growth. Mehdi Hosseini: Okay. Great. Just a quick follow-up here. Should I assume that MRDIMM margin is comparable to product? Or would it be more like an IP type of the margin? . Desmond Lynch: Mehdi, it's Des here. In terms of the MRDIMM, this is obviously a chip product that we will be selling here. What I would say is I would keep it within the same sort of margins of our product business. The long-term goal of that business is 68% to 65%, and I would keep the MRDIMM margins within that. We continue to produce strong margin results on the chip side, and we're really pleased with the portfolio that we have. Mehdi Hosseini: Sure. Great. And my second question has to do with just looking beyond the December and seasonality. I'm under impression that when it comes to servers and companionship, maybe there could be better than seasonal trend into early part of the '26. And I want to see how you're looking at those trends. And I'm not asking for a guide, I'm not asking for a specific revenue guide, but just trend -- with better than seasonal trend that I see in the server and AI would also apply to Rambus. Luc Seraphin: Thank you, Mehdi. We do see the market for servers to continue to grow between mid- to high single digit, going into next year. There's some tailwinds, as we said, because of the growth of inference, for example, or Agentic AI, that's going to create tailwinds for standard CPU types of solutions. So we do see a growth between mid- and high single digit for the server market next year. Typically, in Q4, we have our customers being prudent with the inventory before the year-end and that happens every year, but that's included in our guide for Q4 that we just gave. And things are going to be back on track in Q1 of 2026. We keep saying that one of the reasons we don't guide beyond 1 quarter is that things are changing very, very fast, and visibility is not the best. But we do see all the favorable tailwinds for our business going into 2026. Operator: The next question comes from Kevin Cassidy with Rosenblatt Securities. Kevin Cassidy: Congratulations on the great results. Just looking at the market, the DRAM market and maybe Gary touched on it with the lead time stretching out and prices going up. Is there any concern at all of servers de-specing as the price of DRAMs go higher? Or is the need for DRAM and AI applications so strong that there won't be a de-specing? Luc Seraphin: Well, that's a good question for the memory vendors. I would say that historically, we've been kind of agnostic to DRAM pricing. We -- I think what the industry is going to have to go through is to deal with the growth of demand for data centers in general, and to have some arbitrage between the different types of memory. But I don't think that the DRAM pricing is going to have any impact on the demand for our products. Des? Can you hear me? Desmond Lynch: Yes. Kevin, I would just add in the fact that the inventory levels within the channel continue to remain sort of lean. When I look at inventory in Q3 versus Q2, and this is of our chips that our customers are holding. We saw no notable inventory build. And I would really put that down to 2 factors. One, it's been the multiple generations of DDR5 being in the market and really the legacy overhang of overordering of DDR4 inventory from a couple of years ago. So I would say the inventory position just now is lean in terms of our sort of chips. Kevin Cassidy: Right. Okay. Great. And maybe just along that, you mentioned you're 2 years into this DDR5 cycle and maybe it's 3 generations of DDR5 modules. What's the bell curve like of your shipments? And what is that doing to ASPs as you go forward? . Desmond Lynch: Kevin, it's Des. We've been really delighted with how we've been able to execute on the DDR5 cycle. We're in the middle of a fast-paced DDR5 transition, with multiple generations in the market today. I would say that in Q3, the predominance of our shipments was the second generation of DDR5 with growing in early production volumes of the third generation coming into the market. And as I look ahead into sort of Q4, I would still expect the predominance to be the second generation with really growing contributions of the sub generation coming into the market. In terms of pricing, what we've talked about in the past is when we move from one generation to the next generation, we do see a bump up in sort of pricing, which is obviously beneficial for us from there. And we'll continue to sort of see that benefit going into the numbers. We saw the benefit in the gross margin outlook in the third quarter on the product chip side, which increased about 300 basis points, which was really a combination of the product as well as continued manufacturing savings coming into the model. So overall, we're really pleased with how we're executing on the DDR5 generation. And really irrespective of what generation is ramping into the market, through our early investment in continued leadership, we have confidence in our overall market share and leadership position. Operator: The following comes from Nam Kim with Arete Research. Nam Hyung Kim: I want to ask about outlook for CXL. There are a lot of perspective on how this market develops, especially with the CXL 3.1 expected next year. And your competitor like Montage becoming increasingly aggressive on the controller side. At the same time, greater adoption of MRDIMM in the future could address current memory capacity constraint. So can you share your view on how you see CXL market evolving and what the Rambus' strategy is in terms of controllers or other engagement in this space? Luc Seraphin: Thank you, Nam. We have 2 plays or 2 possible plays in CXL. One is on the Silicon IP business. We do have CXL controllers of different generations, and this has been part of this focused portfolio I was talking about where we do have traction. A lot of people developing chips need a CXL interface, and they have the possibility of buying that interface from us. So this has been one of the driver vectors of our growth in Silicon IP business. But what we have observed is that every one of our customers tends to develop a bespoke solution for one, sometimes only 1 or 2 customers. So the chips that use the CXL market is very fragmented. That's how we look at it. And although we did have and we do have a CXL product development, we believe at this point in time that it does not make economic sense to actually roll out that product in the market because what we noticed is that we would have to develop a specific chip for a specific customer, who themselves will have a specific customer as well. So we'd rather play on the SIP side for CXL. So what I would say is that CXL is very exciting in terms of being an interface that is accepted by everyone. But for us, it's not that exciting in terms of products. And we do believe that the usage model that is the most promising is actually memory expansion. And to your question, a very good question. The MRDIMM answers that because it uses the current infrastructure of standard servers. And just by using this MRDIMM type of architectures, we can double the capacity and the bandwidth using that same infrastructure. So that's the option we've taken at this point in time. As the market develops, as we've done in the past, we can pivot, but at this point in time, this is where we are. Operator: The following comes from Kevin Garrigan with Jefferies. Kevin Garrigan: Let me echo my congrats on the results. On the MRDIMM opportunity, you talked about customers starting qualifications. I mean is there anything more that you need to do or can do to kind of help yourselves capture share there? Or is it pretty much all in the customers' hands at this point? Luc Seraphin: It's in customers' hands, our hands and the hands of the people who deploy the platforms like Intel and AMD because they have to be ready with their platforms as well. But I would say, on our hand, what plays in our hand is really the fact that we have a complete chipset for MRDIMM. And that's critically important because when you double the capacity and you double the bandwidth that interoperability is critical to the MRDIMM actually working. And I think that customers are going to be looking at their suppliers like us to really help them not only on the development of the chips but also on the testing of the whole platform, given how compact it's going to be and how fast it's going to have to run at. So this is what I think is going to play in our hands. The fact that we have invested for a long time in signal integrity and power integrity allows us to have a complete chipset and having a complete chipset is going to help us with interoperability testing with our customers. Kevin Garrigan: Yes. Got it. Got it. Okay. That makes sense. And then just as a quick follow-up, going off of a previous question in your silicon IP business. I know you guys are doing well in HBM, but can you just talk about how traction has been with PCIe 7.0 and Secured IP in that business? Luc Seraphin: I'll start and let Des jump in. Typically, we don't split these things, but at a high level, security is about 50% of our business and between controllers, memory controllers or PCI controllers, that's the other 50%. I would say security is widespread in terms of its application. It's really going into lots of applications with lots of customers in very different markets. PCIe and HBM, we tend to work with a large number of customers and much smaller, and we tend to work on the bleeding edge solutions for these. So we mentioned HBM4 and PCIe 7.0. So we typically work with large customers who need to develop the latest and fastest solution mostly for the data center and the AI market. So it's a different dynamic there. Higher -- typically, we have a higher ASP, longer-time development with the bleeding edge solution for memory and PCIe. It's a much broader and faster cycle on the security side. That's the way to look at it. Operator: The final question is a follow-up from Aaron Rakers with Wells Fargo. Aaron Rakers: Thanks for doing the follow-up question. Just kind of thinking back again to the architecture evolution and this AI demand that you're seeing. When you guys look at your RCD business today, how do you assess kind of the number of channels today that you're shipping into on a per socket or per CPU basis, and how that has evolved? And whether or not moving from 8 to 12? And do you see 12 going to 16 channels as we look out into '26? Luc Seraphin: Thank you, Aaron. Certainly, AI workloads need more memory than standard types of applications and more bandwidth. So the very fact that the industry is converging to 12 channels is good. But remember, the -- it's only lately that Intel moved to 12 channels. So it's going to have a, I would say, a modest impact, but positive impact. We do see these memory -- these CPU vendors announcing the 16-channel solution, and that's going to be necessary. There's talk also no plans of going beyond maybe to 20, but the issue is you cannot just add channels after channels. It creates constraints on the packaging designs and the chip designs. So I think there's going to be a limitation there. But that's certainly a tailwind for us. That's going to help, as we said earlier, continue to grow our product business. Aaron Rakers: And on that channel discussion, how does that work with MRDIMMs? Luc Seraphin: So the MRDIMMs is going to intercept given the next generation of platforms on AMD and Intel. These next-generation platforms on AMD and Intel, they announced 16 channel. But MRDIMM is a very dense solution. So the number of DIMMs per channel is going to be the question. But these new platforms for Gen 5 are going to be around 16 per -- 16 channels per CPU, and that's the generation that intercept MRDIMMs. Operator: I will now pass it back over to Luc for closing remarks. Luc Seraphin: Thank you to everyone who have joined us today for your continued interest and time. We look forward to speaking with you again soon. Have a very good day. Thank you. Operator: Thank you. This now concludes today's conference.
Antonino Ottaviano: Good morning, and thanks for joining us at Liontown September Quarter Results. My name is Tony Ottaviano. Joining me today is Ryan Hair, our Chief Operating Officer; Graeme Pettit, our Interim CFO; and Grant Donald, our Chief Commercial Officer. So if we can move to Slide 1, please. It's the typical disclaimer and then we move to our highlights slide. I'd like to provide some context today. This quarter was one of execution and we delivered exactly what we said we would. We advanced the underground ramp-up on schedule, maintained a strong and consistent plant performance and strengthened our balance sheet more than $420 million of cash following the August capital raise and also the restructuring of our debt facility with Ford. Importantly, this quarter represents the low point in our planned transition year, and it sets out the improvement story that unfolds from here. The plan is clear and unchanged. We continue to wrap up the underground production towards a 1.5 million tonnes per annum by March 2026, lift recoveries towards our target 70%, and once we process the cleaner underground ore becomes the dominant mill feed and drive costs down progressively each quarter as we fleet the open pit and move to full underground operations at the desired steady state run rate. So the key messages for investors today are: first, execution and delivery. We achieved every operational milestone to plan. During the quarter, we executed the scheduled maintenance, as we highlighted in the previous results. We're executing our OSP strategy to manage our contact tools, achieved a 105% increase in underground production, reaching our 1 million tonne per annum rate by September. We also advanced the open pit towards completion, with the final clean ore bench reached in September and full completion planned for December quarter as stated. These outcomes demonstrate once again the strong delivery against plan and the continued validation of both the ore body and the process flow sheet. Second, our financial strength. Our balance sheet is in excellent shape, providing full flexibility through our transition year. We closed the quarter with $420 million in cash, as I mentioned just earlier, supported by successful $316 million equity raise, and the Ford facility amendment to help us with the debt repayments in the course of the next 12 months. Thirdly, our operational leverage ahead each quarter from here improves the benefit as we get scale and defray our operating costs, but also our all quality improves. With the underground volumes ramping up, open pit completion imminent and recovery uplift underway, production growth, recovery strengthens and cash generation accelerates. The operational leverage is built on visible -- it is visible in the trajectory ahead. Finally, the long-term fundamentals. Lithium demand remains robust, underpinned by strong EV and the accelerating expansion of the battery -- sorry, the stationary batteries. Liontown's high-quality asset, Tier 1 partners and the fortified balance sheet helps us capture the full benefit as the market turns. So in summary, the context of today's results, disciplined execution through the trough, a clear path of improving margins and cash flow, and a business built on sustainable performance. I'll now move to the next slide, please, which is our highlights. The production for the quarter was 87,000 tonnes at a weighted average grade of 5%, and this is in line with us processing the contaminated by the contract ore being the OSP. Contract sales were 77,000 tonnes. Concentrate on hand is 20,000 or nearly 21,000. Our recovery was the 59%, again, as planned, and this will improve as we get the better quality ore. And plant availability, notwithstanding the planned shutdown, of 92%. On the financial side, I've already mentioned the cash imbalance. The revenue was $68 million, but it was impacted by the lower sales due to port congestion in September and the backward looking and we'll talk about this a little bit later in the presentation. Our realized price on a nausea basis plus our unit operating costs were exactly as planned, given that we had lower recoveries due to the OSP stockpiles. If we move to the next slide. I'll now move on to -- and introduce Ryan here, who will go through the slide for us. Ryan Hair: Yes. Thanks, Tony. So safety, our lost time into frequency rate, roughly in line with the previous quarter. The total recordable injury frequency rates up slightly on the last quarter. And as we've noted in the lead end of this slide, we are focused very heavily at the moment on a back to basic safety drive both on physical and mental well-being. Importantly, our leading indicator safety observations are still in line with our previous quarter, which is in line with our plans. And on ESG, renewable power average of 79% for the quarter. And notably, in September, peaked at 83%. And female workforce participation slightly at 23%. If we can move to the next slide. So now talking to operational performance and starting with open pit. So performance remains strong in the open pit and continued to deliver to plan. We mined 292,000 tonnes of ore at 1.3% lithia, which is 77% up on last quarter. The final clean ore zone was reached in September, and completion remains on schedule for the end of the calendar year. Focus this quarter is on completion of the pit in preparation to contractor demobilization as we transition into full underground operation, which we'll now turn to the next slide on underground. So the underground operation, we continue to perform exceptionally well here, and it does remain one of the most important indicators of our progress towards steady-state operation. During the quarter, all mined just over double to 225,000 tonnes, reaching a 1 million tonne per annum run rate in September, which is in line with plan. The pace fill and primary vent systems are now fully commissioned and performing to design, supporting delivery of the plan and improving operational efficiency. The ordering, power reticulation of materials handling infrastructure are working well, providing strong operating reliability across all levels in the mine. We've mobilized a third jumbo and a fourth production drill, which increases development and production capacity and supports continued ramp-up towards 1.5 million tonnes per annum by Q3 FY '26. The orebody continues to perform well against expectations. Volumes and grades are reconciled closely with the mine plan. fragmentation, overbreak and dilution remain well within design parameters. A total of just over 1,800 meters of development was completed for the quarter, up 8% on the prior period. To date, 18 stopes have been mined including 14 in the September quarter with an average stope size circa 15,000 tonnes. Work fronts are expanding across multiple levels, providing flexibility as we scale up production. Our key priorities now are to optimize stope turnover, continuing to increase the rate of development and refine pace fill scheduling to sustain continuous production. In short, the underground is behaving exactly as designed. Infrastructures in place, performance is consistent and the pathway to 1.5 million tonne per hour and beyond is clear and achievable. So now I'll move to the next slide on the process plant. So the plant continued to perform well and most importantly, exactly in line with the plan we outlined earlier this year with lower recoveries in production when seeding OSP material or our contact material during the early underground transition. We said we'd take this approach to manage all feed during the ramp-up phase, and it's exactly what we did. Plant reliability remains strong with 580,000 tonnes processed at 92% availability. Recoveries behaved as expected with a range of 5% Lithia processed during the quarter, averaging 59% with the recovery, reducing a 5% lithium concentrate meeting all customer specifications. This confirms the plan is performing reliably and to expectations. The current recovery is simply a reflection of the range of fleet types processed this quarter. The transition to cleaner underground ore is underway, and as that proportion increases through FY '26, recoveries were lift progressively. Our FY '26 recovery target remains unchanged with around 70% recovery expected by March 2026 as underground ore becomes the dominant feed. At the same time, recovery improvement initiatives continue to advance. The tails regrind Vertimill has been commissioned and optimization work is ongoing across grind size, reagent dosing and water quality to support incremental recovery gains. In short, the plant is running to design recovery curve is following the planned trajectory and the improvement from here is baked into our guidance. And with that, I'll hand over to Graeme. Graeme Pettit: Thank you, Ryan. Next slide, please. All right. Our results for the quarter were consistent with company expectations, reflecting the planned impacts of maintenance and OSP strategy foreshadowed in the previous quarter presentation. Revenue was $68 million, down 29% quarter-on-quarter as a result of lower shipping volumes over due to port congestion and backward-looking pricing mechanisms. Backward-looking pricing for shipments during this quarter resulted in pricing lowers of May and June impacting realized prices for the majority of the quarter. But a closing cash balance of $420 million, but we can look at in more detail on the following slide. Unit operating costs increased 22% from the prior quarter to $1,093 per dry metric tonne sold due to the drawdown of OSP stockpiles. This increase in unit operating costs was anticipated in form part of our full year guidance. What you'll see going forward is that unit costs will trend lower as volumes ramp up and clean underground ore becomes the dominant part fee. All-in sustaining costs increased 10% from last quarter to $1,154 per tonne reflecting the higher unit operating costs. This was partly offset by lower sustaining capital spend. As with unit operating costs expect to see the trend lower through the year. Next slide, please. Our tax position strengthened significantly, finished the quarter at $420 million with 21,000 tonnes of salable concentrate on hand. This excludes $20 million of the Zenith cashback guarantee, which we anticipate to receive in the coming quarters. Cash flow operating activities for the quarter was a negative $44 million and was mainly attributable to a $53 million reduction in cash receipts from customers compared to June's quarter. cash receipts were impacted by lower sales volumes and working capital movements, including an increase in the value of trade receivables and concentrates on hand. Additionally, final pricing adjustments from the prior quarter sales of $8 million further reduced cash receipts. Capital expenditure of $44 million was primarily underground development and the completion of TSF construction. Given the completion of the TSF construction and the completion of open pit mining in the December quarter, you should expect to see capital expenditure reduce in the coming quarters. Finally, on financing cash flows, inflows of $363 million represents the net proceeds of the August capital raise. The closing cash balance was also supported by the deferral of the commencement of principal and interest payments under the Ford facility, which has now been deferred for 12 months. Overall, we have a strong liquidity position and expect to see improved quarterly cash performance that will ramp up the underground and increased production volumes. Next slide, please. right. So our debt profile remains low cost, long dated and highly flexible. This slide is an update of our debt position following the Ford amendment completed in August. The effect of the amendment has pushed the first repayment under this facility out to September 2026. Looking at the maturity profile. Again, it's important to note that while the LG Energy Solution convertible notes are shown in the maturity schedule as a repayment of $414 million. cash repayment can only occur if the facility is not converted into equity before the maturity date of July 2029. Subsequent to the recent equity raise, the conversion price of the LG notes has been amended from $1.80 to $1.62 per share. And in summary, our debt structure provides a very low cost of capital with no near-term maturities, and this allows us to continue to focus on delivering the ramp-up of the underground mine and deliver the full potential of Kathleen Valley. I'll now pass to Tony. Antonino Ottaviano: Thanks, Graeme. So if we move to the next slide, please. We've actually -- when we announced our forward debt restructuring and contract arrangements, we did make some mention around our volume profile going into the future. We've just simply graph this for the market now so that you can see it visually. So there's no new information here, but it just provides a little bit of extra clarity on the contract profile for tonnes. And we are delivering into some of these already. So that's really what this slide is designed to provide. So if we move to the next one, please. Business optimization. Last year, we made $112 million worth of savings, either directly in recurring or some deferred capital. That pursuit becomes relentless. We need to continue with the business optimization because price is still where it is, and we can't lose sight of that fact. And this next exercise, this next phase is going to be a broad engagement and assessment of priorities across everything. So there will be team-led initiatives. There will be a challenge in everything we do, as I said in the slide, that we will challenge the status quo, and we will focus on our purchasing and contracts. So we will -- we've already said this, and we will continue to optimize our cost structure in the current environment. So next one, please. So I'm now back on to Ryan for this last -- next slide. Ryan Hair: Yes. Thanks, Tony. So this slide, which I think we've presented a couple of times now, recaps how FY '26 is unfolding quarter-by-quarter. In quarter 1, we deliberately executed planned maintenance activities and early technical improvements while implementing the OSP feed strategy to manage transitional ore during this ramp-up phase. That strategy delivered exactly as guided, lower production and recoveries were expected, and those outcomes were fully reflected in our prior guidance. Moving into Q2 this quarter. The focus shifts to completing open bit mining and increasing the proportion of clean underground into the plant. Recoveries are already improving month-on-month and as underground volumes continue to ramp up, throughput and grade consistency will lift. We also expect operating costs to trend lower as we shut down the open pit operation and those costs fall away and we get productivities through increasing the scale of the underground operation. By Q4, in the June quarter, we transitioned fully into steady-state operations. The process plant will be operated in design throughput. Recoveries will stabilize at or above 70% and costs were materially lower than in the first half. That's the point where the business begins to demonstrate sustained cash flow and margin that underpins our long-term investment case. So while Q1 represented the planned low point, every subsequent quarter and first year, higher underground production, stronger recoveries, lower costs and greater cash generation, all consistent with the plan we set out at the start of the year. So next slide, please. So recap on our FY '26 guidance. FY '26 remains a transition with the open pit operations, as we've already mentioned, will conclude in December and the underground ramping up. In the first half, we continue to leverage the investment already made in the rod stockpiles processing the remaining OSP material, which we have always said would be temporarily impact recoveries and production and therefore, outline. As we move into Q2, production and recovery performance are expected to improve as the proportion of clean ore in the mill feed increases and the influence of OSP material declines. This uplift will be driven by higher clean oil production from the open pit and the growing contribution from the underground. Sustaining capital remains on plan, focused on underground development, maintenance and equipment replacement to support the ramp-up. Importantly, there is no change to our recovery target of around 70% by Q3 FY '26, and we remain on track for 100% underground production by Q3 FY '26. So in summary, the transition is unfolding exactly as we planned with Q2 marking the start of a steady state improvement across production and recoveries. We now move to the next slide, please, and I'll ask Grant to lead us through that. Grant Donald: Thanks, Tony. I think it's important to highlight that there are 2 fundamental growth factors driving lithium demand. The first is EV sales and the second is factory energy stationary storage. I'll start with EV demand. As you can see here from the chart on the left, EV sales continue apace. Global sales grew 26% year-on-year from January September. Importantly, September results of the first month we've seen more than 2 million EV sales in a single month. This translated so far this year into over 3 million extra EVs sold versus 2024. And as you can see on the chart on the right-hand side, expectations are for that to continue with a very solid CAGR growth rate of 14% according to Bloomberg New Energy Finance. I think importantly, it's also very interesting to see the growth of the rest of the world. that continues to grow at very, very aggressive rates off a small base. But we are probably about a quarter away from Rest of World sales equally in total North American sales. And one of the points highlighted to me by Homburg just yesterday was that EV sales in China now exceed total auto sales in North America. If we go on to the next slide. battery energy storage systems have really come from nowhere and been a strong driver of demand in the last year plus. I think for the last 2 or 3 years, they have exceeded expectations from forecasters. What this slide is demonstrating is that not only is it accounting for 1 unit and every 4 units of growth over the next 5 years. There are also a wide range of views on how fast this market is going. You can see in the chart on the right there from SC Insights that there's a large spread between the investment bank on the left insights in the middle and CATL's prospectus on the right-hand side. I think it's important to note the spread between the high and the low point is over 765 tonnes of lithium carbon equivalent, and that is around half of the total size of volatile market today. Large-scale grid investments are continuing to accelerate, and these are driven by the rise of data centers to support the shift towards as well as making sure that grids remain reliable with a larger share of renewable power penetration. And with that, I'll hand back to Tony. Antonino Ottaviano: Thank you, Grant. So we don't go to our final slide, please. We end where we started. So we continue to deliver on our strategy. I won't repeat things but effectively, we're executing the plan. We're delivering on the underground ramp up. The compete well comfortable conclusion at the end of the year as we planned. And we've strengthened our balance sheet both with the equity raise in August, but also restructuring the Ford debt facility to give us that further strengthening of that balance sheet in the next 12 months as we see the market recovery. So with that, I'll open it up for Q&A. Operator: [Operator Instructions] Our first question comes from Hugo Nicolaci from Goldman Sachs. Hugo Nicolaci: First one for me just on realized pricing. You called out the impact of the pricing lag through the contract in the quarter impacting that realized price. Now that you've recut some of those offtake agreements after September 30, does that mean that we shouldn't expect to catch up on the pricing balance we saw through the September quarter now if you just realize closer to spot spodumene prices? Antonino Ottaviano: Go ahead, Grant. Grant Donald: Thanks, Hugo. I think anytime you've got a large delta from as we saw in May and June, which was the lowest of the year in the 600s versus where we're trading now in the 900s. You have this impact, and it's just a question of when that impact flows through your revenue line. With Q lagging, it just means it's a little bit delayed. So if you go back to last quarter, we actually had the benefit of that where we outperformed index. So we had a 105% realization compared to Fastmarkets spodumene index in the last quarter. Unfortunately, you have to pay the piper and that came through the sales this quarter. So look, I don't think you're going to necessarily completely avoid any of those impacts because those kind of QP impacts are always there in your portfolio of contracts. And I don't think you should necessarily think that we did a onetime switch where we moved Q lag and we skip out the impact of that in the future. So that's not the case. Hugo Nicolaci: And then maybe just on the cost breakdown. Can you just give a bit more color in terms of maybe on a cash basis, the magnitude of spend, let's say, the open pit underground in the quarter? Antonino Ottaviano: Go ahead, Graeme. Graeme Pettit: So during the quarter, they were roughly even Hugo's, so between $10 million and $15 million per month. Operator: Our next question is from Adam Baker from Macquarie. Adam Baker: Port congestion was called out as an issue, which contributed to the delayed shipment during the quarter. Is this something that you're still seeing? And could this resurface during the December quarter? Antonino Ottaviano: Adam, the Geraldton Port has an issue they call surge. And as a result, during the quarter, we had a number of surge events which then built up the number of ships on lean. So we have to weigh our turn in the queue for those ships to come in and be loaded. Now the government is putting money in to resolve this issue in the Jordan port. But I think we potentially will see the back of it in the next quarter, but it's really what nature puts in. Grant Donald: Yes. Adam, just for further context, it's Grant here. It's a bit seasonal. So that last quarter tends to be the seasonal high spot where you see more swell events in surge events in Geraldton. And it did perform quite a lot of queuing and we weren't the only ones impacted. In fact, everyone who ships out of the part that we ship all was impacted. And I'd say that going forward, we shouldn't expect that. But there's always quarter-end chase that's on where everyone is trying to get shipment away before the quarter end, and that would continue. So this one was particularly bad just because of those surge events. Adam Baker: Okay. And just secondly, spodumene concentrate grades 5% for the sales in the September quarter. Just wondering is this a proactive decision that was taken by the team? Or was this just a flow-through as a result of the higher propane Gabbro going through the mill? And I'm just wondering what the time line would be to get that concentrate back to 5.2%. Antonino Ottaviano: Yes. I think your summary is correct, Adam. It is the latter, which is it's a result of the high gabbro percentage, which we showed in the graph. So we expect that to unwind in the next 2, 3 quarters once we get into 100% underground mill feed -- underground ore for the mill. Operator: The next question is from Levi Spry from UBS. Levi Spry: Yes. So maybe just following up on that. So I mean, this quarter, could it be a bit lower than 5%? And just confirming your guidance is at 5.2% in terms of lithium units? Antonino Ottaviano: Yes. So firstly, the latter, our guidance is confirmed at 5.2%. As I said, once we get into more the dominant seed being underground we will see that improve. And sorry, your first part of your question? Levi Spry: Could it go lower in the short term, I guess? What that offset the basis previously? Antonino Ottaviano: Yes. No, we don't anticipate it going lower in the foreseeable future. Our contracts specify a certain amount. So we're conforming to our contracts. Graeme Pettit: So just a little bit more color, sorry. The chart that we included on the process plant, we were endeavoring to then provide a little bit of color on gabbro. We will to try and maximize recovery and still keep within customer specs is great will naturally kind of trend a little bit lower. And what you'll also see on that chart is with the lower gabbro content, grade naturally drips up. So as we stated as the -- both the amount of OSP material, but also the amount of open pit starts to fall away and we get the clear higher-grade material out of the underground naturally gray order to, which is why we are maintaining guidance on both recovery and grade through the course of FY '26 and beyond. Antonino Ottaviano: Yes, and it's a blending exercise so there is an exclusion where it does drop. We will blend it with higher-grade material when we do have those better days. So that's -- it's all about managing it within the contractor specifications. Levi Spry: Yes. Okay. And just on the price piece, just as we're seeing spodumene prices improve here, can you just help us with how we're modeling that now? So I think you -- one of the previous questions was pointing to it. But just in terms of you repricing your resetting your contracts, how do we think about now the read-through on this grade concentrate to the spot price effectively? Grant Donald: Sure, it's Grant here. Look, the pricing reference is all disclosed, right? So now we've got 1 contract on Sports mean index. On contract continues to be on carbonate at least until the end of '26 when that deal expires. And then the other contract is on hydroxide. Operator: The next question is from Glyn Lawcock from Barrenjoey. Glyn Lawcock: Just a couple of quick ones. Firstly, you talked about the cost program under Phase II. Do you have any thoughts on the quantum that could yield or is it too early? Antonino Ottaviano: It is a bit too early. We're just -- we've kicked it off in the last quarter. We're still trying to assemble all the initiatives. So I can't give you a finger just now. Glyn Lawcock: Okay. No worries. Any orders of magnitude you think similar like half of last year? Antonino Ottaviano: It's still too early, Glyn. It will come out. Glyn Lawcock: Fair enough. Okay. And then maybe just -- I know it's very early days in the markets where it is, but it may be starting to show some signs of turn on the back of EFS, et cetera. But the 4 million tonne case, the expanded option, it says in the report you're still doing a little bit of studies towards it. Maybe just an update on where you are on that timing costs associated if you do -- if the market turns enough, you to exercise that option? Antonino Ottaviano: Well, the way it works and the way we're thinking about it is as we get more real-time operational understanding of our plant, we want to make sure that the expansion option is up to date with those learnings. So there's work that's always ongoing as to how do we -- how does that process flow sheet look like as we get more information from the existing operation. So that's one aspect of it. And the second one is, well, I think until we see a sustained improvement in the market, the Board will be live to this option, but it won't be a commitment yet. Operator: We next have a text question from a private investor who asks, what do Canmax look to benefit from the recent capital raise investment? Antonino Ottaviano: I think we've already made some very good money given that everyone who supported us on the raise at $0.73 is now looking at a share price of over $1. So [ Mr. P ], he came to site and was impressed by the operations that we do, and he wanted to invest all of its financial investment. Operator: Another text question from a private investor who asks, is there any clarity regarding the large tenants recently peaked near Sandstone? Antonino Ottaviano: It's an ongoing process. As we look at our long term, as part of that previous question around future expansion, we want to secure access to good water sources -- so we continually look more broadly as to where we can potentially look for the future long-term expansion requirements for water and other infrastructure. So that's part of that process. Operator: Another text question. In your lithium demand forecast chart, which of the best BESS growth scenarios have you assumed? Antonino Ottaviano: Thanks for the question. Look, with any company, I'm always wary of single point expectations or forecasts we look at a range of scenarios. You can imagine that in our forward planning, we're thinking about what would the world look like at the low end and what would the world look like at the top end, and we try and make sure that the decisions we make are robust against either scenario. Operator: Another question from a private investor. Did you have an update on downstream feasibility studies with LG Energy Solution and Sumitomo? Antonino Ottaviano: Yes. We continue to press work with both Sumitomo and LG Energy Solutions on the potential to pull downstream. I think it's no secret that some of our peers are having challenges in that space. The capital involved is significant. And in the current market environment, margins are squeezed. So for us, we continue to do the work to be option ready, but it's not something that we plan to make a decision on in the near term. Operator: Thank you. That's all the questions we have today. Please reach out to the Liontown team if you have any follow-up questions. We thank you all for your time, and have a great day. You may now log out.
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