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Operator: Welcome to the North West Company Inc. Second Quarter Results Conference Call. I would now like to turn the meeting over to Mr. Dan McConnell, President and Chief Executive Officer. Mr. McConnell, please go ahead. Daniel McConnell: Thank you. Thank you, and good morning, everyone. Welcome to the North West Company Second Quarter conference Call. I'm joined here today by John King, our Chief Financial Officer; and Alexis Cloutier, our VP, Legal and Corporate Secretary. I'm going to start off the meeting by asking Alexis to read our disclosure statement. Alexis Cloutier: Thank you, Dan. Before we begin today, I remind you that certain information presented may constitute forward-looking statements. Such statements reflect North West's current expectations, estimates, projections and assumptions. These forward-looking statements are not guarantees of future performance and are subject to certain risks, which could cause actual performance and financial results in the future to vary materially from those contemplated in the forward-looking statements. Any forward-looking statements are current only as of the date they're made, and the company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future results or otherwise other than what's required by law. For additional information on these risks, please see North West's annual information form and its MD&A under the heading Risk Factors. Daniel McConnell: All right. So thank you, Alexis. I'll begin by providing an overview of our results for the quarter, followed by a brief commentary on North Star Air and wrap up with a few comments on our outlook and the Next 100 program. All right. So let's begin. Overall, I would summarize the quarter this way. It was a flat quarter at the top line, which was negatively impacted by headwinds from community evacuations due to the wildfires and a decrease in child and family service funding for children in our Canadian operations and a weaker economic environment, particularly in our international operations. With the flat Sales performance, there was a bit more torque on the bottom line due to some overall expense savings and a lower effective tax rate, which resulted in a 1.9% increase in net earnings in the quarter compared to last period. Now let me expand on the consolidated results starting with sales. Consolidated sales for the quarter were up slightly compared to last year, but were flat to last year, excluding foreign exchange. Same-store sales were down 1.1% in the quarter compared to a 4.3% increase last year due to the headwinds in our Canadian operations and having to comp very strong sales in the second quarter of last year. Canadian same-store sales decreased 1.8% compared to exceptionally strong same-store sales last year of 6.8%. There were 2 factors that had a significant impact on same-store sales performance. First, obviously, the wildfires we talked about, and this is affecting certain communities that we serve; and second was the decrease in the distribution of funding to individuals from child and family services, including the Jordan's Principle and Intuit Child First Initiative or ICFI programs. Let me unpack these starting with the wildfires. There were 16 stores impacted by wildfires during the quarter, with the communities either fully evacuated in which case our stores were closed or partially evacuated due to smoke and poor air quality, which resulted in significantly reduced customer traffic. Our thoughts are with those who are impacted. I want to thank the firefighters, community leaders and all those working tirelessly to protect residents and ensure their safety. I also want to recognize and thank our store managers and teams who remained in the community to keep stores open and ensure food and supplies are available for emergency personnel and others who remain in the communities. Thankfully, all of our staff are safe and none of our stores or warehouses were significantly impacted. That said, we did feel the impact on our top line as the evacuations negatively impacted same-store sales. When excluding stores impacted by wildfire-related evacuations, adjusted Canadian same-store sales increased 1% compared to last year. As an update, the wildfires in Northern Canada have continued into the third quarter, but the impact has moderated in late August. At this time, there are 3 communities that remain evacuated due to the destruction of hydro transmission lines, which are not expected to be repaired until later in the third quarter, while partially evacuated communities are starting to return. While the impact of the wildfires has moderated, several wildfires are still active and accordingly, conditions could change. The second factor affecting Canadian sales is a reduction in the distribution of funding to individuals through the Jordan's Principle and Inuit Child First initiative programs when compared to last year. I touched on this as part of our outlook discussion on our first quarter call. Let me provide you some further context. Funding for certain Jordan's Principle programs in 2025 has decreased to 2024 pending the finalization of an agreement between First Nations, Inuit and the Government of Canada. This change in funding has negatively impacted a number of Jordan's Principle programs. For individuals in the communities, the community services and in particular, the ICFI food voucher program have started to ramp up in the second quarter last year. The government of Canada announced that the ICFI program would be extended to March 31, 2026, while Canada and Inuit Partners work together on the development of a long-term approach for supporting Intuit children to get greater access to nutritious food. However, starting in late April 2025, the funding under the ICFI program was limited to individual child specific claims, which has significantly reduced the amount distributed compared to the ICFI food voucher program in 2024, which did provide broad access to nutritious foods for Inuit children. Looking ahead, there is uncertainty on how long this change in funding will last, or if and when the ICFI food voucher program that was available in 2024 will resume. Overall, the wildfire community evacuations and changes in child and family services funding were the key factors contributing to a 1.9% decrease in food sales. On a more positive note, general merchandise and other sales increased 5.6% compared to last year as higher third-party airline cargo and passenger revenue and an increase in pharmacy sales more than offset softer general merchandise same-store sales, which were down 3.5% for the quarter. All right. Let me switch gears and briefly comment on international sales. During the quarter, sales in our international operations decreased 0.8% as flat same-store sales results were more than offset by lower wholesale sales. Weaker macroeconomic conditions in commercial fishing and tourism-dependent communities in certain Alaskan markets, combined with the reduction in seasonal workers and construction activity were the main factors impacting sales. Softer economic conditions in the South Pacific were also a factor. As a result, General merchandise sales decreased 11.5% and were down 11.2% on a same-store sales basis compared to last year as consumers reduced spending on discretionary general merchandise and shifted more of their spending on food which contributed to a 0.6% increase in food sales. Okay. With that deeper dive on sales, I'll briefly comment on consolidated gross profit and expenses. Gross profit dollars were up 0.1% for the quarter, with the gross profit rate flat compared to last year. The positive impacts from our Next 100 work and promotions and category management were offset by changes in sales blend and higher markdowns and inventory shrink. Expenses were down 0.1% for the quarter or 3 basis points as a rate to sales, largely due to lower share-based compensation costs, primarily related to changes in the company's share price. This decrease was partially offset by investments in higher staff and technology costs to support the Next 100 work, combined with an increase in depreciation and new store expenses. We also incurred $1.7 million in onetime costs related to the execution of our Next 100 program. These onetime costs were offset by the benefits from our Next 100 initiatives, including more effective promotions, a reduction in print media and other cost-saving initiatives, which I'll touch on later. In addition, similar to last quarter, we continue to see store labor productivity gains, which is resulting in lower store staff costs as a percentage of sales. The net impact of all these factors, combined with a lower effective tax rate resulted in a 1.9% increase in net earnings in the quarter, which is good considering the significant headwinds from wildfires and a decrease in government program funding for children. Before moving on to the outlook, I wanted to briefly comment on our airline operations. As I highlighted previously, the airline revenues during the quarter were solid in both the cargo and passenger businesses. And consistent with our previous calls, we continue to have high utilization of the cargo and passenger fleet. As noted in our report to shareholders, late in the quarter, we acquired a PC-12 Pilates aircraft to provide some additional capacity in our scheduled and chartered passenger business and to help maintain our service levels during planned maintenance cycles. I'd also like to take a moment to acknowledge the addition of Gregg Saretsky, a new member of our Board of Directors, which was announced in early August. Gregg brings deep aviation experience and industry knowledge in addition to a C-suite executive and Board experience, and I look forward to his contributions as a Board member. Okay. Let me now briefly talk about our outlook and provide a few comments on the Next 100 program. Since we have provided commentary on the key factors we expect to impact on our near and long-term outlook in the report to shareholders as well as throughout this call, the only other comment I would add is on tariffs where we continue to see cost increases, but the overall impact to date has not been significant. However, this is a very fluid situation, and there continues to be uncertainty related to the economy and the impact of tariffs on the cost of merchandise and inflation in the countries in which we operate. With respect to the Next 100 program, we remain fully focused on continuing to drive operational excellence and cost efficiencies across our business while delivering further value for our customers, our employees and our shareholders throughout the program. We continue to refine our product assortment and are rolling out our expanded private label offering in our Canadian and international operations. While it's still early in the rollout, the initial feedback from customers has been positive. Similarly, the implementation of store-based inventory forecasting and replenishment technology is also underway. This technology is expected to improve on-shelf availability for our customers and streamline merchandise ordering processes for our store teams. Recognizing we still have a lot of work to do, the feedback from our store teams on the process improvements has been positive. We are pleased with the progress and results to date. However, as I said, there's a lot of work to do as we embed operational excellence in every aspect of our business. To wrap up, we had some external headwinds that impacted our results this quarter. We were focused on what we can control, ensuring that we continue to provide the goods and services that meet our customers' needs and deliver value to our customers, shareholders and employees through the Next 100. With that, I will now open up the call for any questions. Operator: [Operator Instructions] The first question is from Stephen MacLeod from BMO Capital Markets. Stephen MacLeod: Just a couple of questions here. Just with respect to the outlook and specifically around the lower child and family services payments as it relates to -- or funding as it relates to Jordan's Principle. Just thinking back to the last quarter, I don't recall you calling this one out. So I'm just curious, is this new and/or unexpected? And how do you expect it to sort of unfold as you move through the balance of the year and into fiscal 2026? Daniel McConnell: Yes. I mean it is new to us as far as seeing how it looks like. It's really uncertain. I mean there's a lot of things still at play, obviously, the budget being one and just some of the negotiations and discussions going on between, I would say, First Nations, Inuit leaders in the Canadian government. So it's -- I would expect there's going to be some resolution, but I -- at this point, Stephen, for me to tell you when or what it's going to be is, I'm not really clear on what it looks like at this point. Stephen MacLeod: Right. Okay. Okay. And I mean is there any way to quantify kind of what the impact of it might be? Just if you thought about, I guess, what kind of growth it gave you up until this point? Just kind of -- is there a way to understand what the impact would be to same-store sales growth or anything like that? Daniel McConnell: Well, I mean, look, we've kind of outlined some of the puts and takes. And I know it's a tough quarter probably for you guys to forecast, although you guys did pretty well in the sales forecast. But I would say that it's -- at this point, I mean, no, because it's -- there's still things that are going on. Some of the infrastructure has, again, slowed down as a result of the Jordan's Principle dispute with Canada and a majority of the First Nation leaders outside of Ontario and then obviously, as we indicated some of the Inuit Child First program being sailed back as a result of maybe an overcorrection in how they administer the funds. So I think it's pretty fluid right now, Stephen. And I think we're obviously going to learn more as time goes on here. But right now, it's really tough for us to forecast that. Stephen MacLeod: Yes. No, I understand. Okay. And then maybe just turning to the Next 100 program. Did you -- in the quarter, did you more than offset the Next 100 costs? Or was it a pretty even offset? And then maybe the second part of the question is, are you in a position to be able to quantify kind of what you talked about the annualized incremental EBIT ramping up through this year or next year. Are you able to quantify sort of what that impact could look like? Daniel McConnell: We've, I would say, a little bit more than offset it, Stephen, as far as for your first question. And as far as quantifying the forward-looking EBIT, the program is definitely, as I indicated, it's in its execution mode. There's a lot of puts and takes, and we're obviously, I would say, solving some of the opportunities as they come forward. But when we do solidify the earnings on a sustainable basis, then we'll definitely attribute some of the growth and the portion of growth that we have experienced to the Next 100 and allow you to kind of forecast that or create a trajectory or put that into your algorithm for a moving forward growth item. Operator: The next question is from Ty Collin from CIBC. I'm sorry, his line just dropped. I will go to the next one, which is Michael Van Aeist from TD Cowen. Michael Van Aelst: I'd like to start off with the $23 billion child settlement payments that are in the process, I guess, of being processed and distributed and -- there was an article that quoted, I think it was the AFN that said that -- in mid-August, it said the payments were expected the following week -- to start the following week. And when I tried to line that up with what your outlook statement was, it wasn't -- yours wasn't quite as definitive, let's call it. So have you seen some of these payments start to come in yet? Daniel McConnell: Not one. No, I mean, there's -- I guess, it's -- there's a bit of a line between their end, I would say, in the administration or the receipt and the approval of some of these and when it gets to market. So right now, Mike, we haven't seen one. But we know they're coming obviously, but it's just a matter of... Michael Van Aelst: Yes. It's just a matter of time. It's just interesting that they said that the payments were starting in several different places it was quoted. So okay, I guess we'll have to wait to see on that. Secondly, the water settlement payments. At one point in your press release, it sounds like it was lower this year. And then another [ spot ] in Canada, you actually say that it was slightly higher. What are you expecting for the back half of the year? I know it's a crystal ball a little bit, but are you expecting flat water settlement payments? Or do you expect it to come down? Daniel McConnell: Yes, it was slightly higher. I would say for the forward-looking quarter, we're projecting flat. Michael Van Aelst: Okay. And then when we look at the wildfire impact going into Q3, so it sounds like it was still a meaningful issue into mid or late August. But at some point, when you get -- if you're down to 3 communities now or 3 stores that are impacted, and you have people coming back in, and I'd assume there has to be some form of a restocking benefit when they first come back. Do you see the wildfires being a net negative still in Q3. Daniel McConnell: Yes, I think they will be, Michael. Because I mean, at the same time, we see people are starting to migrate back, but they're -- it's not one big swoop. To your point, I think there will be a stock up shop once people get back to community. But I do believe that the fires will be a net negative or a headwind on sales for Q3. Michael Van Aelst: Yes. And then just finally, on the -- the gross margin was the one area where we were surprised it was a little low. You offset it with better OpEx. But on the gross margin side, you talked about markdowns and shrink. I'm wondering, was that a onetime event? I mean I know some of it's tied to the wildfires I assume that has been taken in Canada, correct me if I'm wrong. Daniel McConnell: No, that's correct. Michael Van Aelst: Okay. And then and as far as your international markets, where you talk about markdowns because of -- more because of the economic environment in Alaska -- parts of Alaska. Is that something that you think is just due to the season that you're in, and you'll adjust and we won't see those in the coming quarters? Daniel McConnell: That's our intent, absolutely. Operator: The next question is from Ryland Conrad from RBC Capital Markets. Ryland Conrad: I guess just to start off, you called out higher third-party airline revenue in the quarter. Is that related in any way to the wildfires? Or is that more so just stronger performance with the expanded facility in Thunder Bay. Daniel McConnell: Well, the prior for sure. We definitely saw an increase as a result of the wildfires. That's -- I would attribute a lot of it to that. Ryland Conrad: Okay. Got it. And then just on the private label initiatives, could you just provide a bit of an update there on how the rollout is progressing? And maybe just how the initial uptake has been in the stores where that's now being stocked? Daniel McConnell: Yes, definitely. We're still quite early, but I was in stores over the last month. And like I said, the customers are receptive. The cost -- and the price differential between the private label and the national brands, I think, is meaningful. So I'm anticipating that customers are going to take advantage of it. There's going to be a trial period, obviously, as a lot of the products are new to some of the consumers. So we have to prove to them that the quality and value is worth it. But I definitely anticipate that given the economics in some of the communities that we serve that it's going to be a benefit to our consumers, and I think it will get some good traction over the next number of months. We expect to be in strong operation. Like I would say, our plan is to be up and operating with a full complement in late October. So that's our goal and that's our plan right now. And we're on a good track to get to that. Ryland Conrad: Awesome. That's helpful. And just on inventories, up quite a bit year-over-year and sequentially. Is there anything to call out there? And then related to that, I guess, as this kind of $23 billion settlement, the payments begin to be dispersed, like how are you feeling about your ability to meet that demand just from an inventory perspective? Daniel McConnell: We're feeling good about our ability to meet that demand for sure. It's something we've put a lot of planning into. We've been kind of down this road before. And it's -- I wouldn't say that we've left any pages unturned as far as just our planning and some of the speculation that we have around when the money is coming and what the built-up demand would be on behalf of our customers. So yes, we're managing and monitoring our inventory levels. We know that they are high, but we definitely feel that when the money comes that we'll be ready. Ryland Conrad: Okay. Great. And then just the last one for me, I guess, it would be good to get your latest thoughts on the capital allocation with the NCIB utilized this quarter. I guess was that more opportunistic? Or should we kind of expect you to remain active there? Daniel McConnell: It was opportunistic, yes. Operator: [Operator Instructions] The next question is from Ty Collin from CIBC. Ty Collin: Apologies my line got dropped earlier. So apologies if I missed anything. Let me know if any of my questions have already been asked and answered. But my first one, just on the Canadian communities that are being repatriated. Can you just help us understand maybe from some of your experience so far how long it's taking for those stores to kind of ramp back up to 100% once those communities have had their evacuation orders lifted? Daniel McConnell: It's -- it can be fairly long, unfortunately and that's what we've experienced so far. It is a bit of a long drive, especially at the time of the year being the summer. There's a -- it just hasn't happened as quickly and I think there's more things to do so maybe some more distractions and some more opportunities for people to catch up on some of their activities within the urban cities that they're currently in. So it hasn't happened as quickly as we would like to put that way, Ty. Ty Collin: Okay. Great. That's helpful. And then in terms of some of the headwinds within Alaska. So I know you guys have called out some of the macro headwinds in previous quarters related to the fisheries. It does sound like tourism might have been a bit of an incremental issue now. I guess I just want to understand what changed this quarter compared to previous quarters to drive the deceleration there? And maybe you could speak to how dependent your stores and your communities are on tourism specifically? Daniel McConnell: Well, they are on both tourism. The economy overall, they have an impact with fishing, obviously, just given the remoteness and it's really government -- there's government employees, there's tourism, fishing, which are the drivers behind the economics of our communities. So it is substantial. I mean the Alaskan economy, I think even seeing other places within the United States, they're definitely feeling a pinch and it's just trickled on into our operation. So it's even some of the SNAP decline, I know that's happened in the past, but it's -- the people are still feeling it. It's at a lower baseline rate. We're comping it off last year, but it just continues to be an issue. You see it in our general merchandise sales as they -- people are moving their preferences over to food, and it's definitely going to a, call it, a less expensive food choice in the past. People are making more critical decisions on how they spend their money. Ty Collin: Right. And on tourism, yes, I mean, you alluded to that being an issue sort of throughout the U.S. Do you get the sense that some of the more recent headwinds in Alaska are related to lower tourism from Canada specifically, given some of the noise around tariffs? And if that's the case, would you be inclined to characterize that as a bit more of a transitory issue? Is that sort of moves into the rearview mirror, hopefully. Daniel McConnell: I mean, look we -- definitely, that's a consideration. And we think -- we don't know how long that's going to last. I think you've probably heard some of the commentary behind some of the Canadians that are moving their travel from the U.S. to other places. But at the same time, I think it's probably just a macroeconomic impact from -- yes, tourism is one of the points but I think it's just an overall pinch. Looking at hopefully some of the dollars that are going to be coming back to the state of Alaska through some of the military spend and some of the other programs that are going to be -- sorry, driving a bit of a catalyst behind that economy, we're optimistic around that. But right now, I think it's a number of factors that are just having a negative impact on the macroeconomics scene in Alaska. But tourism is definitely one. And the reason, what you identified is the Canadians going over to Alaska is definitely a contributor. But I think there's a lot of factors at play right now and the macroeconomic environment that is. Ty Collin: Okay. Got it. And then just last 1 for me. I think you -- in one of your previous answers, you mentioned that SNAP or changes to SNAP has already sort of been a headwind in Alaska. I mean my understanding was that the more recent changes came into effect after this quarter. So are you expecting incremental headwinds from SNAP? Or are some of your consumers sort of prepositioning for those changes and already dialing back before those decreases actually came into effect? Daniel McConnell: Well, it's -- yes, so I would say probably the latter. I mean, look, people are more nervous about the economy. So the fact that the SNAP -- the changes are coming into play, some of the commentary around -- the President's comments around SNAP, I think that Alaska will be excluded from some of the impacts or changes that are going to be occurring maybe in the lower 48. But, yes, I definitely think it's just the -- some of the pessimistic outlook on the economy is rippling through just to my previous comment, and it all contributes to the macroeconomic picture in Alaska. Just people are a lot tighter on their pocketbooks, making more frugal decisions, shying away from general merchandise, moving away from some of the, call it, more luxury food and just more into an essential mindset as far as what they're procuring for their homes. Did we lose you, again, Ty? Ty Collin: Sorry, I think I'm having technical difficulties all day. I just said thanks for the questions. I appreciate it. Daniel McConnell: That's funny, Ty, because we're the ones that are remote right now. We're out in [indiscernible] out in a remote community. Operator: The next question is from Michael Van Aeist from TD Cowen. Michael Van Aelst: Just a couple of quick follow-ups. First of all, on the higher SG&A spending tied to your investment in staff resources and IT to support your Next 100 initiatives. When do we kind of cycle the higher run rate of spending? Daniel McConnell: Q4, Q1? I was going to -- Michael, I'd say Q4 is probably more conservative, probably Q1, but I'd say Q4. Michael Van Aelst: Okay. So you just -- so in other words, you kept spending at a higher level through the first half -- I guess through the end of last year and then starting into this year? Daniel McConnell: Correct. Michael Van Aelst: Okay. And then the tax rate, John, it's moved around a little bit. I know you have the global minimum tax, but last year was a -- just over 25%. Where should we expect it for the full year? John King: Mike, it's really at this point now that we're comp on the global minimum tax and that came in, in Q2 last year. And just a reminder that, that was a year-to-date true-up in Q2 last year. So that's the reason for the tax rate differential in the second quarter. But we should be comp on that now heading into the back half of the year. So it really comes down to the earnings across the various jurisdictions. And so going off of -- you'll come up with your run rate tax rate, but more in line with, I would think, where we ended up last year as overall blended rate, somewhere in that range. But I don't think there is -- should be too much other noise like the global minimum tax rate. It should be more normal course, just blend of operations. Michael Van Aelst: Okay. And then just actually one more question. You mentioned that you purchased another or leased another -- did you lease or purchased the PC-12 aircraft and is this something? Daniel McConnell: Purchased. Michael Van Aelst: Oh, you purchased it. So I think in the past, you said you wouldn't add more capacity unless you're confident you could fill it. So this doesn't have to do with just a higher demand during the wildfires or anything like that. You're actually seeing a higher level of third-party demand, I suppose. John King: Yes, that's correct. Yes, this was contemplated obviously and planned and actually executed well before the wildfires. Michael Van Aelst: Okay. So we should expect this to contribute pretty quickly. John King: Correct. Operator: Thank you. There are no further questions registered at this time. I will turn the call back to Mr. Dan McConnell. Daniel McConnell: All right. Thank you, operator. And thanks, everybody, for attending, and we look forward to speaking with you for Q3. Operator: Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation. Daniel McConnell: Perfect. Thank you.
Operator: Your program will begin momentarily. Operator: Good afternoon, everyone. Welcome to today's Lands' End, Inc. Second Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during our question and answer session. Register to ask a question at any time by pressing star 1 on your telephone. Also, today's call is being recorded. Now at this time, I would like to turn things over to Mr. Tom Altholz, Senior Director of Financial Planning and Analysis. Please go ahead, sir. Tom Altholz: Good evening, and thank you for joining the 2025 results, which we released this afternoon and can be found on our website, landsend.com. I am Tom Altholz, Lands' End, Inc. Senior Director of Financial Planning and Analysis, and I am pleased to join you today with Andrew McLean, our Chief Executive Officer, and Bernie McCracken, our Chief Financial Officer. After the prepared remarks, we will conduct a question and answer session. Please also note that the information we are about to discuss includes forward-looking statements. Such statements involve risks and uncertainties. The company's actual results could differ materially from those discussed on this call. Factors that could contribute to such differences include, but are not limited to, those items noted and included in the company's SEC filings, including our annual report on Form 10-Ks and quarterly reports on Form 10-Q. The forward-looking information that is provided by the company on this call represents the company's outlook as of today. We do not undertake any obligation to update forward-looking statements made by us. Subsequent events and developments may cause the company's outlook to change. During the call, we will be referring to non-GAAP measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release issued earlier today. A copy of which is posted in the Investor Relations section of our website at landsend.com. With that, I will turn the call over to Andrew. Andrew McLean: Thanks, Tom. Good evening, and thank you for joining us. To begin today's call, I want to spend a moment talking about a key theme we have seen over the past several months, including over the course of the second quarter and importantly, continuing into the third quarter. That theme is a noticeable increase in momentum across our business. Across our key product categories, channels, and engagement, we are seeing improvements that give us confidence that our strategy to serve our customers' every journey is working. Our weatherproof assortment that prioritizes newness and speed to market continues to resonate with customers, enables more high-quality sales, and deepens customer loyalty. Turning to the second quarter, we continued to reach new and existing customers across a broad base of channels as we have done in previous quarters. We are engaging with them where and when they want to shop and providing considered merchandise stories that resonate individually and create leverage as we reposition the brand via a sophisticated distributed commerce model. Our increasing shift towards an asset-light, low capital intensity model allows us to rapidly deploy newness to optimize customer engagement. And with GMV holding steady year on year, we are beginning to see the benefits of that work. In the B2B channel, our team built on their successes by deepening relationships in the travel and banking sectors, extending a number of our long-term enterprise contracts. Critically, we continue to invest in our brand. Our deliberate strategy to weatherproof our assortment with solutions for life's every journey and deliver for our customers in any environment while also enhancing speed across our supply chain has enabled us to be nimble and react quickly. Especially as we see buying patterns shifting to more wear and out items. In the second quarter, the B2C businesses were dominated by our licensing and third-party marketplaces, we continue to see vastly expanded reach resulting in a more balanced model that importantly, delivers over half of our new customer growth on virtually no capital investment. With regard to sourcing, as you have heard us talk about over the past several quarters, we have been intentionally repositioning our sourcing network to better serve the business we are building leading to a more balanced supply chain that enables us to bring new solutions to customers with more speed and frequency throughout the year. For example, our license partners are becoming part of our sourcing network. Allowing us low lift access to their vendor networks while also providing those same partners with leverage from the Lands' End, Inc. sourcing footprint. Another consequential outcome of our updated sourcing strategy has been the ability to navigate tariffs. By tapping into the full breadth of our sourcing matrix, we are able to swiftly and strategically reposition fabric and manufacturing as tariff conditions evolve. The resilience is there to see as we continue to deliver gross margin rates above last year in the quarter, even as we felt initial tariff headwinds. We feel confident that we have mitigated the near-term impact of tariffs for the remainder of fiscal 2025. Especially with the majority of our fall holiday items already shipped. As Bernie will detail, this is reflected in our guidance. Turning to product. We had notable wins, We launched a focused Lands' End Essentials line on Amazon, consisting of approximately 40 styles providing access points to new and existing customers. The product key item basics across women's, men's, and swim, is priced at the good end of our merchandising pyramid. If the taste of the solutions Lands' End, Inc. is famous for, invites the customer to find the better, best assortment on our brand site. This Essentials product line is a perfect segue from our licensing product to our brand and is attracting new customers. In the brand channels, credit to the tote bag, where our ongoing efforts to collaborate and innovate ranging in size from Meade to Maxi and in construction from canvas to straw have allowed us to expand the assortment. We also added a customization package that is unique in the industry. As seasonal buying habits are changing, we are benefiting from the work we have done to weatherproof our assortment. Allowing us to deliver customers what they want when they want it, be it swim for summer recreation or outerwear to battle the elements. Following a colder spring and slower start for swim, saw momentum build throughout the summer. As weather improved and experienced a strong August, both swim and outerwear were top five items over Labor Day weekend, reflecting changing consumer tastes around weatherproofing. As a nod to Q3, our customers are responding positively to our on-trend assortments. Embroidered jeans are our best seller. Without the need to discount. And we have expanded our popular barrel leg fit. We are pleased to report that these trends with our wear now full product are resonating strongly with customers laying the foundation for a strong third quarter in these important franchise categories. Turning to the performance of our various businesses. Beginning with our B2B business. Our B2B business continues to set us apart from competitors and had a terrific quarter with growth in both top and bottom line performance. On the commercial uniform side, our focus on building scale and contract duration with our enterprise customers yielded significant results. This year, we have won and are extending contracts with several large clients. Marking our highest growth in contract durations that we have recorded during the second quarter. This side of the company's spin has been 2014. As we dial up this strategy, we expect to add other household names in our key industry sectors over the coming year. Our school uniform business had another strong quarter. With revenue up high single digits fueled by new customer wins. We are continuing to win by leveraging the strength of our brand, our steadfast focus on quality, our market-leading embroidery and personalization capabilities, and our great customer service. Turning to our B2C business. Our asset-light licensing business remains a significant growth vehicle for the Lands' End, Inc. brand. We saw particularly strong performance in the club stores with continued wins across men's, women's, and kids categories, and the expected introduction of footwear in that channel later in the year. Lands' End, Inc. remains a highly desirable brand, with licensed partners reporting new interest from a number of distributors in both the department store and club channels. Our third-party marketplace business delivered strong top-line results, driven by performance in Macy's and a record-setting prime week on Amazon. Where we launched the Lands' End Essentials line I mentioned earlier. This targeted approach continues to enhance discoverability, conversion, and drive brand equity across platforms. Marketplaces are relatively low lift, capital light, and fit neatly into our distributed commerce go-to-market model. Along with licensing, we see marketplaces as a compelling driver of continued growth in the reach and brand value of Lands' End, Inc. And importantly, it is where our consumer is shopping where we are meeting those new to our iconic brands. Our U.S. E-commerce business continues its evolutionary journey as the central hub of our commerce strategy. Representing the most fashion-forward collection-oriented manifestation of the brand, we continue to elevate the site. Creating a more immersive and experiential look and feel that best presents our collection to customers. Existing and new. Our recent momentum put a strong start to the third quarter. Is positioning Lands' End, Inc. as a trusted, high-quality brand with broad consumer appeal especially among the all-important thirty-five to fifty-year-old demographic. The website in both mobile and desktop showcases ever greater levels of personalization. Our deployment of our new AI-driven recommendation and outfitting engine makes it easier for customers to mix and match products. Additionally, we are driving more segmented and personalized campaigns leveraging our SMS and email platforms while expanding communications with AI agents a rapidly evolving search sector. Social commerce, is the final part of our distributed commerce platform. While we do not break out this segment and include it within our U.S. E-commerce results, had a wonderful quarter. With our Instagram followers growing by over 100% since last year. Our total social traffic increased nearly 19% versus last year, and nearly 60% in June and July versus last year. Reaching a new and younger customer we created bespoke campaigns. For example, our toad crawl summer campaign, offering our iconic pocket tote with personalization options and a series of pop-up shops, in popular summer destinations we continue to attract new customers at a rapid clip and the Tote remains our number one new to brand acquisition product. Europe showed improvement during the second quarter. With revenue declines beginning to moderate as we became more effective sellers and positioned the brand to build on the distributed commerce success that we are seeing in The U.S. Specifically, we launched the French language website with limited discounting and a more evolved look and feel. In addition, we began to elevate the look and feel of the German and UK sites collaborating with more premium partners like Shearlux and Secret Escapes. For fall holiday, we plan to launch several designer collaborations as part of that reposition. As with The U.S, we look to asset-light low lift launches to broaden our reach, including opening on Amazon, Devon, and NeXT, with results significantly ahead of expectations. Europe will continue to be a test bed for us. And while each market has its own dynamics, we are committed to building a global brand and view the halo that these markets can provide Lands' End, Inc. as invaluable. I will now turn it over to Bernie to discuss our second quarter performance in more detail. Bernie McCracken: Thank you, Andrew. For the second quarter, total revenue performance was $294 million, a decrease of 7% compared to the second quarter last year and GMV was approximately flat year over year. Licensing and our presence across our third-party marketplace partners continue to help the business diversify. And reduce risk from any one business unit product or partner. Our U.S. E-commerce business saw sales decrease 11% compared to 2024. The decrease was largely driven by the slow start to the swim season. And as Andrew discussed, we saw strong swim results through Labor Day which we have incorporated into our third-quarter forecast. Our third-party marketplace business grew approximately 14% with year-over-year growth across our marketplace. We are very pleased with our performance in Macy's and Amazon and we believe improved performance at Kohl's has positioned the marketplace business well for the back half of the year. Sales from Lands' End Outfitters increased 5% from 2024. Sales from our school uniform channel increased high single digits. Driven by our acquisition of new school accounts. Revenues from the business uniform channel were up year over year driven by our enterprise accounts. Sales in Europe decreased 15% year over year. Primarily due to supply chain challenges on key seasonal products and broader macroeconomic pressures. However, we are encouraged by the early progress from adding additional channels and expect this business to improve in the back half of the year. Revenue from our licensing business grew 19% year over year, reflecting the continued momentum of our licensing program. This growth was fueled by increased brand visibility from existing licensees, further expanding our reach and impact. Gross profit decreased by 6% compared to last year. Gross margin in the second quarter was 49%. Approximately 90 basis point improvement from 2024. The margin improvement was driven by continued strength in full price selling across key categories expansion of our licensing business. SG&A expenses decreased by $6 million year over year. As a percentage of net revenue, SG&A increased 130 basis points primarily driven by deleverage from lower revenues. For the second quarter, we had an adjusted net loss of $1.9 million or $0.06 per share. We delivered adjusted EBITDA of $14 million in the second quarter. Representing a year-over-year decrease of 18%. The decrease was driven by initial tariff headwinds, Europe e-commerce performance, and the slow start to the swim season. Partially offset by marketplaces, licensing outfitters. Moving to our balance sheet. Inventories at the end of the second quarter were $302 million, down 3% compared to last year. Reflecting disciplined inventory management and proactive measures to mitigate tariff impacts. In terms of our debt, at the end of the second quarter, our term loan balance was $241 million and our ABL had $35 million of borrowings outstanding. Total long-term debt was flat to last year. During the second quarter, we repurchased $2 million of shares under our $25 million share repurchase authorization announced in March. Bringing the balance of the remaining authorization to $9 million as of the end of the quarter. Now moving to guidance. Our guidance includes the impact of tariffs at the current implemented rates, We are implementing mitigation measures to effectively manage tariff headwinds at current levels for the remainder of fiscal 2025. For the third quarter, we expect net revenue to be between $320 million to $350 million while GMV is expected to be mid to high single-digit growth. Adjusted net income of $3 million to $7 million and adjusted diluted earnings per share of $0.10 to $0.02 and our adjusted EBITDA to be in the range of $24 million to $28 million. Turning to full year. We now expect net revenue to be between $1.33 billion to $1.4 billion while GMV is expected to be low to mid single-digit growth. Adjusted net income of $19 million to $27 million and adjusted diluted earnings per share of $0.62 to $0.88 and our adjusted EBITDA to be in the range of $98 million to $107 million. Our guidance for the full year incorporates Operator: $25 million in capital expenditures. With that, I will turn the call back over to Andrew. Andrew McLean: Thanks, Bernie. I want to thank Lands' End, Inc.'s employees for their hard work and dedication during the quarter. With their support, we have created a truly distributed commerce retailer, with the reach to deliver for customers existing and new across channels, geographies, and categories. Looking ahead to the third quarter, we are seeing broad strength across all categories in our U.S. Business, building on our positive momentum and the trends we saw develop over the course of the second quarter. Our sales and margin over Labor Day weekend was the best we have had in the last decade. Bringing significant use to file sign up. As I mentioned earlier, this reflects the intentional work we have done to weatherproof our business and ensure our customers have what they want when they want it. It also underscores the strength of our strategy to be promotional around holidays while maintaining full price selling. In between. Finally, the Board's previously announced process to explore strategic alternatives remains ongoing. We will not be commenting further on it at this time. And we will provide an update once appropriate. With that, we look forward to your questions. Operator: We will go first this afternoon to Dana Telsey of The Telsey Group. Dana Telsey: Hi, good afternoon everyone and nice to hear about the progress. Andrew, the acceleration in momentum on the top line that you are talking about frankly, into the third quarter now, What are you seeing by product category? How much of it is lower promotions? And given the tariff environment, have you taken price? And then also, it sounds like the Lands' End Essentials is a new opportunity. What are you seeing that is driving the business? How is the margin and price points relative to the rest of the mix? Thank you. Andrew McLean: Hey, thanks, Dana. It is nice to hear from you. Really been progressing the business towards a distributed commerce model over the last twelve months. In fact, we saw this with our customers' shopping habits as we sort of like moved from our very traditional customer, our resolver to our revolver. And I know I have talked Operator: about that on previous calls. We started to Andrew McLean: actually look at where that customer was shopping. And quite a lot of the work we did around working with AI agents. So took it down this path where we started to see these customer habits are changing, customers are migrating to different channels. There are new customers to tap into. And so it became clear to us that we had opportunities that lay beyond just a traditional brand site. The brand site will always be the to us. It is going to be the most fashion-forward version of the brand. It is going to be the most complete version. But we know that those customers are shopping. And we see within our Operator: top marketplaces the distributed model, We see that there is an Amazon customer who wants a price point. And by really focusing in on a couple of handfuls of SKUs, we put ourselves in a position that we can really lean in, put the marketing behind those SKUs and reach them at price points that matter. And we think we can build a significant business. Our Q3 numbers have been absolutely astonishing actually. As we have lent further into this. And in fact, what we are seeing is a tremendous amount of those customers then migrate to see the full assortment on landsend.com. So we think that there is a flywheel effect that is going to be happening and that will continue. To accelerate and spin the business forward as we see that momentum continue. Operator: I would just note that at the top end of that, we have Macy's. Andrew McLean: And Nordstrom where we sell some of the highest price points that we have. In the company and our AOVs have been somewhat astonishing. We see that as we are reaching the top of our merchandise pyramid. So again, we are putting the product we see a certain customer and we are matching that product to the customer all the better. And now we are able to manage promotions differently against each of those. In fact, one thing I want to call out, I think the team has done a great job on this is we built an AI engine that Operator: basically creates product display pages, PVPs, and it will build language that is appropriate to each page. So Andrew McLean: if you see a product that is on landsend.com, how the page materializes the time you get to Amazon, it will read differently. It will read more appropriate Operator: to the Amazon bots and AI search tools, and it will read differently Andrew McLean: and probably more elevated in all candor to a Nordstrom's customer. So we are starting we are being much more thoughtful about how we address each of these Operator: segments. In terms of the category conversation that is out there, Andrew McLean: we have seen strength across all categories. And it was Operator: the second quarter was definitely there was momentum all the way through it. Slower May with SWIM, which is really important to us. One-third of the business in May. What we saw was that Andrew McLean: build in June, it built in July. And then interestingly, it built into August. And what I am starting to see is that the strategy that designers and merchants put in place around weatherproofing has been incredible for us. Because we are able to sell to the customer when they want it, not just where they want it. And so it was Operator: something I had not seen in the company's history before. Andrew McLean: Over Labor Day weekend, where we had both swim and outerwear as Operator: top five categories, which was new to us Andrew McLean: and that was relatively full price selling. Because, again, we are trying to meet more of the discounting in different channels. Like having the customer on landsend.com with something more premium. We were able to manage markdown around that. Operator: You asked me about Andrew McLean: tariffs and are we handing anything on to the customer. I am going to be honest, yes, we are. As little as we possibly can, we look at our tariff and the view we took for 2025, which is in the guidance and into 2026 is that we are making a number of changes. We have made a number of changes in our sourcing network. Operator: They have been very successful for us, and they have given us the nimbleness to move in and out of markets. As tariffs come. And we have also worked with our vendors and narrowed the number of vendors. And that has given us the ability to share some of the Andrew McLean: burden with them. So we think about them for half of the tariff rise that we are seeing. Of the remainder, we are Operator: splitting that fairly evenly between internal changes that we are making as we Andrew McLean: get after below margin and then the rest of it is going through to what I would say is a relatively small increase to the customer. And we will endeavor to make that the smallest number it can be. But I do not want to sugarcoat it that we can absorb the whole thing. So I think I got everything in there. I am happy to go back to it if you have got more. Operator: David, the only thing I would add on product categories would be that you know, one of the exciting things for us is as people are shifting their timing on purchases whilst we noted that '2, but it has actually been a nice tailwind to start Q3 as that swim kicks in. And when Andrew was talking about essentials, it is a smaller part of our business, but it has been really a big lift in its early days in both Amazon and the other places that we are putting in. Dana Telsey: Thank you. Andrew McLean: Thank you. We go next now to Eric Beder of SCC Research. Eric Beder: Good afternoon. Operator: Right. Hey, Eric. Could you talk a little bit about the flow of licensing here? I know that the first half had kind of a little bit of puts and takes because you were shifting. Licensing to from all categories you previously had into a licensing category. What are we going to see in the back half in terms of potentially now becoming expanding the categories beyond what you have done before with the licensing mechanism? Andrew McLean: Hey, Eric. I am going to take the I am going to take the front half, and then I will let Bernie take the back half. We are up 36% on our licensing revenues, then a number you will see in the Q, but I really wanted to call that out. We continue to look at how we will drive the business forward in the back half with that. And in the back half, we think that there is upside to it because there are new licenses. And then on top of that, we get into the holiday season. And it is like we were really still sort of in our infancy last year on this. So we see tremendous upside opportunity. And actually, the sky is the limit in terms of the licenses we can go after. We have been a little slower for reasons. For some reasons this year. And I think as we get into the future, we see opportunity to accelerate those number of licenses. Operator: Yes. And what I would add to that, we started the year you know, the the licensees started the business in early last year, there is a ramp up for those. So what we are starting to see as we hit the back half of this year is them accelerating. Our current licensees are accelerating to their full potential. And we will get that benefit in the back half of this year while we also have the new licensees starting to build their program, and then we will get the benefit next year of them building up to full potential. One of the leverage points that I have Andrew McLean: found really interesting is as we sort of like go down this path and I have done this before in my career, which is to pull the licensees to get the licenses together. And go to a big customer, a big department store customer and really have them all present as a complete house of Lands' End, Inc. And in doing that, it is very powerful to have that leverage. And as we negotiate into that, we see that as an amplification of licenses that was not originally anticipated and what we how we were laying out the business model, but it is now it became very obvious as we went further into this. So we see upside here. Operator: Great. When you look in outerwear, last year, you shifted the continued to shift the outerwear to more wear now and thinner and kind of not as heavy product. And that was a big success. What should we be thinking about how you are going to handle outerwear this year? Obviously, it seems like it started out pretty well in Labor Day. Andrew McLean: Eric, I was in product meetings all morning, and you should see like the outerwear that is to come. It was it is absolutely darling. And actually, in as much as in as much as I want to give you the full answer, and I will, I mean, I would point you to some of the new products that we have out there around squall in particular. And that we will send you the the PDP of the rain jacket and it is it is you will see a couple of things. You will see Operator: new product. Andrew McLean: New innovation and you will see new PDPs that really speak to how the customer wants to shop and the PDP almost in its own way acts as a landing page for the brand. So there is incredible use of imagery. There is incredible use of storyline in there. And actually, we lean heavily into customer reviews. And part of why I was loving the product so much this morning is the team was showing me early reviews on it. Operator: Which Andrew McLean: are many of them are five star and we see it from our resolver and our revolver customer and we know when Operator: both of those Andrew McLean: are loving the product that it is going to be a home run. So I do not think you are necessarily going to see new new franchises being added, but I think you will see those franchises being ened. I am not going to give you the whole story. You are going to have to wait to see some of it because we have got some astonishing product coming up. Operator: Great. Last question. So when you look at the catalogs, there has been an increasing focus on events and lifestyle and driving kind of multiple purchases for that. When you look at your customer base, that thirty-five to fifty-year-old customer is your focus. How has been their response to that versus kind of the prior core? And are you seeing those customers continue to increase Andrew McLean: on the price in terms of percentage of buying all pieces? Thank you. Operator: Yes. We continue to see the evolve. Think thirty-five to fifty-year-old new to file customer is is coming to the brand and they are Andrew McLean: buying across product categories. And buy a bigger basket. And it has been an incredibly successful strategy for us to lean into that versus the more traditional Resolver customer who tends to come back and buy something that is worn out or to stick with the one in one particular category. They just may be a swim customer and that is who they are going to be. Operator: We are starting to see behavior of new cohorts, resolvers with Andrew McLean: evolver tendencies. And so we are starting to break down that barrier. What we have done with catalogs, and in particular, as we came into Q3, Operator: we were extremely thoughtful about this. We really leaned in with the Andrew McLean: our data scientists and began to Operator: be thoughtful about the particular kind of catalog that goes to Andrew McLean: a 5x shopper, which is effectively a resolver for us at this point. Versus a customer we are trying to encourage to a second purchase because we know recency is very important to us. And actually, we began to segment the file more to chase that after lapsed customers. We know there is tremendous amount of value in there. And we have begun actually with the catalog to prospect to gain that for a number of years. Of not using the catalog to prospect and relying probably a little too much on performance marketing because I think performance marketing is under pressure in any case from AI agents. But I think it has a tendency to be more transactional. Versus emotional. And we find that we can handle transactional better on, say, Amazon. That is a better place to be with that kind of with that kind of customer purchase decision. So for us, the catalog is Operator: I think it is fair to say we have taken the catalog on the offensive Andrew McLean: this quarter, and I think you are going to see more and more of that from us. And actually, you just might get different catalogs sent to you. And I will give you a very good example. Operator: Our traditional customer, that resolver, Andrew McLean: she likes to see red lines. What do I mean by that? She wants to see a was his pricing. Our revolver does not want to see that. So you might find that you get a different catalog depending on how we have evaluated you as a customer. And we will continue to lean into this. The data science behind this is fascinating. And hopefully, we can spend some time walking you through it when you visit next. Operator: Okay. Good. Look forward to it. Thank you. Andrew McLean: Thank you. We will go next now to Steve Silver of Argus Research. Operator: Thanks, operator, and thanks for taking my questions. It is great to hear the progress in the outfitters business. It sounds like there might be some new opportunities to be announced over the course of the rest of the year. Just curious as to your view of this state of the pipeline in outfitters broadly. And then maybe if you can just put in some context how many prospects may be in in more advanced stages of conversation at any point in time. Andrew McLean: Yeah. Thanks. How is it going, Steve? It is nice to hear from you as well. Operator: So we break it up into we break out figures out into several buckets. I am just going to start school. We are very deliberately targeting growth in school. Andrew McLean: We have found that the product that we bring to market is OCATEC certified and that means that there is absolutely nothing bad in it. And we find it to be very competitively priced. And if something none of our competitors can do. So we have a competitive advantage that we can lean in and go after progressively more schools from large to small. And so we have really tasked our team to grow that business. And I would say not just because one of our competitors fell out last year, but because of our own doubling down and having more having a better go to market strategy, where we see opportunities to pick those schools. And I tend to think about Operator: adding schools in Andrew McLean: anywhere from about $5 million to $3 million buckets. Given the size of those. So opportunity in there with multiple customers. I think when it gets into the commercial uniforms business, I am going to split it into just to simplify over here all night. I think there is the smaller customers. We have completely rebuilt our experience for smaller customers. And it is paying starting to pay dividends for us. The site which in my opinion had become extremely sort of B2C focused and was more cat category driven is now about the emphasis of differentiation. Of what we can bring to your business. And I think the other part is we have done we changed our IT philosophy to be more about sprints rather than sort of like longer projects, and we are delivering continual upgrades. And that is allowing us to be much more focused on getting turnaround for the customer in there. I would say that it does not stop there because what we tend to find is many Operator: big companies who may well become the second group, which is our enterprise accounts tend to start off by shopping as small. And so we can use that to prospect quite heavily. In terms of the enterprise accounts, Andrew McLean: I have got so much good news in there, but I am really not in the position to share it. Obviously, the last call, we talked about winning Delta back and we are extremely proud about that. Our team just got back from Italy where they had been with Delta assessing uniforms for the future. And it is like it is there is a lot of goodness to come from that. I would say that the of bringing a a delta back is not lost on other airlines out there. I am going to leave it at that. And in financial services, we continue to dominate. The big play for us Operator: is going to be now building adjacent categories. And one of the adjacent categories we really like is in the healthcare industry. And I think you will see us start to add that category more consistently and carefully. I just want to Andrew McLean: like blanket everyone everywhere Lands' End, Inc. does better when it focuses on something and decides to win. And that is how we work as a team. Operator: That is helpful. Thank you so much. And one last one, if I may. You cited some progress in Europe with the narrowing of the declines there. Also the implementation of new websites in some key European markets. I am curious if you could put some context around, the expectations for completing the turnaround of the European business? And moving just towards something more of a contribution to the overall business? Yes, it is a great question. Andrew McLean: Usually, I am in Europe testing out ideas. Operator: Good, bad or indifferent. One idea that we are taking from Andrew McLean: The U.S. That is really important to us is this distributed commerce model. So Operator: just so we are on the same page and it really allows the customer to purchase directly from where they are browsing. So we are meeting customers Andrew McLean: where they are rather than waiting for them to come to the brand site. So that might be social media, it might be from online articles. It might be from smart devices, and it could be from marketplaces. And so we are working our way into social media. We are working our way into marketplaces. And I think I want to put emphasis on the marketplaces because Europe's retail has always been more marketplace driven. Than in North America. And that is an area of growth for us. So we opened NeXT. We opened Devenham's. We opened Amazon. And we have seen terrific Operator: starts to each of those. And I think you will see us continue to grow those Andrew McLean: and take from the strategy that has been already really successful. In The U.S. I think that is focusing around product that is appropriate. To that channel and product that is Operator: that is priced appropriately and narrow assortments Andrew McLean: that then encourage you to be curious about coming back to see other landsend.co.uk or the German site or actually the French site. So Operator: that is the first part of it. In terms of the Andrew McLean: In terms of the sort of brand sites themselves, Operator: The UK is in pretty good shape. I think we have turned the corner there. We understood The UK consumer. And we have made inroads with them. Andrew McLean: I think we have got the product assortment right. Right now, the area we are working on, and again, there is a meeting I was in earlier today, is to get focused around our German resolver. Customer. The Evolver customer we have got nailed. It is about now Operator: working on the Resolver customer, and that arguably is going to come through catalog. So we are spending time working out Andrew McLean: taking excuse the pun, a page out of what we have done in The U.S. And then working at how we can use the catalog as an effective tool to engage with that resolver German customer and then that will bring us fully back. To where the brand is contributing from Europe. Because again, I am absolutely committed to it because the halo that we will get from Europe is key. And the last point I will make on this Operator: particularly to reach our revolver customers, watch for a couple of really powerful collabs. Coming. The collab model that we have had Andrew McLean: from the really, this is the success of the tote bag in The U.S. Has created a halo for the brand everywhere. We are that on the road Operator: and we are now going to be doing that in Europe. And again, I would love to Andrew McLean: would love to share who those co labs are for. But I think my team in Europe would be really, really upset with me. So I am going to keep I am going stay quiet. And watch this space. Steve Silver: Great. Thank you so much for the color and best of luck in the second half. Andrew McLean: Thank you. Take care. Thank you. And gentlemen, that was our final question for today. So that will bring us to the conclusion of today's Lands' End, Inc. earnings conference call. Again, everyone, we would like to thank you all so much for joining us this afternoon and wish you all a great remainder of your day. Goodbye.
Operator: Thank you for standing by, and welcome to the InnovAge Fourth Quarter 2025 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. Star 11 again. And now, as a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Ryan Kubota, Director of Investor Relations. Please go ahead, sir. Ryan Kubota: Thank you, operator. Good afternoon, and thank you all for joining the InnovAge 2025 Fourth Quarter and Fiscal Year End Earnings Call. With me today is Patrick Blair, CEO, and Ben Adams, CFO. Michael Scarbrough, President and COO, will also be joining the Q&A portion of the call. Today, after the market closed, we issued an earnings press release containing detailed information on our 2025 fiscal fourth quarter and year-end results. You may access the release on the Investor Relations section of our company website, InnovAge.com. For those listening to the rebroadcast of this call, we remind you that the remarks made herein are as of today, Tuesday, September 9, 2025, and have not been updated subsequent to this call. During our call, we will refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings press release posted on our website. We may also make statements that are considered forward-looking, including those related to our 2026 fiscal year projections and guidance, future growth prospects and growth strategy, our clinical and operational value initiatives, Medicare and Medicaid rate increases, the effects of recent legislation and federal budget cuts, enrollment processing delays, the status of current and future regulatory actions, and other expectations. Listeners are cautioned that all of our forward-looking statements involve certain assumptions that are inherently subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our annual report on Form 10-K for fiscal year 2025 and any subsequent reports filed with the SEC. After the completion of our prepared remarks, we will open the call for questions. I will now turn the call over to our CEO, Patrick Blair. Patrick Blair: Thank you, Ryan, and good afternoon, everyone. I'll begin with gratitude to our colleagues across InnovAge, to our participants and families, to our state and federal partners, and to our investors. Thank you for your continued support and trust. Fiscal 2025 was a year of delivery. We made clear commitments, and we followed through. In many cases, we exceeded both our internal goals and external expectations. And importantly, we finished the year with strong momentum heading into fiscal 2026. Today, I'll cover fourth quarter and full-year results, fiscal 2025 guidance for fiscal 2026, and progress we're making to position InnovAge for long-term success. Our fourth quarter capped a strong year of consistent execution. Revenue was $221.4 million, up 11% from Q4 last year. Center-level contribution margin was $41.3 million, representing an 18.6% contribution margin. Adjusted EBITDA more than doubled year over year to $11.3 million, representing a 5.1% margin. We ended the year with a census of approximately 7,740 participants. These results reflect disciplined cost management, strong medical utilization performance, and continued sense of growth. Now turning to the full year. Total revenue was $853.7 million, up nearly 12% year over year. Center-level contribution was $153.6 million, with contribution margin expanding to approximately 18%, up 70 basis points from FY '24. Adjusted EBITDA was $34.5 million, above the high end of our FY '25 guidance of $31 million. Adjusted EBITDA margin nearly doubled from 2.2% in FY '24 to approximately 4% in FY '25. These numbers matter not just in isolation but in the context of what we committed at our Investor Day in February 2024. We committed to expanding margins, and we delivered. Center-level contribution margin improved from 17.3% in FY '24 to 18% in FY '25, with further progress expected in FY '26. We committed to improving clinical outcomes, and we delivered. Key internal utilization measures such as inpatient admissions, ER visits, and short-stay nursing facility visits all improved through execution of our clinical value initiatives. We committed to driving revenue growth, and delivered. Revenue grew at greater than a 10% compound annual growth rate from FY '23 to FY '25. We committed to improving operating leverage, delivered. G&A as a percentage of revenue declined steadily from FY '23 to FY '25. We committed to return sustained positive adjusted EBITDA and delivered with year-over-year improvements and results above expectations. And, critically, we closed the year with no material compliance deficiencies. This combination of responsible growth, financial discipline, clinical performance, and compliance execution is what gives us confidence in the durability of our progress. We're operating in a complex environment. Recent legislation has created uncertainty for many value-based care models, particularly Medicare Advantage and Medicaid long-term care programs. State partners are facing fiscal pressures, which can translate into budgetary and operational strain. PACE is different. The strength of our model lies in the integration and coordination of care. Our interdisciplinary teams personalize care for every participant. Today, approximately 40% of our total cost of care is delivered directly in our centers by our employees under one roof. Through regular center attendance, we seek to maintain an active line of sight into each participant's health status, allowing us to intervene earlier and prevent avoidable hospitalizations and ER visits. For the remaining 60%, our providers individually order or prescribe virtually all other non-emergent care. This integrated, high-touch model gives us a real advantage in managing costs and utilization, and we believe this sets InnovAge apart in an inflationary medical cost trend environment. Looking ahead, we're advocating with the new administration and legislators to broaden the role PACE can play in addressing America's senior care challenges. While today PACE primarily serves a subset of dual-eligible seniors, we see meaningful opportunity to expand access to those who could benefit earlier in their care journey. We're advocating for new pathways, such as a Medicare-only option, that would give more seniors access to the coordination and support services that make PACE unique. With more than five decades of public investment in PACE centers across the country, we believe this is the right time to leverage that infrastructure more fully. Done right, this could both improve quality of life for seniors and generate savings by delaying Medicaid enrollment and prolonging nursing home placement. Importantly, it can also create a natural growth channel for the company as participants' needs increase and they transition into full PACE eligibility. Looking ahead, our guidance for FY '26 reflects both continued momentum and the realities of our environment. We project a census of 7,900 to 8,100, member months of 91,600 to 94,400, total revenue of $900 to $950 million, adjusted EBITDA of $56 to $65 million, and de novo losses of $13.4 to $15.4 million. We expect profitability to build through the year, exiting FY '26 with a higher run rate, and we remain on track to achieve adjusted EBITDA margins of 8% to 9% over the next few years. Ben will take you through the details of this shortly. On growth, census increased 10% year over year in FY '25. We strengthened the foundations of our enrollment strategies and processes while also testing and scaling new channels that are beginning to pay off. We're also building strong partnerships. Last year, we formed a joint venture with Orlando Health, and this past quarter, we announced a similar partnership with Tampa General Hospital. These partnerships extend our reach, strengthen our provider networks, and create new pathways to connect eligible seniors with PACE. We continue to work closely with our state partners on enrollment processing. While we have experienced delays in some states and are monitoring the impact of budget constraints and Medicaid eligibility determinations, these dynamics are incorporated into our FY '26 guidance. Demand for PACE remains robust, and we expect healthy top-line growth as we move through the year. Beyond the numbers, we're advancing our transformation agenda. We're investing in talent, technology, and tools to make InnovAge a more disciplined, efficient, and scalable organization. Approximately 40% of our total cost of care occurs within our four walls of our centers, where we are uniquely positioned as both a payer and a provider to capture efficiencies and improve outcomes. This transformation is not just about tightening operations; it's about reimagining the model for the future, positioning InnovAge as the partner of choice for states, payers, providers, and communities looking to create a more sustainable, continuous senior care. In closing, fiscal 2025 was a strong year. We delivered on our commitments, exceeded expectations, and ended the year with momentum. Fiscal 2026 will be another important step forward, one that we expect to further advance our financial performance, strengthen our model, and bring us closer to achieving our long-term ambitions. I want to thank all our colleagues who make this possible. Every day, they bring both a caregiver's heart and an owner's mindset to serving our participants. They are the reason we've been able to execute consistently, and they will be critical to our success in the years ahead. With that, I'll turn it over to Ben for more detail on the financials. Ben Adams: Thank you, Patrick. Today, I will provide some highlights from our fourth quarter and fiscal year-end 2025 financial performance, followed by our fiscal year 2026 guidance. I am pleased with our overall performance and strong finish to the year. As Patrick mentioned, we really started to feel the impact of our clinical value initiatives throughout this year, and we expect those to carry through into fiscal 2026. We are also pleased with the progress of our new operational improvement initiatives this year and expect them to continue building throughout the next fiscal year. Starting off our fiscal 2025 highlights with Census, we served approximately 7,740 participants across 20 centers as of June 30, 2025, which represents annual growth of 10.3% and sequential quarter growth of 2.8%. We reported 23,000 member months in the fourth quarter, an increase of approximately 10.5% compared to 2024 and an increase of approximately 2% over 2025. Total revenues increased by 11.8% to $853.7 million for fiscal year 2025. The increase was primarily driven by an increase in member months coupled with an increase in capitation rates. The increase in capitation rates includes rate increases for both Medicare and Medicaid, partially offset by revenue reserves and an out-of-cycle risk or true-up payment received in fiscal 2024. Compared to the third quarter, total revenues increased by 1.5% to $221.4 million in the fourth quarter, primarily due to a sequential increase in member months partially offset by a decrease in Medicare rates associated with decreasing risk scores as new participants are entering PACE with lower risk scores and disenrolling participants are leaving PACE with higher risk scores. We incurred $431.2 million of external provider costs during the fiscal year, a 7% increase compared to fiscal year 2024. The increase was primarily driven by an increase in member months, partially offset by a decrease in cost per participant. The decrease in cost per participant was primarily driven by a decrease in inpatient, assisted living, permanent nursing facility, and short-stay nursing facility utilization, a decrease in external hospice care associated with the transition of this function to internal clinical resources, and a decrease in pharmacy expenses due to the transition to in-house pharmacy services. The decrease in external provider cost per participant was partially offset by an increase in inpatient unit cost and an annual increase in assisted living and permanent nursing facility unit cost. During the fourth quarter, we incurred $108.2 million of external provider costs. And when compared to 2025, external provider costs were essentially flat. The stable costs were the result of higher costs associated with an increase in member months offset by a decrease in cost per participant. The decrease in external cost per participant was primarily driven by a decrease in inpatient and permanent nursing facility utilization and a decrease in pharmacy expense associated with the transition to in-house pharmacy services, partially offset by an increase in short-stay nursing facility and assisted living facility utilization. Cost of care, excluding depreciation and amortization, was $268.9 million, an increase of 17.5% compared to fiscal year 2024. The increase was due to an increase in member months coupled with an increase in cost per participant. The overall increase was driven by higher salaries, wages, and benefits associated with increased headcount and higher wage rates, an increase in software license fees, an increase in de novo occupancy and administrative expenses associated with opening centers in Florida and the acquisition of the Crenshaw Center, an increase in contract provider expenses in California associated with growth, consulting fees and shipping costs associated with in-house pharmacy services, and fleet costs inclusive of contract transportation. For the fourth quarter, cost of care, excluding depreciation and amortization, increased 3.5% compared to the third quarter. The increase was primarily due to an increase in consultant fees and shipping costs associated with increased volume of in-house pharmacy services. Center-level contribution margin, which we define as total revenues less external provider costs and cost of care, excluding depreciation and amortization, which includes all medical and pharmacy costs, was $153.6 million for fiscal year 2025 compared to $132.1 million, a 16.3% increase for fiscal year 2024. As a percentage of revenue, center-level contribution margin of 18% increased approximately 70 basis points compared to 17.3% in fiscal year 2024. For the fourth quarter, center-level contribution margin was $41.3 million compared to $40.7 million for 2025, an increase of 1.3%. As a percentage of revenue, center-level contribution margin of 18.6% decreased by approximately 10 basis points compared to 18.7% in 2025. Sales and marketing expenses of $28.2 million increased 13.1% compared to fiscal year 2024, primarily due to increased headcount and wage rates to support growth. For the fourth quarter, sales and marketing expenses increased by 2.6% compared to 2025, as a result of additional marketing support and project timing in the fourth quarter. Corporate, general, and administrative expenses increased 9.6% to $122.1 million compared to fiscal year 2024. The increase was primarily due to the $10.1 million accrual of the potential settlement of the securities class action lawsuit and an increase in employee compensation and benefits as a result of greater headcount and increased wage rates to support compliance and bolster organizational capabilities. These increases were partially offset by a reduction in consulting and insurance expenses. For the fourth quarter, corporate general and administrative expenses decreased 27.9% to $27.8 million compared to 2025. The decrease was primarily due to the potential settlement of the securities class action lawsuit referenced earlier that was recorded in the third quarter. Net loss was $35.3 million compared to a net loss of $23.2 million in fiscal year 2024. We reported a net loss per share of 22¢ compared to a net loss per share of 16¢, each on both a basic and diluted basis. Our weighted average share count was approximately 135.4 million shares for the fiscal year, on both a basic and fully diluted basis. For the fourth quarter, we reported a net loss of $5 million compared to a net loss of $11.1 million in the third quarter and a net loss per share of 1¢ each on both a basic and diluted basis. Adjusted EBITDA was $34.5 million for fiscal year 2025, compared to $16.5 million in fiscal year 2024 and $11.3 million for the quarter compared to $10.8 million in 2025. Our adjusted EBITDA margin was 4.0% for fiscal year 2025, and 5.1% for the fourth quarter. We do not add back losses incurred by our de novo centers in the calculation of adjusted EBITDA. We define de novo center losses as net losses related to preopening and startup ramp through the first 24 months of de novo operation. We incurred $15.4 million of de novo losses in fiscal year 2025. This compares to $12 million in fiscal year 2024. For the fourth quarter, de novo losses were $3.9 million, primarily related to our Tampa and Orlando centers in Florida. This compares to $3.5 million of de novo losses in 2025. Turning to our balance sheet. We ended the quarter with $64.1 million in cash and equivalents, plus $41.8 million in short-term investments. We had $72.8 million in total debt on the balance sheet, representing debt under our senior secured term loan and finance lease obligations. We also refinanced our term loan facility in the fourth quarter with a $50.7 million term loan, renewed our revolving credit facility commitments, and extended the maturity of both to August 8, 2028, from March 8, 2026. For the fourth quarter, we reported positive cash flow from operations of $9 million and had minimal cash capital expenditures of $200,000, primarily due to timing. We completed the share repurchase program that we launched back in June 2024, acquiring approximately 1,426,000 shares of common stock for an aggregate of $7.3 million during the entirety of the program. During the fourth quarter, we acquired approximately 101,800 shares of our common stock for an aggregate of approximately $300,000. Turning to fiscal 2026 guidance, which we included in today's press release, and based on information as of today, we expect our ending census for fiscal year 2026 to be between 7,900 and 8,100 participants. In member months, to be in the range of 91,600 to 94,400. We are projecting total revenue in the range of $900 million to $950 million and adjusted EBITDA in the range of $56 million to $65 million. And we anticipate that de novo losses for fiscal 2026 will be in the $13.4 to $15.4 million range. I will also provide some additional color on a few of the components that comprise our guidance assumptions. Our census and member months reflect the redesign of our eligibility enrollment system due to state Medicaid redetermination. We expect that this will result in more rapid disenrollments in the first half of the fiscal year for those participants who have lost Medicaid coverage and have not been able to regain eligibility. Regarding revenue, we are expecting a low single-digit Medicare rate increase and a mid-single-digit increase for Medicaid. As a reminder, our Medicare rates are based on county-specific rates that are adjusted by CMS in January, coupled with prospective risk score adjustments in January and July. Effective January 1, CMS will begin to transition PACE organizations onto the V28 Medicare Advantage payment model from our current V22 payment model. The process is scheduled to begin on January 1, 2026, and be phased in annually through 2029, starting with a 90/10 split of V22 and V28, respectively, and has been factored into our guidance. Regarding cost of care, external provider costs, and overall center-level contribution margins, we have continued to make measurable progress since we returned to issuing guidance in September 2023. In 2024, we introduced clinical value initiatives, followed by operational value initiatives in 2025. This upcoming fiscal year, while we continue our focus on quality, we are also pushing ourselves to stretch operationally by continuing to reimagine and further refine what we do and how we do it in order to continue growing our adjusted EBITDA margin. As an example, the ramp-up of our new internal pharmacy initiative is going well and is expected to give us more control over pharmaceutical fulfillment, allow us to improve medication adherence, enhance participant outcomes, and streamline logistics. We are also excited to see that the business is reducing costs and is expected to continue generating overall cost savings into the future. In closing, we are pleased with our 2025 results. We continue to push ourselves toward improving and optimizing the business as we strive to be the provider of choice for participants as well as our federal and state partners. We remain focused on quality, and we believe in the value that the PACE program can bring to eligible seniors with complex needs. We look forward to the trajectory of the business and toward the year ahead. Operator, that concludes our prepared remarks. Please open the call for questions. Operator: Certainly. And our first question for today comes from the line of Matthew Gillmor from KeyBanc. Your question, please. Matthew Gillmor: Hey, guys. Thanks for the question. I wanted to ask about member mix and how that's impacting margins and cost trends. If I recall, I think the acuity of the membership is in the process of normalizing with your census growth that had been resuming starting last fiscal year. How far along are you on that process? Is there still more room to go in terms of acuity normalizing? And is there any way to think about the impact that that's been having on margins or some of the utilization metrics you've been sharing? Patrick Blair: Hey, Matt. It's Patrick. Great question. I'd say largely, we've sort of seen the mix rebalancing that we would expect since the sanctions were lifted. We've grown well. We've kept a very balanced pool of enrollments as it relates to people living in the community, people living in assisted living facilities, and I think we've done a really nice job of ensuring that we're a solution to keep people in the community rather than to go into nursing homes. As a result, the mix of our population, the age, the acuity has, I think, progressed much as we anticipated. I'd say we're largely at a point where we feel like achieving our targets. All of our work going forward is about continuing to grow and maintaining an appropriate mix. It does negatively impact our risk score, so we have to be mindful of that shift, which can come with some revenue impacts. But generally, we've got the right mix of healthier folks, and with the right clinical model wrapped around them, they can be a contributing factor to the company's growth and margin expansion. Ben, anything to add? Ben Adams: No. I think you really covered it. If you think about the average tenure of a PACE participant, it's three and a half years or so. We've been going through a normal enrollment process for about two years now, so the mix is pretty much normalized if things have washed through the system. Matthew Gillmor: Okay. Great. That's helpful. And then as a follow-up, I wanted to ask about V28. I heard Ben's comments about the phase-in starting next year. Should we think about that as being a slight headwind to your revenue growth, or is that a slight tailwind? Just wanted to sort of understand how that might play out both in 2026 and then, of course, beyond that as well. Patrick Blair: Well, as I think Ben said in his remarks, we're just sort of entering into this phase where we're starting to see a phase-in of the V28 relative to the V22. It's going to take multiple years for that to play out. As you probably know, there are a lot of variables with the PACE population and how all this will work out. It is included in our guidance, and I just want to make sure that's clear. Ben Adams: No. I think you pretty much hit it. We expect it to be a headwind over the next couple of years. We only provide one year of guidance, so it's all factored in for this year. But obviously, it's something we're spending a lot of time thinking about for future years. Matthew Gillmor: Got it. I appreciate it. Thank you. Operator: Thank you. And our next question comes from the line of Jared Haase from William Blair. Your question, please. Jared Haase: Yeah. Hey, guys. Thanks for taking the questions. Maybe I'll ask on the outlook for EBITDA margins. Congrats on all the progress that you've made there. I know you kind of reinforced the expectation that you're on track for the 8% to 9% target over the next few years. I think the guidance implies about 250 basis points of margin expansion. I guess, number one, should we think of that as a reasonable cadence in terms of margin expansion continuing for the next few years on that pathway to the high single-digit target? And then I'd also be curious if you could just unpack, given all the initiatives and progress you've made, where you think the balance is in terms of the bigger opportunities for leverage between center-level margin and then operating leverage. Patrick Blair: I'll let Ben pick up, but I would just start with I do think a lot of our margin improvement over the last couple of years has been a combination of factors. Being able to reinstitute growth for the company and growing that in double digits. We've had a variety of transformation efforts that focus on a lot of clinical value initiatives. We've done our best to predict when that value will flow through. We've talked about the latency between execution of an initiative and when we start to see the impact flow through the P&L. We're doing our best to predict that, but it's kind of hard to hit on a quarter-by-quarter basis. But I'll say we're very pleased with the work by our clinical teams to address medical costs. I think that is a nice driver of this. As I said in my opening remarks, one of the things that I think we're really developing a strong appreciation for, especially since we've brought pharmacy in-house, is that over 40% of the total cost of care we're delivering with our team, our employees, in our centers. And then this notion that for the remaining 60%, we're ordering that care. We're ordering the specialist visits and specialist services, and that gives us a lot of control. So I do think medical costs are an area we've been very successful in. We've got a great team, and we continue to move there. And then the operating leverage, as we grow our centers, we're getting operating leverage at the center level. Pharmacy insourcing is an area where the real value to that is the medical-pharmacy integration. That's given us more control over the total cost of care when we have pharmacy integrated more closely with our medical. So overall, I think we're pretty pleased with margin growth. And I think it is fair to say that over the next couple of years, the growth we've seen in the last two probably translates over the next couple. Ben, what would you say? Ben Adams: Yeah. I mean, I think Patrick pretty much covered it. I would say that the guidance we put out about the long-term margin opportunity when we met with everybody back in two years ago in February, I think that sort of outlook we put out there probably holds true today. And I think probably today more than ever, we've always been convinced that we'd get to the right margin structure. It was always just a question of when we would get there. So it wasn't an if, it was a when. And I think we feel very confident with the vision we put out a couple of years ago. And I think this year shows us that we're kind of halfway there. Jared Haase: Got it. That's helpful. I appreciate that. And then maybe as a follow-up, I'll switch gears a little bit. But I'm curious, you obviously have the partnership with Epic, your electronic health record, and they've been in the news recently rolling out a number of new AI or automation-related features. I'm not sure if you're able to benefit from any of that at all. I know you probably had some specific modules and implementations related to PACE. But just curious, anything specific to Epic or, I guess, even more broadly, areas where you might see opportunities for automation and continue to take cost out of the cost structure. Patrick Blair: I'm going to flip that to Michael, but I'll say it's a great question. It's something we're spending a lot of time on, really trying to figure out how do we leverage the latest AI-driven tools just to make us a better company and help us with cost efficiencies and quality of care and outcomes, etc. I think, given the size of our company, we certainly don't have the capability or the ambitions of a much larger managed care organization as an example. So to that point, you're correct in that we're working very closely with a broad range of technology partners that we have within the company today. That, of course, includes Epic, and I'll let Michael say a little bit about some of the work there. But then whether it's a medical partner, or it's a claim system partner, or some of our clinical programs, each of those companies has a really robust AI agenda. And ours is really trying to figure out how do we leverage what our partners are developing and then connect that to how we operate as a PACE program. And I think we're off to a good start, but it's certainly early days. Michael, please say more. Michael Scarbrough: Yeah. Thanks, Patrick. And so I would just add, I think as we have continued to invest in our technology capabilities, we've really gone with a kind of a best-in-class strategy and doing so. Tools like Epic and others provide us a number of out-of-the-box capabilities and out-of-the-box solutions that we're finding a lot of applicability with within our business. Everything from how we provide clinical care, inform our clinicians, highlight for them information about our participants, which might not be otherwise easily discernible from all of the information in Epic, through our Oracle implementation and the ability to use tools like that. Just continue to look for opportunities with our business where we have processes that could be optimized and generate not just efficiency, but also greater accuracy of the work that we do. And so I think we're very much working as the whole industry is around just looking for opportunities where AI could be a lever to improve the output of our business. Patrick Blair: I'd probably highlight Salesforce as another partner who we're doing some really interesting work with. More focused on sort of efficiency and accuracy of business processes both in compliance as well as in sort of the enrollment processing space. So Salesforce has been a great partner as we sort of dip our toe in the AI space. Jared Haase: Got it. That's really great to hear. I appreciate all the color. Operator: Thank you. And as a reminder, our next question comes from the line of Jamie Perse from Goldman Sachs. Your question, please. Jamie Perse: Hey, thank you. Good afternoon. I wanted to start with one quick clarification which relates to my first question. I know you talked about the Medicaid redeterminations and that being a headwind to census and member progression through the year. You mentioned that being a headwind in the first part of the year. Is that a January type of headwind? Or are you referring more to the start of the fiscal year, so impacting the first quarter? Ben Adams: Well, I think if you think about redeterminations, they go on obviously throughout the course of the year. And I think what you've seen with us is we've changed a lot of our internal processes. Because as we've tried to partner with the states and make that whole eligibility enrollment redetermination process more efficient, we basically put in new processes that made it easier for us to identify people who are going to lose Medicaid coverage potentially. And if we think they're going to lose it and it's not recoverable, we can get them disenrolled more quickly, right? So as those new processes roll in and we begin to disenroll people who will never regain Medicaid eligibility more quickly, it'll put a little bit of a headwind on growth both in terms of census and in terms of member months. And you'll see that really happening in 2026. And then we think it will wash through the system by the time we hit January. And the other thing I would say is it's not really changing the rate of growth for us. Our trends around gross enrollment growth per month are really going to be the same. So it's not changing the slope of the line. It's really just shifting the line down slightly as we work through the implementation of this new eligibility process. Jamie Perse: Okay. That's helpful. And I think you partially answered my first question here, but just want to make sure I'm clear. Obviously, you had really strong census growth in fiscal '25. The guidance is kind of call it, low, maybe mid-single-digit growth this year on a net basis. I hear your comments on the redetermination piece. Are you assuming that the gross enrollment trajectory that you had in fiscal '25 continues? And maybe just any updates from a capacity standpoint, anything that might change that enrollment trajectory? Ben Adams: Yeah. You're right. The gross enrollment trends are going to remain the same, we think, this year. What you're seeing in terms of slightly lower census and member months growth is basically the work through the new eligibility process. And we kind of went through an intentional strategic decision this year where we said, look, there were people that we were probably carrying too long to try to reestablish Medicaid eligibility. As opposed to moving them off of our system into a more appropriate place for them once we knew that they weren't going to get their Medicaid eligibility renewed. By moving people out of the system more efficiently when we know they no longer qualify for PACE, it slows us down on the top line. But it actually gives us a big boost on the EBITDA line. Right? So you think of this as kind of a year where we're using the enrollment mechanism to strategically reposition the business. We're going to give up a little census growth, but not the growth in gross enrollment trends. But we're going to get a big pickup in EBITDA from it. Jamie Perse: Okay. Alright. That's really helpful. My second question, I know there were some earlier ones on just kind of connecting your guidance to the long-term targets you've laid out. Looking back at those targets, you're kind of a little bit ahead on external provider costs. There's maybe some room to continue seeing some progression on cost of care and then certainly on G&A. There's more room relative to the prior financial targets you laid out. Are those two buckets, just the cost of care and G&A operating leverage, the primary areas we should expect continued margin performance or improvement in fiscal 2026 specifically? Ben Adams: Yes, it's a good question. When you think about when I think about when you go back and you look at the presentation we gave back in February '23 about '24. Sorry. Had the year wrong. Anyhow, we gave that presentation about what the long-term margin potential is. You probably remember we went through sort of breaking out the different components. There was sort of the third-party provider care where we get some efficiencies. But then there was the cost of care, which was provided in our centers. And we get a lot of efficiency out of that number. Not only because we can, as Patrick spoke about before, we can control and coordinate that care more closely. But there's also an administrative component in there as well. Where we get some margin lift as the business scales. So we get some out of that line item. Then when you think about the G&A, obviously, we had some activities in the past related to compliance and other things. That we've been able to scale down going forward. So where we're investing in G&A really today is around improving operations. And if we start to look at that G&A line item as a percentage of revenue or even on a PMPM basis, we think you'll continue to see improvements in the next couple of years in that line item. So again, really focus more on the EBITDA percentage target than anything else. But those are probably the two line items where we'll get the biggest lift. Jamie Perse: Got it. Thank you. Operator: And this does conclude the question and answer session of today's program as well as today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.
Operator: Greetings, and welcome to Limoneira's Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Deirdre Thomson with ICR. Thank you. You may begin. Deirdre Thomson: Good afternoon, everyone, and thank you for joining us for Limoneira's Third Quarter Fiscal Year 2025 Conference Call. On the call today are Harold Edwards, President and Chief Executive Officer; and Mark Palamountain, Executive Vice President and Chief Financial Officer. By now, everyone should have access to the third quarter fiscal year 2025 earnings release, which went out today at approximately 4:05 p.m. Eastern Time. If you've not had the chance to review the release, it's available on the Investor Relations portion of the company's website at limoneira.com. This call is being webcast, and a replay will be available on Limoneira's website. Before we begin, we'd like to remind everyone that prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. Such statements involve a number of known and unknown risks and uncertainties, many of which are outside the company's control and could cause its future results, performance or achievements to differ significantly from the results, performance or achievements expressed or implied by such forward-looking statements. Important factors that could cause or contribute to such differences include risk details in the company's Form 10-Qs and 10-Ks filed with the SEC and those mentioned in the earnings release. Except as required by law, we undertake no obligation to update any forward-looking or other statements herein, whether a result of new information, future events or otherwise. Please note that during today's call, we will be discussing non-GAAP financial measures including results on an adjusted basis. We believe these adjusted financial measures can facilitate a more complete analysis and greater understanding of Limoneira's ongoing results of operations, particularly when comparing underlying results from period to period. We have provided as much detail as possible on any items that are discussed on an adjusted basis. Also, within the company's earnings release and in today's prepared remarks, we include adjusted EBITDA and adjusted diluted EPS, which are non-GAAP financial measures. A reconciliation of adjusted EBITDA and adjusted diluted EPS to the most directly comparable GAAP financial measures are included in the company's press release, which has been posted to its website. And with that, it is my pleasure to turn the call over to the company's President and CEO, Mr. Harold Edwards. Harold Edwards: Thank you, Deirdre, and good afternoon, everyone. During the third quarter, we made significant strides in unlocking long-term value through our two-part value creation strategy: agriculture production optimization, and land and water value creation. As we enter the fourth quarter and turn our attention to fiscal year 2026, we're excited about the profitable growth opportunities ahead. In the third quarter, we continued to navigate challenging lemon market conditions with pricing pressures in the first 2 months, though we saw improvement in the final months as we captured higher prices for fruit held in storage. Our fresh utilization was lower due to the strategic timing, but we remain confident in achieving our volume goals for both lemons and avocados in fiscal year 2025. In addition, we expect pricing to improve in fiscal 2026 due to anticipated shortages in several international areas. Our strategic partnership with Sunkist for citrus sales and marketing remains on track to drive $5 million in annual cost savings and EBITDA enhancements starting in fiscal year 2026. This partnership will unlock access to new high-quality customers while creating the operational efficiencies we've discussed. We expect lemons to return to profitability with more normalized pricing and fresh utilization levels in fiscal year 2026. Our avocado business continues to expand, with pricing and volume on plan during the quarter. We anticipate a significant increase in avocado production as our newly planted acreage begins maturing in fiscal year 2027 and beyond. We have 700 acres of nonbearing avocados estimated to become full-bearing over the next 2 to 4 years, enabling strong organic growth. This will be a near 100% increase in avocado producing acreage. Our Real Estate Development continues to exceed expectations. Harvest at Limoneira is selling homes ahead of schedule, and we continue to expect future distributions from our real estate projects to total approximately $155 million over the next 5 fiscal years. Today, I'm also excited to announce our exploration of development options for our Limco Del Mar property. This 221-acre agricultural infill property bordered by developed areas in the city of Ventura presents an opportunity for residential development that directly addresses Ventura County's critical housing shortage. As a historically local company, Limoneira is dedicated to helping solve this housing crisis. We believe that a strong community needs homes for everyone, and we're ready to do our part. The Limco Del Mar Ranch is ideally suited for efficient, well-planned infill development that may stimulate economic growth, create jobs and contribute to vibrant livable communities. We're committed to conducting a comprehensive community-based planning process, including complete CEQA, which is the California Environmental Quality Act review, City of Ventura City Council Review, a SOAR, Save Open-space and Agricultural Resources vote and the LAFCO, Local Agency Formation Commission, review process for annexation to the City of Ventura. Our goal is to create a pathway to design, permit and develop new homes that will meet the needs of Ventura County's residents. We continue to advance our water monetization efforts. In January 2025, we sold water pumping rights in the Santa Paula Basin for $30,000 per acre foot across three transactions, generating $1.7 million in proceeds and recording $1.5 million of gains. In summary, we're executing a comprehensive strategy that positions us for long-term growth. Our citrus operational enhancements through the Sunkist partnership, expanding avocado production, accelerating real estate development, adding new housing development opportunities and ongoing water value creation, all contribute to building sustainable long-term shareholder value. And with that, I'll now turn the call over to Mark to discuss our third quarter results. Mark Palamountain: Thank you, Harold, and good afternoon, everyone. Before I begin, I would remind you it is best to view our business on an annual, not quarterly basis due to the seasonal nature of our business. Historically, our first and fourth quarters are the seasonally softer quarters, while our second and third quarters are stronger. For the third quarter of fiscal year 2025, total net revenue was $47.5 million compared to total net revenue of $63.3 million in the third quarter of the previous fiscal year. Agribusiness revenue was $45.9 million compared to $61.8 million in the third quarter last year. Other operations revenue was $1.5 million for the third quarter of fiscal year -- fiscal years 2025 and 2024. The decline in Agribusiness revenue stems primarily from continued pricing pressure in the lemon market during the first 2 months of the quarter, though we saw improvement in July. Additionally, our fresh utilization was lower as we held lemons longer in storage to capture higher prices during the final month of the quarter. Looking beyond this year, the citrus sales and marketing plan we announced with Sunkist is anticipated to enhance our resilience to market volatility by creating a more efficient cost structure, leading to an expected $5 million in EBITDA improvement during fiscal year 2026. Agribusiness revenue for the third quarter of fiscal year 2025 includes $23.8 million in fresh packed lemon sales compared to $25.8 million during the same period of fiscal year 2024. Approximately 1.4 million cartons of U.S. packed fresh lemons were sold during the third quarter of fiscal year 2025 at a $17.02 average price per carton compared to 1.4 million cartons sold at an $18.43 average price per carton during the third quarter of fiscal year 2024. Brokered lemons and other lemon sales were $3.8 million and $9.8 million in the third quarter of fiscal years 2025 and 2024, respectively. The company recognized $8.5 million of avocado revenue in the third quarter of fiscal year 2025 compared to $13.9 million of avocado revenue in the same period of fiscal year 2024. Approximately 5.7 million pounds of avocados were sold in aggregate during the third quarter of fiscal year 2025 at a $1.50 average price per pound compared to approximately 8.9 million pounds sold at a $1.57 average price per pound during the third quarter of fiscal year 2024. The California avocado crop typically experiences alternating years of high and low production due to plant physiology and was the primary reason for lower volume this year compared to last year. Both avocado pricing and volume were on plan, and we achieved our volume goals for fiscal year 2025. The company recognized $1.7 million of orange revenue in the third quarter of fiscal year 2025 compared to $1.2 million in the third quarter of fiscal year 2024. Approximately 94,000 cartons of oranges were sold during the third quarter of fiscal year 2025 at an $18 average price per carton compared to approximately 43,000 cartons sold at a $26.98 average price per carton during the third quarter of fiscal year 2024. Specialty citrus and wine grape revenue were $600,000 for the third quarter of fiscal years '25 and '24. Farm management revenues were $100,000 in the third quarter of fiscal year 2025 compared to $3.2 million in the same period of fiscal year 2024. The decline was due to the termination of our farm management agreement effective March 31, 2025. Total costs and expenses for the third quarter of fiscal year 2025 decreased to $48.1 million compared to $54.3 million in the third quarter of last year. Operating loss for the third quarter of fiscal year 2025 was $600,000 compared to operating income of $9 million in the third quarter of the previous fiscal year. Net loss applicable to common stock after preferred dividends for the third quarter of fiscal year 2025 was $1 million compared to net income applicable to common stock of $6.5 million in the third quarter of fiscal year 2024. Net loss per diluted share for the third quarter of fiscal year 2025 was $0.06 compared to net income per diluted share of $0.35 for the same period of fiscal year 2024. Adjusted net loss for diluted EPS for the third quarter of fiscal year 2025 was $400,000 or $0.02 per diluted share compared to adjusted net income per diluted EPS of $7.8 million or $0.42 per diluted share in the same period of fiscal year 2024. A reconciliation of net income or loss attributable to Limoneira Company to adjusted net income or loss for diluted EPS is provided at the end of our earnings release. Non-GAAP adjusted EBITDA for the third quarter of fiscal year 2025 was $3 million compared to $13.8 million in the same period of fiscal year 2024. A reconciliation of net income or loss attributable to Limoneira Company to adjusted EBITDA is also provided at the end of our earnings release. Turning now to our balance sheet and liquidity. Long-term debt as of July 31, 2025, was $63.3 million compared to $40 million at the end of fiscal year 2024. Debt levels as of July 31, 2025, less the $2.1 million of cash on hand resulted in a net debt position of $61.3 million at quarter end. In April of 2025, we received $10 million of our share of a $20 million cash distribution from our 50-50 real estate development joint venture with The Lewis Group of Companies. The distribution came from the joint venture's available cash and cash equivalents, which as of July 31, 2025, totaled $36.4 million. Now I'd like to turn the call back to Harold to discuss our fiscal year 2025 outlook and longer-term growth pipeline. Harold Edwards: Thanks, Mark. We continue to expect fresh lemon volumes to be in the range of 4.5 million to 5 million cartons for fiscal year 2025, and avocado volume is approximately 7 million pounds for fiscal year 2025. Fiscal year 2025 avocado volume is lower than fiscal year 2024, primarily due to the alternate bearing nature of avocado trees. Looking beyond fiscal year 2025, we have strong visibility on multiple value drivers. First, we believe we are in a good position to divest additional real estate assets in fiscal year 2026. Second, we expect to receive an additional $155 million from our real estate projects over the next 5 fiscal years. Third, we have 700 acres of nonbearing avocados estimated to become full-bearing over the next 2 to 4 years, which we expect will enable strong organic growth in avocado production. Additionally, we plan to continue expanding our plantings of avocados over the next 2 fiscal years. Fourth, we expect lemons to return to profitability with more normalized lemon prices and fresh utilization levels in fiscal year 2026 in which we continue to estimate 4 million to 4.5 million cartons. Our partnership with Sunkist fundamentally strengthens our citrus business model, unlocking availability to new high-quality customers and driving an anticipated $5 million in annual cost savings beginning in fiscal year 2026. This partnership positions us for sustainable EBITDA growth and creates a strong foundation for long-term value creation. And fifth, the exploration of our Limco Del Mar property represents another significant value creation opportunity, addressing critical community needs with anticipated substantial returns for shareholders. In summary, we're executing on a comprehensive strategy across agricultural production optimization and asset monetization that positions us for both near-term resilience and long-term growth. We believe we have the asset base, strategic partnerships and operational improvements in place to deliver sustainable value creation while maintaining flexibility to capitalize on additional opportunities as they arise. Operator, we will now open the call to questions. Operator: [Operator Instructions] Our first question comes from the line of Ben Klieve with Lake Street Capital Markets. Benjamin Klieve: First, a couple of questions on the Limco Del Mar opportunity here. It's great to hear that, that's progressing. One very specific question on, is there any kind of expectations of costs flowing through the income statement on this, say, through '26, maybe associated with regulatory costs or consulting costs, anything of that nature? And then second, on a higher level, what's your vision for how this will get developed over the long term in terms of what Limoneira's role will be? I mean, are you going to be looking for kind of a Lewis Group type 50-50 partner? Do you want to maybe offload more of the kind of developmental burden on a partner? Kind of how are you thinking about that on a -- from a big picture perspective? Mark Palamountain: Great question, Ben. Thank you. So multiple pieces to that. So we'll start with the cost and the income statement. So as you know, we recently tendered from our position, we had 28% as the general partner and achieved up to 55%. It's good to know we have a bunch of local still involved in this. And so we've got support from all around. From a cost perspective, it will be similar to how we developed Harvest and the entitlement period. We're trying to be conservative, thinking 3 years on a minimum, 5 years out and $3 million to $5 million depending on that time frame. But the majority of those costs will be capitalized and will not run through the income statement and then as we develop the project. Now Limoneira being the community player behind all this, and Lewis has been a great partner and we'd love to have them involved at that point. Right now, it's just Limoneira running with the ball, and we've put together a great team of legal experts and development experts and county experts to really figure out what the community benefit is going to be and how we make this a benefit for everybody so we can move it across the line. And so at the end of the day, I think the $3 million to $5 million is a good number to hold on to. And we're working really hard. We've already started and had some good progress and good support as well. Harold Edwards: So Ben, I would also just add that there'll be two value triggers that happen along this journey. The first real value-creating opportunity will become evident upon entitlement. And so as mentioned in the description earlier, we'll go through a comprehensive CEQA review, a comprehensive SOAR vote. And then assuming that we are successful in winning a SOAR vote, and that vote will be comprised of the City of Ventura citizens voting to support the project. Assuming a majority of the citizens vote yes, then we'll work with the Local Agency Formation Commission to annex the 220 acres into the City of Ventura. And at that point, it would become entitled. At that point, the value creation will be significant. But then the second chapter of that value creation will be in the actual development of the project. And as Mark pointed out, we've had a great relationship with the Lewis Group. The way that we've developed Harvest at Limoneira and Santa Paula has been extremely successful. But I would say when we get to the point of development, we'll assess what the best options are for the community of Ventura, but also for the Limoneira Company and decide at that point. Benjamin Klieve: Got it. That makes plenty of sense. Very good. We'll stay tuned for updates on that in quarters to come. I've got a question on the lemon side. Great to see fresh lemon prices rebound sequentially from a difficult second quarter. You guys talked about kind of a normalization of pricing going into next year as there's maybe some industry supply constraints that should be supportive. Given the reset that lemons -- the lemon market has had over the past few years, how do you kind of think about what normalized pricing is in this business today? And then kind of what are the different kind of sources of supply constraints that you see out there that are going to be helpful as you look into next year? Mark Palamountain: Yes. So Ben, we were pleasantly surprised into August into the lemon pricing. So as we mentioned, it lasted a little longer. Our average price in the quarter was -- in Q3 was just over $17. August, we saw prices in the low 20s, so almost a $4 to $5 jump. There was a bit of a shortage around on the East Coast. A lot of the imports that usually came to the U.S. went to Europe. And you mentioned some of those issues. And Turkey had a really challenging freeze, which it's always hard to get the best assessment, but could have gone all the way down to damaging trees, which would be 2 years of crop. And so -- and then also Spain had their own set of weather issues. So next year, we see Spain and Turkey being short, call it, 20% to 30%, which then, again, will allow some of our Southern Hemisphere friends to move fruit there. And all of our market is about balance, right? And so when us -- Limoneira coming back into the Sunkist, there's a lot more contracted business. And we've got those new customers in the quick-serve restaurant business, along with our existing customer base, we see a lot more potential for stability. And I think you'll see a price with a two in front of it. Right now, as I said, August was in the low 20s, call it, $23. And if you keep a higher price, and this has been historical since as long as I've been here, coming into the fall, you always have a dip into that winter. But if you have a higher entry point, obviously, you're going to have a lower low theoretically. And so that's sort of what is setting up. And we're at year 7 going into year 8 of a really challenging lemon environment. And usually, those cycles last that long. Will we have a mother nature event? We're not sure about that. But for the most part, that's what gives us confidence is the balance around the world, the lemons we've seen come out, including our own at a higher starting point going into next year. Benjamin Klieve: Got it. That would be great to see. Very good. One more for me, and I'll get back in queue. And it might be a little premature on the '26 outlook for avocados. But given the kind of biannual nature of the crop and the California harvest complete at this point, do you have any kind of rough ideas of what your expectations are for avocado volumes here looking into '26? Harold Edwards: So it's a little premature, but we're looking up into the trees right now. You're seeing a set. I would say that as this -- as we're counting pieces and assuming we hold on to the fruit, I would expect it to not be greater than this year. It looks like it's going to be similar to this year to less, but it's too early to really know that. So I wouldn't count on a big rebound in production. It's why we made our forward-looking comments that we believe our first big breakout year with volume improvement will be 2027. But more to come. Let's see what we come up with. And when we talk in the next call, we'll have a much better idea of what we're looking at for 2026 with avocados. Operator: [Operator Instructions] And we have reached the end of the question-and-answer session. I would like to turn the floor back over to CEO, Harold Edwards, for closing remarks. Harold Edwards: Thank you. I'd like to point out that as of this afternoon, we have updated our investor deck and it is now available on our website at limoneira.com. I'd like to thank you all for your questions and your interest in Limoneira. Have a great day. Operator: And ladies and gentlemen, this concludes today's conference, and you may disconnect your line at this time. We thank you for your participation. Have a great day.
Operator: Good morning, ladies and gentlemen, and welcome to the First Quarter 2026 Results Conference Call. I would now like to turn the meeting over to Ryan Hanley. Please go ahead, Mr. Hanley. Ryan Hanley: Thank you, and good morning, everyone. As mentioned, we would like to welcome you to Major Drilling's conference call for the first quarter of fiscal 2026. With me on the call today are Denis Larocque, President and CEO; and Ian Ross, CFO. Our results were released last night and can be found on our website at www.majordrilling.com. We also invite you to visit our website for further information. Before we get started, we'd like to caution you that during this conference call, we will be making forward-looking statements about future events or the future financial performance of the company. These statements are forward-looking in nature, and actual events or results may differ materially from those currently anticipated in such statements. I'll now turn the presentation over to Denis Larocque, President and CEO. Denis Larocque: Thanks, Ryan, and good morning, everyone, and thank you for joining us today to discuss our first quarter results. So we got off to a slower start to the calendar year due to delayed mobilizations, but we're pleased to see activity levels steadily accelerate through the beginning of fiscal 2026. As we reach our previously stated growth target achieving 21% revenue growth over the last 3 months, showing momentum across the business. We were particularly pleased with activity levels in Peru and Chile with Peru's revenue run rate continuing to increase following the completion of the Explomin acquisition last November. This growth is expected to more than offset temporary softness in the Australian -- Australasian market where pauses at certain projects caused by changing exploration plans led to a reduction of activity in the quarter. While the North American market was impacted by forest fires, permitting delays and continues to see elevated levels of competition, activity levels began to improve towards the end of the quarter. That recovery, combined with our strong positioning in Latin America gives us confidence in our platform as we face further growth in exploration budget over the years to come. Overall, we remain optimistic as we move into the second quarter of fiscal 2026. I'll discuss the rest of the outlook when Ian has taken us through the financials. Ian Ross: Thanks, Denis. Revenue for the quarter was $226.6 million, up 20.8% from the prior quarter and 19.3% from the $190 million over the same period last year. Revenue growth was driven by continued strength in the South and Central American region, in particular, Peru, but partially offset by Australasia, which were impacted by unexpected modifications to certain drill programs. The unfavorable foreign exchange translation impact on revenue when compared to the effective rates for the same period last year was approximately $1 million. While the impact on net earnings was minimal, expenditures and foreign jurisdictions tend to be in the same currency as revenue. The overall adjusted gross margin percentage, excluding depreciation, was 25.2% for the quarter compared to 28.9% from the same period last year. The decrease in margins was attributable to the continued competitive environment in North America as well as by some mobilization costs as a few additional projects ramped up in the quarter. Additionally, Explomin's margin profile is reflected given its focus on longer-term contracts and a higher proportion of underground drilling. While these programs typically result in more margins, they provide increased revenue diversification and stability. G&A costs increased $3.2 million compared to the same quarter last year due to the addition of Explomin along with annual inflationary wage adjustments. Company generated EBITDA of $32.1 million in the quarter compared to $34.3 million in the prior year period with net earnings of $10.1 million or $0.12 per share compared to net earnings of $15.9 million or $0.19 per share for the prior year period. The company ended the quarter with $2.8 million in net debt while working capital grew by $13.1 million to $206.8 million, driven by an increase in receivables, which coincided with the ramp-up in activity levels. The total available liquidity of $127 million and strong levels of cash flow expected to be generated through the busier months of the year, the company remains very well positioned moving through fiscal 2026. During the quarter, we strategically relocated drill rigs within certain regions to areas experienced higher levels of demand, which when combined with prior investments in the fleet, resulted in lower-than-expected CapEx spending of $14.4 million in the quarter and improved utilization. A total of 5 new drill rigs and support equipment were added, while 4 older, less efficient rigs were disposed of, bringing total rig count at quarter end to 709. The breakdown of our fleet and utilization in the quarter is as follows: 307 specialized drills at 46% utilization, 163 conventional drills at 50% utilization, 239 underground drills at 54% utilization for a total of 709 drills at 50% utilization. As we've mentioned before, specialized work in our definition is not necessarily conducted with a specialized drill. Rather, it is work that requires that meet the rigorous standards of our customers in terms of technical capabilities, operational and safety standards and other related factors. These standards are becoming increasingly important to our customers. In the first quarter, specialized work accounted for 60% of our total revenue. We continue to see high levels of demand for our specialized services and expect this trend to continue as deposits become increasingly more challenging to find with discoveries continuing to be in remote locations. Conventional drilling, which is mostly driven by juniors, increased slightly to 14% of revenue for the quarter, while underground drilling contributed 26% of total revenue, aided by the contribution of Explomin. We continue to see the bulk of our revenue driven by seniors and intermediates representing 92% of our revenue this quarter as they continued their elevated efforts to address the depleting reserves. While junior financings have begun to increase, the amount of capital raise is still well below the level seen in prior cycles. As a result, juniors continue to represent approximately 8% of our revenue in the first quarter. In terms of commodities, oil represented 41% of revenue in the first quarter with continued high gold price, while copper accounted for 34% of revenue, driven primarily by strength in the South and Central American region. Iron ore continues to make a meaningful contribution at 11% aided by our Australian operations and demonstrating the diversity in the commodities for which we drill forward around the world. With that overview of the financial results, I'll now pass the presentation back to Denis to discuss the outlook. Denis Larocque: Thanks, Ian. As we head into Q2, we expect to see some top line momentum driven by additional projects, particularly in the South American region. As we previously discussed, our Peru revenue base -- our Peru revenue run rate has continued to grow since the acquisition of Explomin that was closed back in November. This trend is expected to continue in the second quarter as more long-term contracts are added, while our Peruvian operation also addresses the growing demand for underground drilling. These types of projects provide stable and diversified streams of incremental revenue. As well, we remain optimistic on the North American region as the junior financing market has begun to show signs of life while discussions surrounding more streamlined permitting processes in both Canada and U.S. are also expected to lead to an increase in activity. On the commodity side, as you probably know, gold just hit another record high and the outlook for copper and other base metals is looking strong. We anticipate these elevated prices to support further growth in exploration budget over the years to come as mining companies use the additional cash flow generated from these high commodity prices to address their need to replace depletion and continue to build reserves. From an operational standpoint, we're in great shape. Our fleet in a great condition, inventory levels are solid and our crews are doing an outstanding job on safety and performance. Thanks to prior investments in infrastructure and equipment, we do not foresee the need for significant incremental CapEx. This positions us to unlock a meaningful operational leverage as activity scales up and demand continues to grow. With that, we can open the call to questions. Operator? Operator: [Operator Instructions] Our first question is from Donangelo Volpe from Beacon Securities. Donangelo Volpe: First question from me. Can you talk about the dynamics you guys are seeing in North America. We've been seeing a modest uptake in junior financings. Just wondering how you view the pipeline in Canada versus the United States. And I was just wondering if you could provide any additional commentary related to the streamlined permitting process you're seeing in both regions. Denis Larocque: Yes. Well, in Canada, the activity has -- as we said, we've seen -- as we progress through the quarter, we've seen a pickup in activity. Some of that's driven by juniors, but they're still not back in great force, if I might say, as the financings that were done, there's always a period before we see that come through in the field. And I think we certainly saw some of that coming near the end of the quarter. We didn't see that uptick in the U.S., though at this point. From the permitting perspective, I must say that we haven't seen -- well, we definitely haven't seen an impact in terms of drilling because it takes -- again, there's -- it takes a bit of time before you see that coming through. And frankly, it's still not moving as quick as I personally would have thought it would following our Canadian election. And in the U.S., you had resolution, for example, just as an example in the U.S. that still got blocked a few weeks ago. So it's still not -- we're still not seeing a great uptick in permitting in North America, while we're certainly seeing more activity coming from that in other areas of the world. Donangelo Volpe: Okay. And then I guess that kind of segues into my next question. With the outlook pointing towards continued top line growth driven by out performance in South America. Can you discuss some of the stronger regions you foresee in the future? And what some of the dynamics are there that will be driving that growth? Denis Larocque: Yes. Well, Peru, we're seeing that operation continues to grow over the next quarter for sure. Lots of activity, but at the same time, as we said, lots of mobilization activity, preparation of rigs, additional people that were brought in and with its load of onboarding costs since the beginning of the year. But we're looking forward to all of that basically hitting cruising altitude by next quarter. So Peru is certainly an area. We see North America like financings, with financing, as you said, picking up lots of time that comes in North America. So we are seeing Canada continuing to increase going into next quarter as well. We'll see in the U.S. if that happens as well. And then the rest is going to be really stated by what mining companies where mining companies end up spending their next budgets. Donangelo Volpe: Okay. Perfect. I appreciate the color. And then last question for me. Just CapEx was about $14 million for the quarter. Can you discuss some of the dynamics that led to the lower-than-expected CapEx? And can we still expect it to be in the $60 million to $70 million range on an annual basis? Denis Larocque: Yes. Part of it really was, as I mentioned, I mean, we prepared 30-some rigs for Peru. And the good news is that we were able to move some of those rigs to some of those rigs from other operations to Peru, which helped. You saw that come through on the utilization rates, which are higher. We've hit 50% for the first time in a long time. And so that played part of it in terms of the growth that we expected and not having to spend as much on CapEx. Going forward, we don't foresee having to spend a lot more than what we had expected. So we'll see how it plays out. Again, it all depends which region, where the demand comes from and the type of demand. But at the moment, we don't foresee needing more CapEx than what we had guided at the last quarter. Operator: [Operator Instructions] Following question is from Brett Kearney from American Rebirth Opportunity Partners. Brett Kearney: Terrific to see the continued strength in your major markets and you guys' ability to capitalize and execute on that in the precious metals and copper front. Just curious, as there's been a heightened focus on critical minerals and I guess, the expanded list of the resources included therein. I know they're all small individually, but just curious kind of in aggregate, whether you're seeing any opportunity across some of more niche mining areas from rare earths, tin, tungsten, antimony in aggregate currently or going forward that can move the needle at all for you all? Denis Larocque: Yes. Well, like you said, all of those individually are not big contributors to exploration. But in aggregate, can certainly have an impact. So I mean, you mentioned tin, we have part of our operation in Peru that's drilling for 10. Lithium comes back on and off, depending on the times and you've got nickel, you've got uranium down the road that could be a contributor in terms of the whole electricity and everything that is needed there. So when you -- again, when you put it, it's still going to be -- we're still going to have between 70% to 80% of our activity that's going to come from gold and copper. But those other metal, I always use the flavor of the day kind of comment and critical minerals certainly the flavor of the day. So we expect to see activity from some of these metal... Brett Kearney: Excellent. And then maybe an extension of that, given your guys' size and trusted position as a mining services provider to Canada, North America, the West. To the extent you can comment, are you all actively engaging in or been approached at all in some of the security discussions as the importance of these metals, including even copper takes quite in priority. Are you guys being looked in at all to conversations involving discussions around NATO, the West. Denis Larocque: Well, I mean, not directly because we're just a supplier to the mining industry, but we are certainly having discussions with different people involved with ministers and trying to drive the point that our Canadian economy really need resources, and we need to get on if we're going to track investment, we need to make the -- we certainly need to make the environment or the business environment conducive to that. So we're certainly participating in those discussions and making that heard. It's just a matter of speed the intentions are there, and it's just a matter of speed of making this happen. And we certainly see other countries basically taking action much quicker than we see in Canada. But the conversation is certainly heading the right way, let's put it that way. It's more a question of... Operator: Following question is from James Vail from Arcadia Advisors, LLC. James Vail: Denis, you said that the second quarter top line is showing momentum. I guess I'll get to the bottom line is what you see change the dynamics of the third fiscal quarter and expecting maybe less of a slowdown that you've had historically, so that the activity wouldn't slow down as quickly as it did last year and slower to pick up in the spring. Is that a possibility? Or is that -- will those historic dynamics still be in place? Denis Larocque: Yes. To be frank, Jim, we -- it's too early to tell because we typically have those discussions when we get to October, November when they start to have plans. And lots of time, those -- even those decisions of continuing or not close to Christmas are made when they get to October, November, if they haven't spent all of their budgets or the environment like right now with gold running up, they say, okay, well, let's just add more -- 2 more months of budget to this year and keep going and so those decisions typically happen in October, November. So it's early to tell, but the environment with commodity prices is certainly positive for that to maybe continue later in the season. But again, too early to tell. James Vail: Okay. And then just finally, looking at the segment information, and there's the asterisk that says Canada U.S. includes revenues for Canada. If you do the arithmetic, it looks like the U.S. was down 20% in the quarter. Is that correct? Is that accurate? Denis Larocque: Yes. It is. There's been a slowdown. We've seen some slowdown in the U.S. A lot of that was driven by juniors. That's where -- last year, we had a lot of junior customers that didn't come back this season and we're waiting to see that. But then basically, as you mentioned, Canada has certainly grown from last year. James Vail: Yes, that's up 20%. That's encouraging. That is good. Okay. Are you going to present at Beaver Creek, Denis? Denis Larocque: No. We're not. Basically Beaver Creek is only for mining companies in terms of presenting. So we won't be at that conference. Operator: [Operator Instructions] We have no further questions registered at this time. I would now like to turn the meeting back over to Denis Larocque. Denis Larocque: Well, thank you. And please don't forget to join us. It's our AGM today, which will be held in-person and virtually at 3:30 Eastern Time. And all the details related to the AGM can be found on our website. So thank you for joining us today, and I hope to see you at our AGM. Operator: Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.
Operator: Good afternoon, and welcome to the Ambiq Micro Second Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, September 4, 2025. I would now like to turn the call over to Ms. Charlene Wan. Charlene, please go ahead. Charlene Wan: Good afternoon, and welcome to Ambiq's Second Quarter 2025 Earnings Conference Call. I'm Charlene Wan, Vice President of Corporate Marketing and Investor Relations at Ambiq. I'm joined today by Ambiq's CEO, Fumihide Esaka; and Ambiq's CFO, Jeff Winzeler. As part of today's call, we will review our quarterly financial performance and provide a summary of our outlook. Our earnings release and the accompanying financial levels are available on the Investor Relations page of our website at www.ambiq.com. Before I turn the call over to Fumi, I'd like to remind our listeners that during the course of this conference call, the company will provide financial guidance, projections, comments and other forward-looking statements regarding future market development, the future financial performance of the company, new products or other matters. These statements are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC. Specifically, the final perspective related to our initial public offering and our most recent 10-Q, which identify important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements. Also, the company's press release and management statements during this conference call will include discussions of certain non-GAAP financial measures. These financial measures and related GAAP to non-GAAP reconciliations are provided in the company's press release and related current report on Form 8-K. For those of you unable to listen to the entire call at this time, a recording will be available via webcast in the Investor Relations section of the company's website. And now it's my pleasure to turn the call over to Ambiq's CEO, Fumihide Esaka. Fumi, please go ahead. Fumihide Esaka: Thank you, Charlene. Good afternoon, and thank you to everyone for joining us on our first earnings call since our IPO on July 30. Ambiq has been on an incredible journey. The company was founded in 2010 to put intelligence everywhere using the world's most power-efficient chips. At this point, we have enabled more than 280 million devices in applications ranging from personal devices to medical and health care to the industrial edge to smart home and smart buildings. We are excited about enabling the next billion devices as AI move out of the cloud and on to the edge. For those of you new to Ambiq's story, I'd like to give you a quick overview of our business. Ambiq is a pioneer and leading provider of ultra-low power semiconductor solutions. Our mission is to enable intelligence and AI everywhere by delivering the lowest power semiconductor solutions. As many of you know, most of to date's AI computation including both training and inference happens in data centers, which are far away from the action. Moving AI inference to the edge is a great alternative because it offers lower latency, greater privacy, improved security and reduced costs. However, we haven't yet seen the full potential of edge AI because edge devices tends to be smaller and battery-powered. With that innovation, it's nearly impossible for those devices to run AI without quickly draining their batteries. Ambiq has solved this power problem with our SPOT platform. SPOT stands for Sub-threshold Power Optimized Technology. It significantly reduces total system power consumption and enables devices to run AI locally without sacrificing battery life. SPOT has been foundation for 5 generations of our flagship SoC family called Apollo. In addition to hardware, we also offer extensive software solutions to help our customers reduce their products and design cycle. More and more people are realizing potential of running AI at the edge as that's where the action takes place. If your smart watch is capable of running on device AI, you get a doctor or personal trainer on your wrist. Hearing aid with onboard AI models can filter out the noise in a restaurant and enhance the 1 voice you actually want to hear. And the factory machinery equipped with a wireless fault detector can identify failure before it happens and calls for help without bringing the factory line down. With our energy-efficient products and solutions, Ambiq is well positioned to drive and benefit from the edge AI revolution. In that, let me now turn the call over to Jeff Winzeler, our CFO, to discuss our second quarter results and third quarter outlook in more detail. And then I will talk more about our strategic priorities as we look ahead to the coming quarters and year. Jeffrey Winzeler: Thank you, Fumi, and thanks, everyone, for joining us today. Before I review the financials, please note that I will focus my discussion on non-GAAP financial results and refer you to today's press release for a detailed reconciliation of GAAP to non-GAAP financial results. The non-GAAP adjustments relate to stock-based compensation, depreciation, amortization, warrant value and other charges. Revenue for the second quarter of 2025 was $17.9 million compared to $15.7 million in the first quarter and $20.3 million in the second quarter of 2024. The sequential increase in second quarter revenue was driven by increased customer demand and favorable product mix. The year-over-year decrease in net sales reflected the company's strategic decision to diversify revenue toward higher-value opportunities with customers outside of China. In the second quarter of 2025, net sales to end customers in Mainland China were 11.5% as compared to 42% in the second quarter of 2024. Non-GAAP gross profit for the second quarter of 2025 was $7.6 million or 42.7% of revenue compared to $7.4 million or 47.1% of revenue in the prior quarter and $6.7 million or 32.9% of revenue in the same quarter a year ago. The sequential and year-over-year increases in non-GAAP gross profit for the second quarter of 2025 were the result of a more favorable product end customer mix, as the company continued to execute on its strategic prioritization of geographies outside of China. Non-GAAP operating expenses in the second quarter of 2025 were $13.8 million compared to $13.1 million in the prior quarter and compared to $14.4 million in the second quarter of 2024. The breakdown of non-GAAP operating expenses for the second quarter of 2025 are as follows: Research and development expenses were $7.3 million compared to $7 million last quarter and $7.3 million in the same quarter a year ago. One of our top strategic initiatives post-IPO is to continue growing our technical capabilities and investing in our product development road map to capture the opportunities ahead of us. SG&A expenses in the second quarter were $6.5 million compared to $6.2 million in the prior quarter and $7.1 million in the second quarter of 2024. Total other income in the second quarter was $315,000, consisting mainly of interest income from our cash reserves compared to $461,000 in the prior quarter and $337,000 during the same quarter a year ago. Net loss for the second quarter of 2025 was $8.5 million or $18.90 per share based on 449,785 weighted average shares outstanding. This compares to a net loss of $8.3 million or $18.96 per share in the first quarter of 2025 and net loss of $10.6 million or $34.59 per share in the second quarter of 2024. The per share amounts have been adjusted to reflect a 1 for 28 reverse stock split that was affected prior to our IPO. Second quarter non-GAAP net loss was $5.9 million compared to non-GAAP net loss of $5.2 million in the first quarter of 2025 and non-GAAP net loss of $7.4 million in the second quarter of 2024. The loss per share in the second quarter of 2025 was $0.43 based on unaudited pro forma common shares of 13.6 million as disclosed in the company's F-1. Turning to the balance sheet. Cash and cash equivalents were $47.5 million at the end of Q2 2025. On July 30, the company completed an initial public offering, consisting of 4.6 million shares of common stock issued at $24 per share. After deducting underwriting costs, commissions and other transaction costs, the net proceeds were $97.2 million. Now let me turn to our guidance for the third quarter of 2025. We expect revenue to be in the range of $17.5 million to $18 million. Non-GAAP loss per share is expected to range between $0.35 loss per share and $0.28 loss per share on a weighted average post-IPO share count of approximately 18.2 million shares. This share count reflects the pre-IPO reverse split and conversion of preferred shares into common plus the common shares issued at the IPO and is the baseline share count for the company going forward. In summary, during Q2 2025, Ambiq grew revenue from the previous quarter and importantly, grew gross profit dollars, both sequentially and year-over-year in support of our ambitions for profitable growth. Subsequent to the quarter, we successfully completed the company's initial public offering and secured the necessary financial resources to execute on our strategic business plan, which Fumi will now detail further. With that, let me pass the call back to Fumi. Fumihide Esaka: Thank you, Jeff. Since this is our first earnings call, I'd like to take a moment to outline our mission and strategic initiatives. Our goal is to drive long-term shareholder value through sustainable and profitable growth. After our successful IPO we intend to use the proceeds to support the execution of 3 key initiatives. Our first initiative is to expand into new markets and geographies with our existing products. This will fuel our revenue and margin growth. We have demonstrated a strong end customer adoption with market leaders. These top tier brands validate the value proposition of our Apollo products and have helped us acquire a growing number of new customers. We will be expanding our sales and support resources to enable these new customers. We are proud to share 1 great example of our recent new customer announcement. Whoop, a leader in health-oriented wearables recently chose Apollo for their newest fitness tracker product line. The new Whoop 5.0 and Whoop energy products give an incredible intelligent view of your health and even your blood pressure in a small band that lasts for more than 14 days on the battery. Ambiq's Apollo delivers 10x better battery efficiency allowed Whoop to utilize on-device AI to process biometric data intelligently. In addition to personal devices and wearables markets, we are pursuing new edge AI use cases such as AR/VR glasses, heart monitors, smart medical patches, oxygen condition monitors, smart alarms and locks and robotics. We are also sifting our geographic concentration. Historically, we had significant sale with end customer in Mainland China. As the demand for edge AI grows globally, we are prioritizing sales efforts towards other meaningful geographies. In 2023, 66% of our net sales were to the end customer in Mainland China. This fell to 50% in 2024. In the second quarter of 2025, only 11.5% of our net sales were to end customers in Mainland China. This is a big reduction compared to the 42% number we saw in the second quarter of 2024. We currently anticipate this mix to continue in 2025 and beyond. Our second key initiative is to expand our existing Apollo family and introduce the new atomic product line. As a high-growth company, we are scaling our R&D and go-to-market capability to capture the edge AI opportunities. Since we launched the first Apollo SoC in 2015, we have introduced new products nearly every year. The original Apollo 3 and 4 SoCs are being used for a variety of early edge AI deployments. The new Apollo510 and Apollo330 SoCs launched in the past 18 months add better accelerated AI compute. Last week, we announced the expansion of our Apollo 5 line with Apollo510B wireless SoC. It has a 250 megahertz Cortex-M55 coprocessor alongside a dedicated 40 megahertz network processor and Bluetooth Low Energy 5.4 radio. Target applications include wearables, AI glasses, heart monitors, smart locks and factory condition monitors. The fourth Atomic family product is currently in development. This innovative product is expected to deliver our highest performance and lowest power consumption for AI model at the edge. It targets edge AI applications with demanding compute requirements, especially for vision. Atomic features a full Neural Processing Unit, or NPU, for high-performance AI acceleration along with new memory innovations. And lastly, our third and long-term initiative is to build a variant of the SPOT platform that enables IP licensing to third parties. As this is the most energy-efficient edge AI chip design platform, we have received numerous increase to license SPOT. There are specialized applications that require power efficiency, such as data centers and automotive AI processing. To reach these markets, we plan to develop SPOT into IP and chip development platform. This offering will enable other companies to license or partner with us to incorporate SPOT into their own low-power chip designs. Our plan to develop this IP and technology platform for licensing would take place over the next 3 to 5 years. To conclude my prepared remarks, I want to first thank our investors, customers, partners, suppliers and employees for their support of Ambiq over the past 15 years. Thank you for helping us become a public traded company. The future of Ambiq is very bright and we are only at the beginning of unlocking the full potential of AI at the edge. I look forward to reporting our continued progress and meeting with each of you in the coming quarters. With that, I will open the call to questions. Operator, please go ahead. Operator: [Operator Instructions] Our first question comes from the line of Vivek Arya with Bank of America. Vivek Arya: Welcome to the public markets. Fumi, for my first question, I'm curious how does Ambiq kind of define edge AI? And what percentage of your sales today would kind of fit that definition? And how do you see that mix evolving in any kind of ASP benefits as that mix evolves towards more edge AI? Fumihide Esaka: Again, edge AI is growing in medical, industrial edge, personal devices, smart home and buildings, and we ourselves is really focusing on enabling this edge AI market. It is very hard to define. The percentage of AI use at our end customers, but most of our customers are already using intelligence. And that's where we add a lot of value. So we believe that more than half of the business is already using intelligence on their devices and we will continue to grow. Vivek Arya: Okay. And for my follow-up, I think the IP licensing opportunity sounds very interesting. But you did mention that it might take a few years to fully develop. Is there anything that you can do -- so first of all, what kind of use cases and applications are asking you for that licensing and chiplet-type architecture? And then can you do anything to accelerate that development of being able to license SPOT technology? Fumihide Esaka: Yes, Vivek, we believe that data center, automotive and mobile devices, those could take advantage of our SPOT technology. And as we are focusing on enhancing our R&D capability, we may be able to accelerate our development, our IP, with more resources and funding available. And we do have a dedicated team that is focusing on our SPOT licensing. And as previously discussed, they are right now focusing on 12-nanometer SPOT platform. And with proven that 12-nanometer development, we believe that we can accelerate our plan. Operator: Our next question comes from the line of Tim Arcuri with UBS Financial. Dino Ragazzo: Hello. This is Dino on for Tim. Welcome to the public markets. Could you talk about your progress on the non-wearable's opportunities as of now? You previously announced some design wins in medical and industrial. Can you just give us an update on your progress there? Fumihide Esaka: Well, again, about 17% of our funnel is already towards medical, industrial edge, smart home and building, and we believe that more than 20% is already -- we're working with some of the customers to define Atomic edge AI in vision. So we're making great progress even since we talked last time. Dino Ragazzo: Got it. And then I guess another question, just on your Q2 results, do you see any signs of pull-ins that impacted results? Jeffrey Winzeler: I think we had a pretty good ramp from Q1 to Q2. And if you think about our business typically seasonally, you would expect Q2 to be higher than Q1 and growth throughout the year. I think the 1 thing that kind of impacted this year was the announcement or the possibility of tariffs. And with the uncertainty of that, we did see some upside demand from customers in Q2 that drove revenue slightly higher than what we had originally anticipated in our model. That's really the only pull-in activity that we saw in the quarter. Operator: Then your next question comes from the line of Quinn Bolton with Needham & Company. Quinn Bolton: Fumi and Jeff, congratulations on the successful IPO. I guess I wanted to start with just looking at some of your end customers fitness tracker area, they seem to have pretty good results. Garmin, I think, reported a 41% year-on-year increase. And I guess I was wondering, can you give us a sense of just like the order trends you saw through the second quarter? Is your customer end market success leading to higher order rates? And then I guess a related question, how far in advance would you guys ship the Apollo processor ahead of when the end device might sell? Is that typically like a quarter lead time, but any sense on how far in advance you might ship ahead of your customers' end device sale would be helpful. Fumihide Esaka: Typically, our customers do place an order about 16 weeks lead time, and we do see our end customer, like you mentioned, but we cannot be -- we cannot make a very -- comment about the specific customer, but we see that the healthy growth, and we're very optimistic that they will continue to grow. Quinn Bolton: I guess maybe just on the orders, are you seeing kind of with that 16-week lead time, is that order book sort of suggesting sort of a healthy second half? I think you guys had previously seen some uncertainty around tariffs that had led to perhaps some caution on the second half. Any update on the tariff impact as you look into the second half of the year? Jeffrey Winzeler: Yes. I mean in terms of our guidance for Q3 revenue reflects the fact that we think there's a little bit of upside to what our financial model was, so that's a good thing. And we're cautiously optimistic. We also have seen the same news from the customers. I think in general, there's a macro feel that some of the tariff is not going to be as impactful as our end customers previously thought. So as I said, we're cautiously optimistic that the second half of the year will be better than what we had originally built into our plans. Quinn Bolton: Excellent. And then lastly, Jeff, any thoughts on gross margin as you look into the third quarter, I think you were around 43% in Q2. Would you expect gross margins to be relatively flat, up or down in the third quarter? Any directional comment would be helpful. Jeffrey Winzeler: Yes. We've taken a big step up from previous years, obviously, with exit out of China and the focus on other markets. So the 43% that we announced in Q2, I think, is relatively indicative of where our gross margin is today. Now going forward, that will vary by a point or 2 depending on the product mix in any given quarter, manufacturing yields, et cetera. But in general, I think that's a pretty safe place in terms of where our business is today. Operator: Our final question comes from the line of Tore Svanberg with Stifel. Tore Svanberg: Fumi, Jeff, welcome to the public market, and congrats on that Whoop win. So Fumi, you talked about the sort of first long-term strategic initiative. Clearly, you're starting to broaden the applications and markets that you are going into, especially on wearables. As we look at maybe in the next 4 months or so, which are some of the applications you expect to see revenue from? I know it's hard to kind of think out a few, but any color you could share with us that would be great. Fumihide Esaka: Well, we're not going to see a revenue from a new application, and again, this coming quarter, but definitely, some of the AR glasses are taking a first would -- working with some of the AR glass customers that definitely will be in the market very near term. And also, worker safety monitors and machine health monitor, those are already in the market, and we continue to -- we believe that to grow that market segment. So we believe that our application is growing really fast. Tore Svanberg: Very good. That's exactly what I was looking for. And then as my follow-up, could you just give us an update on Atomic, where we sort of are in the development process there? I think you have previously talked about that product being potentially available sometime next year. But yes, any -- well, precisely and obviously not for production, but any updates there would be helpful. Fumihide Esaka: Well, we're very excited to talk about Atomic, because we started working with early adopter on spec soon after we did a public offering. And activity is more active than ever before. Again, I believe that becoming a public company and our customers becoming more comfortable with working with Ambiq, we believe that we're going to make great progress coming quarters. Operator: With no further questions in queue, I will hand the call back to Jeffrey Winzeler for closing remarks. Jeffrey Winzeler: Thank you. Before closing the call, I'd like to let you know that we'll be attending the UBS Global Technology Conference in Scottsdale, Arizona on December 3, and the following day, December 4, we'll be at the Stifel Deep Tech Forum in Menlo Park, California. If you'd like to arrange a meeting with us at these events, please contact our IR firm, the Shelton Group. You can find the relevant contact information on the Investor page of our website, ambiq.com. Thank you again for joining us today, and we look forward to discussing our continued progress on our next earnings call. Operator, you may now disconnect. Operator: Thank you. Thank you for joining us today. This does conclude today's conference call. You may now disconnect.
Operator: Ladies and gentlemen, welcome to the Synopsys Earnings Conference Call for the Third Quarter Fiscal Year 2025. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If you should require assistance during the call, please press star 0, and an operator will assist you. Today's call will last one hour. As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to Tushar Jain, Investor Relations. Please go ahead. Tushar Jain: Good afternoon, everyone. With us today are Sassine Ghazi, President and CEO of Synopsys, and Shelagh Glaser, CFO. Before we begin, I'd like to remind everyone that during the course of this conference call, Synopsys will discuss forecasts, targets, and other forward-looking statements regarding the company and its financial results. While these statements represent our best current judgment about future results and performance as of today, our actual results are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect. In addition to any risks that we highlight during this call, important factors that may affect our future results are described in our most recent SEC reports and today's earnings press release. Pursuant to the close of the ANSYS acquisition on July 17, our results include roughly two weeks of ANSYS financials. As shown in today's financial statements, the vast majority of ANSYS revenue appears under the simulation and product group, with the remainder included under EDA. In addition, we will refer to certain non-GAAP financial measures during this discussion. Reconciliations to their most directly comparable GAAP financial measures, and supplemental financial information, can be found in the earnings press release financial supplement, and 8-K that we released earlier today. All of these items plus the most recent investor presentation, are available on our website at www.synopsys.com. In addition, the prepared remarks will be posted on our website at the conclusion of the call. With that, I'll turn the call over to Sassine Ghazi. Sassine Ghazi: Good afternoon. Q3 was a transformational milestone quarter for Synopsys. Against an unprecedented and challenging geopolitical environment, we closed the ANSYS acquisition, expanding our revenue, our customer base, and our long-term opportunity. We delivered third-quarter revenue of $1.74 billion and non-GAAP EPS of $3.39. Our results were primarily impacted by underperformance in the IP business as we had the expectation of deals that did not materialize, driven largely by the following three factors. One, new export restrictions disrupted design starts in China, compounding China weakness. Two, challenges at a major foundry customer are also having a sizable impact on the year. And finally, we made certain roadmaps and resource decisions that did not yield their intended results. We are actively pivoting our IP resources and roadmap towards the highest growth opportunities which I'll discuss in more detail. Looking ahead, we believe we have derisked our forecast knowing that transformation takes time and the external headwinds I cited will continue. We are taking a more cautious view of Q4 while still expecting to deliver a record revenue year. Let me provide more color on our Q3 execution and the actions we're taking to accelerate our strategy before Shelagh covers the financials in more detail. Zooming out, AI continues to drive unprecedented investment in infrastructure and R&D. Demand for high-performance computing and AI applications continues, while semiconductor demand in markets like industrial and automotive remains subdued. Despite the uncertainties and industry dynamics that we must navigate, I remain very optimistic about Synopsys' future. The increasing complexity, cost, and time-to-market pressure of designing and delivering AI-powered systems is a trend that persists across industries and underpins our opportunity. Now more than ever, we believe Synopsys will be a mission-critical partner in addressing these challenges. Adding ANSYS' gold standard simulation and analysis solutions to our portfolio dramatically expands our long-term growth opportunity. We are now not only the EDA leader, we are the global leader in engineering solutions from silicon to systems. This acquisition marks a significant milestone for not only Synopsys but also our customers and the industry. As products evolve into more sophisticated intelligent systems, their designs grow increasingly complex while development cycles continue to accelerate. The rise of physical AI underscores the importance of our combined expertise. R&D teams must not only optimize product design for performance and efficiency but also consider the real-world interactions of these products. That's why, for example, we're embedding NVIDIA Omniverse technology into our ANSYS simulation solutions making it easier to develop, train, test, and validate autonomous systems with greater speed and confidence. Not only can we deliver new innovation, with ANSYS now part of Synopsys, we have diversified our portfolio and our global customer base. Together, we will maximize the capabilities of engineering teams across industries, from semiconductor to automotive, industrial, aerospace, and beyond, enabling them all to rapidly innovate AI-powered products. Let's move on to business highlights. Design automation revenue inclusive of ANSYS products was up 23% year over year led by strength in hardware. As the complexity of designing silicon for AI workloads drives demand for Synopsys' powerful emulation and prototyping solutions. In Q3, we achieved multiple competitive wins with leading hyperscalers and shipped record Zebu Server 5 and HAPS 200 Xebu 200 units. EDA continues to demonstrate resiliency. Our Q3 results reinforce our leadership in next-generation chip design. Synopsys continues to win competitive bids for full-flow digital implementations, including a multiyear commitment with a leading AI customer. Synopsys' sign-off and extraction platforms also continue to set the industry standard with broader customer deployments and successful tape-outs on advanced designs. Synopsys' leading AI capabilities are a key differentiator. Today, roughly 20 customers are broadly piloting Synopsys.ai GenAI-powered capabilities. These capabilities pave the way for agent engineer technology. We believe the evolution of AI from helper to a doer will truly transform engineering workflows. Multi-die momentum also continued in Q3. We enabled multiple successful multi-die tape-outs for leading AI semi companies. Customers are enthusiastic about the promise of integrating our semiconductor timing and power sign-off capabilities with ANSYS' gold standard of thermal sign-off. And we expect to deliver our first fully integrated solution in the first half of next year. I'll turn now to simulation and analysis products which empower users to build and test products virtually. These solutions represent the largest portion of our ANSYS acquisition and performed in line with our expectations for the quarter. As is typically the case, the largest contributors were in the high-tech, aerospace, and automotive verticals. In Q3, we released ANSYS 2025 R2, providing customers access to groundbreaking advancements in AI-driven simulation, GPU acceleration, system-level modeling, and cloud computing. These newly released products extend Synopsys' AI leadership into simulation and analysis to help customers more efficiently develop and deliver their innovations. Turning to design IP, which was down 8% year over year due to the headwinds I previously mentioned. Again, we need to pivot our IP resources and roadmap to the highest growth opportunities. These changes are already underway. Let me give some context. Zooming out, evolving data center architectures, particularly those focused on AI, are accelerating the demand for faster data movement. This trend is driving strong demand for high-speed protocol IP and solutions that enable both scaling up and scaling out of large-scale systems. At the same time, the semiconductor and IT landscape is undergoing profound change. What was once a business rooted in individual licensing is rapidly evolving. The industry is increasingly requiring more sophisticated subsystems and chiplet-based solutions to combat complexity and accelerate time to market. In summary, our high-performance silicon-proven IP portfolio positions us as the leader in the fast-growing interface IP market. We support a broad spectrum of applications, including HPC, Edge AI, automotive, mobile, and consumer. By retargeting our resources and portfolio toward higher-value solutions, we are further strengthening our leadership in advanced interface and foundation IP. Before handing over to Shelagh, I want to address the company-wide steps we're taking to achieve greater scale and efficiency to accelerate our silicon-to-systems strategy and drive long-term growth. Synopsys' transformation, which began with the divestiture of the Software Integrity Group followed by our strategic acquisition of ANSYS, continues. Specifically, we are conducting a strategic portfolio review and will be taking actions to focus our investments and our execution on the highest growth opportunities. We look forward to delivering with ANSYS a differentiated design solutions roadmap and remain firmly committed to realizing the projected synergies of the merger. In addition, our enterprise-wide initiative to develop and deploy custom GenAI is boosting productivity. We will continue harnessing AI efficiencies to optimize our cost structure. Taken together, we expect to undertake related actions starting soon that will reduce our global headcount roughly 10% by the end of fiscal year 2026. A few closing thoughts. Synopsys is transforming. With ANSYS, we are now the leader in engineering solutions from silicon to systems. We've expanded our opportunity, broadened our portfolio, and increased the resiliency of our business. We remain focused on maintaining our leadership position while pioneering new solutions that will shape the next wave of innovation. Near term, we are deeply committed to prioritizing our IT execution and improving our efficiency to scale the business, accelerate our strategy, and capitalize on the highest growth opportunities. Thank you to our employees, customers, and partners for your continued commitment. Engineering is undergoing unprecedented transformation and Synopsys is seizing the opportunity to reengineer engineering. Now over to Shelagh. Shelagh Glaser: Thank you, Sassine. Q3 revenue came in at $1.74 billion, non-GAAP operating margin at 38.5%, and non-GAAP EPS at $3.39. Backlog came in at $10.1 billion including ANSYS, underscoring the resilience of our business. Our results were impacted by the underperformance in the IP business due to the headwinds Sassine outlined. Tailwinds from a strong quarter in our design automation segment and the close of the ANSYS acquisition partially offset these headwinds. In light of these headwinds and tailwinds, we are taking a conservative view on Q4 and updating our full-year 2025 targets for revenue, operating margin, EPS, and free cash flow. I'll now review our third-quarter results. All comparisons are year over year unless otherwise stated. We generated total revenue of $1.74 billion, up 14%, with strong growth in design automation. Regionally, we saw strength in Europe and North America, and despite sequential improvement in China, headwinds persist. Total GAAP costs and expenses were $1.57 billion and total non-GAAP costs and expenses were $1.07 billion, resulting in a non-GAAP operating margin of 38.5%. GAAP earnings per share were $1.50, and non-GAAP earnings per share were $3.39. Earnings included the impact of lower cash on our balance sheet and the additional $4.3 billion term loan used to fund a portion of the cash consideration and expenses associated with the ANSYS acquisition. Now onto our segments. Design automation segment revenue was $1.31 billion, up 23%, with strong performance from our hardware business. Design automation adjusted operating margin 44.5%. Design IP segment revenue was $428 million, down 8%. As mentioned before, our IP business faced several headwinds. In response, we are taking a more conservative view of Q4 and we are realigning our IP resources to the highest growth opportunities and improving our execution. Third-quarter Design IP adjusted operating margin was 20.1%, due to the lower than expected revenue and the investments we are making in the IP roadmap. Moving to cash. Free cash flow was approximately $632 million. We ended the quarter with cash and short-term investments of $2.6 billion and debt of $14.3 billion. Now to guidance, which has been updated to include ANSYS, as well as factoring the continuation of the headwinds previously discussed. For fiscal year 2025, the full-year targets are revenue of $7.03 to $7 billion, total GAAP costs and expenses between $6.08 and $6.1 billion, total non-GAAP costs and expenses between $4.43 and $4.44 billion, non-GAAP tax rate of 16%, GAAP earnings of $5.03 to $5.16 per share, non-GAAP earnings of $12.76 to $12.80 per share. Cash flow from operations of $1.13 billion and free cash flow of approximately $950 million, lower than prior expectations due to lower revenue and the interest impact of cash utilization and additional debt for the ANSYS acquisition. Now to targets for the fourth quarter. Revenue between $2.23 and $2.26 billion, total GAAP costs and expenses between $2.12 and $2.14 billion, total non-GAAP costs and expenses between $1.44 and $1.45 billion, GAAP earnings of negative 27¢ to negative 16¢ per share, and non-GAAP earnings of $2.76 to $2.80 per share. Our press release and financial supplement include additional targets in GAAP to non-GAAP reconciliations. With the ANSYS acquisition now closed, we remain confident in achieving the committed synergies of the merger. This is despite the delay in completing the follow-on divestitures of the Optical Solutions Group and PowerArtist business which is elongating the full integration of ANSYS as we work to obtain a final regulatory approval of the buyer. In conclusion, this was a milestone quarter for Synopsys. We are clear-eyed about the challenges we face and the actions we must take to align our portfolio to the highest growth opportunities, optimize our cost structure to drive greater scale and efficiency, which will include reducing our global headcount roughly 10% by 2026, and importantly, to extend our leadership position in engineering solutions from silicon to systems. Delivering a differentiated design solutions roadmap with ANSYS. The team is laser-focused on executing a strong finish to the year and delivering resilient, long-term growth for our shareholders. With that, I'll turn it over to the operator for questions. Thank you. Operator: Thank you. To ask a question, please press 1 on your telephone keypad. Please ensure you are not on mute when called upon. Before we begin the Q&A session, I would like to ask everyone to please limit yourself to one question and one brief follow-up to allow us to accommodate all participants. If you have additional questions, please reenter the queue, and we'll take as many as time permits. Again, it is star one to ask a question. Your first question comes from Ruben Roy of Stifel. Your line is open. Ruben Roy: Yes, hi. Thank you very much. Sassine, I'm wondering if you could maybe spend a few minutes just walking through the three challenges around the IT business. Just kind of thinking through export restrictions and design starts in China and then the foundry customer versus the roadmap and, you know, the impact of that. It seems like that's potentially a bigger issue that could be a headwind longer term. And maybe you could just kind of describe Q3 and kind of what the impacts were across each of those three issues. And then, you know, as you think about next year, and, you know, resource reallocation, etcetera, you know, will this require acceleration in things like M&A, or are you, you know, kind of positioned to address the needs of your customers with what you're working on for organically? And how soon can you turn this around on what sounds to be the most important part of those three headwinds? Thank you. Sassine Ghazi: Yeah. Thank you, Ruben, for the question. You're right. There are three factors that we mentioned that impact our IP performance for the year. The first one is the China BIS. Even though the restriction was only limited to six weeks, the impact from our customer behavior lasted definitely longer than the six weeks restriction. Customers were questioning whether or not they will invest in a multiyear commitment with Synopsys, how broad will they make that investment, they start an investment in a chip, can they finish it? Can they tape it out? So I don't want us to assume that the impact was limited to the restriction period, which was six weeks. The other factor, which is the foundry customer impact, where we have made a significant investment in building out our IP for that foundry customer with an expectation that there will be a return in '25 and that did not materialize for a number of reasons out of our control. They are market-driven reasons and customer-related reasons for that. So when we look at the impact for the quarter and as we derisk our Q4, those two primary reasons were what created the impact for the revenue during Q3 and as we're anticipating, Q4 and continuation of these factors. As for the last point, which is the roadmap and resource allocation, it's somewhat related to bullet number two. As we make investments and as the leader in IP, we have responsibility as part of the market position we have. We're not a boutique IP. We have the broadest IP portfolio and our customers expect us to serve various needs and requirements that they have. So some of the decisions we made were investing, for example, in edge AI opportunities for IP, that we put resources on delivering to these opportunities and it came at some roadmap cost. On which foundry to make that investment and for data center delay in some of our IP titles. That is something we know exactly what we need to do, and we're already underway to address them and to give you some color on what we are doing. Within Q3, we have merged two engineering teams. So we have our IP team that builds and delivers on what we call standalone IP. And the market is shifting towards subsystem and potentially in the future chiplet delivery, and we had a separate team that works on customization, which we call the system solution group. We merged these two groups together in order to accelerate our ability to deliver to the opportunities that they're in front of us. So it's all about scaling and we are addressing the scaling opportunities. And I have no doubt that we will see our ability to pivot these resources. And these are things you cannot visit within a ninety-day window. But as we look at the roadmap and the priority of the roadmap, we will commit and deliver to these items. Ruben Roy: Thank you for that detail, Sassine. If I could segue then into a question for Shelagh on the operating margin. With IP coming down, and ANSYS, you know, sort of coming into the model here. I've done my math correctly. It looks like, Shelagh, the operating margin is gonna net out to a little less than 36% for Q4. And just wondering if you can comment on kind of the decline in operating margins and maybe how you bridge to the longer-term target in the mid-40s? Shelagh Glaser: Yeah. Thanks for the question, Ruben. It's really the impact of the IP business and the downside on revenue of the IP business. As Sassine talked about, that's a very resource-intensive business. So as the revenue headwinds that we talked about are hitting the business, we're realigning the resources but we want to continue to invest in that roadmap for the long term. And so, that's really the impact. I would say it's a lesser impact. Obviously, ANSYS is fully integrated. ANSYS came with a higher operating margin, so the impact is really the IP. And our commitment to the long-term margin in the mid-forties is still intact. So our short-term headwinds that we're managing through are really short-term headwinds, but there's no change in our long-term commitment. Ruben Roy: Got it. Thank you, Shelagh. Sassine Ghazi: Thank you, Ruben. Operator: The next question comes from Lee Simpson of Morgan Stanley. Your line is open. Lee Simpson: Great. Thanks for squeezing me in. I mean, maybe I'll start again with the design IP. I mean, clearly, the weakness here has come as quite a surprise for everyone. We haven't seen this elsewhere. It does look maybe on simplistic mathematics that it's run about $120 million that you're weaker versus expectation anyway for design IP and I think you've called out the two elements, China and, of course, the foundry customer as primary here. So I'm just trying to understand how much of a heads up did you have on this weakness, this design IP slowdown, and maybe how much of this is permanent? I mean, does the China business come back, you think? Does the foundry business evolve into something else? And I'm really just trying to get a color on how permanent this might actually be. Thanks. Sassine Ghazi: Yeah. Thank you, Lee, for the question. I want to start with that we had an aggressive plan in IP for FY 2025 after an outsized performance the year prior where we grew that IP business by 24% and the year before that, by 17%. And there were some large agreements we were not able to get during this, I want to call it, hyper and intense period of our company's history. I know I communicated to some of you that during Q3, I was in China six times. In order to work on the transformative acquisition that we got to a positive outcome. Of course, it was the most important thing we had to do, and we got it done and we're very excited about it. In the process, there were signals that were missed in the forecast as to the magnitude of the factors I described, the two factors that you outlined. So I don't believe that these factors are just a Q3 impact. We will continue on derisking our forecast and anticipate that we will have a transitional and muted year in IP as we look ahead into FY '26. Now in December, we'll provide more color about the overall FY '26 components and we feel strongly about the other segments of the business. But as it relates to IP, and these two factors regarding China and the conditions in China, I don't believe this is a Q3 only challenge. As it relates to the foundry customer, it all depends on where do they go with the technology that we already developed the IP for. And what's the opportunity to sell that IP we developed it? Now is it permanent? It depends what you mean by permanent and at what level of the IP business. We have an incredible market position in IP. The demand actually is much higher than our capacity to deliver. One of the challenges that I described as roadmap, resource allocation, we have a massive team working on IP yet we cannot capture all the opportunities ahead. I mentioned some of the actions we took, there will be more, deeper look in terms of priority as well as our ability to scale by leveraging technology like AI. New methodology to be able for our team to deliver the IP faster, higher quality, etcetera. So the opportunity in IP is absolutely strong, but there will be a transitional period due to the factors I mentioned. Lee Simpson: Gotcha. And maybe just one further clarification on the roadmap and resourcing. I'm just trying to understand. Is there a specific area that we should be thinking about here? It sounds to my ears, and I could be wrong, obviously, that this is mainly foundational IP that you're realigning for. Because you did mention interface technology but didn't suggest that that was where you're realigning. That almost seemed like where you were doubling down. Have I got that the right way around? Sassine Ghazi: Let me add more color, Lee, because it's not quite. So today, if you look at the Synopsys portfolio for IP, we serve multiple markets. HPC, Edge AI, automotive, mobile, consumer, and we serve that portfolio for multiple foundries, not only one foundry. And as I mentioned to Ruben when he asked the question, we have and our customer has expectations. And we have the responsibility given that portfolio breadth that we have to serve the multiple foundries for those multiple markets. In both interface IP and foundation IP. There's more and more customization in particular for interface IP. And these customizations are moving from an off-the-shelf to a more subsystem delivery. Which is it takes longer, it takes more resources. And our ability to change the business model or the need to change the business model is an ongoing dialogue with our customers. Because as they're expecting us to do more work than just off-the-shelf IP, there's an opportunity for higher monetization. And that's what we're pivoting our resources, our methodology, our approach, from an architecture point of view to serve that market for the interface IP that I talked about. Lee Simpson: That's very clear. Thanks so much. Sassine Ghazi: Thank you, Lee. Operator: Your next question comes from Charles Shi with Needham and Company. Your line is open. Charles Shi: Yeah. Good afternoon. I do want to follow-up. The pivoting on the IP side of the business. It does sound like, other than the China and maybe the foundry customer challenges, Synopsys is really going through a transition in the IP business model. I think one thing really caught my attention in your prior remarks, Sassine, was about the higher level of customization, maybe more migration into subsystems. It seems like that it's something your IP, not necessarily a competitor, but another peer of your IP in the IP business is going through over the past couple of years. I wonder how should we rethink about the long-term IP operating profitability from that perspective because we do get the idea of why this is moving to that direction, but are you able to maintain or the same kind of IP long-term operating profitability targets going forward? Wonder if you can provide some strategic thoughts on that direction. Thanks. Sassine Ghazi: Yeah. Thank you, Charles. You know, the pivot from our customers in terms of expectation from off-the-shelf IP to customization is not new. But what is new is the magnitude in which the number of customers are expecting for us to deliver instead of discrete IP, to deliver a number of IP that we glue them together with some customization logic and test logic, etcetera, and validate and ensure that it hits the mark with the right quality. Each one of those engagements historically had two components. It had an NRE component and a use fee component. Given the demand for that customization, we need to ensure that we are capturing the right value for the impact we're delivering. Therefore, it's not something that we are, I want to say, happy to just say it's an NRE plus a use fee. There has to be another element in order for us to put priority for these opportunities and deliver too. And that's what discussions we're having with a number of these customers. And as you look ahead, if you fast forward two plus years from now, will we start delivering from a discrete IP to a subsystem to possibly chiplet? What level of chiplet? Is it a soft chiplet? Is it a hardened chiplet? Meaning, GDSII? Is it all the way down to a known good die with a partner? These are all questions and expectations our customers are asking us given we are the leader in that space. And we have a number of engagements with a few strategic partners, we are absolutely assessing as this market is pivoted and we're pivoting with it what is the business model to maintain the right profitability? In order to capture the opportunity and growth that we have? Charles Shi: Thanks, Sassine. Maybe I'll follow-up a short-term 10.1 billion backlog for the quarter exiting July. How much of that was ANSYS backlog and how much of that was legacy Synopsys backlog? Thanks. Shelagh Glaser: Hi, Charles. We're not gonna be breaking that out, but we have strength across the business. So we continue to see strength in our core business. We saw strength in ANSYS. And that gives us a lot of confidence in the long-term growth of the business. 10.1 billion. Thank you. Operator: Thanks for the question, Charles. The next question comes from Joe Quatrochi with Wells Fargo. Your line is open. Joe Quatrochi: Yeah. Thanks for taking the questions. Maybe just to follow-up on that last kind of train of thought on the IP business. I mean, are we to think about, you know, you looking at different business models in terms of royalty, and things of that nature similar to some of your competitors? And I guess, you talk about just if your customers, I think you talked about them wanting to move very quickly on these subsystems and IP. I guess, can you talk about just time to market and the competition there? Sassine Ghazi: Yeah. Joe, the key is the IP business is scaling. And Synopsys, we've been fortunate. We've been in that business for 26 years and we do have the investment and the scale. But given the fragmentation, I want to call it, based on our customer needs and requirements that are becoming more customized. No matter how much scale you have, you need to put priority. And based on the priority, the right business model, in order to capture the right value for what we are delivering to those customers. And some of the discussions we're having with our customers is a combination that does include some sort of a royalty. We're in a fairly early phase in this discussion, and those are very much related to subsystem type of delivery to our customers. So I hope that clarifies it, Joe, what I mean by we need to look at something different than an NRE plus a use fee given that customization opportunity. Joe Quatrochi: Yeah. Appreciate the detail. And then as a follow-up, for Shelagh, how should we think about just on the go-forward basis? Like, what's the right level of cash balance that you need, you know, day to day as we think about just the debt pay down and the pace? Shelagh Glaser: Sure. So in terms of our day-to-day cash balance, we have a minimum that we hold just to ensure that, you know, we're properly able to invest in the business. We're well above that with the cash balance we have. This year, we'll make interest payments on the debt. And we anticipate being able to start to pay some of the principal next year on the term loans. Those two term loans are due in '27 in the '28 time frame. So well above our minimum to be able to manage the business. And the one other cash inflow that we'll have once it was in my prepared remarks, but once we complete the approval with SAMR of the buyer, of OSG and PowerArtist, we'll have that cash in. Both of those dispositions. Thank you. Operator: Thanks for the question. Your next question comes from Sitikantha Panigrahi with Mizuho. Your line is open. Sitikantha Panigrahi: Thank you. I want to switch to the ANSYS acquisition. So it's been now ANSYS one and a half more than one and a half months. With after the close. So what are the puts and takes in terms of, you know, what you expected at the beginning last year when you talked about versus after you having? What are the surprises that you have seen? And, specifically, I think you talked about the revenue synergy. You still reiterated, but going back to the ANSYS growth, if we look at S-4 filing there, they were talking about low to mid-teens over the next few years. So what are the potential drivers for that ANSYS to grow above that 10% market growth? Any color would be helpful. Sassine Ghazi: Yeah. Thank you, Sitikantha, for the question. As you can imagine, we are incredibly thrilled and enthusiastic about the opportunities ahead. And the market is speaking, actually, when you look at the moves that are happening in the market, to grab assets in order to bring in the solution that is required for physical AI to have a digital twin of a system. And in order to have it on time with high quality and low cost, you need simulation. You need virtualization of these systems. And in order to have it, with high quality, you need a sign-off product, multiple levels of physics in order to make it happen. Now the opportunity is not waiting for the physical AI when it takes place and it happens. There's an immediate opportunity, which is 3D IC. With 3D IC, there's a thermal need. There's a structure need. There's a fluid need. And ANSYS is bringing a great position into the Synopsys portfolio and integrating this technology during the semiconductor and chip design phase. So when you're building that multi-die system, you are confident that you're signing off with the right technology in order to achieve the right outcome. So from a surprises, there are no surprises actually except pleasant ones, given we know the team very well, a lot of enthusiasm, and energy and excitement from the teams. As Shelagh mentioned in her remarks, there's a final stage that we're trying to close with SAMR as soon as possible, which is the acquisition's scope has been, oh, sorry. The divestiture scope has been approved. But the buyer is in the process of approval. So we are taking some measures to keep the business and the integrity of the optical and power artist separate. But once that is behind us, the integration full force ahead to deliver on these solutions. Sitikantha Panigrahi: And, Shelagh, just a follow-up to that. ANSYS revenue, $78 million in Q3. But what's your assumption of ANSYS revenue embedded into the Q4 guidance? Is Q4 historically a strong quarter for ANSYS, but, again, you'll only include October. So is there any linearity in the quarter that we should consider? Any color will be helpful. Shelagh Glaser: Yeah. So in Q3, as you noted, the $78 million revenue disaggregation of S&A, and as we noted in the prepared remarks at the beginning, there's a small portion of ANSYS revenue that is also in our EDA. And for Q4, it's included in the full guide that we have ANSYS for all weeks of the quarter. And then in terms of ANSYS, they have conformed to our fiscal calendar, which as you note, their Q4 only one month of it falls into our fiscal calendar. So, obviously, some of that, some strength that you see in sort of the November time frame, that'll be in our Q1. And so we've aligned that fully. But I'm not gonna give a subsegment view as we don't guide below the total company. Thanks for the question. Sitikantha Panigrahi: Thank you. Operator: Your next question comes from Joe Vruwink with Baird. Your line is open. Joe Vruwink: Great. Thanks for taking my questions. EDA and IP as industries have fairly diversified opportunities, and that's true across customer accounts and end markets. But Synopsys has always been fairly unique that traditionally, you have one outsized account. It exposure, and some of the things you're saying seem to consider a need to diversify further. You made a remark, Sassine, earlier, about two years, you know, two years from now, we'll look back, and I think contract lengths being two to three years. Is that the appropriate time frame to fully enact the changes you're focused on and getting the business back on the track you believe is right? Sassine Ghazi: You're right. In terms of EDA and IP, we have a fairly diversified customer base simply because you cannot build a semiconductor chip without the need of EDA or IP. So while we have a fairly diversified customer base, Synopsys has been very successful with capturing the large percentage of wallet from leading large semiconductor companies. That has been our strength. With this one customer exposure that you're talking about, we have derisked part of that exposure in our FY '25. And there's a blend of contracts we have with that customer no different than any other customer, which is EDA, software, hardware, and IP. They have different time horizons, and it's very difficult at this stage to forecast what will happen and by when not knowing the situation of that customer one, two years from now. But that being said, we work very actively to expand our business at multiple levels of growth opportunities and that's where ANSYS will bring us a significant and positive opportunity to diversify the portfolio as well in terms of customer concentration as well as regional concentration. For example, the percentage of business in Europe versus China for ANSYS is very different than Synopsys Classic. So there's a big opportunity to diversify further with the ANSYS addition to the portfolio. Joe Vruwink: Okay. That's helpful. Thank you. Shelagh, maybe you'd answered this already, but I think it would be helpful just to get a baseline around what's changing in this guidance versus the guidance that was previously on the table. You know, how much is IP coming down, how much does ANSYS add, China is a factor. Just anything there that can help get us all on the right baseline going forward. Shelagh Glaser: Sure. So, as you know, the three headwinds that Sassine talked about in the IP, those are fully incorporated, and it's a balance between those three. What the impact was, and then as you noted, ANSYS has been added and it was a sub-period in Q3, so somewhat minimal. You saw the S&A, $78 million. And then ANSYS for Q4, again, I will remind you, the question that was asked previously. So I would say the biggest part of the ANSYS quarter is usually in the November time frame, and that'll be in our Q1. You know, the decline was really that update on the IP and then that's offset by the addition of ANSYS. Joe Vruwink: Okay. Thank you. Operator: Thanks for the question. Your next question comes from Harlan Sur with JPMorgan. Your line is open. Harlan Sur: Good afternoon. Thanks for taking my question. I assume that the Q3 foundry revenue weakness in IP was due to your largest customer as they pivot from their prior focus on 18A to now 14A foundry manufacturing technology? Is that the right assessment? And given the challenges of this customer, I mean, there's still question marks on their ability to be successful in Foundry. Is this Synopsys team still gonna support this customer on their future Foundry roadmaps? Sassine Ghazi: Harlan, as you know, I used the word earlier. There's an expectation. When you're the leader in IP, and you engage with a customer, we cannot tell that customer that we want to pick and choose what project or which foundry and for which application we want to engage. Because then they will not trust and the relationship with Synopsys. That has been our strength. As far as the whole 18A and the pivot to possibly a different technology, that's a customer choice. Whatever choice they make, we already have the IP available to the node that we have built it to. And part of the relationship with the foundry is we look ahead at timing, and the size of the opportunity, meaning the commitment to Synopsys and the post-delivery on that IP, what is the available market that we can sell it to? So that's really the situation that we have in general in IP. And specifically with some of our foundry customers. Harlan Sur: Thank you for that, Sassine. And then, Shelagh, looks like your total expense guidance for Q4 is coming in about $15 million higher, about three and a half percent higher than if I just combine your total expense structure and ANSYS' total expense structure prior to the close of the acquisition. So what's driving the higher expense outlook for Q4? And then more importantly, from the Q4 base, how do we how should we think about the potential cost synergies looking out over the next few quarters? In other words, how should we think about the fiscal 2026 Q4 exit run rate on total expenses? Shelagh Glaser: For the question, Harlan. On the first one, there's just some cost with, you know, really the initial quarter of bringing ANSYS on. And we want to make sure that it's a very successful integration. So I would say it's just part of ensuring that we've got a smooth integration going on. And then in terms of longer-term guidance, we'll talk about that in our Q4 earnings, what the expectations are for 2026. As we talked about in our prepared remarks, we are taking a comprehensive portfolio look and we're also driving greater scale and efficiency with a 10% overall headcount reduction that will drive through fiscal year 2026. And so that has the effect of actually accelerating our synergies that we had talked about when we announced the deal. So we'll talk more specifically though, Harlan, about sort of the direction of travel in '26. When we do Q4 earnings. Harlan Sur: Okay. Thank you. Operator: Your next question comes from Jay Vleeschhouwer with Griffin Securities. Jay Vleeschhouwer: Sassine, for you first, is the 10% targeted reduction of headcount something that you would have done irrespective of the current and anticipated unpleasantness in IP? And in other words, you would have done that anyway. It looks as though your organic headcount ex ANSYS was up 2,000 heads year over year, up over 600 sequentially. So perhaps you got a bit ahead of yourselves in terms of the organic expansion. And in the meantime, can you talk about the integration or consolidation that you've done of ANSYS already? Our understanding is that very soon after the close, you consolidated around the named accounts direct business. And perhaps you could also talk about your intentions on their very large indirect business. And then my follow-up for Shelagh. Sassine Ghazi: Jay, thanks for the question. As you can imagine, with an eighteen-month regulatory process, we were somewhat limited in terms of our ability to take actions on either portfolio or headcount adjustments. So the 10% headcount adjustment is something we would have done and we've been planning for it for a while and before even the acquisition was approved in preparation that we will be ready to act and carefully and thoughtfully of where to target that reduction. So that we have gone through internal strategic portfolio review. We're looking at the multiple layers of management processes, systems, the impact of AI that we have been deploying inside the company for about two years. So there are many opportunities actually to make sure we're putting the resources at the high impact, high return, and reducing where we can reduce, leveraging technology and the impact of it for further reduction or cost avoidance in the future. There's a very thoughtful process we've gone through for a number of months in preparation for action to be taken post-close. In terms of integration, as I mentioned a few questions ago, we have to make sure that we are very careful in our integration speed as we still are owning OSG, which is the optical business and PowerArtist. To make sure there's no contamination, there's no impact whatsoever in terms of the health of that business as we're handing it over to the buyer. So we are moving in some places where there's no impact. In other places, we're being very cautious and careful how fast do we go. Jay Vleeschhouwer: Okay. Shelagh, you made the interesting comment that you've already coordinated ANSYS' fiscal period with yours. And you noted the Q1 concentration. Following up on that, historically, ANSYS was indeed highly seasonal, particularly in their Q4, but not only in their Q4 because of 606 effects. So the question is, do you think that over time you could perhaps smooth out those seasonality and or 606 effects that they had so pronounced in their numbers? In other words, do you think you might change their lease and upfront model to more of your prevailing subscription model? Shelagh Glaser: Jay, that's certainly something we're looking at over time as we deploy new products and have new offerings for customers, how there might be more alignment with how we renew with customers, we give products to customers, and then we service them. So that's certainly something, but as you mentioned, that's a bit longer term because the renewal dates and the products that customers are buying are those have to be on the shelf right now. So as we move forward, there's an opportunity to do that. I do want to follow-up because you had a question for Sassine on the channel, I think. And so I want to make sure that we do address that. As a really important part of is about 25% of ANSYS. We're really thrilled to have such a robust channel, and we are ensuring that that's very smooth and that's very seamless, and those customers continue to get service. And then there's an opportunity, of course, because at Synopsys Classic, we did not have a channel. But now there's an opportunity for our products to be sold by those great partners. So there's no change whatsoever for the channel. They're just, you know, a wonderful asset, and we're ensuring that there's no disruption to the channel as we move forward. Jay Vleeschhouwer: Okay. Thank you. Kevin, I'll take one more question. Operator: Thank you. Our final question comes from Jason Celino with KeyBanc Capital Markets. Your line is open. Jason Celino: Hey. No. I appreciate you fitting me in. I'll just ask one. In the essence of time. I think, you know, you've mentioned multiple times that you've tried to derisk, you know, the Q4 guide to adjust for some of the headwinds you've been seeing. Without knowing how much ANSYS is contributing, it's hard to measure how conservative or derisked it is. So maybe I'll ask it a different way and say, you know, IP historically has been up sequentially for the past two years in Q4. Maybe it's regular seasonality or maybe it was something more specific. But, you know, given the headwinds you've seen directionally, you know, could we see the same trend again with seasonality in IP for the last couple of years? Sassine Ghazi: Jason, we do expect a transitional period and a muted year as we look ahead in IP. And that's due to the two factors we don't believe they will disappear in a short period of time. Now we have it balanced with a number of other opportunities to scale and deliver to the points I mentioned, like the subsystem opportunity, the serving the various markets, various foundries, etcetera, etcetera. But that's the expectation as we look ahead. Sassine Ghazi: Thank you all for joining our call. We look forward to talking you through the quarter. Sarah, could you please close us out? Operator: Thank you. This concludes today's conference. We thank you all for joining. You may now disconnect.
Operator: Welcome to the Rubis 2025 Half Year Results presentation. [Operator Instructions] Now I will hand the conference over to the speakers to begin today's conference. Please go ahead. Clemence Mignot-Dupeyrot: Good evening, everyone. I'm Clemence Mignot-Dupeyrot, Head of Investor Relations. I am here today for Rubis's H1 2025 Results. I am with Clarisse Gobin-Swiecznik, Managing Partner; and Marc Jacquot, CFO. Clarisse will start the conference. Clarisse Gobin-Swiecznik: Ladies and gentlemen, good evening. To kick off this presentation of our H1 results, let me very quickly remind you what we do. Our business is about distributing energy while supporting mobility solutions. In Europe, we distribute and sell LPG, and we also produce and sell photovoltaic power. In Africa, we distribute and sell bitumen to road contractors in West Africa and fuel and LPG in East Africa. In the Caribbean, we distribute and sell fuel and LPG. Those products reached a wide range of customers, both individuals and professionals while the distribution is supported by a reliable and most of the time in-house logistics. For H1 2025, this diversified business model delivered a steady performance. In a global economic environment marked by uncertainty, our results for the first half of 2025 standout with growth in volumes and margins across all regions and product lines. Photosol continues to progress according to plan on track towards 2027 objectives. Our group EBITDA grew by 3% and the net income group share by 26%, driven by a stronger operational performance, better FX management and stable emerging currencies. Cash flow generation remains steady at EUR 276 million for H1, which is a key highlight of this publication. All of this gives us confidence in reaching our full year guidance, even in a less favorable USD-Euro exchange rate environment in H2. The following slide highlights our balanced growth across product lines and geographies. It showcases the strength of our commercial strategies, our agility, and seamless execution. Looking at our H1 performance by business line, you can see that in Retail & Marketing, all products delivered both volume and margin growths. LPG was driven by a very strong commercial momentum in Europe. In fuel distribution, the expected pricing formula adjustment in Kenya took the first step in March. The second step implemented in mid-July will show in our H2 performance. In bitumen distribution, demand in Nigeria is strongly picking up. The sharp decrease in unit margin visible here is purely a basis effect linked to the 2024 currency devaluation. We already mentioned it in Q1, Marc will elaborate further on this point. As for Support and Services, which covers supply to the distribution business, and the SARA refinery performance remains overall stable. Finally, the renewable business is expanding as planned with a sharp increase in both assets in operation and secured portfolio, in line with the remark we presented at last year's Photosol Day. In conclusion, this first half results are yet another demonstration of the group's ability to deliver consistent commercial and operating performance, cycle after cycle. And when you combine that resilience with discipline and proactive financial management, the outcome is clear, the strong and steady cash flow generation is fully in line with our historical standards. Marc Jacquot: Thank you, Clarisse. Good evening to all. Let's start with the big picture for the first half. Our EBITDA is up 3% year-on-year and flat on a comparable basis. As Clarisse already mentioned, this is driven by strong LPG performance in Europe, while in Africa, Kenya improved volumes and margins in the retail segment, and bitumen return to growth in Nigeria. Net income is up 26% to EUR 163 million, reflecting the absence of FX losses. CapEx related to the distribution business remains well under control, roughly stable at EUR 73 million while they are increasing in renewable to EUR 85 million, which is a concrete and positive sign that our growth projects are now materializing and are being steadily derisked. Nearly 85 megawatts were put in operation over H1 and 290 megawatts are now under construction. Corporate net debt is stable at 1.4x despite a negative trend in working capital over H1 which confirms our strong financial position. And finally, cash flow from operations remained strong at EUR 276 million for the first half year, supported by the good operating performance and the absence of FX losses. All in all, that's a solid performance. Now let's take a closer look at our activities. Retail & Marketing delivered a solid performance across the board with EBITDA increasing by 3% year-on-year. In Africa, we have three things to highlight. First, retail. Retail is contributing well and the impact of the new pricing formula in Kenya is expected to be fully visible in the second half. Second, aviation, which is more volatile, is facing higher pricing competition, leading us to reduce our volumes for the moment in Kenya. And the third one is bitumen. Bitumen margins increased less than volume and this is a basis effect from 2024 when naira devaluation impact affecting the financial results below the EBITDA was passed through to customers. Now let's look at the Caribbean. The Caribbean region was broadly stable, which is in line with our expectations. Guyana slowed down a bit with the election coming up in September, creating some kind of wait-and-see behavior among our B2B customers. In Haiti, the measures we have taken in our logistic management are starting to pay off, even if volumes remain a bit soft. Jamaica is normalizing with supply conditions slightly less favorable than last year. Now Europe. In Europe, the momentum is particularly good as a result of our challenger positioning combined with the excellence drive of our commercial teams and a colder winter this year. Looking at Support and Services, it remained stable, which is normal as this segment usually flexes with our Retail & Marketing activities. Now the renewable electricity production, what we can say is that the power EBITDA stands at EUR 22 million, which is up 38% year-on-year. In line with our road map, our development expenses have increased, reflecting the acceleration of the growth of this business, resulting in a consolidated EBITDA at EUR 10 million. In conclusion, this is a robust operating performance, attesting to the strength of our product and geographical diversification. Let's have a look at our financial results. Let me highlight just a few items here. The net income group share is up 26% or on a comparable basis, 18%. This is the result of lower expensive local debt levels and reduced FX exposure. When analyzing our income statement, let me remind you that the share of net income from associates in H1 2024 included Q1 results from Rubis Terminal. Interest costs are down, thanks to lower debt in Kenya and more favorable interest rates. As you know, last year, Rubis recorded significant FX losses, particularly in Kenya and Nigeria. In H1 this year, local currencies were more stable and the strategies we put in place to mitigate the FX risk have proven efficient, and we didn't incur any FX loss. As for taxes, nothing major to flag, the OECD global minimum tax is now fully integrated in our normal run. Overall, Rubis demonstrated agility and delivered solid financial results, fueling its cash flow momentum and supporting its balance sheet. Now a word on our financial debt. Total net debt stands at EUR 1.4 billion, with corporate debt at EUR 910 million, maintaining a healthy leverage of 1.4x at corporate level. Our liquidity level is high with more than EUR 180 million under RCF in addition to our EUR 530 million cash on balance sheet. The main variation of this debt this half came from the steady operational cash flow of EUR 390 million, which is up 11%, reflecting the good operating performance combined with the absence of FX losses. A negative impact from change in working capital of EUR 68 million after a very positive effect in H2 '24 as a consequence of lower trade payables. CapEx of EUR 164 million, which is higher than last year with the ramp-up of Photosol, hence, our usual June dividend that we paid to shareholders, but also to minority interest and general partners. Nonrecourse debt increased by EUR 63 million, in line with the renewable investments. All in all, our balance sheet remains solid with ample liquidity to support our future growth. Clarisse Gobin-Swiecznik: Thank you, Marc. Before we open the floor to Q&A, let me wrap up. So first, we saw Rubis commercial and operating performance. Second, our seamless execution and agility deliver reliable cash flows through the cycle. Finally, these H1 achievements make us confident, we are on track to reach our 2025 targets even in the less favorable euro-dollar context in H2. With a healthy balance sheet and a stable leverage ratio, we confirm we are aiming at EUR 710 million to EUR 760 million EBITDA within the framework of assumptions you have here on the slide. Thanks a lot for your attention. We are ready to take your questions. Operator: [Operator Instructions] Marc Jacquot: We have no audio questions for the moment. I propose you begin by the written questions on the webcast. Clemence Mignot-Dupeyrot: So we have 2 questions on the webcast from Auguste Deryckx of Kepler. Question number one is group EBITDA was stable on a comparable basis despite 5% volume growth, what are the key headwinds preventing stronger margin conversion? Marc Jacquot: What we can say on the margins, as I mentioned, the LPG margins were stable over the first half. And in the fuel distribution business, so the unit margin decreased by 1% in H1. And this decrease came exclusively from the Caribbean, especially from Jamaica. In Jamaica, the supply is not in Rubis' hands. And last year, we had very favorable condition for this supply. And this semester, actually, those conditions normalized, I would say. So that's the first explanation. Second one is on the bitumen, bitumen distribution business. So the volume growth in Nigeria resumed, as we explained. And H1 2024 was high due to the FX pass-through and the significant decrease in margin is explained by the basis effect after H1 2024 devaluation, after considering the guidance. Clemence Mignot-Dupeyrot: We have 2 questions considering on euro and USD FX. So question number one is -- but both questions have the same answer. Question number one is what level of FX rate and hyperinflation assumptions underpin the guidance, the EBITDA target of EUR 710 million to EUR 760 million. And what contingency levers do you have if the macro backdrop worsens. And another question from Emmanuel Matot is what is the total negative impact we can expect for 2025 on your EBITDA? Marc Jacquot: So regarding the guidance and the hyperinflation embedded in the guidance. We have the same level of hyperinflation in the guidance than in 2024, meaning a positive impact of EUR 25 million -- EUR 24 million on the EBITDA, EUR 22 million on the EBIT and minus EUR 10 million at a net income group share level, okay? So this is our assumption, and it will be -- and this is something that we will know only at the closing. So there is a lot of uncertainty in the hyperinflation. So we cannot commit on this number. In terms of impact of U.S. dollar, euro, the initial assumption we have was the euro-dollar level of the beginning of the year, meaning an exchange rate of $1.05 okay, for EUR 1. Now we are at $1.17 or $1.16 depending of the day. What we can say is that the good performance of the H1 will compensate the favorable impact related to the U.S. dollar impact. The margin we have in U.S. dollar is concerned, actually, I would say, 2/3 of our business, okay? So you can calculate what is the impact yourself on for H2. Operator: [Operator Instructions] Clemence Mignot-Dupeyrot: So we have another question online from [ Jean-Luc Romain ]. Could you please give us an idea of what the renewable EBITDA is before development costs? Marc Jacquot: So the renewable EBITDA before development cost is what we call the power EBITDA, the power EBITDA amounted to EUR 22 million in H1. Clemence Mignot-Dupeyrot: We have another question from [ Thomas Trotter ] saying about the aviation business. Are any of your markets showing activity in SAF, sustainable aviation fuel and is that a market Rubis might get into? Clarisse Gobin-Swiecznik: We are more or less agnostic to the type of fuel we distribute. We adapt to the demand of our customers. We would be able to distribute SAF and we do, in some places, especially in the Caribbean, but it's mainly a question of offer and demand, and there is not a lot of offer to date. We are, in any case, adapting ourselves to the demand from our customers. Clemence Mignot-Dupeyrot: Another question from Mr. [indiscernible] about Photosol portfolio evolution. It is not on the slide you have here in the presentation that is in the webcast, which you can find it on our website. Operator: [Operator Instructions] Clemence Mignot-Dupeyrot: We have another question from Emmanuel Matot at ODDO online, asking us if we have any impact of U.S. tariffs during the summer? Clarisse Gobin-Swiecznik: Rubis geographic and operational model makes it largely insulated from the direct effects of tariffs. We are not present in the U.S. nor in China, and we do not depend in any case of U.S.-based or China-based suppliers in our distribution business. On the indirect side, the products and services we offer are essential, particularly in the energy space. As such, demand tends to be relatively inelastic, meaning it remains quite stable even during periods of price volatility or economic slowdown. So I would say we have no effect of tariffs on our P&L or results. Clemence Mignot-Dupeyrot: Another question from [ Roger Degree ]. Can you update us on the CapEx plans and specific projects for the next year or 2 in the energy distribution business? Marc Jacquot: Roger. What we can say on the Photosol CapEx, this level, as you know, will increase in line with the ambitions communicated to the market at Photosol Day. So this is a EUR 1.1 billion CapEx in the 2024, 2027 back-end loaded. And for 2025 it should be in the range of EUR 150 million to EUR 160 million. Talking about Rubis Energy, so the distribution business, we should be in the normalized level in the -- I would say, EUR 185 million on the run rate. Clemence Mignot-Dupeyrot: Another question online. Can you give us an update on the shareholder structure? So the answer is public. The shareholding structure as of today is, the largest shareholder is Mr. Patrick Molis with more -- a bit more than 9%. Then you have the Bolloré Group through Plantations des Terres Rouges, a bit above 5%. You have Mr. Sämann 5% or so, Groupe Industriel Marcel Dassault a bit above 5%, and then the rest of the shareholding is structure an overall split between different shareholders. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing remarks. Clemence Mignot-Dupeyrot: Thanks a lot for being here. We will be on the road on the days to come. So do not hesitate to reach out to us if you want to schedule a meeting or if you have questions, you know where to reach us. Thanks a lot, and have a nice evening.
Philip White: I'm Phil White. I'm Executive Chair of Mobico. Welcome to our 2025 half year results presentation. Now I'm not standing at the podium today. A few weeks ago, I had an operation on my knee. I've got a new knee. And the last thing I want to do is stand up there and fall over. That will make the wrong headlines. Okay. So you'll have to bear with me if I sit down. So sorry for this. So anyway, can I first introduce my colleagues sat next to me on my left is Brian Egan, who's just joined us as CFO. Brian's got a lot of experience in many difficult businesses in many difficult countries. So he's definitely the right guy for us at the moment. You'll find that he's a very softly spoken, polite, gentle Irishman from Dublin. But believe me, don't be fooled by that. It's nothing of the sort. Anybody who worked with him in the room will know he's as absolutely hard as [indiscernible], especially when you're negotiating fees with him. Okay? So don't be fooled. On my right is Paco Iglesias. Paco is our new -- not new, but in this year, our Group Chief Operating Officer. He's also been Chief Executive of ALSA for nearly 10 years. Now you only have to look at the results of ALSA for the last 10 years, which are absolutely stunning, and they continue to be so. So that's all down to Paco and his team. Welcome. All 3 of us are from 3 different countries. We've got an Irishman, a Yorkshireman, our own country, and we've got a Spaniard. But we've got one thing in common, although we speak differently. We've all joined the Board this year in 2025. So what you see before you today is a brand-new team. We set ourselves various commitments. The first thing I did was go around our shareholders and speak to them and introduce myself to try and understand their thoughts on why I've been appointed, why I'd come back. So I had to calm them down on that a bit. And when Brian came, we did a full roadshow of our lenders and our banking colleagues. And what we've said to them is that our style is perhaps different, not only from our predecessors, but probably from different countries. Going forward, we will be very open and very honest. We will communicate regularly. So hopefully, there won't be any unwelcome surprises. But most importantly, we will deliver what we have promised. Now this should be pretty easy for us because this is how we normally work. We're normal people. So we're going to be open and honest and probably we will be a bit too honest at times. I'm often criticized for that. We will talk a lot to our stakeholders and probably a bit too much and a bit too less, and we'll always try to overdeliver. But we are human. Sometimes we won't get it right. We can't get it right every time. We will make mistakes. So as it says on your pads in front of you, quite interesting headline, which I've just seen, what will inspire you today, and this is what we're here for. So we hope we inspire you. So let me start by telling you how the 3 of us are approaching our new roles. It really is back to the future. We've actually decided to start by going backwards. I know that sounds a bit crazy, but we are taking a small step back to achieve a bigger future. We've asked ourselves 2 simple questions. We think the strange questions are so easy. What are we? And what's our priorities? In our case, we don't have the luxury of starting with a clean sheet of paper. We've got to work with what we've got. So what are we? Now this is very simple. We're a major public transport group. We've been listed for years on the London Stock Exchange. We've got businesses in the U.K., the U.S.A. and Spain and some other business in some other countries. That's a pretty obvious answer to that question. But being listed on the LSE does give us responsibilities and obligations, and we are fully aware of what our responsibilities are. The second question, what are our priorities needs a little bit more explanation. So what I'm going to do is take you briefly through the group and all our divisions. And we're going to be absolutely open and honest with you on this. So if you look at group first, despite having some great businesses, we're not performing as well as we would like to. We have a track record of overpromising and underperforming, and we're overleveraged and unloved by our shareholders. They've told me that, absolutely. Despite this, there are some things that haven't changed since my first spell at National Express when I was a bossier. We still have a great team of loyal people who are committed to looking after their customers and the communities in which they work. And as before, we also have a diverse portfolio of businesses, a bit different from the old days, but we've got deep expertise across many geographies and many different modes of transport. We think that we've got many opportunities for significant value creation for our investors and our people, although we have to be a lot more disciplined in our execution. But please remember, we are a new team, and we don't have all the answers just yet. So let's take a look at our various divisions. Firstly, Coach. This is where it all started in the '70s with National Express coaches created under National Bus Company. And we still have a national network of coach services in the U.K., mainly run by third parties under our branding. I think that model is well known to you all. But we are now creating a pan-European coach powerhouse. U.K. Coach will join ALSA from January next year. This will unlock our ability to compete, win and grow and deliver more efficiencies and synergies. The National Express brand is highly respected in the U.K., is highly recognized and it will remain as it is. We have today announced that Javier Martinez Prieto has been appointed as MD of U.K. Coach. As you know, we're facing many competitive challenges to our network, particularly in pricing. We are fighting back by continuing to invest in the digital customer service interface, more dynamic pricing and upgrading customer service in all our coach stations. This will give our passengers a much better experience of traveling with us. Although at the moment, we are maintaining our passenger numbers, which is great news, we are experiencing reduction in our yields. So we have to respond by being more efficient and more cost effective. If you look at U.K. Bus, as you know, in my time, U.K. Bus was formerly the jewel in the National Express Group Crown. It's a leading operator in the West Midlands market, but has struggled a lot since COVID. We now have a funding agreement with Transport for the West Midlands, which covers fares and service levels. Thanks to Kevin Gale and his new team, we have now much improved relationships with our West Midlands stakeholders, which is crucial to us given what is coming around the corner. So what's coming around the corner? The answer is the mayor of the West Midlands, as you know, has decided to introduce bus franchising in the region, and this will happen between 2027 and 2030. This marks the end of the deregulated and commercial bus network introduced in 1986. Our focus now is on preparing for franchising, leveraging our long history in the area, but also looking for opportunities in the other major conventions. As we did when deregulation was introduced in the '80s, we will embrace the change and do our best to help our local authority partners achieve a seamless transition to the new regulated era. Over to the States. WeDriveU operate shuttle transit services across the U.S.A. It has nearly 100 contracts, the majority -- the vast majority, in fact, of which are profitable. But unfortunately, 2 are loss-making, and that's affected the group's results today. One of the loss-makers is in Charleston and this will terminate at the end of the year, the contract, and we will not be renewing it. The other loss maker is our Washington contract, and this has operational issues. We have an action plan in place to fix the problems, which have been caused by a difficult mobilization at the start of the contract and significant driver management issues. As you know, WeDriveU separated from its sister business, School Bus, when School Bus was sold earlier in the year, and it is now run as a separate stand-alone business. There is a strong pipeline of growth opportunities, both in shuttle and in transit with 4 new contracts already secured for the second half of this year, which is good news. Our focus going forward will be securing more asset-light contracts, which are cheaper to operate and carry far less risk. Moving on to German Rail. We're the second largest operator in North Rhine-Westphalia and one of the top 5 rail operators in Germany. We have 3 contracts, 1 profitable and 2 loss-making. I've got the balance quite right there. These have been very difficult contracts for us, particularly in driver recruitment and issues arising from poor rail infrastructure. We are now making progress in reducing the driver shortage gap, which has vastly improved network performance. And we are looking forward to more work by Deutsche Bahn on the network to fix the problems we have that have plagued the system for quite some time now. We have a new management team in Germany and the U.K. who have engaged a lot more closely with our local stakeholders, again, crucially important. I can say today that discussions with our German local authority colleagues on our contracts are progressing very well. We are aiming to press ahead with supplementary agreements, which hopefully will be finalized in the coming months. I'm told from a reliable source that we've made more progress in the last 4 months than the last 4 years. Hopefully, it will soon be sorted. Moving on to ALSA. In preparing for my script for today, I Googled to try and find what the original name of ALSA was and here it is, but I can't pronounce it. So Paco, what is it? Francisco Iglesias: ALSA is Automóviles Luarca Sociedad Anónima. I think Phil has made up a new name. That's much better. Philip White: But when I go [indiscernible] called ALSA, a life-saving acquisition. And it truly is. And we much prefer ALSA to the big name, don't we? But we like a life-saving acquisition because that makes me feel good as well. So ALSA truly has been a life-saving acquisition. It is a new jewel in the Mobico crown. It's the largest bus and coach operator in Mainland Spain and has expanded into the Canaries, the Balearics, and also Morocco, Portugal, Switzerland and Middle East. It has also been very brave and very successful in diversifying into other transport-related businesses, such as health transport, which basically is ambulances. There is also a strong pipeline of growth opportunity in both new contracts and potential acquisitions. For instance, ALSA are currently bidding with a local partner for a significant 10-year asset-light contract in Saudi Arabia. This contract is valued at over EUR 500 million and is part of a EUR 75 billion global investment there to create the world's largest entertainment destination. So if we get that, that will be really good news. But ALSA continues to be our dominant business within the group. Underlying profit growth compared to last year is again in double figures at around 10%. We will be maximizing ALSA's operational experience to drive improved performance across the whole group. So looking ahead, there are 3 things we need to do. Firstly, we've got to simplify our business. Secondly, we've got to strengthen our balance sheet. And thirdly, we've got to succeed by delivering on our premises. We've got to stop letting people down. So we're streamlining our management structure. We're attacking overheads. We're removing duplication and integrating businesses where this makes sense to do so. Sounds simple, and it is. We will strengthen our balance sheet by generating more cash, improving liquidity and reducing debt, which is far too big. We are already reviewing our CapEx and acquisition plans to get better value from our investments. Succeed. What does succeed mean? Well, I always feel the biggest motivator for people who work for us and work with us is not money. It's a success of a business. If we have a successful business, we have happy people who provide quality service for all our customers. If our people feel good about our business, they'll stay with us, fight for us and hopefully feel even happier. And this is what I focused on in the first few months. I'm trying to get a buzz back in the business, a good feeling. But to achieve success, we've got to deliver what we've promised, and we haven't done this for quite a while, which is not good. So we've got to make our customers happy. We've got to hit our targets. We've got to generate cash to fund more investment in the business. We've got to be smarter. We can't settle for sake and invest anymore. And we've got to achieve the right value for our investors, earn back their trust, and we want to make them love us again. So just a brief explanation of the results before I hand over to my colleague on my left. Here is a summary slide of our H1 results. You've already seen these in the [ RNS ] this morning. The good news, particularly in public transport, is the top line is still growing, up 7% in the group compared to last year. But the bottom line is not so good. We're not converting our revenue and our cash into profits. So we've got to manage our costs better. Let's face it, this should be a lot easier job from us compared to managing our revenue. Hitting the costs, controlling the cost, reducing their costs is a lot easier than making your customers and your stakeholders pay for you. So ALSA has delivered another strong performance this year. But unfortunately, it's not been replicated elsewhere in the group. Our U.K., WeDriveU and German Rail businesses have made little or no financial contribution to the half year bottom line. This is incredibly sad and it can't continue. As a result of this, EBIT is GBP 9 million down on last year, and we've also had to make a further impairment charge on the sale of School Bus. This means we have wasted even more money on that investment. I'll be as bold to say that. We've got to invest our monies a lot better than we have done in the past. So it's a first half where we could have done much better. As I've said this morning, we are taking immediate action to address all these underlying issues, and we expect to deliver full year results, Gerald, in line with our previously stated guidance. I will now hand over to Brian to give you some interesting stuff. Brian Egan: Okay. Thank you very much, Phil, and good morning, everyone, and thank you very much for coming today. First of all, I would like to begin by highlighting the direction we are taking in terms of the financials. And the good news is that our revenue continues to grow year-on-year. However, we are now focused on reducing and controlling costs in order to improve profitability. Second, we need to manage our balance sheet, and this means, in particular, tighter control over CapEx and working capital. This will increase our cash generation so we can reduce our debt to acceptable levels. As Phil said, we need to simplify and strengthen the business. H1 group revenue increased by GBP 86 million, reaching GBP 1.3 billion. This is a 7% increase, mainly reflects the strong growth in ALSA, where passenger figures grew across all businesses, including 11.5% in Spain. And in WeDriveU, we also saw strong revenue growth of over 13%, driven by new contracts in corporate, university shuttle space and paratransit operations. U.K. revenue was flat in H1 when you take into account the exit of NXTS contracts. It is important to note that the Coach sector in the U.K. remains extremely competitive. Adjusting operating profit for the group is GBP 59.9 million, an GBP 8.7 million decrease versus last year. This reduction was the result of lower profitability in WeDriveU caused by operational challenges in Washington-based paratransit contract. Of particular note, GBP 82 million profit was generated by ALSA. The rest of the group reduced the profit by GBP 22 million. This is being addressed. The business simply cannot afford the central and divisional overheads at this level and steps to reduce them significantly have already been taken. I would like to confirm that our full year profit guidance remains at GBP 180 million to GBP 195 million. Free cash flow of GBP 57.8 million is GBP 38.5 million down from the prior year as a result of an increase in working capital, mainly because of delayed collections in ALSA. This is expected to reverse in H2. Return on capital employed was 11.6% versus 8.1% in half year '24. However, this is primarily due to the impairment of School Bus leading to a lower asset base. Whilst net debt and covenant gearing have increased since the year-end, this is before the benefit of the GBP 273 million School Bus deleveraging proceeds. Taking these proceeds into account, gearing would have been 2.7 rather than 3. Statutory profit from continuing operations is GBP 35 million, a GBP 23 million improvement on the prior year. Revenue has grown across all of our business, except for U.K. Coach, and this is the result of the exit of the loss-making private coach operations, which reduced revenue by GBP 12.5 million. In terms of operating profit, only 2 divisions made a profit, ALSA and WeDriveU. However, the profit from WeDriveU is GBP 13 million lower than last year due to operational challenges in the WMATA contract. It is clear that there is a strong top line growth, but we need much better control over our costs. And as I mentioned before, central and divisional overheads are being reduced at present. I will now discuss our divisions in their local currencies. ALSA's continued strong performance saw revenue increase of over 13%. Adjusted operating profit was in line with the last year with a 0.9% increase in adjusted operating profit. There was particularly good momentum in regional urban and long-distance markets in Spain, where revenue grew by over 10% and operating profit grew 8%. The extended Young Summer initiative has driven strong long-haul performance, which is 20% up on prior years. ALSA continues to diversify business in Spain. For example, the health transport business, where revenue more than doubled since the same period last year from GBP 18 million to GBP 39 million. It's also important to note that of the GBP 97 million profit generated by ALSA, GBP 9.3 million came from outside Spain. Underlying profit margin is in line with Half 1 one-off settlements in regional and urban businesses in the prior year taking into account. The underlying profit growth was 11%. ALSA had a successful half year in terms of contract retention and bids for new contracts, including Andalucia, [indiscernible] and the contract in Saudi Arabia that Phil mentioned earlier on. Whilst WeDriveU has seen revenue grow by 16%, the operating profit of $3.4 million is disappointing. This is as a result of operational challenges with the WMATA contract. Although it took some time, WMATA operational targets are now being met. However, costs grew in doing so, and these are now being rightsized. Looking forward, streamlined business processes, automated systems and tight cost control will drive margin improvement in WeDriveU. Strong contract momentum continued in half 1, and these contract wins alone will increase annual operating profit by over $2 million. Moving on to the U.K. performance. During H1, we saw increased competition in the Coach sector and the announcement by TfWM of their intention to franchise the regional bus market. Overall, revenue declined by GBP 12.5 million. However, this was due to our exiting of the loss-making NXTS and NEAT Coach businesses. Otherwise, revenue is flat. Growth continued in Ireland with strong -- with revenues up GBP 2.7 million due to strong demand. The reduction of GBP 1.5 million in operating losses to GBP 9.1 million in the Coach business is materially driven by the exit of the loss-making contracts that I've already mentioned. Total U.K. Coach operating margin improved by 0.6% as a result of the restructuring and changes to seasonal timetables to optimize the network utilization. U.K. Bus reported an operating loss reduced by GBP 2.5 million to negative GBP 0.5 million. So it's virtually breakeven. However, this was supported by funding increases from GBP 23.7 million to GBP 26.2 million from TfWM. To optimize business operations, a 2% network reduction commenced in May with a 1% already in effect and the remainder expected by September. This will improve operating profit by approximately GBP 1.4 million. In addition, an agreed price increase of 8.6%, which was effective from the 16th of June. This is expected to generate almost GBP 8 million in operating profit for the full year '25. Finally, turning to German Rail. Our Rail business in Germany performed in line with expectations, delivering a H1 turnover of EUR 143 million, up 1.9% and delivering an operating profit of EUR 0.6 million. The RRX1 and RRX 2/3 contracts are both onerous contracts with losses of GBP 26.5 million. That's cash losses of GBP 26.5 million, being offset by a utilization of the onerous contract provision, which has now reduced from -- to GBP 158 million at the 30th of June. Our investment in driver training is paying off with an increase of 22 drivers year-to-date, up to 333 drivers in total. The increased level of infrastructure works and network disruption continued to result in penalties under the contract. However, as Phil has already stated, the discussions with the German PTAs are progressing constructively and are expected to conclude in the coming months. Now looking at our cash -- focusing on our cash. Our operating free cash flow generation is lower by GBP 38.5 million versus last year. This is driven by increased working capital outflow in the period. The outflow is as a result of the timing of cash collections in ALSA and is expected to reverse before the year-end. Growth capital expenditure of GBP 61.5 million has increased by GBP 33.4 million, GBP 50.8 million of this CapEx related to School Bus. Acquisitions cash outflow of GBP 14.9 million related to deferred consideration on the CanaryBus acquisition that ALSA completed last year. In terms of net debt, the cash outflow of GBP 44.1 million consists of GBP 26.5 million OCP utilization, which I mentioned previously on the German Rail contracts, GBP 17.6 million related to restructuring, the majority of which is -- the vast majority, in fact, of which relates to the School Bus disposal. Adjusting items are explained in more detail in the appendix. GBP 21.3 million of coupon payments on the hybrid instrument were made in the period, in line with prior periods. And net funds outflow for the period of GBP 90 million resulted in adjusted net debt of GBP 1.3 billion at the end of the period. At 30th of June, covenant gearing was 3x. And again, as I mentioned before, this does not reflect the benefit of School Bus net proceeds for the covenant deleveraging of GBP 273 million. This would have reduced gearing to GBP 2.7 billion. But obviously, the cash came in, in July and missed the year-end. We expect full year '25 covenant gearing to be approximately 2.5x, and that's at the 31st of December. Finally, debt maturity. At the 30th of June '25, the group had utilized GBP 1.2 billion of committed facilities with an average maturity of 5 years. And we had cash and undrawn facilities of GBP 700 million in total. And of course, we received the School Bus deleveraging proceeds in July. 75% of our debt is fixed with most of the floating portion due to revert to fixed by the end of the year. With the proceeds from School Bus sale, we have sufficient liquidity to meet the earliest debt maturities, which are May 2027. In addition, the majority of the core RCF facility has been extended to 2029. Finally, in relation to the hybrid bond's call window, which expires in February '26, the group will decide whether to roll the bond prior to this date. So I'd now like to hand you back to Phil. Philip White: So let me just summarize and conclude the presentation by telling you what we want to do with the business going forward. Please remember, we are a new team. We've got a new approach. We've got a very different style, and we've got a very simple strategy. So our first objective is to get the group right by fixing the underperforming businesses. This is an absolute must. Secondly, we want to continue to invest in our strong businesses to ensure they continue to grow and develop. This is also very important. We have to continue to feed and support our growing businesses. Thirdly, we want to -- we need to be leaner and smarter. We want to be more efficient and improve our EBITDA. We have to do this to strengthen our balance sheet. Fourthly, we're going to continue to generate positive cash flows to reduce our debt levels so they are more manageable and more affordable. Fifthly, to care for our customers, give them a great experience on their journeys, so they come back and they stay with us. And most importantly of all, to make our people feel proud again. Happy people means happy customers. Thank you. So over to you guys now, it's your turn. Q&As, and Paco has been very quiet this morning. So he's going to answer all the difficult questions. Paco. Gerald? Nice easy one to get going. Gerald Khoo: Gerald Khoo from Panmure Liberum. I will start with three. Firstly, can you elaborate on the problem contract in Washington? You talked about inherited problems. How much of that was foreseen? How much of it was foreseeable? How do you go about fixing the operations and therefore, the profitability? Secondly, in U.K. Coach, what changes with -- shall we say the effective merger operationally with ALSA? What's going to be run differently? And how much can change given the fact that 80% of the operations are actually outsourced? And finally, in U.K. Bus, what share do you think you have of the West Midlands bus market? And what opportunities might there be to extract capital or assets once franchising has run its course? Philip White: Okay. WeDriveU first. I'll answer it generally and perhaps Brian or Eric can come in. But Eric will correct me if I'm wrong. This was a contract in Washington. We did have a contract there already, but this opportunity gave us to secure a much, much bigger operation. We were given a very short time scale, I think, a month to mobilize it. And probably we -- hindsight is a wonderful thing on these sort of things, but we could push back on that and give them more time. And also, I think when you talk about an inheritance, there were also driver retentions and recruitment problems, Gerald, before we start -- before we got there. And these turned out to be much bigger than we thought. So it was -- first of all, the issue was understanding the financial information when we first arrived and understanding what it was telling us. And secondly, we had to tackle the driver recruitment issue very quickly because we weren't hitting our required service levels, which were incurring penalties on us, quite expensive penalties. We fixed that by recruiting more drivers. Like in Germany, we've bridged the gap. Probably to be on the safe side, we've recruited more drivers than we need. So instead of incurring the penalties, we're incurring extra operational costs. So what we've got to try and achieve, and it's really what our main purpose in life is to get the number of drivers in line with the number of buses we've got to get out every morning. So it's not rocket science. It's just getting down to the detail, managing the driver, getting them on the buses and hitting the service and making our customer happy, which is not at the moment, right? So it's probably a longer job than we thought. As far as ALSA is concerned and the transfer of ALSA to Coach, the coach market has changed. As you know, we've got people who want more of our business than we like them to have, but that's life. There's different rules applying to disruptors coming in and how you can act to incumbents already there and how you can respond. And the balance of power under competition law is with the disruptor, not the incumbent, and you might think that's fair. How long the cream off our existing routes is another matter. They don't operate a network. These disruptors, they cream off the best routes and take our best revenue away. So we've got big issues to face. The market has changed. It won't go back. And we've got to respond by being meaner and leaner, and we can't afford the overhead costs that go with the current business. So this is why it's going to be part of ALSA to form a big pan-European coaching business. That will bring new eyes into the business. The coach operation has been operated for a long time. We bring people in who can look at things differently, probably be a bit harder than our current management and me, I'm too soft. So we need somebody else coming in there, looking at the new model, using all the systems and best practices from ALSA and really looking at the business as an acquisition. That's what we want them to do. I think what I'd like to do, if at all possible, is to become the new disruptor. We can't do that ourselves. It's impossible. And secondly, on U.K. Bus market share, it's big, Gerald. I don't want to quote a number, but it's pretty big, right? And there's a lot of interest. The key to success of bus reregulation is having the vehicles and the depots. You can see that in Manchester. And I've got a long queue, [indiscernible] operators ring me every day to buy our buses and to buy our depots. So there's a lot of interest, but I think there's better ways of doing this in the future. I think, as I said before, we didn't like deregulation, but we embraced it. We don't like reregulation now because it don't suit us. Deregulation didn't, but we'll embrace reregulation, and we're working with the local authorities in the West Midlands. And we want to begin to think again to lovers, not to think we're just after the money because we don't. Jack Cummings: Jack Cummings at Berenberg. Also three questions, please. Firstly, just two on the guidance. The profit guidance is obviously quite half 2 weighted. So could we just get a little bit more color in terms of the building blocks, which can get you to that half 2 profit number to hit the guidance? Then secondly, on the guidance. So obviously, there's a GBP 15 million range. What needs to happen? Or what are the kind of pinch points here that could get you to the top end versus the bottom end of that guidance? And then the final question is just on the CapEx. So what goes into the decision-making process between that growth CapEx and the CapEx that's kind of to decide for small M&A versus potential cash conversion given the leverage? Philip White: They are three easy ones, so I'll hand it over to Brian. Brian Egan: So just looking at H1 versus H2, I mean, traditionally, 1/3 of the profit is H1, 2/3 is H2, and that's mainly driven by the fact that particularly July and August are really big months for the business. And in fact, December is also a big month. So it really is very much in line with -- if you go back over the last 2 or 3 years. In terms of delivering at the higher end of the range, I look towards Eric here. I mean some of the critical factors, particularly WeDriveU is a big one. So if WeDriveU can manage to get the cost issue under control earlier, it's going to help us towards the higher end. If it's going to be later, then we're going to be towards the lower end. That's probably the biggest one, if I'm honest about it. The third one was -- so we are looking at CapEx. It's a bit hard at this time of moment. CapEx, we have a budget that we've agreed for CapEx over the next couple of years. The priority, obviously, is retention CapEx, and then there's a balance left. And then it depends upon a level of flexibility around that depending on the opportunity. But one of the problems at the moment is that we are quite constrained because of our debt position. But the priority number one is retention, retention CapEx. Then there is an amount left over and then we look at the returns depending on whether it's a contract bid and there are a couple of good opportunities, in fact, that we're looking at present -- that ALSA is looking at the moment. But that will depend on the return of both of those. Alexander Paterson: It's Alex Paterson from Peel Hunt. As if I'm greedy, can I ask four questions, please? But they're all very simple ones. Philip White: That's fine. No condition. Alexander Paterson: First question is, just before the North American School Bus deal closed, you were talking about leverage being fairly flat year-on-year. You're now saying 2.5x. Can you just say what's driven that improvement, please? Secondly, in the U.K. Bus, can you say what sort of proportion of your fleet is owned, because I know you've got some of it through Zenobe, and I'm not quite sure what those proportions are now. And thirdly, on Germany, can you say has the group given any guarantees over the German Rail losses? And then lastly, just on Germany, as it stands. So if nothing changed, what would your expectation of cash losses be in the next couple of years? If you can get a better deal is when you described it as equitable in the statement, does that mean no more outflows? Or what kind of change on that? Philip White: Brian? Brian Egan: Okay. So they weren't so easy. Okay. So let me just -- I mean, first of all, cash losses for Germany. So you'll see for the first half of this year '26. So we have actually impairment at the start of the year of GBP 170 million. So that is the expected cash loss from those contracts. So clearly, the discussions we're having at present, we are optimistic that I mean they are going quite well. So anything that will hopefully end up because discussions end up in a positive note, we will hopefully be able to reverse some or maybe even all of that GBP 170 million depending on how they get on. So that is cash. Kevin Gale: I think they're quite front-end loaded. Brian Egan: They are, correct. That's correct. So this year, it's almost GBP 50 million. Yes. In terms of the improved leverage as a result of School Bus, this year, we have the benefit of half year's profit from School Bus and that half year disappears last year. So we get a double benefit in this particular year because we -- the half year benefit of the School Bus profit. Next year, that half year disappears. So in fact, we have a negative impact with School Bus taken out next year. So it sort of -- it goes -- it improves and then it sort of goes back a little bit then we look at next year, unless, of course, we take actions to address that, which we're looking at, at the moment. There is a guarantee [indiscernible] the details, there is a guarantee in relation to Germany. And in terms of the percent of fleet owned by us. Philip White: Kevin, have you got that number? Kevin Gale: Circa 2/3, 1/3, So 2/3... Philip White: Any other questions, guys? Ruairi Cullinane: It's Ruairi Cullinane from RBC. The first question is it doesn't seem like you're looking for a CEO, which I think was a top priority in the spring. So what drove the change there? Secondly, could you touch on options to delever? Would that be noncore disposals? What could be on the cards given the potential upward pressure to leverage in full year '26 as School Bus EBITDA drops off? And then finally, I think there was a fare increase in U.K. Bus last summer, but there wasn't sort of much sign of it annualizing in H1. So could you just explain that? And should we expect the fare increase this summer to annualized as a sort of typical fare increase? Philip White: Okay. As sort of Executive Chairman, which means both jobs, I think I'm best answer to the first question. And at the moment, I think the Board are happy with the new team. We've got a lot of projects in hand at the moment. I'd like to work with Paco and Brian into the near future to make sure all those projects are achieved in a good way. So I don't think at the moment, the Board are rushing to find a new CEO, and they're quite happy to stick with the team that's here. And hopefully, we'll deliver the results that we are set to deliver. Delevarage. I suppose the easy answer is when you're in a position like that, when we're earning the EBITDA we've got at the moment, and we've got the level of debt we've got at the moment, nothing is off the table. And I think we've got to be hard. There might be disposals, there might be more disposals. And we've already said we're going to look at efficiencies. We're looking at integrating the businesses together. We're going to duplicate in -- we're going to cut out the duplication. But you have to remember between 60% and 70% of our costs are labor costs. So when we're talking about being more efficient, cutting costs, we're really talking about people. But the important thing is if we do that, we've got to be honest with them, and we've got to do it in a kind and caring way. But as I said, we're looking at everything at the moment. Brian Egan: So I think in general, we haven't -- we put a detailed plan together, but there are two approaches. First of all is to reduce the debt itself. We have to look at how we do that. And the second is create capacity to manage more debt by improving our EBITDA. So there are the two things we're looking at. First of all, create more capacity with the higher EBITDA and second then to tackle the debt. And the fare increase... Philip White: On the fare increase...When do we implement it, Kevin? Kevin Gale: The end of June. Philip White: Oh, it is end of June, so fairly early. Brian Egan: For this year, it's... Philip White: It's 8.6%. So it's a big one. So it's going to be interesting to see what -- how the customers react to it. Brian Egan: The expectation is a GBP 7.5 million impact. Philip White: Yes. And I think Kevin will agree with me. It's -- we spent too many years with -- you get a funding agreement with it, but you don't get it for nothing. So to get that funding agreement, which is [indiscernible] at the moment. They control our service levels and our fares. But it's the first increase we've had in many years, Kevin? Kevin Gale: Substantial increase in 5 years. Philip White: So it's a big one. So it's going to be interesting to see whether we land it. Kaitlyn Shao: Kait Shao from Bank of America. Also three from me. First, I think, Brian, you mentioned for WeDriveU, you're expecting a [ GBP 2 million ] improvement. Can I just confirm it's a [ GBP 2 million ] kind of on top of first half performance, basically full year impact coming through in the second half? And then second, on ALSA margin. You mentioned some one-off items for the first half. Can you elaborate a little bit on what those items are? And just thinking ahead for second half, how should we think about margin? It's going to be kind of similar around 12%, that kind of level? and then number three, on the hybrid, I appreciate a decision is coming in the next [ year ]. Brian Egan: Profit value of contracts won in the first half of the year. So that's the annual profit increase expected to begin [ ranging ] from those contracts. In terms of the margin, if you compare like-for-like, you will see the margin -- the profit margin is slightly down in the first half of last year. A provision was released, so the expectation was we would have to repay some grants. We didn't have to repay the grants, therefore, we released [ GBP 8 million ] provision. So it basically slightly inflated the last year's results compared to this year. So if you back that out, you will see that overall there is an 11% growth in profit in ALSA. The final one, on the hybrid. We will take a view on that [indiscernible] with the current thinking is that we will [indiscernible]. We'll make a decision closer to the date. Gerald Khoo: Gerald Khoo from Panmure Liberum again. German Rail, can you sort of outline the sort of scope of talks? You talked about how -- well, there was a discussion about how the onerous contract provisions are front-end loaded. What's the trade-off between time and value? And if talks were to drag on, is there a lost opportunity to recover? Or is it not possible to recover past losses, so to speak? Brian Egan: No. So the discussions -- I mean, there are two broad buckets. The first is compensation for the past is what we are seeking. Whether we'll be successful or not, we don't know at this time. But there are two buckets. One is to do with the compensation for the past. So for example, we've incurred a lot of penalties, which really relate to the poor infrastructure. And then the second bit is in terms of profitability going forward. So it's -- they're the 2 areas. And then depending on how we come out, we have two different buckets. So the answer is yes, we absolutely are looking for compensation for some of the past costs, absolutely. Ruairi Cullinane: Ruauri Cullinane, RBC again. Just on -- is there any growth angle to incorporating U.K. Coach within ALSA? Obviously, there's mention of making a pan-European powerhouse? Or is it mostly about best practice? Brian Egan: So the integration sort of -- do we see a growth opportunity... Francisco Iglesias: Well, okay. First, sorry for my English, sorry for English. I'm a very simple person. So I think that the success is to do the things simple. That's the reason why I believe in this project, I believe in this team. This strategy is very simple. And the plan for this merger between U.K. Coach and ALSA is right there -- is to get the things simple. And what do I mean by that? For me, we need to focus on the metrics, on the basics. What does it mean? For example, occupancy, what's the ratio of occupancy that can we improve that? For sure, I think. For example, customers, can we improve the scoring of the -- from our customer, what do they need? Are we delivering the best for them? I think we can do that. For example, the cost, can we remove duplicates between people in ALSA and people in U.K., for sure. For sure, U.K. does things better than ALSA and ALSA does other things better than U.K. Can we get the best of that? So my expectation is to focus on these three things: operation, the occupancy level, cost efficiency, customer, how to deliver better and cost that is very related with technology. We have different technologies in U.K. and ALSA. We are not going to get just ALSA. But I think we have to make a better decision in the next tools, for example, for planning, for pricing, for whatever you can consider that is important in a transport business. So this is my idea. And I'll work with Kevin and the team and the new people that are going to join the project. And I think we are not going to make up the wheel again. It's just to make very simple things. And I think we have had success in the past, why not in the future? This is -- let's see in the next months, but I'm optimistic. Philip White: Okay. Thanks, Paco. Anymore? Okay. Then guys, just before we finish, I'd just like to thank a few people, if you don't mind me saying so. So thanks for everybody in the room today, and thanks for all the people who have dialed in to listen and see the presentation. I would also like to thank our fantastic advisers who make us think differently and help us to really explain our strategy to everybody, our shareholders and our lenders. Thank you to all the people at the center and in our divisions who work so hard, we deliver what they're doing. They've worked incredibly hard over the last few weeks and getting the results in order and the presentation so we can explain the results to guys like you and people on the phone. But I'd also say a special thank you for 2 people. First of all, thank you for the RMT for being so caring again, looking after all your customers in London. You do a great job of there. And thank you to a writer in the Sunday Times called Rod Liddle. I don't know whether you saw it over the weekend, but it was comparing various accents in the north of England and now nice Jordi and Cleveland accents were lovely to hear. But you described the Yorkshire accent "as a pantamine agglomeration of belched arrogance, right? So thank you for listening to my belched arrogance this morning. I really appreciate it. Now going forward, we're going to update you later in the year. This will include the strategic update on ALSA and we'll do that quite a comprehensive presentation on that to you. And secondly, we'll bring you up to date on the progress we're making in efforts to improve our efficiency and to increase our EBITDA, things that have formed such a huge part of the presentation this morning. So great to see you all. Have a safe journey back to work or back to home, avoid the tube, give a big kiss to RMT and we'll see you soon. Thank you.
Operator: Greetings, and welcome to the Diversified Energy Company acquisition of Canvas Energy Webcast and Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Douglas Kris, Senior Vice President, Investor Relations and Corporate Communications. Please go ahead, sir. Douglas Kris: Good morning, Kevin, and thank you, everyone, for joining us today for the special conference call to discuss Diversified's acquisition of Canvas Energy. Joining me today on the call are Diversified's Founder and CEO, Rusty Hutson; and President and CFO, Brad Gray. We have also posted a slide deck to accompany our remarks today, and we will reference the slide numbers during our discussion. We will open the line for questions after our prepared remarks. Following the conclusion of today's call, we are happy to follow up with any specific modeling questions. Before we get started, I will remind everyone that the remarks on this call reflect the financial and operational outlook as of today, September 9, 2025. These outlooks entail assumptions and expectations that involve risks and uncertainties. A discussion of these risks can be found in our regulatory filings. During this call, we also referenced certain non-GAAP and non-IFRS financial measures. All of our disclosures around those items and additional forward-looking disclosures are found in our materials released today on our website or in regulatory filings. I will now turn the call over to Rusty. Robert Hutson: Thank you, Doug, and thank you all for joining the call today. On our call today, we are providing further context about the acquisition of Canvas Energy and the assets we are acquiring, how their operations and assets fit within our broader financial and operational model and the significant sources of value we expect to deliver from this transaction. We are excited to announce the acquisition of Canvas Energy, a privately held company headquartered in Oklahoma City. We believe this acquisition will add accretive size and scale advantages and further align with our strategy of building a portfolio of high-quality cash-generating energy assets. We believe that our team of professionals are experts at optimizing the existing long life and undervalued U.S. assets, and there continues to be a great growth opportunity to consolidate these assets under the diversified vertically integrated infrastructure. Our focus remains firmly on executing on our unique growth strategy that creates value-based, resilient and consistent cash flow from our growing portfolio of cash generating energy assets. We intend to utilize our experienced employees' institutional knowledge and commercial relationships to extend our position as a dominant force in the Oklahoma market. In my view, what we are building at Diversified is a battleship, a corporate and financial structure that is strong, durable, agile, resilient and in the best position to serve its shareholders while protecting and delivering cash generation to provide a tangible return to our shareholders. And much like a battleship, our competitive edge, strength and power comes from the importance of every component and the coordination of every team and task no matter how large or small. The addition of Canvas enhances the size and scale of our company, furthering our progress in our strategy and providing investors with a unique opportunity for value accretion that further bolsters our promise to deliver reliable, long-term shareholder returns. Starting on Slide 3. This acquisition has the potential to create significant value over and above the purchase price through the combination of high-quality assets with our proven competitive operating model, which leverages operational focus and expertise, scale, vertical integration and technology. We are acquiring additional liquids-rich exposure to premium markets that will help drive top line revenue, adding Canvas' production, which is approximately 147 million cubic feet or approximately 24,000 barrels of oil equivalent per day, with a commodity split between 57% liquids and 43% natural gas, further expanding our exposure to both premium oil and LNG opportunities. The combined company will continue to maintain an enviable peer-leading low decline production profile with the added resource of total proved reserves on a PV-10 basis of approximately $1.4 billion. Canvas adds approximately 240,000 net acres with the assets creating significant operational overlap where we can apply our proven consolidation and operating model. Canvas also offers immediate financial accretion through its strong, stable financial profile, which is anticipated to generate approximately $155 million in the next 12 months EBITDA, or an increase of approximately 18% to our current base. Additionally, we are meaningfully growing our free cash flow by 29%. It's worth noting that these financial metrics do not include any synergies, margin enhancements and our time-tested smarter asset management optimization programs, which we believe provide meaningful uplift in value and bottom line cash flow. This bolt-on acquisition in Oklahoma offers a tremendous opportunity, adding contiguous acreage and the optionality for portfolio optimization either through partnership development or via divestiture. By remaining disciplined, we are growing our company by acquiring value-accretive reliable PDP assets and consistent cash flow at an approximate 3.5x next 12 months multiple. This transaction brings us solid assets at an accretive value. Turning to Slide 4. Let me now spend a few minutes talking about the specifics of this deal. We are acquiring Canvas Energy for approximately $550 million. The purchase price will be funded through the issuance of up to $400 million of asset-backed securitization funding originated by Carlyle and approximately 3.4 million shares of Diversified cash on hand and current liquidity. Following the closing of the transaction, Canvas unitholders will own approximately 4% of Diversified shares outstanding. Importantly, with a small dilution, we are delivering a leverage-neutral transaction that generates a significant 29% increase in free cash flow. It's worth noting that this acquisition marks a significant milestone as it is the initial transaction that utilizes the Carlyle Strategic Funding partnership. We have a historically established Carlyle relationship through their previous purchases of ABS notes, and they remain investors in 2 of our ABS notes. Since then, we have grown their confidence in our acquisition evaluation, management experience, operational capabilities and stewardship focus. We are excited to further leverage our strategic partnership to continue to fund high-quality PDP assets and to grow our combined portfolio. We expect the transaction to close during the fourth quarter of 2025 after we receive customary approval and regulatory clearance. Turning to Slide 5. This acquisition creates significant asset density in Oklahoma, and we are very excited about this aspect. The impact on our Sooner State operations will include a combined acreage footprint in Oklahoma of approximately 1.6 million acres, including the largest in the Western Anadarko Basin. Combined Oklahoma production at approximately 78,000 barrels of oil equivalent per day that consists of a high liquids cut, additional exposure to the emerging Cherokee play and other high-quality acreage creating organic growth opportunities for asset optimization or potential development partnerships. Turning to Slide 6. This slide further illustrates the combined position in Oklahoma and the Western Anadarko Basin. The map shown on this page creates a powerful picture of the significant acreage position resulting from this acquisition. We have a proven approach and ability to identify and achieve synergies in our acquisitions. Our stewardship operating model, supported by our smarter asset management practices is all about optimizing the assets we acquire through production optimization and expense efficiency. We use every lever at our disposal to free cash flow from our investments. With this acquisition, we will accelerate synergies as a result of increasing asset density and field operations, integrating processes and systems into our One DEC platforms and consolidating applicable corporate functions. In addition to the high-quality developed assets we are adding to our portfolio, there is also room for attractive asset optimization opportunities, which include a variety of options with our expanded acreage position. As we have demonstrated over the past few years, our talented land and legal teams have proven experience to help us optimize cash generation from our acreage positions. Turning to Slide 7, Diversified has again delivered meaningful growth in important operational and financial metrics that are improving its position among peers and allowing the company to benefit from further trading multiple expansion. The relative performance and significant increase in cash generation have now allowed us to compete with peers with market capitalization and production profiles that are larger. Specifically, with this acquisition, we have a step change in free cash flow generation increasing by almost 30%, notably without any increase in leverage. Importantly, Diversified provides investors, especially those focused in the small to mid-cap arena, the opportunity to own a company with a high free cash flow yield and long duration exposure to the improving natural gas macro environment. Turning to Slide 8. Diversified has developed a disciplined acquisition framework, which we utilize to analyze and evaluate all the deals we review. Because we operate with size and scale in multiple basins, we believe the company has the opportunity to participate in significantly more acquisition opportunities while also allowing us to profitably leverage our scale, vertical integration and technology. By using low cost of capital to finance attractive returns based on purchase price multiples and discounted cash flow percentages, we are able to successfully capture that spread to increase shareholder value. It's worth noting that there are immediate transaction benefits with the Canvas acquisition before giving any value to multiple avenues for upside, including strategically monetizing undeveloped acreage, implementing targeted synergies and potentially entering into joint development agreements to accelerate additional value creation. This acquisition is accretive on several metrics, and it will allow us to continue to deliver and unlock additional shareholder value while providing our investors with peer-leading shareholder returns anchored by a quarterly dividend that we intend to maintain at $0.29 per share. We will also provide the option to return additional capital to shareholders through continued deleveraging and share repurchases. Finally, moving to Slide 9. Our acquisition of Canvas continues to reinforce our leadership in the industry as the right company to manage resilient cash flow generating assets now and into the future. The strategic acquisition of Canvas Energy allows us to grow our Diversified low-risk business model while also being financially accretive on many key metrics and notably grows our EBITDA by 18% and free cash flow by 29%. We also gain best-in-class operational efficiencies with an expanded geographic footprint in one of our favorite operating areas, the Sooner State. With enhanced cash flow, achievable synergies and an increase in liquids weighting that strengthens our margins, we create a must-own energy asset manager with substantial equity upside through a multiple rerate. The bottom line is we have created a highly scalable and highly investable platform that generates significant free cash flow and is well positioned for future growth. Thank you for your continued interest in our company and in this transaction. We believe this acquisition is a win for our employees, our customers, our shareholders and our partners, notably our initial partnership funding with Carlyle. I'm excited to work with our teams to integrate the Canvas assets into our great company. With that, I'll now open the floor to questions. Operator, please open the line for questions. Operator: [Operator Instructions] Our first question is coming from Tim Rezvan from KeyBanc Capital Markets. Timothy Rezvan: Congrats on the deal. Rusty, I see the acquisition grows your production by 13%, but we also see that 16% 5-year PDP decline which I guess would imply years 1 and 2 maybe closer to 20%. So do you expect to need to sort of increase your D&C CapEx much to sort of offset that a little steeper decline? Or do you think your Mewbourne JV or something else in the mix can address that? Robert Hutson: Yes, I think that's exactly right, Tim. I mean we -- some of these wells were drilled -- that canvas had drilled in the last few years, obviously, have a little steeper decline rate on them. But with what we're doing at Mewbourne with our Mewbourne JV, and also with the upside that's potentially in this portfolio with some JV opportunities, we're more than able to moderate that and not really affect our overall decline rate as a company. Keep in mind, it's only 13% of our total production as it sits here today. So even with a little steeper decline on that with our other organic mechanisms within the portfolio, we'll be able to maintain and moderate that pretty well. Bradley Gray: And Tim, this is Brad. I'll just add the fact that in modeling this transaction for us and building it into our existing portfolio, we've not looked at intentionally increasing CapEx as a result of this deal. Timothy Rezvan: Okay. That's great context. And then as a follow-up, it's been now 2.5 months since you announced the JV with the Carlyle funds, and you have a deal with about 20% of that capital committed. Can you talk about maybe the quality and quantity of asset packages that you're evaluating and what a potential capital deployment time line could be like? Could this fully be deployed by the middle of 2026? Do you have any sort of line of sight on how to do that? Robert Hutson: Yes. I think it's -- we obviously evaluate a lot of things. And we don't do very many of them. I mean, I know that sounds funny because we do so many transactions, but we do pass on a lot of stuff. And we're looking for the right deals. We're looking for the ones that have the most synergies attached to them in good locations where we feel like we like the production. We like the production profiles, we like the assets. We like where they're located. And so we're not just grabbing everything that's out there in the market. So we're trying to be very focused on what we like and what we think is going to add to the long-term success of the company. And we want to buy it right. As it relates to the Carlyle partnership, yes, this was 20% in essence of the commitment. But I would say that commitment, as we continue to evaluate and look at things, I'm sure they'll be willing to invest right alongside of us as much as we can possibly look at and acquire. And so I can't tell you how quickly we're going to fill up that $2 billion original commitment. But I wouldn't be shocked if we did by the middle of 2026. And so we'll continue to focus and they're going to be focused with us alongside larger transactions. And so we're going to be very focused on getting the right things, and we're going to work with them. We have very common ways of evaluating assets and the value of the deals. And so it's a very efficient process with them, let's put it that way. Bradley Gray: And Tim, if you just look back over the last 18 months, with the inclusion of this acquisition, we're at close to $2.5 billion of acquisitions. So yes, I'm just supporting Rusty's comment there that at that pace, if that pace were to replicate, then we could achieve that pace. Timothy Rezvan: Okay. Okay. I appreciate that. If I could sneak one final one in. I know primary drilling is not your business. But looking at Canvas, most of their wells looks like about 60% are in the Meramec over the last few years. Can you talk about what undrilled horizon sort of you're most excited about on this acquired acreage? And I'll leave it there. Robert Hutson: Yes, I think it's -- some of the stuff that was -- had been recently drilled down in the SCOOP/STACK area. I think that some of those well results down there were pretty appealing. So we'll probably focus on those first in terms of trying to determine how we want to drive value from that, whether that be through a JV similar to what we've done with Mewbourne or whatever. So -- but that seemed to be the ones that we really thought had the greatest upside and the best returns through the experience that we saw from them. Operator: Next question is coming from Charles Meade from Johnson Rice. Charles Meade: Rusty and Brad, I want to pick up kind of right where you left off with Tim there. So -- and my question is around if you could kind of -- a little bit more characterization of these assets. I think you have in your press release that 23 of these wells are -- have been brought online in the last 12 months. And so it seems to me that's probably going to be, I don't know, half of the total production that you're getting with these assets. And if that's the case, it seems like there's actually both a lot of concentration to these relatively recent vintage wells, but also that there's a lot of acreage out there that probably doesn't have much production. So I wonder if you could just elaborate on that and kind of give us a sense of the concentration and where some of the undeveloped potential for divestiture farmout is? Robert Hutson: Yes. Well, the 23 wells that were drilled in the last 12 months, those do not represent 50% of the production. That's -- it's much less than that. I'd say it's probably 25% to 30% of the overall production in the -- you got about 500 wells in this package. Some of it's very -- is much more mature and much lower decline. So from that perspective, yes, these are newer wells. We do have good data on them now where they have been performing. So we have good ideas of kind of how those would play out if you continue to develop that acreage position where these wells are located. I think that, as I said with Tim, I think the SCOOP/STACK area where those 23 wells were kind of drilled over the last 12 to 18 months, that's really our high -- as we sit here today, that's our high-value area. And so we think that there's a great opportunity there to look at some organic type growth mechanism, whether it be through a JV, like I said, like we did with Mewbourne and Cherokee or someone else. We're not going to stand up a drilling expense -- in our existing assets or in our existing operations, we're not going to set up a drilling program ourselves, but we do like to do and like the way that these JVs work out for us. And so I would say that, that's probably our top priority in terms of that organic growth that you're mentioning is to look at that area down there. And we have several, what I would consider to be undrilled locations that could be JV-ed or -- look, and if somebody comes in and offers you enough money and it's going to be worth more than the JV itself, then you would all -- by all means, you take the cash and get the returns that way also. So it's one of many ways that we can benefit from undeveloped acreage that we didn't pay for. Charles Meade: Got it. That's helpful -- go ahead. Bradley Gray: Well, Charles, I was just going to add. This is a -- this transaction is right in one of our existing operators where we have an outstanding team. We're excited about our Canvas employees that will be joining us as well. So in addition to some of the optionality that we will acquire when we close this transaction, we also will have our Smarter Asset Management playbook and margin enhancement opportunities that we will start working on actually today. So it's not just about the wells that were drilled or the optionality we have with new development partnerships. It's about the existing PDP, adding to our portfolio of assets in an existing operating area and driving improved margins once we consolidate. Charles Meade: Got it. That is helpful. And then as a follow-up, since we're still in the early days of this Carlyle relationship you have, can you walk us through the mechanics of how this -- of how and when this ABS is going to be placed? And just a couple of things I'm thinking that may be relevant are, is it going to close before the acquisition? Or does it close right after the acquisition? And also, I know there's been some -- there was some talk before whether these -- whether -- the accounting treatment of these, whether they're going to be consolidated on your financial statements or whether it's going to come through in a different manner. So can you just talk about some of the mechanics of how this is going to work and eventually appear? Bradley Gray: Sure. I'll hit a couple of those points, Charles. Thanks for the question. So the transaction will close simultaneously with the closing of the acquisition. So that will -- it will be contingent upon the closing of the acquisition. So it will be simultaneous. We will go through a process -- well, let me talk about the off-balance sheet treatment that has been referred to in the past. This transaction, the debt will remain on our balance sheet. Carlyle is going to be providing financing at the debt level for this transaction. The SPV that will be established to support the ABS, the equity of that SPV will be 100% owned by Diversified. So this will be just -- this will look just like our other ABSs that we have on our balance sheet. We have talked to Carlyle about participating at the SPV equity level, and they are willing and would like to do that for the right transaction. This transaction primarily for tax-related challenges, just was not a good fit for that. So they're providing the debt only for this one. And then this will be really a straightforward process, very similar to our other ABSs. This will be a rated piece of paper. We'll go through that process with the rating agencies. The primary difference from our other ABSs is that we will not go through a syndication process with investors. Carlyle will be the primary and -- will be the investor in this ABS. Charles Meade: Got it. That is helpful detail. Operator: [Operator Instructions] Our next question is coming from Tim Hurst-Brown from Tennyson Securities. Tim Hurst-Brown: Congrats on the deal. A couple of questions from me. Just wondering whether you could give a sense of the scale of the synergies on this acquisition. So if we look at the Maverick deal, I mean, I think we're talking about $60 million of annualized synergies, which is around 15% of the acquired EBITDA. Would we be looking at something similar here or less? So that's the first question. Robert Hutson: Yes. Tim, I -- we don't really know exactly what the synergy dollars are yet. Obviously, once we get in there, operate the asset for a period of time, we'll be able to communicate that back to the market in more detail. Of course, the G&A structure will be the main focus. Obviously, we will -- for a transaction this size and for the number of wells and such, the G&A structure that we currently have, our existing platform will be more than sufficient to consolidate and integrate. So you can kind of get some sense around that. Field synergies, we just don't know until we get in there and operate the assets, but we do feel really, really good that there are going to be significant areas to recognize those synergies. Bradley Gray: Yes. And Tim, I would anticipate that upon closing of the transaction in the fourth quarter, we'll have some updated information related to that. Tim Hurst-Brown: Great. That would be useful. And just in terms of the corporate G&A at the Canvas level, are you able to let us know what that is or was last year? Bradley Gray: It's roughly $25 million to $30 million of G&A. Tim Hurst-Brown: That's useful. And then just a quick follow-on. The vendor shares, I think roughly $55 million worth is a relatively sort of small component of the overall consideration, just wondering what the rationale was to include that in the consideration and not entirely with existing cash and debt? Robert Hutson: Well, we just wanted to -- really, the main focus is to get some -- to make sure that we're keeping leverage neutral to going down, which is always very important to us. In this situation, with the Carlyle deal just being debt-only and not an equity position in our SPV, then we wanted to make sure that we kept that leverage at a level that's consistent with our stated desire to stay in that 2 to 2.5x. So mainly that, it's 4% of our total shares. And for us, any time we can utilize our -- 4% of our shares to pick up 29% of free cash flow accretion, we look at that as being pretty positive. Tim Hurst-Brown: Great. I appreciate it. Robert Hutson: Thanks, Tim. Operator: Next question is coming from Sam Wahab from Peel Hunt. Sam Wahab: Congrats on a very accretive deal here. Just a couple of follow-on questions from me. The first around the ABS. I mean this looks like one of your historic deals, given that they're not going to use the SPV structure on this occasion. And just on that basis, could you give a bit more info on the expected interest rate and maturity terms of this ABS? And then there's just one more after. Bradley Gray: Yes. So just one quick clarification, Sam, look we are going to have an SPV that the assets will be placed into. My comments earlier was that, that Carlyle will not be purchasing a portion of the equity of this SPV so that will be -- so that's the similarity with our other structures and ABS notes that we have. In regards to the interest rates, I think that we've seen a decline here in the treasuries, which is positive for us because the majority of the debt will be priced off of the 5-year treasury so that's been positive. And I think you'll see us have a similar type of spread on top of that with Carlyle. So I think our ABS X note that we printed earlier in the year, I would expect we would see similar type results to that, if not better. Sam Wahab: Okay, brilliant. And yes, just a small point on the lockup. It might be in the small print, but is there a timing on that lockup? Is it 6 months or so? That's on the business and the shares... Bradley Gray: The lockup is 6 months. Yes. Sam Wahab: Okay, brilliant. Bradley Gray: Post close. Robert Hutson: Post closing. Bradley Gray: Post close. Robert Hutson: Post closing, Sam. So if we close at the end of... Bradley Gray: End of fourth quarter. Robert Hutson: End of the fourth quarter, it would be 6 months from then. If we -- whatever month we close in, it will be 6 months from that point. Sam Wahab: Perfect, brilliant. Operator: We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments. Robert Hutson: Yes. Thank you all for joining today. We're really excited about the transaction and we look forward to sharing additional information with you as we -- once we close the transaction and start to recognize all the benefits that we discussed today. Thank you all very much. Operator: Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation.
Operator: Greetings, and welcome to the Diversified Energy Company acquisition of Canvas Energy Webcast and Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Douglas Kris, Senior Vice President, Investor Relations and Corporate Communications. Please go ahead, sir. Douglas Kris: Good morning, Kevin, and thank you, everyone, for joining us today for the special conference call to discuss Diversified's acquisition of Canvas Energy. Joining me today on the call are Diversified's Founder and CEO, Rusty Hutson; and President and CFO, Brad Gray. We have also posted a slide deck to accompany our remarks today, and we will reference the slide numbers during our discussion. We will open the line for questions after our prepared remarks. Following the conclusion of today's call, we are happy to follow up with any specific modeling questions. Before we get started, I will remind everyone that the remarks on this call reflect the financial and operational outlook as of today, September 9, 2025. These outlooks entail assumptions and expectations that involve risks and uncertainties. A discussion of these risks can be found in our regulatory filings. During this call, we also referenced certain non-GAAP and non-IFRS financial measures. All of our disclosures around those items and additional forward-looking disclosures are found in our materials released today on our website or in regulatory filings. I will now turn the call over to Rusty. Robert Hutson: Thank you, Doug, and thank you all for joining the call today. On our call today, we are providing further context about the acquisition of Canvas Energy and the assets we are acquiring, how their operations and assets fit within our broader financial and operational model and the significant sources of value we expect to deliver from this transaction. We are excited to announce the acquisition of Canvas Energy, a privately held company headquartered in Oklahoma City. We believe this acquisition will add accretive size and scale advantages and further align with our strategy of building a portfolio of high-quality cash-generating energy assets. We believe that our team of professionals are experts at optimizing the existing long life and undervalued U.S. assets, and there continues to be a great growth opportunity to consolidate these assets under the diversified vertically integrated infrastructure. Our focus remains firmly on executing on our unique growth strategy that creates value-based, resilient and consistent cash flow from our growing portfolio of cash generating energy assets. We intend to utilize our experienced employees' institutional knowledge and commercial relationships to extend our position as a dominant force in the Oklahoma market. In my view, what we are building at Diversified is a battleship, a corporate and financial structure that is strong, durable, agile, resilient and in the best position to serve its shareholders while protecting and delivering cash generation to provide a tangible return to our shareholders. And much like a battleship, our competitive edge, strength and power comes from the importance of every component and the coordination of every team and task no matter how large or small. The addition of Canvas enhances the size and scale of our company, furthering our progress in our strategy and providing investors with a unique opportunity for value accretion that further bolsters our promise to deliver reliable, long-term shareholder returns. Starting on Slide 3. This acquisition has the potential to create significant value over and above the purchase price through the combination of high-quality assets with our proven competitive operating model, which leverages operational focus and expertise, scale, vertical integration and technology. We are acquiring additional liquids-rich exposure to premium markets that will help drive top line revenue, adding Canvas' production, which is approximately 147 million cubic feet or approximately 24,000 barrels of oil equivalent per day, with a commodity split between 57% liquids and 43% natural gas, further expanding our exposure to both premium oil and LNG opportunities. The combined company will continue to maintain an enviable peer-leading low decline production profile with the added resource of total proved reserves on a PV-10 basis of approximately $1.4 billion. Canvas adds approximately 240,000 net acres with the assets creating significant operational overlap where we can apply our proven consolidation and operating model. Canvas also offers immediate financial accretion through its strong, stable financial profile, which is anticipated to generate approximately $155 million in the next 12 months EBITDA, or an increase of approximately 18% to our current base. Additionally, we are meaningfully growing our free cash flow by 29%. It's worth noting that these financial metrics do not include any synergies, margin enhancements and our time-tested smarter asset management optimization programs, which we believe provide meaningful uplift in value and bottom line cash flow. This bolt-on acquisition in Oklahoma offers a tremendous opportunity, adding contiguous acreage and the optionality for portfolio optimization either through partnership development or via divestiture. By remaining disciplined, we are growing our company by acquiring value-accretive reliable PDP assets and consistent cash flow at an approximate 3.5x next 12 months multiple. This transaction brings us solid assets at an accretive value. Turning to Slide 4. Let me now spend a few minutes talking about the specifics of this deal. We are acquiring Canvas Energy for approximately $550 million. The purchase price will be funded through the issuance of up to $400 million of asset-backed securitization funding originated by Carlyle and approximately 3.4 million shares of Diversified cash on hand and current liquidity. Following the closing of the transaction, Canvas unitholders will own approximately 4% of Diversified shares outstanding. Importantly, with a small dilution, we are delivering a leverage-neutral transaction that generates a significant 29% increase in free cash flow. It's worth noting that this acquisition marks a significant milestone as it is the initial transaction that utilizes the Carlyle Strategic Funding partnership. We have a historically established Carlyle relationship through their previous purchases of ABS notes, and they remain investors in 2 of our ABS notes. Since then, we have grown their confidence in our acquisition evaluation, management experience, operational capabilities and stewardship focus. We are excited to further leverage our strategic partnership to continue to fund high-quality PDP assets and to grow our combined portfolio. We expect the transaction to close during the fourth quarter of 2025 after we receive customary approval and regulatory clearance. Turning to Slide 5. This acquisition creates significant asset density in Oklahoma, and we are very excited about this aspect. The impact on our Sooner State operations will include a combined acreage footprint in Oklahoma of approximately 1.6 million acres, including the largest in the Western Anadarko Basin. Combined Oklahoma production at approximately 78,000 barrels of oil equivalent per day that consists of a high liquids cut, additional exposure to the emerging Cherokee play and other high-quality acreage creating organic growth opportunities for asset optimization or potential development partnerships. Turning to Slide 6. This slide further illustrates the combined position in Oklahoma and the Western Anadarko Basin. The map shown on this page creates a powerful picture of the significant acreage position resulting from this acquisition. We have a proven approach and ability to identify and achieve synergies in our acquisitions. Our stewardship operating model, supported by our smarter asset management practices is all about optimizing the assets we acquire through production optimization and expense efficiency. We use every lever at our disposal to free cash flow from our investments. With this acquisition, we will accelerate synergies as a result of increasing asset density and field operations, integrating processes and systems into our One DEC platforms and consolidating applicable corporate functions. In addition to the high-quality developed assets we are adding to our portfolio, there is also room for attractive asset optimization opportunities, which include a variety of options with our expanded acreage position. As we have demonstrated over the past few years, our talented land and legal teams have proven experience to help us optimize cash generation from our acreage positions. Turning to Slide 7, Diversified has again delivered meaningful growth in important operational and financial metrics that are improving its position among peers and allowing the company to benefit from further trading multiple expansion. The relative performance and significant increase in cash generation have now allowed us to compete with peers with market capitalization and production profiles that are larger. Specifically, with this acquisition, we have a step change in free cash flow generation increasing by almost 30%, notably without any increase in leverage. Importantly, Diversified provides investors, especially those focused in the small to mid-cap arena, the opportunity to own a company with a high free cash flow yield and long duration exposure to the improving natural gas macro environment. Turning to Slide 8. Diversified has developed a disciplined acquisition framework, which we utilize to analyze and evaluate all the deals we review. Because we operate with size and scale in multiple basins, we believe the company has the opportunity to participate in significantly more acquisition opportunities while also allowing us to profitably leverage our scale, vertical integration and technology. By using low cost of capital to finance attractive returns based on purchase price multiples and discounted cash flow percentages, we are able to successfully capture that spread to increase shareholder value. It's worth noting that there are immediate transaction benefits with the Canvas acquisition before giving any value to multiple avenues for upside, including strategically monetizing undeveloped acreage, implementing targeted synergies and potentially entering into joint development agreements to accelerate additional value creation. This acquisition is accretive on several metrics, and it will allow us to continue to deliver and unlock additional shareholder value while providing our investors with peer-leading shareholder returns anchored by a quarterly dividend that we intend to maintain at $0.29 per share. We will also provide the option to return additional capital to shareholders through continued deleveraging and share repurchases. Finally, moving to Slide 9. Our acquisition of Canvas continues to reinforce our leadership in the industry as the right company to manage resilient cash flow generating assets now and into the future. The strategic acquisition of Canvas Energy allows us to grow our Diversified low-risk business model while also being financially accretive on many key metrics and notably grows our EBITDA by 18% and free cash flow by 29%. We also gain best-in-class operational efficiencies with an expanded geographic footprint in one of our favorite operating areas, the Sooner State. With enhanced cash flow, achievable synergies and an increase in liquids weighting that strengthens our margins, we create a must-own energy asset manager with substantial equity upside through a multiple rerate. The bottom line is we have created a highly scalable and highly investable platform that generates significant free cash flow and is well positioned for future growth. Thank you for your continued interest in our company and in this transaction. We believe this acquisition is a win for our employees, our customers, our shareholders and our partners, notably our initial partnership funding with Carlyle. I'm excited to work with our teams to integrate the Canvas assets into our great company. With that, I'll now open the floor to questions. Operator, please open the line for questions. Operator: [Operator Instructions] Our first question is coming from Tim Rezvan from KeyBanc Capital Markets. Timothy Rezvan: Congrats on the deal. Rusty, I see the acquisition grows your production by 13%, but we also see that 16% 5-year PDP decline which I guess would imply years 1 and 2 maybe closer to 20%. So do you expect to need to sort of increase your D&C CapEx much to sort of offset that a little steeper decline? Or do you think your Mewbourne JV or something else in the mix can address that? Robert Hutson: Yes, I think that's exactly right, Tim. I mean we -- some of these wells were drilled -- that canvas had drilled in the last few years, obviously, have a little steeper decline rate on them. But with what we're doing at Mewbourne with our Mewbourne JV, and also with the upside that's potentially in this portfolio with some JV opportunities, we're more than able to moderate that and not really affect our overall decline rate as a company. Keep in mind, it's only 13% of our total production as it sits here today. So even with a little steeper decline on that with our other organic mechanisms within the portfolio, we'll be able to maintain and moderate that pretty well. Bradley Gray: And Tim, this is Brad. I'll just add the fact that in modeling this transaction for us and building it into our existing portfolio, we've not looked at intentionally increasing CapEx as a result of this deal. Timothy Rezvan: Okay. That's great context. And then as a follow-up, it's been now 2.5 months since you announced the JV with the Carlyle funds, and you have a deal with about 20% of that capital committed. Can you talk about maybe the quality and quantity of asset packages that you're evaluating and what a potential capital deployment time line could be like? Could this fully be deployed by the middle of 2026? Do you have any sort of line of sight on how to do that? Robert Hutson: Yes. I think it's -- we obviously evaluate a lot of things. And we don't do very many of them. I mean, I know that sounds funny because we do so many transactions, but we do pass on a lot of stuff. And we're looking for the right deals. We're looking for the ones that have the most synergies attached to them in good locations where we feel like we like the production. We like the production profiles, we like the assets. We like where they're located. And so we're not just grabbing everything that's out there in the market. So we're trying to be very focused on what we like and what we think is going to add to the long-term success of the company. And we want to buy it right. As it relates to the Carlyle partnership, yes, this was 20% in essence of the commitment. But I would say that commitment, as we continue to evaluate and look at things, I'm sure they'll be willing to invest right alongside of us as much as we can possibly look at and acquire. And so I can't tell you how quickly we're going to fill up that $2 billion original commitment. But I wouldn't be shocked if we did by the middle of 2026. And so we'll continue to focus and they're going to be focused with us alongside larger transactions. And so we're going to be very focused on getting the right things, and we're going to work with them. We have very common ways of evaluating assets and the value of the deals. And so it's a very efficient process with them, let's put it that way. Bradley Gray: And Tim, if you just look back over the last 18 months, with the inclusion of this acquisition, we're at close to $2.5 billion of acquisitions. So yes, I'm just supporting Rusty's comment there that at that pace, if that pace were to replicate, then we could achieve that pace. Timothy Rezvan: Okay. Okay. I appreciate that. If I could sneak one final one in. I know primary drilling is not your business. But looking at Canvas, most of their wells looks like about 60% are in the Meramec over the last few years. Can you talk about what undrilled horizon sort of you're most excited about on this acquired acreage? And I'll leave it there. Robert Hutson: Yes, I think it's -- some of the stuff that was -- had been recently drilled down in the SCOOP/STACK area. I think that some of those well results down there were pretty appealing. So we'll probably focus on those first in terms of trying to determine how we want to drive value from that, whether that be through a JV similar to what we've done with Mewbourne or whatever. So -- but that seemed to be the ones that we really thought had the greatest upside and the best returns through the experience that we saw from them. Operator: Next question is coming from Charles Meade from Johnson Rice. Charles Meade: Rusty and Brad, I want to pick up kind of right where you left off with Tim there. So -- and my question is around if you could kind of -- a little bit more characterization of these assets. I think you have in your press release that 23 of these wells are -- have been brought online in the last 12 months. And so it seems to me that's probably going to be, I don't know, half of the total production that you're getting with these assets. And if that's the case, it seems like there's actually both a lot of concentration to these relatively recent vintage wells, but also that there's a lot of acreage out there that probably doesn't have much production. So I wonder if you could just elaborate on that and kind of give us a sense of the concentration and where some of the undeveloped potential for divestiture farmout is? Robert Hutson: Yes. Well, the 23 wells that were drilled in the last 12 months, those do not represent 50% of the production. That's -- it's much less than that. I'd say it's probably 25% to 30% of the overall production in the -- you got about 500 wells in this package. Some of it's very -- is much more mature and much lower decline. So from that perspective, yes, these are newer wells. We do have good data on them now where they have been performing. So we have good ideas of kind of how those would play out if you continue to develop that acreage position where these wells are located. I think that, as I said with Tim, I think the SCOOP/STACK area where those 23 wells were kind of drilled over the last 12 to 18 months, that's really our high -- as we sit here today, that's our high-value area. And so we think that there's a great opportunity there to look at some organic type growth mechanism, whether it be through a JV, like I said, like we did with Mewbourne and Cherokee or someone else. We're not going to stand up a drilling expense -- in our existing assets or in our existing operations, we're not going to set up a drilling program ourselves, but we do like to do and like the way that these JVs work out for us. And so I would say that, that's probably our top priority in terms of that organic growth that you're mentioning is to look at that area down there. And we have several, what I would consider to be undrilled locations that could be JV-ed or -- look, and if somebody comes in and offers you enough money and it's going to be worth more than the JV itself, then you would all -- by all means, you take the cash and get the returns that way also. So it's one of many ways that we can benefit from undeveloped acreage that we didn't pay for. Charles Meade: Got it. That's helpful -- go ahead. Bradley Gray: Well, Charles, I was just going to add. This is a -- this transaction is right in one of our existing operators where we have an outstanding team. We're excited about our Canvas employees that will be joining us as well. So in addition to some of the optionality that we will acquire when we close this transaction, we also will have our Smarter Asset Management playbook and margin enhancement opportunities that we will start working on actually today. So it's not just about the wells that were drilled or the optionality we have with new development partnerships. It's about the existing PDP, adding to our portfolio of assets in an existing operating area and driving improved margins once we consolidate. Charles Meade: Got it. That is helpful. And then as a follow-up, since we're still in the early days of this Carlyle relationship you have, can you walk us through the mechanics of how this -- of how and when this ABS is going to be placed? And just a couple of things I'm thinking that may be relevant are, is it going to close before the acquisition? Or does it close right after the acquisition? And also, I know there's been some -- there was some talk before whether these -- whether -- the accounting treatment of these, whether they're going to be consolidated on your financial statements or whether it's going to come through in a different manner. So can you just talk about some of the mechanics of how this is going to work and eventually appear? Bradley Gray: Sure. I'll hit a couple of those points, Charles. Thanks for the question. So the transaction will close simultaneously with the closing of the acquisition. So that will -- it will be contingent upon the closing of the acquisition. So it will be simultaneous. We will go through a process -- well, let me talk about the off-balance sheet treatment that has been referred to in the past. This transaction, the debt will remain on our balance sheet. Carlyle is going to be providing financing at the debt level for this transaction. The SPV that will be established to support the ABS, the equity of that SPV will be 100% owned by Diversified. So this will be just -- this will look just like our other ABSs that we have on our balance sheet. We have talked to Carlyle about participating at the SPV equity level, and they are willing and would like to do that for the right transaction. This transaction primarily for tax-related challenges, just was not a good fit for that. So they're providing the debt only for this one. And then this will be really a straightforward process, very similar to our other ABSs. This will be a rated piece of paper. We'll go through that process with the rating agencies. The primary difference from our other ABSs is that we will not go through a syndication process with investors. Carlyle will be the primary and -- will be the investor in this ABS. Charles Meade: Got it. That is helpful detail. Operator: [Operator Instructions] Our next question is coming from Tim Hurst-Brown from Tennyson Securities. Tim Hurst-Brown: Congrats on the deal. A couple of questions from me. Just wondering whether you could give a sense of the scale of the synergies on this acquisition. So if we look at the Maverick deal, I mean, I think we're talking about $60 million of annualized synergies, which is around 15% of the acquired EBITDA. Would we be looking at something similar here or less? So that's the first question. Robert Hutson: Yes. Tim, I -- we don't really know exactly what the synergy dollars are yet. Obviously, once we get in there, operate the asset for a period of time, we'll be able to communicate that back to the market in more detail. Of course, the G&A structure will be the main focus. Obviously, we will -- for a transaction this size and for the number of wells and such, the G&A structure that we currently have, our existing platform will be more than sufficient to consolidate and integrate. So you can kind of get some sense around that. Field synergies, we just don't know until we get in there and operate the assets, but we do feel really, really good that there are going to be significant areas to recognize those synergies. Bradley Gray: Yes. And Tim, I would anticipate that upon closing of the transaction in the fourth quarter, we'll have some updated information related to that. Tim Hurst-Brown: Great. That would be useful. And just in terms of the corporate G&A at the Canvas level, are you able to let us know what that is or was last year? Bradley Gray: It's roughly $25 million to $30 million of G&A. Tim Hurst-Brown: That's useful. And then just a quick follow-on. The vendor shares, I think roughly $55 million worth is a relatively sort of small component of the overall consideration, just wondering what the rationale was to include that in the consideration and not entirely with existing cash and debt? Robert Hutson: Well, we just wanted to -- really, the main focus is to get some -- to make sure that we're keeping leverage neutral to going down, which is always very important to us. In this situation, with the Carlyle deal just being debt-only and not an equity position in our SPV, then we wanted to make sure that we kept that leverage at a level that's consistent with our stated desire to stay in that 2 to 2.5x. So mainly that, it's 4% of our total shares. And for us, any time we can utilize our -- 4% of our shares to pick up 29% of free cash flow accretion, we look at that as being pretty positive. Tim Hurst-Brown: Great. I appreciate it. Robert Hutson: Thanks, Tim. Operator: Next question is coming from Sam Wahab from Peel Hunt. Sam Wahab: Congrats on a very accretive deal here. Just a couple of follow-on questions from me. The first around the ABS. I mean this looks like one of your historic deals, given that they're not going to use the SPV structure on this occasion. And just on that basis, could you give a bit more info on the expected interest rate and maturity terms of this ABS? And then there's just one more after. Bradley Gray: Yes. So just one quick clarification, Sam, look we are going to have an SPV that the assets will be placed into. My comments earlier was that, that Carlyle will not be purchasing a portion of the equity of this SPV so that will be -- so that's the similarity with our other structures and ABS notes that we have. In regards to the interest rates, I think that we've seen a decline here in the treasuries, which is positive for us because the majority of the debt will be priced off of the 5-year treasury so that's been positive. And I think you'll see us have a similar type of spread on top of that with Carlyle. So I think our ABS X note that we printed earlier in the year, I would expect we would see similar type results to that, if not better. Sam Wahab: Okay, brilliant. And yes, just a small point on the lockup. It might be in the small print, but is there a timing on that lockup? Is it 6 months or so? That's on the business and the shares... Bradley Gray: The lockup is 6 months. Yes. Sam Wahab: Okay, brilliant. Bradley Gray: Post close. Robert Hutson: Post closing. Bradley Gray: Post close. Robert Hutson: Post closing, Sam. So if we close at the end of... Bradley Gray: End of fourth quarter. Robert Hutson: End of the fourth quarter, it would be 6 months from then. If we -- whatever month we close in, it will be 6 months from that point. Sam Wahab: Perfect, brilliant. Operator: We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments. Robert Hutson: Yes. Thank you all for joining today. We're really excited about the transaction and we look forward to sharing additional information with you as we -- once we close the transaction and start to recognize all the benefits that we discussed today. Thank you all very much. Operator: Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation.
Operator: Hello, and welcome to the Core & Main Q2 2025 Earnings Call. My name is Alex, and I'll be coordinating today's call. [Operator Instructions] I'll now hand it over to Glenn Floyd, Director of Investor Relations. Please go ahead. Glenn Floyd: Good morning, and thank you for joining us. I'm Glenn Floyd, Director of Investor Relations at Core & Main. We appreciate you taking the time to be with us today for our fiscal 2025 second quarter earnings call. Joining me this morning are Mark Witkowski, our Chief Executive Officer; and Robyn Bradbury, our Chief Financial Officer. On today's call, Mark will begin by sharing an overview of our business and recent performance. Robyn will follow with a review of our second quarter results and our outlook for the rest of fiscal 2025. We'll then open the line for Q&A, and Mark will wrap up with closing remarks. As a reminder, our press release, presentation materials and the statements made during today's call may include forward-looking statements. These are subject to various risks and uncertainties that could cause actual results to differ materially from our expectations. For more information, please refer to the cautionary statements included in our earnings press release and in our filings with the SEC. We will also reference certain non-GAAP financial measures during today's discussion. We believe these metrics provide useful insight into the underlying performance of our business. Reconciliations to the most comparable GAAP measure are available in both our earnings press release and the appendix of today's investor presentation. Thank you again for your interest in Core & Main. I'll now turn the call over to our Chief Executive Officer, Mark Witkowski. Mark Witkowski: Thanks, Glenn, and good morning, everyone. We appreciate you joining us today. If you're following along with our second quarter earnings presentation, I'll begin on Page 5 with a business update. I'm proud of our associates' dedication to supporting customers and delivering critical infrastructure projects. Our teams drove nearly 7% net sales growth in the quarter, including roughly 5% organic growth. Municipal demand remained healthy, supported by traditional repair and replacement activity, advanced metering infrastructure conversion projects and the construction of new water and wastewater treatment facilities. Our nonresidential end market was stable in the quarter. Highway and street projects remain strong, institutional construction has been steady, and we're seeing continued momentum from data centers. While data centers represent a small portion of our sales mix today, customer sentiment points to continued growth in this space, and we expect it to become a larger portion of our sales mix over time. On the residential side, lot development for single-family housing, which accounts for roughly 20% of our sales, slowed during the quarter, especially in previously fast-growing Sunbelt markets. We believe higher interest rates, affordability concerns and lower consumer confidence are weighing on demand for new homes. And until these macro headwinds ease, we expect activity in this end market will continue to soften through the second half. As a result, we are factoring in a lower residential outlook into our full year expectations, which Robyn will speak to in more detail. Against this market backdrop, we drove significant sales growth and market share gains across key initiatives, including treatment plant and fusible high-density polyethylene projects, where our technical expertise and consistent execution continue to differentiate Core & Main in the industry. We are also deepening relationships with large regional and national contractors, especially those pursuing critical infrastructure projects across the country. These customers increasingly value our ability to support them with consistent service, scale and product availability wherever their projects take them. Sales of meter products declined year-over-year, primarily due to project delays in the current year and a difficult comparison to last year's 48% growth rate. However, we have a growing backlog of metering projects we expect to release in the second half of the year, supporting our expectation for strong full year metering sales growth. Additionally, a healthy pipeline of bids and continued project awards gives us confidence in both the near- and long-term outlook for metering upgrade projects. Gross margins performed well in the quarter at 26.8%, up 10 basis points sequentially from Q1 and up 40 basis points year-over-year. Our gross margins reflect strong execution of our private label and sourcing initiatives, while our local teams continue to capture market share. At the end of the day, our performance is largely driven by how well we support our customers, making sure they have the right products at the right time with the service they need to keep projects on schedule and on budget. At the same time, our operating costs were elevated this quarter. We've experienced unusually high employee benefit costs and inflation in other categories like facilities, fleet and other distribution-related expenses. We have also carried higher costs from recent acquisitions, which have contributed to sales growth but have not yet reached their full synergy potential. Although we anticipated some of these pressures, certain costs were more pronounced than expected. To address these factors, we have implemented targeted cost-out actions to improve productivity and operating margins. We expect a portion of the savings to be realized in the second half of this year with a larger annualized benefit in 2026. We expect to achieve additional synergies tied to recent acquisitions. Our integration approach is phased and growth-oriented, starting with people, sales and operations to position each business for success. Once that foundation is in place, we evaluate opportunities in terms of costs and resources and develop plans to drive SG&A synergies. Our approach to cost management will be measured and focused on realigning the business with the demand environment without jeopardizing future performance, growth opportunities or the ability to serve our customers. We remain confident in the long-term growth and profitability prospects of Core & Main, including our ability to drive SG&A improvements and generate substantial value for shareholders. We continue to be balanced in how we allocate capital. During the quarter, we generated $34 million of operating cash flow and deployed approximately $24 million across organic growth initiatives, share repurchases and debt service. Year-to-date, we have repurchased $47 million of shares, reducing our share count by nearly 1 million. Our growth strategy is driven by organic growth and complementary acquisitions. After the quarter, we announced the acquisition of Canada Waterworks, a 3-branch distributor of pipe, valves, fittings and storm drainage products in Ontario, Canada. We expect the transaction to close later this month, further enhancing our position in the multibillion-dollar Canadian addressable market. With this acquisition, we now have 5 locations in Ontario, all established through value-enhancing M&A. This has created a platform for meaningful growth in Canada. On the organic side, we're making prudent investments to enhance our capabilities and better serve customers. We recently opened new locations in Kansas City and Wisconsin, strengthening our presence in priority markets. We are also evaluating additional high-growth markets for future expansion. These investments are designed to generate long-term growth, strengthen our market share and support our goal of delivering above-market growth over the coming years. We have plans to open several more locations this year, and I look forward to sharing updates on these initiatives. Before turning the call over to Robyn, I want to reiterate my confidence in Core & Main's growth and margin expansion opportunity. We are well positioned to benefit from future investments in aging U.S. water infrastructure. We have the right team in place to execute on the opportunities ahead, and we look forward to delivering even greater value to our customers, suppliers, communities and shareholders. Thank you for your continued support and trust in our vision. With that, I'll turn the call over to Robyn to walk through our financial results and outlook for the remainder of the year. Go ahead, Robyn. Robyn Bradbury: Thanks, Mark. I'll start on Page 7 of the presentation with some highlights from our second quarter results. As Mark mentioned, we grew net sales nearly 7% in the quarter to $2.1 billion. Organic sales were up roughly 5% with the balance of growth coming from acquisitions. Prices continue to be flat overall, and our teams worked diligently to sustain pricing in an evolving tariff and end market environment. In total, we estimate that our end markets grew in the low single digits range. We outperformed the market with significant sales growth and market share gains in our treatment plant and fusible high-density polyethylene initiatives. Gross margin came in at 26.8%, up 10 basis points from the first quarter and up 40 basis points year-over-year. The sequential and year-over-year improvement were both largely driven by continued execution of our private label and sourcing initiatives and contribution from accretive acquisitions. SG&A expenses increased 13% this quarter to $302 million. Roughly half of the $34 million increase was related to incremental costs from acquisitions and timing of onetime and other nonrecurring costs. The remainder was made up of volume-related growth, inflation and distribution-related costs and investments to drive future growth and market share gains. We implemented certain productivity and cost-out measures earlier this year, but with higher costs and inflation continuing to pressure our operating margins and our expectation of softer residential demand, we will be taking additional targeted cost reduction actions in areas that won't impact our ability to serve customers. Importantly, we will continue to make strategic investments to strengthen the business. We're seeing strong results from our sales initiatives, and we have opportunities to accelerate that with additional investment. We intend to keep expanding through greenfield locations to better serve customers and capture share while also investing in technology solutions that improve efficiency and support long-term margin expansion. Interest expense was $31 million in the second quarter, down from $36 million in the prior year. The decrease was primarily driven by lower fixed and variable interest rates on our senior term loan credit facilities and lower average borrowings under our ABL credit facility. Our provision for income tax was $41 million compared to $42 million in the prior year. Our effective tax rate was 22.5% for the quarter versus 25% a year ago. The decrease in effective tax rate was primarily due to tax benefits associated with equity-based compensation. Adjusted diluted earnings per share increased approximately 13% to $0.87 compared to $0.77 in the prior year. The increase reflects higher adjusted net income as well as the benefit of a lower share count following our share repurchase activity across fiscal years 2024 and 2025. We exclude intangible amortization because a significant portion of it relates to the formation of Core & Main following our leverage buyout in 2017. We believe adjusted diluted EPS better reflects the results of our operating strategy and the value creation we're delivering for shareholders. Adjusted EBITDA increased 4% to $266 million in the quarter, while adjusted EBITDA margin declined 40 basis points to 12.7%. The decline in adjusted EBITDA margin was driven by higher SG&A as a percentage of net sales, which we are taking actions to optimize. Turning to the balance sheet and cash flow. We ended the quarter with net debt of $2.3 billion and net debt leverage of 2.4x within our stated goals. Total liquidity was $1.1 billion, consisting primarily of availability under our ABL credit facility. Net cash provided by operating activities was $34 million in the quarter, down from $48 million in the prior year. The decline was primarily due to higher investment in working capital, partially offset by higher net income, lower tax payments and timing of interest payments. During the second quarter, we returned $8 million to shareholders through share repurchases, bringing our total for the first half of fiscal 2025 to $47 million and reducing our share count by nearly 1 million shares. As of today, we have $277 million remaining under our share repurchase program. Next, I'll cover our revised outlook for fiscal 2025 on Page 9. We are very pleased with our sales growth, gross margin expansion and capital allocation efforts through the first half of the year. However, higher operating costs and softer residential demand have resulted in operating margins coming in below our expectations. As a result, we are lowering our guidance to reflect current market conditions and higher operating expenses. We now expect net sales of $7.6 billion to $7.7 billion, adjusted EBITDA of $920 million to $940 million, and operating cash flow of $550 million to $610 million. We expect end market volumes to be slightly down for the full year. Municipal end market volumes are expected to grow in the low single digits, nonresidential volumes are expected to be roughly flat and residential lot development is expected to decline in the low double digits. Residential volumes were soft in the quarter and have weakened further through August, consistent with our updated guidance. We still expect pricing to have a neutral impact on full year sales, and we remain on track to deliver 2 to 4 percentage points of above-market growth. We expect adjusted EBITDA margins in the second half of the year to be slightly lower than the first half, reflecting continued gross margin performance, offset by a softer residential market and a higher SG&A rate. In summary, we continue to execute our growth initiatives, expand gross margins and make the strategic investments needed to position the business for long-term success. We have favorable long-term demand characteristics across each of our end markets, many levers to drive organic above-market performance, a healthy M&A pipeline, and numerous opportunities to improve operating margins. We are taking targeted actions to align the business with current demand trends and deploying capital to accelerate growth and enhance shareholder returns. We are confident in our ability to execute on the opportunities ahead, and we look forward to delivering even greater value to our customers, suppliers, communities and shareholders. With that, we'll open it up for questions. Operator: [Operator Instructions] Our first question for today comes from Brian Biros of Thompson Research Group. Brian Biros: On the guidance changes, I guess, the adjustment to the resi outlook from flat to down low double digits looks to account for maybe a little bit more than the adjustment to total sales overall. So it seems like maybe there's something at least positive partially offsetting that resi impact. Maybe that's slightly better municipal market, maybe it's just recent M&A being added in. Can you just touch a little bit more on the puts and takes to the revenue guidance there? Because it seems like there's more than just the resi impact to the top line. Robyn Bradbury: Yes. Thanks, Brian, for the question. You're right. Resi is the kind of the main driver for the reduction in the sales guide. We were expecting that to be flat kind of earlier in the year. It has declined kind of during the quarter, continued to soften after the quarter, and we're expecting that to be in the low double digits range now. That's the majority of the decline there. And then we do have some other areas of bright spots on the top line that are offsetting some of that. So some of our sales initiatives continue to perform really well, like things like treatment plant. Some of our fusible high-density polyethylene product lines are performing well. The municipal market remains strong with ample funding, and we're seeing a lot of demand there, too. So those are kind of the puts and takes on the top line with the revised guide. Brian Biros: Understood. And then second question for me, I guess, just the water category overall is kind of getting a lot of attention now. It used to kind of be a green initiative angle. Now it's seemingly a crucial part of the AI infrastructure build-out and kind of just the general reindustrialization trend. You highlighted in some of your prepared remarks and I think in the press release, things about your technical expertise, your consistent execution, leading to share gains, focusing on the larger contractors. So I guess just bigger picture here kind of going forward, where do you see, I guess, the biggest opportunities for growth with the way the water market is evolving? Mark Witkowski: Yes. Thanks, Brian. Great question. And I would tell you, we're obviously very favorable on the overall water market. And we've really seen more and more demands for water as you've seen these data centers going up in certain areas that need energy and water to satisfy those types of projects. So we're seeing the demands with projects like that. I think the value of water has improved. You're seeing rates passed at the local level more and more so that the municipalities are very healthy right now. And that's giving them more opportunities to get projects designed and ultimately improve the aging infrastructure, which is really the key piece that's really behind the multiyear tailwinds that we have in that municipal market. But then when you throw on top of that some of the demands now for water, which are even more with some of these projects that are going on, obviously sets us up really well. And that's a big part of why we continue to invest in this business, invest in resources, invest in facilities. Those tailwinds are there. We're capturing a lot of those as you're seeing in the municipal results. We're obviously facing some temporary headwinds here with the residential market being softer. We're on the front end of a lot of this with lot development. Our results obviously go into the July period. So I think we're facing some of this a little earlier than some are seeing it on the residential side. But that municipal strength and then that strength that we're seeing with some of these projects in the nonresidential space like data centers is definitely helping offset some of that weakness. Operator: Our next question comes from Matthew Bouley of Barclays. Matthew Bouley: So just a question on the, I guess, the makeup of the guide. So at the midpoint, I guess, revenue cut by $50 million and EBITDA cut by $45 million. So I guess I hear you on the higher operating expenses, but then you're also taking these targeted cost actions as well. So is it more just -- it just simply takes a lot of time to get these cost actions into place. You mentioned more of a 2026 impact, I believe. Or is the kind of maybe changed mix of business with residential a lot weaker impacting the margin as well? I guess just what else would explain that kind of larger decremental EBITDA margin? Robyn Bradbury: Yes. Thanks, Matt. Yes, we are taking cost out. We have already taken some costs out. We started taking some out in the first quarter. We continue to do so in the second quarter. There is some kind of stubborn inflation and other higher cost areas that are continuing to offset some of that. So we will continue to do additional cost-out actions. We will see some of that in the second half, but the larger majority of that will be seen into FY '26. Some of the cost-out actions that we made earlier in the year were in our fire protection product line that was experiencing some softness given some market pressures on nonresidential at that time and also the steel pricing pressures that we were seeing in the fire protection. That has since rebounded. So we took some cost out earlier in the year. It was very targeted to certain areas that we knew wouldn't disrupt the business, and now we're seeing that recovery, and we're well positioned for that. So we'll continue to do additional cost out, targeted actions that won't impact our ability to service our customers or service growth. We'll continue to make investments in growth. And Mark and I have been around the business for a long time. So we kind of know where those cost actions can come out and where we need to make investments. Matthew Bouley: Okay. Got it. And then secondly, just on residential specifically, obviously, a fairly substantial change to the outlook over the past -- relative to 90 days ago. So I guess what I'm trying to get at is sort of, a, your visibility into that end market? And b, maybe how did residential look during both Q1 and Q2? You're talking about kind of low double digits. I'm wondering if the expectation is that it would weaken a lot further in the second half. And so yes, just any color on that kind of cadence of residential and then just more specifically, what you're hearing from customers in that group? Mark Witkowski: Yes. Thanks, Matt. On the residential side, as we kind of worked our way into 2025, really felt like that market was going to be flat overall as we got into the first quarter. And we actually saw some pretty, I'd say, decent residential performance in Q1. Obviously, wasn't great, but we at least saw some projects going earlier in the year and obviously had a really good first quarter. And some of that was just, I'd say, better performance there than we expected. If you go back to Q1, we were well over our consensus and expectations on the top line. And really, what we saw as we got into Q2, really saw residential weaken really throughout the quarter. We definitely started to hear some of those signs at the end of the first quarter, but it was more of like scaling back some projects and frankly, just continue to weaken as we got throughout Q2 and definitely into August, as Robyn had mentioned. So that residential really kind of whipsawed from Q1 into Q2. We do think low double digit is the right way to look at it from here through the end of 2025. Obviously, we're expecting some kind of rate cut here in September. I think that's starting to be reflected a little bit on the mortgage rate side, but we're definitely not seeing the investments in the infrastructure from the builders. That's kind of been a mixed bag. Some are investing in land, some aren't. Definitely, we're not seeing the level of lot development going into those at this point. So the results that we're seeing, I think, are kind of reflective of what obviously we're hearing from the customers, and the scaling down is definitely what we felt in Q2. So we'll work through that. Obviously, we think there's continued significant pent-up demand that that's just creating. At some point, that's going to release, and we want to be well positioned to capture that when it does. Operator: Our next question comes from David Manthey of Baird. David Manthey: You might have just answered this in relation to one of Matt's questions there. But what was the residential market in the first half in terms of growth rate? And then your down low double-digit outlook, what does that imply for the back half? Mark Witkowski: Yes. Thanks, Dave. I'd say for the first half of the year, it was kind of down low -- or down mid-single digit to high single digit. And in the second half, obviously, I think that's overall going to be low double digit, slightly worse just to get to the low double digit over the full year. David Manthey: Got it. Okay. And then maybe back on the SG&A side. I think last quarter, you said that your organic revenues were up mid-single digits and organic same-store SG&A was up 4% year-over-year. Could you provide those organic figures for this quarter as well so we can compare that? Robyn Bradbury: Yes, Dave, when you think about how M&A impacted us in the quarter, it contributed about 2 points of growth to the top line. And then if you think about our growth in SG&A for total company, it contributed about 3 points of that overall growth. David Manthey: Okay. And then also last quarter, thinking about operating expenses, I believe you sort of implied you're expecting to see improving SG&A as a percentage of sales each quarter as we move through the year, which on the old forecast, I think, sort of implied lower dollars each quarter. But assuming no major M&A from here, do you think that the second quarter will be the high watermark for SG&A dollars this year as you implement these cost-out actions and normal seasonality impacts those numbers? Robyn Bradbury: Yes, Dave, we do. We've got -- as we talked about M&A and the record year we had in M&A that we did in the prior year, we've got a lot of opportunities there on the synergies. Those are things that we're working through. So we expect to continue to work through those and get some of those synergies recognized in the back half of the year and into FY '26. There were some onetime items in the second quarter that we don't expect to continue. So that's contributing to a little bit higher SG&A kind of rate and dollars in the quarter. And so with those things combined, we do expect to start seeing some progress on SG&A. And we do have some seasonality in there. But when you look at the SG&A rate year-over-year each quarter, we do expect that to kind of improve sequentially as we go throughout the rest of this year. David Manthey: Yes. Okay. And if I could sneak one more in here as we're talking about all the seasonality and 2025 being an unusual year in terms of lack of acquisitions versus all the deals you've done historically. When you think about normal seasonality ex acquisition, sort of the organic progression, how do you think about that? Do you think about it in terms of percentage of total full year sales per quarter? Do you think of sort of quarter-to-quarter growth rate? How do you think about the seasonality? And if you could just give us an idea of what we should expect this year because of the fact that you have very few or no acquisitions other than this Canada deal you just announced? Robyn Bradbury: Yes, Dave, I'll give you some color around that. So I would think about the second and the third quarter are typically similar size-wise. And then we typically see about a 15% to 20% decline in the top line from the third quarter to the fourth quarter. We can see a little bit of uplift in the first quarter from the fourth quarter, but those are typically pretty well in line. So it is a pretty kind of standard bell curve of the second and third quarter being the highest with it being a 15% to 20% decline from there ex any M&A activity. Operator: Our next question comes from Sam Reid of Wells Fargo. Richard Reid: I wanted to touch on your updated guide perhaps from a slightly different perspective. Just on the second half EBITDA margins. So it sounds like you're still expecting favorable year-over-year gross margin, if I heard correctly, Robyn. But can you talk about what that looks like sequentially on the gross margin line relative to Q2? So just basically the guide path for gross margin as we look into Q3 and Q4? Robyn Bradbury: Yes. Yes, we're expecting it to be stable, which would imply up in the 20 basis points range for the second quarter for gross margins. But our gross margin initiatives are performing very well. Private label has been performing well. Sourcing has been performing very well. We expect to continue to make improvements on gross margins. But I would say, as we think about the back half of the year, we're thinking about it as stable to the second quarter. We've made a lot of progress in gross margins kind of already in the first half of the year and expect to see those trends continue and be stable in the second quarter -- or second half. Richard Reid: That helps. And then as a follow-up, so one, could you just give us a rough sense as to the size of private label today, perhaps how much you were able to grow that in the second quarter relative to the first quarter? And then just a follow-up on the SG&A optimization initiatives. Could you just offer up some perspective on sizing those just so we have a rough sense as to where you're going to exit the year into 2026? Mark Witkowski: Yes. On the private label piece, as Robyn mentioned, we made some really good progress there, continue to drive that through the business. Right now, it's about 4% of our revenue, but I'd say steadily growing and expect that to be even more as we exit 2025. So very pleased with the new products we've introduced. The pull-through to the branch network has been strong. And if we get a little help from the volume in the second half, we'll make even more progress on pulling some more private label through. And I'll let Robyn cover the SG&A question. Robyn Bradbury: I think, Sam, your question was on the sourcing side, right? We've made a lot of progress there, too... Richard Reid: It was on the sizing of the SG&A initiatives. Robyn Bradbury: Okay. Sorry about that. Yes, let me give you a little bit of color on that, on the cost-out actions. So acquisition synergies is a big part of that and a big area that we have begun taking cost out there, and we've got a lot of opportunity. We've talked about that. Taking quite a bit of time to get through as we integrate these businesses. We've got a lot of controllable spend reductions that we've been working on with things like travel and overtime. One thing that we've done a really good job on as a business is managing headcount and any of those controllable expenses. So the sizing of it is really inflation related. Some of our incentive comp increases are a little bit larger given the improvement on gross margin. And so those are some of the big areas that we're looking at. And as you look at the back half of the year, the SG&A rate is a little bit higher than the first half, just given some of these inflationary and trends that we're seeing there. Operator: Our next question comes from Mike Dahl of RBC. Michael Dahl: Sorry to keep harping on the SG&A. But in terms of the actual variance versus your expectations, you've noted some things were even more pronounced. Can you just be more specific on what came in worse than expected? And then back to the question of kind of segmenting out actions, when you think about all those different actions, do you have a good way of giving us kind of roughly how much is headcount related versus kind of fleet and infrastructure related in terms of the cost outs? Robyn Bradbury: Yes. Thanks, Mike. Let me break down a little bit for you the kind of the contribution in the quarter. So if you think about the 13% increase in SG&A over the year, what we talked about was about half of that was M&A-related kind of onetime nonrecurring items. So if you think about that 13% growth, about 3 points of that was M&A, and that's an area, like I said, we've got synergy opportunities there. About 1 point of that growth was related to some onetime items, some changes that we're making to improve performance over time. Those are things like retention and severance and relocations. And then we had about 2 points of, I would call it, a surge in the quarter related to just some higher medical claims, insurance costs, things like that, that are a little bit unusual and had some timing impacts in the quarter. So that's kind of the first half. The second half of the SG&A increase year-over-year was a lot of items related to increased volume, inflation and investments that we're making into the business. So I mentioned incentive compensation. That's up more than our sales, just given our gross margin enhancement and the nature of those compensation plans that's worth about 1 point. We've seen a lot of inflation on our facilities and fleet that's worth about 1 point. On the medical side and some of those insurance claims, we've seen a lot of inflation in that area. We've seen some higher cost claims that's worth about 2 points. And then we've got a little bit of a difference in the way that the equity-based compensation is showing up. We've just got a new run rate there with 3 years of vesting. So that's worth about 1 point. And then like Mark and I said, we're going to continue to make investments in growth. So we feel good about the long-term dynamics of this business. We're continuing to make investments in greenfields, investments in growth initiatives, investments in technology, and that's worth about a couple of points as well. So that kind of gives you the breakdown for that 13% growth that we saw in the quarter versus what we consider M&A and onetime versus kind of more structural related to volume and inflation. Some of those inflation items were a lot higher than we were expecting. And so that's what we need to work to offset. So we've got several million dollars of cost-out actions that have been executed in the first half of the year. I would say we've got a meaningful amount of actions that are in process that we're working through. And to date, we've already managed headcount very well. It's not up much on a year-over-year basis. It's kind of more in that flatter range, and we'll take a look at that. But we're looking at areas where we can maybe not backfill, where we can have some selective hiring, where we have underperforming areas where we can take some cost out there. But we feel like we've got a lot of levers to pull here on the SG&A side. We're going to get it under control and offset some of this inflation, but we're also going to continue to make some of those investments for growth because of the long-term market dynamics. Michael Dahl: Okay. Got it. My second question, just on pricing. I think you said it was neutral. Can you just give us a better sense of kind of how the commodity side trended through the quarter into 3Q? And as you think about kind of neutral or better for the year, just elaborate a little more on what you're seeing on finished goods versus commodity right now? Mark Witkowski: Yes, Mike, I'll take that one. On the pricing side, it kind of played out exactly the way we thought it would, neutral for the quarter. We did see some increases come through related to some of the, call them, the non-pipe-related products, some of which are imported by our suppliers. There's a little bit of tariff probably increase there into some of those prices that some of the suppliers passed along to start the year, which ultimately offset some of the moderating of the larger diameter water PVC pipe that we have. We saw some moderation of that pricing through the first half of the year. That will be likely a little bit of a headwind into the second half, but these other product categories that have seen increases has effectively offset that and expect that to continue to be stable like we've talked about for a while. Operator: Our next question comes from Collin Verron of Deutsche Bank. Collin Verron: First, I just wanted to touch on the meter sales. It was a bit surprising just given the magnitude. You called out some project delays. I guess how much of the decline do you think was due to project delays? And what are your expectations for meter sales through the rest of the year and sort of how you're thinking about long-term growth in that category still? Mark Witkowski: Yes, sure. Thanks for the question. I would tell you on the meter side, the primary driver of the somewhat small decline in the quarter was the substantial growth we saw last year. We were up 48% in a quarter on meter sales. So that just gives you the magnitude of the initiative that we're driving there, and that performance last year was really, really strong. We did have some meter delays in the quarter. But really, I think the way to think about that is really just created a nice backlog for us that we expect to ship out in the back half of the year. Collin Verron: That's helpful color. And you guys also talked about some greenfield opportunities here. I guess how should we think about the decision between greenfield and M&A and sort of the expenses associated with opening these branches and how quickly they ramp to sort of the company average metrics? Mark Witkowski: Yes, sure. When we think about greenfields, we think about those in conjunction with M&A. So as we look across the U.S. and Canada for priority markets, we're evaluating both of those opportunities. Is there an M&A opportunity? Is there a greenfield opportunity? Both are very attractive to us. We've been able to generate really strong returns, whether we do a greenfield or an acquisition. Obviously, if you do an acquisition, you're going to pick up that revenue and profitability much quicker. Greenfields will take a little longer, but typically, we're breaking even within the first couple of years and expect to be at kind of the company average in 3 to 5. So there is a little bit of ramp-up in cost when you do greenfields. We're definitely accelerating our greenfield strategy with, I'd say, a renewed focus on driving our organic core growth in the business and I expect that you'll continue to see greenfields open up throughout the country in these priority markets as we review them and continue to have a nice healthy pipeline of M&A as well that we're evaluating. So we like having both of those levers as we look at those priority markets. Operator: Our next question comes from Patrick Baumann of JPMorgan. Patrick Baumann: A lot has been covered already. Just wanted to go back to the resi side quickly. So the move from flat to down low double just seems like a bigger revision than what we've seen from the starts data. So from that perspective, just trying to understand, was there like an overbuild of lots that are now being reduced at a greater magnitude than what we're seeing in starts? Maybe just address where lot development stands today to provide some context versus history and for the revision. Mark Witkowski: Yes, sure. If you go back again to the early part of the year, we felt it was going to be flat. That did kind of worsen throughout the first half of the year. I would say we probably saw some buildup in developed lots in the earlier part of the year. Obviously, single-family starts has not really met that early expectation, even though it was only kind of guided to at flat. So I think that's part of it. Obviously, we've seen a phasing down of a lot of these projects. And then we did see in parts of the country where we performed really well, frankly, in parts of Florida and the Southeast, which were pretty hot markets for a while, which was helping kind of keep resi kind of in at least that flat territory really fall off as we got late into Q2 and here to start Q3. So we've definitely seen the activity weaken on the lot side. And we'll see ultimately when those developers decide to reinvest and get that going. I wouldn't say there's a significant amount of developed lots, but there's definitely been an increase there just given the slowdown that we've seen in single-family. But again, believe that is temporary. We'll work through that this period of time. And then we're going to be really well positioned to capture that growth as it comes back, as these rates ease, you're seeing lumber prices drop. Some of these things may ultimately lend themselves to better affordability, and we'll see that pent-up demand release. Patrick Baumann: Okay. And then on the acquisition you did, just to clean up here. I assume that's not in the guidance since it hasn't closed. Any perspective on size of that deal? And then any update on how the pipeline for M&A looks these days? Mark Witkowski: Yes, sure, Pat. The acquisition we did in Canada was a 3-branch acquisition with 2 locations around Toronto and another one in Ottawa. And I would say those branches are typical kind of branch size for us and kind of the $15 million range and really excited about that one. It really builds a great platform for us to grow from in Canada. That's now the second acquisition we've completed there. I think it gives us a really good opportunity to not only build on the synergies there that we think we can bring, but start to put in some greenfields in Canada as well. So expect some continued growth there. So one that we're really excited about. We've got a great management team with that one and it is really going to allow us to capture a lot of that addressable market in Canada that just hasn't been available for us before. And then the pipeline continues to be healthy. We've got a series of deals that we're looking at right now, I'd say, in various stages and varying sizes. We've got a lot of different opportunities that we're evaluating right now and really excited about it. Obviously, we absorbed a lot of M&A from the 2024 year. You saw us get this one announced in Canada and excited to continue to drive that part of our growth strategy as we go forward. Operator: Our next question comes from Anthony Pettinari of Citi. Asher Sohnen: This is Asher Sohnen on for Anthony. I just wanted to ask about the current kind of competitive environment, if that's changed at all from the prior quarter. Maybe there's industry response to kind of resi demand slowing. Just any thoughts on competitive environment? Mark Witkowski: Yes. Thanks for the question. I would tell you there's been no real meaningful change in the competitive environment. It's been pretty typical for several quarters. I expect it to continue along those lines. We've had -- I'd say, in some very limited markets across the U.S., we've had some regional competitors kind of going after each other pretty good, which frankly, plays right into our hands. I think our customers like the stability that Core & Main brings both in service and value. And overall, it's been, I'd say, a pretty typical kind of competitive environment for several quarters now. Asher Sohnen: Great. And then can you just remind us which of your product groups are kind of most exposed to the resi end markets? And if that softness in resi is making any kind of -- or that you anticipate kind of in the second half as well, kind of driving any shift in the mix or strategy around inventory positioning? Mark Witkowski: No, I wouldn't say there's a major difference on the resi side outside of -- if you think about our fire protection product category that we have is much more focused on kind of non-resi for us, which includes that multifamily piece, and most of that is kind of steel pipe on that piece of it. But the rest of the end markets for resi, non-resi and municipal really have a kind of a standard mix for the most part of all of our product categories. It's obviously very local. It depends on what those local specifications are. Really, for us, it's really an assessment of where we're aligning some of those resources. So if resi gets softer in an area, we may move some of that head count and resources into other areas that are driving growth. So when we think about resource allocation, that's really more of how we think about the moves that we've got to make. And as part of the kind of the targeted actions that Robyn was referring to that we're making and putting in place, so we can continue to invest in the business where we're growing. Where there's market headwinds or underperformance, we're shifting some of those resources and ultimately managing the cost that way to make sure we continue to capture the growth that's there. Operator: Our next question comes from Keith Hughes of Truist Securities. Julian Nirmal: This is Julian on for Keith. I know you already touched on it a little bit, but how should we think about the pricing in third quarter versus fourth quarter? Robyn Bradbury: For pricing, we're expecting it to be flattish for the remainder of the year, and I would think about that for both the third quarter and the fourth quarter. The pricing has been very stable over the last few quarters now, and we're expecting that to continue. So I would say no notable changes expected there. Operator: Our next question comes from Nigel Coe of Wolfe Research. Nigel Coe: Yes, look, we've touched on a lot of the stuff here. But I just want to circle back to SG&A, if I may. Just so I understand the guide, if gross margins are going to be fairly flat to second quarter, it seems like SG&A dollars stepped down versus the $302 million in 2Q. Just want to make sure that's correct. And I'm just wondering what the impact of the 53rd week has on SG&A specifically. Robyn Bradbury: Yes. Thanks, Nigel. You're right. The SG&A dollars are going to step down quite a bit in the second half compared to the first half, and that's related to cost-out actions and also just the lower volumes that we're expecting, which then creates a little bit of pressure on the rate in the second half because of the lower volumes. But you're thinking about that the right way. And then the way that we're thinking about the 53rd week, that's an extra -- or 1 less week of sales kind of we categorize it in the fourth quarter in that January time frame. Obviously, there's variable SG&A related to that, that will come out. But when you think about it from an EBITDA perspective, it should be in that kind of $8 million to $10 million range. Nigel Coe: Okay. That's helpful. And then obviously, I think we understand the drivers of the residential weakness and maybe the flat outlook was a tad optimistic in hindsight. Nonres, I think, is the big debate, though, and it seems it could go in 2 directions here. We've got a weakening economy, but then we've got a lot of these mega projects, data centers, et cetera. So I'm just curious, Mark, Robyn, how you see, based on, I don't know, feedback from the field, customers, what sort of direction do you think this breaks into as we go into 2026? Do you think nonres as a category gets stronger? Or is there some risk there as you go into '26? Mark Witkowski: Yes. Thanks, Nigel. I think that's definitely how we're seeing the nonresidential area right now. There's a lot of puts and takes in that market, both by project types and, frankly, by geography as well. So we're seeing a lot of variation there. I do think there's a lot of good things there to be excited about, in particular, on the highway work, street work, that we get a lot of storm drainage product put in place on those types of projects. That's been really strong. The data center activity seems like that's got plenty of legs to it yet, and we pick up, I'd say, more than our fair share of that work, which has really helped cushion some of the softer commercial and retail kind of development in that area, which I wouldn't expect that we're going to see any near-term return of that really until we see some of the pent-up residential start to release. So I'd expect probably more of the same out of non-resi kind of for us. Just given our exposure there and how those work, it's going to -- kind of just the broad project types that we service, it's going to kind of flatten out, which is what we've experienced in '25. So I wouldn't see a lot of upside or downside as we think about that one going forward, at least in the very near term. Operator: At this time, I'll now hand back to Mark Witkowski for any further remarks. Mark Witkowski: Thank you all again for joining us today. I want to close out by recognizing our associates for their dedication and commitment to delivering exceptional service to our customers. This quarter, we delivered solid sales growth driven by resilient end market demand, stable pricing and continued market share gains. We're seeing strong results from our growth initiatives, and we believe there's an opportunity to accelerate that momentum with additional investment. We recently expanded our presence with new locations in priority markets and announced an acquisition that broadens our footprint in Canada. These actions reflect our disciplined approach to investing in the business to drive long-term growth. We're well positioned to capitalize on long-term secular drivers of water infrastructure investment, including aging systems, population growth and increasing regulatory requirements. With the right team in place, a growing platform and a proven strategy, we are confident in our ability to execute on the opportunities ahead and deliver even greater value to our customers, suppliers, communities and shareholders. Thank you for your continued interest in Core & Main. Operator, that concludes our call.
Operator: Good afternoon, ladies and gentlemen. And welcome to the Rubrik Second Quarter Fiscal Year 2026 Results Conference Call. At this time, all lines are in a listen-only mode. If at any time during this call, you require immediate assistance, please press 0 for the operator. This call is being recorded on Tuesday, September 9, 2025. I would now like to turn the conference over to Melissa Franchi, Vice President, Head of Investor Relations. Please go ahead. Hello, everyone. Welcome to Rubrik's Second Quarter Fiscal Year 2026 Financial Results Conference Call. Melissa Franchi: On the call with me today are Bipul Sinha, CEO, Chairman, and Co-founder of Rubrik, and Kiran Chaudhry, Chief Financial Officer. Our earnings press release was issued today after the market closed and may be downloaded from the Investor Relations page at www.ir.rubrik.com. Also on this page, you'll be able to find a slide deck with financial highlights that, along with our press release, includes a reconciliation of GAAP to non-GAAP financial results. These measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. During this call, we will make forward-looking statements including statements regarding our financial outlook for the third quarter and full fiscal year 2026. Our expectations regarding market trends, our market position, opportunities, including with respect to generative AI, growth strategy, product initiatives, and expectations regarding those initiatives, and our go-to-market motion. These statements are only predictions that are based on what we believe today and actual results may differ materially. These forward-looking statements are subject to risks, and other factors that could affect our performance and financial results which we discuss in detail in our filings with the SEC. Rubrik assumes no obligation to update any forward-looking statements we may make on today's call. With that, I'll hand the call over to Bipul. Bipul Sinha: Thank you, Melissa. I want to start by thanking everyone for joining us today. We are pleased with our second quarter results that once again exceeded all guided metrics across top line and profitability. Here are five key numbers. First, subscription ARR surpassed $1.25 billion, growing 36% year over year. Net new subscription ARR reached $71 million in the second quarter. Second, our subscription revenue was $297 million, growing 55% year over year. Third, our subscription NRR remained strong once again, above 120%. Fourth, customers with $100,000 or more in subscription ARR crossed 2,500, growing 27% year over year. Finally, on profitability, we once again made material improvement in subscription ARR contribution margin, up about 1,800 basis points year over year. On cash generation, we are very happy to report we generated over $57 million in free cash flow this quarter. This combination of top line growth and cash flow margin at our scale is rare. We remain confident about the opportunity ahead, and thus, we are raising our outlook for the year. Let me first give you some context on where we are focused. Rubrik is evolving into the security and AI company. In the last several quarters, it is clear to us that as we continue to focus on and win the past cyber resilience market, we also have a tremendous opportunity in the enterprise AI acceleration. Let's start with cyber resilience. And the broader context of the market opportunity. From our inception, Rubrik was designed to help customers achieve the fastest cyber recovery time. To deliver this, we uniquely combine data security posture management, identity resilience, and cyber recovery natively on our Rubrik Security Cloud or RFC platform to achieve complete cyber resilience. And at the center of our differentiated architecture is the Rubrik preemptive recovery engine. In Q2 alone, I had over 125 meetings with customers and prospects worldwide. What was abundantly clear is that IT and security leaders now have an assumed breach mindset. Simply meaning they are certain that cyber attacks are inevitable despite significant investments they have made in cyber prevention and detection. At the same time, these enterprises are also looking to replatform and modernize their infrastructure in preparation for the imminent enterprise AI transformation. As companies shift deeper into cloud engine AI, customers continue to turn to us, Rubrik, for complete cyber resilience. Delivering uniform and consistent data security policy control as well as rapid accurate recovery from cyber attacks. Concurrently, our Predibase acquisition I'll discuss later in my remarks, also allows us to deliver enterprise AI acceleration. The bottom line is this. We have tremendous opportunities ahead of us. First, we continue to lead the vast cyber resilience market. And second, at the same time, we continue to build a new future for enterprise AI. Now I'll detail some of the wins across our initiatives at varying scale. For our cyber resilient data protection business, we continue to add solutions across new applications and workloads. Leveraging the same underlying preemptive recovery engine to deliver risk and remediation capabilities. This unique architecture consistently enables us to outperform both legacy and new gen backup vendors. Let me highlight this with two illustrative customer events from the quarter. A major North American oil and gas company selected Rubrik after its legacy backup provider was unable to support a fast recovery following a disruptive cyber attack. Rubrik was selected because of our superior recovery time relative to both legacy as well as new gen alternatives. Our comprehensive yet radically simple platform cyber recovery across all workloads including the cloud, was another key reason for the legacy backup replacement. In another example, a Fortune 50 pharma leader turned to Rubrik to protect its critical applications displacing its twenty-year-old legacy backup vendor as well as native cloud backup solutions. We also outcompeted new gen backup vendors for this opportunity. Rubrik was selected due to not only our ability to deliver greater cyber resiliency, in the face of escalating cyber risk, but also more efficient cloud storage cost. Let me now talk about innovations in cloud protection that are delivered from RSC which is a single unique platform across center, cloud, SaaS, and identity workloads. We continue to expand our purpose-built cloud data protection solution to more applications services, and databases in the public cloud. This quarter, we expanded our cyber protection of AWS RDS database. And added comprehensive protection for Amazon DynamoDB strengthening Rubrik's leadership in cyber resilience for cloud databases. We'll continue to build upon our code to cloud cyber resilience platform which offers protection from the first line of code full stack of applications in production across the major hyperscalers. Let me highlight a few customer wins cloud and SaaS protection. First, a global Fortune 500 transportation organization increased their investment in Rubrik this quarter, adding M365 protection. Protection for Azure workloads, code-based recovery for GitHub, and Azure DevOps as well as Jira protection. This expansion bolsters the company's cyber resilience. And reduces recovery times across its critical cloud applications. Another example is with the Fortune 500 logistics and supply chain company that also expanded its partnership with Rubrik, by fortifying its mission-critical data state in Azure and M365 applications. After adding Rubrik to safeguard its data center applications in the past. Furthermore, the customer added identity recovery, reducing recovery time of directory and Entra ID, from several weeks to mere hours. Rubik's cyber resilience platform now avoids an estimated $65 million losses per day for this customer in case of downtime due to cyber attacks. Now let's turn to our opportunity in identity resilience. In just a couple of quarters of general availability, we have seen notable momentum for Rubik identity recovery solution with now over 200 customers. Rubik is addressing a critical need for enterprises by enabling the rapid recovery of their identity services following cyber attack, or operational failure so that they can return to business as usual. We are the only vendor in the market that delivers rapid recovery of both active directory and intra ID in a hybrid cloud manner the backbone of identity solution worldwide. Let me give you two specific customer wins in identity. This quarter, a leading UK financial services company strengthened its partnership with Rubrik by adopting Rubrik Identity Recovery, prompted by a recent cyber attack on a major UK retailer the company evaluated vulnerabilities within its own active directory environment. They recognize that these weaknesses could lead to significant post-attack disruption resulting in substantial market cap declines and potentially affecting millions of pensioners. By consolidating data and identity protection with Rubrik, this company now considers Rubrik one of its top three strategic IT vendors. In another example, a Fortune 500 financial institution in The US turned to Rubrik after an audit uncovered that its active directory recovery would take upwards of seven days with millions of dollars at risk each day. By adding rubric identity recovery, they reduced recovery times to under two hours preventing potentially significant business disruption and satisfying board mandate. We continue to invest in our identity solutions. We deepen our innovation with the general availability of Rubik identity resilience. Like I mentioned in the last quarter's earnings call, we are bringing together Rubrik's identity and DSPM solutions. Our latest Rubik identity resilience solution brings together data security and identity intelligence for the first time. Similar to how we monitor and sustain data, Rubric Identity Resilience continuously monitors and protects human and nonhuman identities. Tracking misconfiguration, as well as high risk and malicious changes in the active directory and intra ID. It also ties identity-based information like privilege access to rubrics, DSPM sensitive data context and activity. To strengthen risk posture and accelerate cyber recovery. Next, let's talk about our innovation in the Gen AI space. As I noted during our IPO, Rubik by design perpetually lives on the frontier of innovation. And our long-term success depends upon our ability to continuously create and commercialize pioneering products. As part of this, we continue to build a portfolio of innovation at different stages and at different levels of risk. This approach allows us to stack multiple f curves to maintain maximal momentum. While preparing for what's next. Along these lines, I will talk about our longer-term initiatives for GenAI. While GenAI can unlock significant new efficiencies for every organization, there are significant barriers like accuracy, cost, and security which hinders its adoption beyond proof of concept. We are addressing these challenges while leveraging our unique ability to extract, manage, and business data. Rubrik's data platform not only delivers robust cyber recoveries, but also provides clean, secure data with the necessary permission and policy enforcement to power generative AI applications. This ensures only the right person has access to the sensitive data. Our recent acquisition of Predibase furthers this vision. Just as Rubrik is working to simplify data access for GenAI, Readybase works to solve performance and cost issues around deploying GenAI models for proprietary AI applications. The Predebase platform allows enterprises to fine-tune GenAI model and run an optimized inference stack for faster accurate results at lower cost. We believe the combination of Rubrik and Predibase is incredibly powerful in accelerating GenAI from proof of concept to full production and value realization. We welcome the pretty based team to Rubrik. Where they have hit the ground running and continue to innovate and define new frontiers in enterprise agentic AI. We recently announced agent rewind, built on our Rubrik's secure data platform underpinned by ReadyBasis AI technology. We have spent years helping our customers recover from cyber attacks and operational error. With Agent Rewind, we can now help customers undo the mistakes of AI agents without full system rollback. Which is crucial for a scalable and secure AI adoption. We are still in the early stages of optimizing product market fit for our AI solutions. Including agent rewind. We plan to add more capabilities and investments to enable confident enterprise AI transformation and agentic work adoption. This is our multiyear initiative to scale rubrics AI solutions. In closing, I would like to share my gratitude. First, thank you to all my fellow Rubik continues to win the cyber resilience market. Because of Rubikanth's collective focus and disciplined execution. We continue to break new grounds for enterprise AI acceleration. And you know what? It's still early days for all the opportunities ahead of us. Also, a big thank you to all our customers and partners. Your trust inspires us to continue to lead and define future of cybersecurity and enterprise AI. And lastly, of course, thank you to you, our shareholders, your continued support and trust. With that, I'm pleased to pass it over to our Chief Financial Officer, Kiran Chaudhry. Kiran Chaudhry: Thank you, Bipul. Good afternoon, everyone, and thank you for joining us today. We had a strong Q2, which was highlighted by solid growth at scale and continued improvement in profitability. We continue to benefit from our leadership in the growing market for cyber resilience, and we are pleased to raise our outlook for the year. Let me start by briefly recapping our second quarter fiscal 2026 financial results and key operating metrics and then I'll provide guidance for the third quarter and full year fiscal 2026. All comparisons, unless otherwise noted, are on a year-over-year basis. We are very pleased to have ended Q2 with subscription ARR of over $1.25 billion, growing 36%. We added $71 million in net new subscription ARR. We continue to drive adoption of our Rubrik Security Cloud which resulted in $1.1 billion of Cloud ARR up 57%. Our differentiated land and expand model benefits from multiple avenues to gain new customers and grow our footprint after the initial contract. Expansion occurs through increased data existing applications, securing more applications or identities, or adding more security functionality. As a result, we continue to see a strong subscription net retention rate which remained over 120% in the second quarter. All vectors of expansion are healthy contributors to our NRR. Highlighting the meaningful runway we have to more deeply penetrate our customer base. Adoption of additional security functionality contributed approximately 35% of our subscription net retention rate in the quarter. We ended the second quarter with 2,505 customers with subscription ARR of $100,000 or more up 27%. These larger customers now contribute 85% of our subscription ARR up from 82% in the year-ago period as we become an increasingly strategic partner to our enterprise customers. For our second quarter, subscription revenue was $297 million up 55%. Total revenue was $310 million, up 51%. Revenue in Q2 benefited from our strong ARR growth and tailwinds from our cloud transformation journey. We also saw a higher nonrecurring revenue which was accounted for as material rights related to a crowd transformation. This contributed approximately seven percentage points to the revenue growth this quarter. Which was a few percentage points above our expectation. Adjusting for the benefit from material rights in Q2, total revenue grew approximately 44%. Turning to a geographic mix of revenue. Revenue from The Americas grew 53% to $225 million. Revenues from outside The Americas grew 46% to $85 million. Before turning to gross margins, expenses, and profitability, I would like to note that I'll be discussing non-GAAP results going forward. Our non-GAAP gross margin was 82% in the second quarter compared to 77% in the year-ago period. Our gross margin benefited from the revenue outperformance including higher nonrecurring revenue, reduced hosting costs from new cloud contracts, including a one-time hosting cost credit, and the improved efficiency of our customer support organization. We anticipate total gross margin to remain within our long-term target of 75% to 80% in fiscal 2026. As a reminder, we look at subscription ARR contribution margin as a key measure of operating leverage. We believe the improvement in our subscription ARR contribution margin demonstrates our ability to drive operating leverage and profitability at scale. Subscription ARR contribution margin was positive 9% the last twelve months ended July 31 compared to negative 8% in the year-ago period. An improvement of approximately 1,800 basis points. When normalizing for the $23 million, in employer payroll taxes associated with the IPO in the prior period, the improvement was approximately 1,500 basis points. The improvement in subscription ARR contribution margin was driven by higher sales the benefits of scale, and improving efficiencies and management of costs across the business. Free cash flow is positive $57.5 million compared to negative $32 million in 2025. This increase was driven by higher sales including timing of renewals, improved operating leverage, and optimizing our capital structure. Turning to our balance sheet, we ended the second quarter in a strong cash position with $1.5 billion in cash, cash equivalents, restricted cash, and marketable securities and $1.1 billion in convertible debt. Let me now provide some context for our outlook for fiscal 2026. We remain confident about our outlook given the strength of the fiber resilience market and demand for our differentiated offerings. We believe these drivers alongside our strong and consistent execution will deliver strong subscription ARR growth ahead. In terms of operating investments, we continue to invest in R&D to drive innovation in the large and growing markets we operate in across data, security, and AI. We'll also continue to make investments in go-to-market where we see the most compelling ROI across select regions and verticals and to find product market fit and scale our new innovations. Let me discuss our current outlook on quarterly seasonality. After a strong first and second quarter, we anticipate Q3 will contribute approximately 21 to 22% of full-year net new subscription ARR. In addition, subscription ARR contribution margin has some seasonality due to the timing of net new subscription ARR and operating expenses each quarter. Based on our current net new ARR linearity and investment plans, we continue to anticipate the subscription contribution margins will be the seasonally lowest in Q3 before moving higher in Q4. In terms of revenue, we now expect material rights related to our cloud transformation to contribute approximately six percentage points to revenue growth for the full year. Up from our prior expectation of a few percentage points. As a reminder, the revenue related to material rights is nonrecurring, and we expect minimal revenue contribution from material rights in fiscal 2027. Please see additional modeling points for fiscal 2026 in our investor presentation which can be found on our investor relations website. Now turning to our guidance for the third quarter, and full year fiscal 2026. In Q3, we expect revenue of $319 million to $321 million, up 35-36%, which includes a few percentage points higher benefit from material rights than previously expected. We expect non-GAAP subscription ARR contribution margins of approximately 6.5%. We expect non-GAAP earnings per share of negative $0.18 to negative $0.16 based on approximately 200 million weighted average shares outstanding. For the full year fiscal 2026, we expect subscription ARR in the range of $1.408 billion to $1.416 billion reflecting a year-over-year growth rate of 29% to 30%. We expect total revenue for the full year fiscal 2026 in the range of $1.227 billion to $1.237 billion reflecting a year-over-year growth rate of 38% to 40%. Or 32% to 34% without the benefit from material rights in fiscal year 2026. We expect non-GAAP subscription ARR contribution margins of approximately 7%. We expect non-GAAP earnings per share of negative $0.50 to negative $0.44 based on approximately 197 million weighted average shares outstanding for the full year. We expect free cash flow of $145 million to $155 million. Finally, we are pleased with our execution in the first half of the year as we continue to deliver cyber resilience to organizations around the world. With that, we'd like to open up the call for any questions. Thank you. Ladies and gentlemen, we will now begin the question and answer session. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed with the number two. If you are using a speakerphone, please lift the handset before pressing any keys. In the interest of time, please limit yourselves to only one question. Your first question comes from the line of Saket Kalia from Barclays. Your line is now open. Saket Kalia: Okay. Great. Hey, guys. Thanks for taking my question here and another nice job this quarter. Absolutely. You know, guys, the number that really jumped out to me the most of all was the free cash flow margin at 19% in the quarter. I think that's now four consecutive quarters of positive free cash flow. Bipul, maybe the question is, what's changed strategically in driving that type of profitability? And, Kiran, is there anything that we should think about in the second half on free cash flow as we fine-tune our models? Bipul Sinha: Thanks, Saket. As I've said before, I'm a capitalist. And I love profitability and cash flow. But, look, we are in a very large and an expanding market of cyber resilience. And as customers are looking to transform their businesses into AI enterprises, they are doing multiple transformations around cloud, around infrastructure, and cyber resiliency is the number one topic for them because if your data doesn't have integrity or availability, none of the AI will be useful. Or helpful. So we are helping do that cyber resilience transformation for our customers. Giving them like, AI-based ransomware detection, fast recovery, capabilities like that. And that's what is helping us win in this large market. And as we are scaling our business, the efficiencies are kicking in. I would love to have Kiran add some more from a finance perspective. Kiran Chaudhry: Sure, Bipul. And hi, Saket. I'll just give you a little bit more context both for the cash flow in the quarter and assumptions on the guide. So super pleased with the $58 million we generated in free cash flow this quarter. As you said, 19%. It was 3,500 basis points improvement year over year. And then from 700 basis points from last quarter Q1. A few reasons for that. Starting off with stronger ARR performance, than anticipated, and then the margin improvement as well, 9% sub AR margin. That was a key driver for the cash flow. In addition to that, you'd have seen we made some capital structure optimization in the quarter. We settled our private company debt, which has a higher interest coupon with a 0% convertible. So we had more cash on the balance sheet and less interest expense, which we sometimes pay out in cash. So that helped as well. And then on the duration front, we saw favorable duration this quarter. As you know, we increasingly sell cloud-native products, which tend to have a shorter contract length as well as shorter payment terms, and we didn't see that compression duration this quarter. And the last thing I'll say is that there's probably more timing related, but we saw more early renewals. Related to the usual trend and some of which was multiyear as well. This was in the context mostly of customers co-terming renewals with active expansion. So all of that really drove the cash flow outperformance to 19% margin this quarter. I look at the guide, we are happy to raise the guidance for the year. We previously had guided around 6% margin and we're guiding to 12%. And that's a thousand basis point or 10 percentage points improvement year over year. Some of the trends continue. Obviously, it's based on our ARR guide as well as the higher investments we are making in the second half from an OpEx perspective. Obviously, the capital structure portion will continue. But specifically in the duration, we are not assuming the compression continues. We are modeling in a little bit more compression. Would say low to mid-single digits through the rest of the year, and that is all the assumptions. We have made in the guidance. Saket Kalia: Super helpful, guys. Thank you. Melissa Franchi: Thank you, Saket. Operator: Your next question comes from the line of Andrew Nowinski from Wells Fargo. Your line is now open. Andrew Nowinski: Good afternoon. I just wanted to say, I think the net new ARR in Q2 is really impressive. Considering you went through a sales comp change, moving to annual sales comp plans this year. And so I know the change really didn't have an impact on your year-over-year growth in Q2, but I was wondering if you could just talk about whether you saw any impact from that and whether you're expecting higher seasonality in Q4 because of that change? Thank you. Bipul Sinha: Let me give you some qualitative perspective on it, and I'll let Kiran provide some more details. Look. We have been running our business on a per-year net ARR basis. And it jumps this quarter, that quarter, depending upon the deal timing and deal closure. But we run our business on a full-year new ARR. We used to do a quota compensation for the sales team on a half-yearly basis. So starting this fiscal year, fiscal year 2026, we decided to align how we run the business with how we compensate our sales team. And that change in the first half so far has not brought out any material impact to how we see our business or their achievement. Obviously, we have the rest of the year in front of us and we'll know more about the impact by the end of this year. But so far, it has gone well. Kiran? Kiran Chaudhry: I'll just add a few more thoughts here. So there are, of course, some shifts in seasonality. But it's only the first half. So we can give you a full update on our first year with this sales compliant change at the end of the year. But so far, it's been smooth and there's been no disruption. But from a modeling perspective, since we don't have a Q2 accelerator as we had in the previous half-year plans, Q2 and Q3 will look somewhat similar. That is reflecting our guidance, but Q4 will be seasonally strong. And this is reflected both in our subscription ARR guidance as well as the margins and free cash flow. Andrew Nowinski: Thank you very much. Melissa Franchi: Thank you, Andy. Operator: Your next question comes from the line of John DiFucci from Guggenheim. Howard Ma: Great. Thank you. This is Howard Ma on for John. I guess either for Bipul or Kiran, can you help us better understand how you're levered to data growth? So for instance, there's an aspect to your pricing model that's based on volume tiers. Which you could argue is directly tied to data growth. And then there's a user-based element especially with securing SaaS apps, So what is the mix today, and is there an opportunity for a purely consumption-driven component that gets bigger over time? Bipul Sinha: So Rubrik's products are a combination of data volume, and data security features and capability that we attach to it. And the combination of the two is the pricing for our different editions like enterprise edition, foundation edition, So we don't separate the two. And we help our customers identify all of the critical data and deliver all our security capabilities on those critical data. And as their data grows, as their applications or number of users grow, as they adopt more workload for Rubrik, we grow. So we have multiple growth vectors in Rubrik. One vector is organic data growth within a workload and applications that we are already securing. The new workloads that are coming to Rubrik, or existing applications, which are moving to Rubrik. And then the third piece is attaching the data security products. For products such as M365, which is tied to the number of users, We have a licensing model that aligns to that SaaS program. So we'll make it easy for our customers to adopt Rubrik and for them to understand the pricing model and expense based on how they pay for their core platform. Howard Ma: Does it answer your question? Bipul Sinha: Yes. That does. Thank you so much. Melissa Franchi: Thank you, Howard. Operator: Your next question comes from the line of Eric Heath from KeyBanc. Your line is now open. Eric Heath: Hey, guys. Thanks for taking the question and congrats on the results again. Kiran, I want to ask a few different questions on the model if I could. Could you just help us understand maybe what drove some of that early renewal activity given some of the sales comp structure changes to make it more year-end? I would have thought the opposite would have happened given the comp structure change. And if you could just speak to what's driving the decline in non-cloud ARR quarter over quarter is a little bit bigger than normal one. And lastly, if I could, if I could push it. But on the material rights, just what's driving that higher material rights activity that you're not necessarily expecting or you weren't expecting? Thanks. Kiran Chaudhry: Sure. I'll take them in order. So from a renewal perspective, we always see some early renewals every quarter. I mean, some of this is timing. Right? We have some on-time renewals, which is the majority. And some early and some late. But the renewals which occurred this time were more related to our expansion deals, which were in process with the same customers. And, typically, customers' core term the renewal activity with the expansion itself. So that was really the driver of the early renewals. And I also pointed out that some of those renewals are multiyear in nature. So that obviously impacted cash flow because of the higher billings. And just to add one more point, that is not related to the comp structure changes because that is tied to expansions, which is occurring along with renewals. So I wouldn't relate those two activities. And the second question, the non-cloud ARR, most of our since we're about 85% cloud right now, most of the cloud ARR is net new in the sense either coming from new customers or expansion with current customers. But there's still a small element of migrations which are happening from the non-cloud part. So you still see that declining a little bit. And at some point, we're getting towards the, I would say, point where it optimizes to a more steady rate it's a few points more than 80%, after which you'll see the non-cloud ARR grow as well. And then on the last point on the material rights, just to give some context, these are related to some qualified customers who had gotten some credits at the time we start our cloud transformation and those credits are beginning to expire. In some cases, where the qualification is possible, the customers use the credits to purchase some newer expanded products. In other cases, they expire. So the accountant treatment is slightly different. When those credits are used to purchase something versus when it expires. So that drives variability as well, and there's some timing element to that. Too, which we saw outperformance this quarter. Eric Heath: Thanks, Kiran. I threw a lot at you, but appreciate that. Thank you. Melissa Franchi: Thank you. Yep. Thank you, Eric. Operator: Your next question comes from the line of Kash Rangan from Goldman Sachs. Your line is now open. Matt Martino: Hey, guys. This is Matt Martino on for Kash. Thanks for taking my question. Bipul, Rubrik's brought to market a slew of new innovations across identity AI and data security. As you expand from a core product to a multiproduct platform, how do you see your go-to-market and sales motion evolving to effectively sell this broader, more complex vision to the C-suite? Thanks. Bipul Sinha: So multiproduct sales for some time now. Because we started with our core data protection business for data center as well as cloud, then we added M365. Then we added like, Salesforce, then we added now identity recovery, identity resilience, We are now building solutions for AI. So we have a kind of, like, a pipeline of three stages. So the stage number one is what we call RubrikX. That actually is the incubation phase of new products and go-to-market. And then the next phase is PLS, which is our product line sales team. That takes the early majority of product to scale it to be ready for the core sales team, and then we've transferred it to the core sales team. That's how we kind of scale our multiproduct go-to-market strategy. Obviously, we are doing all our product in a single platform. Rubrik Security Cloud. So that when our customers adopt more of Rubik's solution, our platforms get smarter and smarter and deliver more value. For example, if our customers have M365, as well as on-premises data center solutions. If there is a threat actor on both sides, we will be smart. We'll be giving our customers a smarter information about the complete picture of their data security and cyber resilience. As opposed to dumping logs and having them analyzed separately. So that's the platform strategy that we have taken from day one. And that's how we are building a multiproduct portfolio, but driving the value from a single platform. Matt Martino: Very helpful. Thank you, Bipul. Operator: Your next question comes from the line of Gregg Moskowitz from Mizuho. Your line is now open. Gregg Moskowitz: Great. Thank you for taking the question, and very nice quarter, guys. I wanted to ask about the DSPM. First of all, how it did in Q2? But more broadly, because it remains a hot area within cybersecurity, But, you know, these days, almost all the larger vendors have some sort of offering. Clearly, a significant majority of enterprises have yet to implement DSPM, When I think about Rubrik, I know you have a differentiated position here, but is there a point at which you think we'll see an inflection in DSPM market adoption? How do you think this will all evolve? Bipul Sinha: We have a belief that cyber resilience requires both resilience and identity resilience. And combining DSPM, is the data portion with identity information is needed to provide complete cyber resilience. Because when a privilege gets escalated for a user, inside your active directory, you may want to understand what new sensitive data is now being exposed to this customer and what is the blast radius for the customer credential get compromised. So bringing the identity intelligence and data security intelligence in a single platform is differentiated. We have this new unique vision in this market, and we believe that the future is going to be a holistic view for the customers from data identity and cyber recovery to be able to drive complete cyber resilience. And that's what we are driving for. Gregg Moskowitz: Okay. That's helpful. Thank you. Melissa Franchi: Thanks, Gregg. Operator: Your next question comes from the line of Todd Coupland from CIBC. Todd Coupland: Great. Good evening, everyone. You Bipul, you gave a number of examples on competitive wins this quarter. Could you just talk about the environment and your major sources of share and update us on your deal win rate? Thanks a lot. Bipul Sinha: As far as we are concerned, there is no change in the competitive environment for us. We still win the vast, vast, vast majority of deals against all competition legacy as well as new gen vendors. And it is due to our unique platform Rubrik Security Cloud, it is underpinned by a preemptive recovery engine that pre-calculates a clean data state even before the cyber attack happens. So that our customers are ready to recover as soon as they have a successful cyber attack. As a result, many of our customers are not in the news even when they are confronted with significant cyber attacks and they are not disrupted. And that's what is differentiated about Rubrik. And, again, we are equal opportunity replacers. For both legacy solutions as well as new gen solutions because they lack cyber resilience. Capabilities in a way of preemptive recovery engine. Just to give you an example, a European multinational industrial company replaced the legacy backup vendor with Rubrik's cyber resilience platform because a third-party audit found that they were not ready to recover upon a cyber attack, and they needed to upgrade their resilience posture. And they chose Rubrik for fast recovery for a simplified software platform for cyber resilience. So that's what we see in the marketplace. Again, our win rate comes from a very differentiated platform that we envision and built in the last ten years. Todd Coupland: Great. Thanks for the color. Operator: As a reminder, if you wish to ask a question, please press 1. Your next question comes from the line of Junaid Shah Siddiqui from Truist. Your line is now open. Junaid Shah Siddiqui: Great. Thanks for taking my question. Bipul, as the MCP protocol adoption gains traction across the cybersecurity ecosystem, do you view it as a strategic growth lever that could expand Rubrik's role from, you know, data protection into a broader security orchestration platform? Bipul Sinha: The way we see Rubrik is not in the prevention and detection business. We are in the cyber resilience business. Because we have a fundamental belief you can't prevent the unpreventable. And the world requires cyber resiliency and cyber recovery capabilities, and that's what we are focused on. Having said that, if you take a step back, Rubik is really a secure data lake. And we use that data lake data to recover applications. And recover your system. And this data is governed and secured and classified. And with Anapurna platform, we built vectorized search to deliver embeddings directly into GenAI applications. And now Predibase which is the fine-tuning and serving platform, And now we are building AgenTeq Rewind that combines our core cyber resilience plus the AI platform technology to really deliver capabilities around undoing the action bad actions of agents. So we are looking at AI in a holistic way. But we are not just focused on securing the AI. What we are focused on security, which is the cyber resilience business, as well as AI operations business, which is about agent fine-tuning, serving, agent rewind plus plus. So that's why we are defining ourselves Rubrik is the security and AI company. Junaid Shah Siddiqui: Thank you. Melissa Franchi: Thank you. Yeah. Operator: Your next question comes from the line of James Fish from Piper Sandler. Your line is now open. James Fish: Hey, guys. Sorry for any background noise here. Just wanna go back to the DSPM side. Any way to think about the updated penetration here? What you're seeing competitively just within this part of the market? And then additionally, what are you guys assuming you're thinking about for Fed here heading into, you know, the big Fed? And understanding it's been a small part historically, you know, what do you actually see for maybe some disruption there? Thanks, guys. Bipul Sinha: Sorry. Did you say Fed? Fed. Okay. As I said, we see the opportunity in the data security market around combining data and identity together. Because I don't believe just the data classification itself is a long-term sustainable business or a platform. So our vision is that how do we combine identity and data together to give a full picture of not just the posture of the data and identity, access to the data, but at runtime understanding what is really happening to the data and should anything bad happen. How do we do data recovery or identity remediation? And it's all data is the underpinning technology or the platform across all three. And that's the vision that we are driving. In terms of the again, this is still in the investment phase for us. And we are continuing to kind of build the cyber resilience transformation for our fed customers. It is high priority for fed organization given the nation-state actor and the fed that they face. It is we continue to invest in the growth and develop the Fed market for ourselves. We recently received Fed RAMP Moderate, For example, this quarter, a Fed agency had a challenge of deployment of a new gen vendor that they had bought a couple of years ago. So they are replacing that new gen vendor with Rubrik to protect their mission-critical databases. Which is required for their cyber resilience. And they picked Rubrik for our ability to deliver faster recovery times on the data. So fed again, we continue to win in the fed. It's still a developing market for us. Continue to invest. And we believe that Fed will continue to be a significant opportunity for us given how important cyber resilience and cyber recovery is for this market. James Fish: Thank you, James. Operator: Your last question comes from the line of Shrenik Kothari from Baird. Your line is now open. Zach Schneider: Great. Hey, guys. This is Zach Schneider on for Shrenik. Thanks for taking our question. So I believe nearly half of new deals are landing in the enterprise tier with foundation still key entry point for budget-constrained customers, and please correct me if that number is wrong, But could you just walk us through how deal sizes, renewal patterns are subsequent expansions differ across the tiers? Especially over multiyear contracts? Thanks. Kiran Chaudhry: Hi, Shrenik. So this is Kiran. I'll take your question. So on the first part, it's generally the trend has been similar. Close to half of our lands are coming from the enterprise edition. And then a mix of both the business and foundation with foundation being the larger of those two. And the enterprise the expansion path can vary. As you know, we are a multiproduct company. So customers start with one of these editions and maybe a couple of one or two of these workloads, and then they can expand by either expanding to a higher tier edition if they start with foundation or business, or if they already start with enterprise, they could expand to other workloads as well. And start with Microsoft 365, go to a native cloud workload or an Oracle workload, or database workload. So the expansion paths are not limited just because you started in a higher edition because you can always add more workloads as well. Zach Schneider: Great. Thanks a lot. Melissa Franchi: Thank you. Operator: This concludes our Q&A session. I would now like to turn the call over to Bipul Sinha for closing remarks. Bipul Sinha: Thank you. Thank you, everyone, for joining us today. We remain very excited about the cyber resilience opportunity as we build the future of AI transformation in terms of the enterprise AI acceleration. Much appreciate your support and trust. Again, very early days for Rubrik. We are in the first decade of our multi-multi-decade story. Thank you so much for your time. Talk to you three months from today. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Thank you for standing by, and welcome to the InnovAge Fourth Quarter 2025 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. Star 11 again. And now, as a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Ryan Kubota, Director of Investor Relations. Please go ahead, sir. Ryan Kubota: Thank you, operator. Good afternoon, and thank you all for joining the InnovAge 2025 Fourth Quarter and Fiscal Year End Earnings Call. With me today is Patrick Blair, CEO, and Ben Adams, CFO. Michael Scarbrough, President and COO, will also be joining the Q&A portion of the call. Today, after the market closed, we issued an earnings press release containing detailed information on our 2025 fiscal fourth quarter and year-end results. You may access the release on the Investor Relations section of our company website, InnovAge.com. For those listening to the rebroadcast of this call, we remind you that the remarks made herein are as of today, Tuesday, September 9, 2025, and have not been updated subsequent to this call. During our call, we will refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings press release posted on our website. We may also make statements that are considered forward-looking, including those related to our 2026 fiscal year projections and guidance, future growth prospects and growth strategy, our clinical and operational value initiatives, Medicare and Medicaid rate increases, the effects of recent legislation and federal budget cuts, enrollment processing delays, the status of current and future regulatory actions, and other expectations. Listeners are cautioned that all of our forward-looking statements involve certain assumptions that are inherently subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our annual report on Form 10-K for fiscal year 2025 and any subsequent reports filed with the SEC. After the completion of our prepared remarks, we will open the call for questions. I will now turn the call over to our CEO, Patrick Blair. Patrick Blair: Thank you, Ryan, and good afternoon, everyone. I'll begin with gratitude to our colleagues across InnovAge, to our participants and families, to our state and federal partners, and to our investors. Thank you for your continued support and trust. Fiscal 2025 was a year of delivery. We made clear commitments, and we followed through. In many cases, we exceeded both our internal goals and external expectations. And importantly, we finished the year with strong momentum heading into fiscal 2026. Today, I'll cover fourth quarter and full-year results, fiscal 2025 guidance for fiscal 2026, and progress we're making to position InnovAge for long-term success. Our fourth quarter capped a strong year of consistent execution. Revenue was $221.4 million, up 11% from Q4 last year. Center-level contribution margin was $41.3 million, representing an 18.6% contribution margin. Adjusted EBITDA more than doubled year over year to $11.3 million, representing a 5.1% margin. We ended the year with a census of approximately 7,740 participants. These results reflect disciplined cost management, strong medical utilization performance, and continued sense of growth. Now turning to the full year. Total revenue was $853.7 million, up nearly 12% year over year. Center-level contribution was $153.6 million, with contribution margin expanding to approximately 18%, up 70 basis points from FY '24. Adjusted EBITDA was $34.5 million, above the high end of our FY '25 guidance of $31 million. Adjusted EBITDA margin nearly doubled from 2.2% in FY '24 to approximately 4% in FY '25. These numbers matter not just in isolation but in the context of what we committed at our Investor Day in February 2024. We committed to expanding margins, and we delivered. Center-level contribution margin improved from 17.3% in FY '24 to 18% in FY '25, with further progress expected in FY '26. We committed to improving clinical outcomes, and we delivered. Key internal utilization measures such as inpatient admissions, ER visits, and short-stay nursing facility visits all improved through execution of our clinical value initiatives. We committed to driving revenue growth, and delivered. Revenue grew at greater than a 10% compound annual growth rate from FY '23 to FY '25. We committed to improving operating leverage, delivered. G&A as a percentage of revenue declined steadily from FY '23 to FY '25. We committed to return sustained positive adjusted EBITDA and delivered with year-over-year improvements and results above expectations. And, critically, we closed the year with no material compliance deficiencies. This combination of responsible growth, financial discipline, clinical performance, and compliance execution is what gives us confidence in the durability of our progress. We're operating in a complex environment. Recent legislation has created uncertainty for many value-based care models, particularly Medicare Advantage and Medicaid long-term care programs. State partners are facing fiscal pressures, which can translate into budgetary and operational strain. PACE is different. The strength of our model lies in the integration and coordination of care. Our interdisciplinary teams personalize care for every participant. Today, approximately 40% of our total cost of care is delivered directly in our centers by our employees under one roof. Through regular center attendance, we seek to maintain an active line of sight into each participant's health status, allowing us to intervene earlier and prevent avoidable hospitalizations and ER visits. For the remaining 60%, our providers individually order or prescribe virtually all other non-emergent care. This integrated, high-touch model gives us a real advantage in managing costs and utilization, and we believe this sets InnovAge apart in an inflationary medical cost trend environment. Looking ahead, we're advocating with the new administration and legislators to broaden the role PACE can play in addressing America's senior care challenges. While today PACE primarily serves a subset of dual-eligible seniors, we see meaningful opportunity to expand access to those who could benefit earlier in their care journey. We're advocating for new pathways, such as a Medicare-only option, that would give more seniors access to the coordination and support services that make PACE unique. With more than five decades of public investment in PACE centers across the country, we believe this is the right time to leverage that infrastructure more fully. Done right, this could both improve quality of life for seniors and generate savings by delaying Medicaid enrollment and prolonging nursing home placement. Importantly, it can also create a natural growth channel for the company as participants' needs increase and they transition into full PACE eligibility. Looking ahead, our guidance for FY '26 reflects both continued momentum and the realities of our environment. We project a census of 7,900 to 8,100, member months of 91,600 to 94,400, total revenue of $900 to $950 million, adjusted EBITDA of $56 to $65 million, and de novo losses of $13.4 to $15.4 million. We expect profitability to build through the year, exiting FY '26 with a higher run rate, and we remain on track to achieve adjusted EBITDA margins of 8% to 9% over the next few years. Ben will take you through the details of this shortly. On growth, census increased 10% year over year in FY '25. We strengthened the foundations of our enrollment strategies and processes while also testing and scaling new channels that are beginning to pay off. We're also building strong partnerships. Last year, we formed a joint venture with Orlando Health, and this past quarter, we announced a similar partnership with Tampa General Hospital. These partnerships extend our reach, strengthen our provider networks, and create new pathways to connect eligible seniors with PACE. We continue to work closely with our state partners on enrollment processing. While we have experienced delays in some states and are monitoring the impact of budget constraints and Medicaid eligibility determinations, these dynamics are incorporated into our FY '26 guidance. Demand for PACE remains robust, and we expect healthy top-line growth as we move through the year. Beyond the numbers, we're advancing our transformation agenda. We're investing in talent, technology, and tools to make InnovAge a more disciplined, efficient, and scalable organization. Approximately 40% of our total cost of care occurs within our four walls of our centers, where we are uniquely positioned as both a payer and a provider to capture efficiencies and improve outcomes. This transformation is not just about tightening operations; it's about reimagining the model for the future, positioning InnovAge as the partner of choice for states, payers, providers, and communities looking to create a more sustainable, continuous senior care. In closing, fiscal 2025 was a strong year. We delivered on our commitments, exceeded expectations, and ended the year with momentum. Fiscal 2026 will be another important step forward, one that we expect to further advance our financial performance, strengthen our model, and bring us closer to achieving our long-term ambitions. I want to thank all our colleagues who make this possible. Every day, they bring both a caregiver's heart and an owner's mindset to serving our participants. They are the reason we've been able to execute consistently, and they will be critical to our success in the years ahead. With that, I'll turn it over to Ben for more detail on the financials. Ben Adams: Thank you, Patrick. Today, I will provide some highlights from our fourth quarter and fiscal year-end 2025 financial performance, followed by our fiscal year 2026 guidance. I am pleased with our overall performance and strong finish to the year. As Patrick mentioned, we really started to feel the impact of our clinical value initiatives throughout this year, and we expect those to carry through into fiscal 2026. We are also pleased with the progress of our new operational improvement initiatives this year and expect them to continue building throughout the next fiscal year. Starting off our fiscal 2025 highlights with Census, we served approximately 7,740 participants across 20 centers as of June 30, 2025, which represents annual growth of 10.3% and sequential quarter growth of 2.8%. We reported 23,000 member months in the fourth quarter, an increase of approximately 10.5% compared to 2024 and an increase of approximately 2% over 2025. Total revenues increased by 11.8% to $853.7 million for fiscal year 2025. The increase was primarily driven by an increase in member months coupled with an increase in capitation rates. The increase in capitation rates includes rate increases for both Medicare and Medicaid, partially offset by revenue reserves and an out-of-cycle risk or true-up payment received in fiscal 2024. Compared to the third quarter, total revenues increased by 1.5% to $221.4 million in the fourth quarter, primarily due to a sequential increase in member months partially offset by a decrease in Medicare rates associated with decreasing risk scores as new participants are entering PACE with lower risk scores and disenrolling participants are leaving PACE with higher risk scores. We incurred $431.2 million of external provider costs during the fiscal year, a 7% increase compared to fiscal year 2024. The increase was primarily driven by an increase in member months, partially offset by a decrease in cost per participant. The decrease in cost per participant was primarily driven by a decrease in inpatient, assisted living, permanent nursing facility, and short-stay nursing facility utilization, a decrease in external hospice care associated with the transition of this function to internal clinical resources, and a decrease in pharmacy expenses due to the transition to in-house pharmacy services. The decrease in external provider cost per participant was partially offset by an increase in inpatient unit cost and an annual increase in assisted living and permanent nursing facility unit cost. During the fourth quarter, we incurred $108.2 million of external provider costs. And when compared to 2025, external provider costs were essentially flat. The stable costs were the result of higher costs associated with an increase in member months offset by a decrease in cost per participant. The decrease in external cost per participant was primarily driven by a decrease in inpatient and permanent nursing facility utilization and a decrease in pharmacy expense associated with the transition to in-house pharmacy services, partially offset by an increase in short-stay nursing facility and assisted living facility utilization. Cost of care, excluding depreciation and amortization, was $268.9 million, an increase of 17.5% compared to fiscal year 2024. The increase was due to an increase in member months coupled with an increase in cost per participant. The overall increase was driven by higher salaries, wages, and benefits associated with increased headcount and higher wage rates, an increase in software license fees, an increase in de novo occupancy and administrative expenses associated with opening centers in Florida and the acquisition of the Crenshaw Center, an increase in contract provider expenses in California associated with growth, consulting fees and shipping costs associated with in-house pharmacy services, and fleet costs inclusive of contract transportation. For the fourth quarter, cost of care, excluding depreciation and amortization, increased 3.5% compared to the third quarter. The increase was primarily due to an increase in consultant fees and shipping costs associated with increased volume of in-house pharmacy services. Center-level contribution margin, which we define as total revenues less external provider costs and cost of care, excluding depreciation and amortization, which includes all medical and pharmacy costs, was $153.6 million for fiscal year 2025 compared to $132.1 million, a 16.3% increase for fiscal year 2024. As a percentage of revenue, center-level contribution margin of 18% increased approximately 70 basis points compared to 17.3% in fiscal year 2024. For the fourth quarter, center-level contribution margin was $41.3 million compared to $40.7 million for 2025, an increase of 1.3%. As a percentage of revenue, center-level contribution margin of 18.6% decreased by approximately 10 basis points compared to 18.7% in 2025. Sales and marketing expenses of $28.2 million increased 13.1% compared to fiscal year 2024, primarily due to increased headcount and wage rates to support growth. For the fourth quarter, sales and marketing expenses increased by 2.6% compared to 2025, as a result of additional marketing support and project timing in the fourth quarter. Corporate, general, and administrative expenses increased 9.6% to $122.1 million compared to fiscal year 2024. The increase was primarily due to the $10.1 million accrual of the potential settlement of the securities class action lawsuit and an increase in employee compensation and benefits as a result of greater headcount and increased wage rates to support compliance and bolster organizational capabilities. These increases were partially offset by a reduction in consulting and insurance expenses. For the fourth quarter, corporate general and administrative expenses decreased 27.9% to $27.8 million compared to 2025. The decrease was primarily due to the potential settlement of the securities class action lawsuit referenced earlier that was recorded in the third quarter. Net loss was $35.3 million compared to a net loss of $23.2 million in fiscal year 2024. We reported a net loss per share of 22¢ compared to a net loss per share of 16¢, each on both a basic and diluted basis. Our weighted average share count was approximately 135.4 million shares for the fiscal year, on both a basic and fully diluted basis. For the fourth quarter, we reported a net loss of $5 million compared to a net loss of $11.1 million in the third quarter and a net loss per share of 1¢ each on both a basic and diluted basis. Adjusted EBITDA was $34.5 million for fiscal year 2025, compared to $16.5 million in fiscal year 2024 and $11.3 million for the quarter compared to $10.8 million in 2025. Our adjusted EBITDA margin was 4.0% for fiscal year 2025, and 5.1% for the fourth quarter. We do not add back losses incurred by our de novo centers in the calculation of adjusted EBITDA. We define de novo center losses as net losses related to preopening and startup ramp through the first 24 months of de novo operation. We incurred $15.4 million of de novo losses in fiscal year 2025. This compares to $12 million in fiscal year 2024. For the fourth quarter, de novo losses were $3.9 million, primarily related to our Tampa and Orlando centers in Florida. This compares to $3.5 million of de novo losses in 2025. Turning to our balance sheet. We ended the quarter with $64.1 million in cash and equivalents, plus $41.8 million in short-term investments. We had $72.8 million in total debt on the balance sheet, representing debt under our senior secured term loan and finance lease obligations. We also refinanced our term loan facility in the fourth quarter with a $50.7 million term loan, renewed our revolving credit facility commitments, and extended the maturity of both to August 8, 2028, from March 8, 2026. For the fourth quarter, we reported positive cash flow from operations of $9 million and had minimal cash capital expenditures of $200,000, primarily due to timing. We completed the share repurchase program that we launched back in June 2024, acquiring approximately 1,426,000 shares of common stock for an aggregate of $7.3 million during the entirety of the program. During the fourth quarter, we acquired approximately 101,800 shares of our common stock for an aggregate of approximately $300,000. Turning to fiscal 2026 guidance, which we included in today's press release, and based on information as of today, we expect our ending census for fiscal year 2026 to be between 7,900 and 8,100 participants. In member months, to be in the range of 91,600 to 94,400. We are projecting total revenue in the range of $900 million to $950 million and adjusted EBITDA in the range of $56 million to $65 million. And we anticipate that de novo losses for fiscal 2026 will be in the $13.4 to $15.4 million range. I will also provide some additional color on a few of the components that comprise our guidance assumptions. Our census and member months reflect the redesign of our eligibility enrollment system due to state Medicaid redetermination. We expect that this will result in more rapid disenrollments in the first half of the fiscal year for those participants who have lost Medicaid coverage and have not been able to regain eligibility. Regarding revenue, we are expecting a low single-digit Medicare rate increase and a mid-single-digit increase for Medicaid. As a reminder, our Medicare rates are based on county-specific rates that are adjusted by CMS in January, coupled with prospective risk score adjustments in January and July. Effective January 1, CMS will begin to transition PACE organizations onto the V28 Medicare Advantage payment model from our current V22 payment model. The process is scheduled to begin on January 1, 2026, and be phased in annually through 2029, starting with a 90/10 split of V22 and V28, respectively, and has been factored into our guidance. Regarding cost of care, external provider costs, and overall center-level contribution margins, we have continued to make measurable progress since we returned to issuing guidance in September 2023. In 2024, we introduced clinical value initiatives, followed by operational value initiatives in 2025. This upcoming fiscal year, while we continue our focus on quality, we are also pushing ourselves to stretch operationally by continuing to reimagine and further refine what we do and how we do it in order to continue growing our adjusted EBITDA margin. As an example, the ramp-up of our new internal pharmacy initiative is going well and is expected to give us more control over pharmaceutical fulfillment, allow us to improve medication adherence, enhance participant outcomes, and streamline logistics. We are also excited to see that the business is reducing costs and is expected to continue generating overall cost savings into the future. In closing, we are pleased with our 2025 results. We continue to push ourselves toward improving and optimizing the business as we strive to be the provider of choice for participants as well as our federal and state partners. We remain focused on quality, and we believe in the value that the PACE program can bring to eligible seniors with complex needs. We look forward to the trajectory of the business and toward the year ahead. Operator, that concludes our prepared remarks. Please open the call for questions. Operator: Certainly. And our first question for today comes from the line of Matthew Gillmor from KeyBanc. Your question, please. Matthew Gillmor: Hey, guys. Thanks for the question. I wanted to ask about member mix and how that's impacting margins and cost trends. If I recall, I think the acuity of the membership is in the process of normalizing with your census growth that had been resuming starting last fiscal year. How far along are you on that process? Is there still more room to go in terms of acuity normalizing? And is there any way to think about the impact that that's been having on margins or some of the utilization metrics you've been sharing? Patrick Blair: Hey, Matt. It's Patrick. Great question. I'd say largely, we've sort of seen the mix rebalancing that we would expect since the sanctions were lifted. We've grown well. We've kept a very balanced pool of enrollments as it relates to people living in the community, people living in assisted living facilities, and I think we've done a really nice job of ensuring that we're a solution to keep people in the community rather than to go into nursing homes. As a result, the mix of our population, the age, the acuity has, I think, progressed much as we anticipated. I'd say we're largely at a point where we feel like achieving our targets. All of our work going forward is about continuing to grow and maintaining an appropriate mix. It does negatively impact our risk score, so we have to be mindful of that shift, which can come with some revenue impacts. But generally, we've got the right mix of healthier folks, and with the right clinical model wrapped around them, they can be a contributing factor to the company's growth and margin expansion. Ben, anything to add? Ben Adams: No. I think you really covered it. If you think about the average tenure of a PACE participant, it's three and a half years or so. We've been going through a normal enrollment process for about two years now, so the mix is pretty much normalized if things have washed through the system. Matthew Gillmor: Okay. Great. That's helpful. And then as a follow-up, I wanted to ask about V28. I heard Ben's comments about the phase-in starting next year. Should we think about that as being a slight headwind to your revenue growth, or is that a slight tailwind? Just wanted to sort of understand how that might play out both in 2026 and then, of course, beyond that as well. Patrick Blair: Well, as I think Ben said in his remarks, we're just sort of entering into this phase where we're starting to see a phase-in of the V28 relative to the V22. It's going to take multiple years for that to play out. As you probably know, there are a lot of variables with the PACE population and how all this will work out. It is included in our guidance, and I just want to make sure that's clear. Ben Adams: No. I think you pretty much hit it. We expect it to be a headwind over the next couple of years. We only provide one year of guidance, so it's all factored in for this year. But obviously, it's something we're spending a lot of time thinking about for future years. Matthew Gillmor: Got it. I appreciate it. Thank you. Operator: Thank you. And our next question comes from the line of Jared Haase from William Blair. Your question, please. Jared Haase: Yeah. Hey, guys. Thanks for taking the questions. Maybe I'll ask on the outlook for EBITDA margins. Congrats on all the progress that you've made there. I know you kind of reinforced the expectation that you're on track for the 8% to 9% target over the next few years. I think the guidance implies about 250 basis points of margin expansion. I guess, number one, should we think of that as a reasonable cadence in terms of margin expansion continuing for the next few years on that pathway to the high single-digit target? And then I'd also be curious if you could just unpack, given all the initiatives and progress you've made, where you think the balance is in terms of the bigger opportunities for leverage between center-level margin and then operating leverage. Patrick Blair: I'll let Ben pick up, but I would just start with I do think a lot of our margin improvement over the last couple of years has been a combination of factors. Being able to reinstitute growth for the company and growing that in double digits. We've had a variety of transformation efforts that focus on a lot of clinical value initiatives. We've done our best to predict when that value will flow through. We've talked about the latency between execution of an initiative and when we start to see the impact flow through the P&L. We're doing our best to predict that, but it's kind of hard to hit on a quarter-by-quarter basis. But I'll say we're very pleased with the work by our clinical teams to address medical costs. I think that is a nice driver of this. As I said in my opening remarks, one of the things that I think we're really developing a strong appreciation for, especially since we've brought pharmacy in-house, is that over 40% of the total cost of care we're delivering with our team, our employees, in our centers. And then this notion that for the remaining 60%, we're ordering that care. We're ordering the specialist visits and specialist services, and that gives us a lot of control. So I do think medical costs are an area we've been very successful in. We've got a great team, and we continue to move there. And then the operating leverage, as we grow our centers, we're getting operating leverage at the center level. Pharmacy insourcing is an area where the real value to that is the medical-pharmacy integration. That's given us more control over the total cost of care when we have pharmacy integrated more closely with our medical. So overall, I think we're pretty pleased with margin growth. And I think it is fair to say that over the next couple of years, the growth we've seen in the last two probably translates over the next couple. Ben, what would you say? Ben Adams: Yeah. I mean, I think Patrick pretty much covered it. I would say that the guidance we put out about the long-term margin opportunity when we met with everybody back in two years ago in February, I think that sort of outlook we put out there probably holds true today. And I think probably today more than ever, we've always been convinced that we'd get to the right margin structure. It was always just a question of when we would get there. So it wasn't an if, it was a when. And I think we feel very confident with the vision we put out a couple of years ago. And I think this year shows us that we're kind of halfway there. Jared Haase: Got it. That's helpful. I appreciate that. And then maybe as a follow-up, I'll switch gears a little bit. But I'm curious, you obviously have the partnership with Epic, your electronic health record, and they've been in the news recently rolling out a number of new AI or automation-related features. I'm not sure if you're able to benefit from any of that at all. I know you probably had some specific modules and implementations related to PACE. But just curious, anything specific to Epic or, I guess, even more broadly, areas where you might see opportunities for automation and continue to take cost out of the cost structure. Patrick Blair: I'm going to flip that to Michael, but I'll say it's a great question. It's something we're spending a lot of time on, really trying to figure out how do we leverage the latest AI-driven tools just to make us a better company and help us with cost efficiencies and quality of care and outcomes, etc. I think, given the size of our company, we certainly don't have the capability or the ambitions of a much larger managed care organization as an example. So to that point, you're correct in that we're working very closely with a broad range of technology partners that we have within the company today. That, of course, includes Epic, and I'll let Michael say a little bit about some of the work there. But then whether it's a medical partner, or it's a claim system partner, or some of our clinical programs, each of those companies has a really robust AI agenda. And ours is really trying to figure out how do we leverage what our partners are developing and then connect that to how we operate as a PACE program. And I think we're off to a good start, but it's certainly early days. Michael, please say more. Michael Scarbrough: Yeah. Thanks, Patrick. And so I would just add, I think as we have continued to invest in our technology capabilities, we've really gone with a kind of a best-in-class strategy and doing so. Tools like Epic and others provide us a number of out-of-the-box capabilities and out-of-the-box solutions that we're finding a lot of applicability with within our business. Everything from how we provide clinical care, inform our clinicians, highlight for them information about our participants, which might not be otherwise easily discernible from all of the information in Epic, through our Oracle implementation and the ability to use tools like that. Just continue to look for opportunities with our business where we have processes that could be optimized and generate not just efficiency, but also greater accuracy of the work that we do. And so I think we're very much working as the whole industry is around just looking for opportunities where AI could be a lever to improve the output of our business. Patrick Blair: I'd probably highlight Salesforce as another partner who we're doing some really interesting work with. More focused on sort of efficiency and accuracy of business processes both in compliance as well as in sort of the enrollment processing space. So Salesforce has been a great partner as we sort of dip our toe in the AI space. Jared Haase: Got it. That's really great to hear. I appreciate all the color. Operator: Thank you. And as a reminder, our next question comes from the line of Jamie Perse from Goldman Sachs. Your question, please. Jamie Perse: Hey, thank you. Good afternoon. I wanted to start with one quick clarification which relates to my first question. I know you talked about the Medicaid redeterminations and that being a headwind to census and member progression through the year. You mentioned that being a headwind in the first part of the year. Is that a January type of headwind? Or are you referring more to the start of the fiscal year, so impacting the first quarter? Ben Adams: Well, I think if you think about redeterminations, they go on obviously throughout the course of the year. And I think what you've seen with us is we've changed a lot of our internal processes. Because as we've tried to partner with the states and make that whole eligibility enrollment redetermination process more efficient, we basically put in new processes that made it easier for us to identify people who are going to lose Medicaid coverage potentially. And if we think they're going to lose it and it's not recoverable, we can get them disenrolled more quickly, right? So as those new processes roll in and we begin to disenroll people who will never regain Medicaid eligibility more quickly, it'll put a little bit of a headwind on growth both in terms of census and in terms of member months. And you'll see that really happening in 2026. And then we think it will wash through the system by the time we hit January. And the other thing I would say is it's not really changing the rate of growth for us. Our trends around gross enrollment growth per month are really going to be the same. So it's not changing the slope of the line. It's really just shifting the line down slightly as we work through the implementation of this new eligibility process. Jamie Perse: Okay. That's helpful. And I think you partially answered my first question here, but just want to make sure I'm clear. Obviously, you had really strong census growth in fiscal '25. The guidance is kind of call it, low, maybe mid-single-digit growth this year on a net basis. I hear your comments on the redetermination piece. Are you assuming that the gross enrollment trajectory that you had in fiscal '25 continues? And maybe just any updates from a capacity standpoint, anything that might change that enrollment trajectory? Ben Adams: Yeah. You're right. The gross enrollment trends are going to remain the same, we think, this year. What you're seeing in terms of slightly lower census and member months growth is basically the work through the new eligibility process. And we kind of went through an intentional strategic decision this year where we said, look, there were people that we were probably carrying too long to try to reestablish Medicaid eligibility. As opposed to moving them off of our system into a more appropriate place for them once we knew that they weren't going to get their Medicaid eligibility renewed. By moving people out of the system more efficiently when we know they no longer qualify for PACE, it slows us down on the top line. But it actually gives us a big boost on the EBITDA line. Right? So you think of this as kind of a year where we're using the enrollment mechanism to strategically reposition the business. We're going to give up a little census growth, but not the growth in gross enrollment trends. But we're going to get a big pickup in EBITDA from it. Jamie Perse: Okay. Alright. That's really helpful. My second question, I know there were some earlier ones on just kind of connecting your guidance to the long-term targets you've laid out. Looking back at those targets, you're kind of a little bit ahead on external provider costs. There's maybe some room to continue seeing some progression on cost of care and then certainly on G&A. There's more room relative to the prior financial targets you laid out. Are those two buckets, just the cost of care and G&A operating leverage, the primary areas we should expect continued margin performance or improvement in fiscal 2026 specifically? Ben Adams: Yes, it's a good question. When you think about when I think about when you go back and you look at the presentation we gave back in February '23 about '24. Sorry. Had the year wrong. Anyhow, we gave that presentation about what the long-term margin potential is. You probably remember we went through sort of breaking out the different components. There was sort of the third-party provider care where we get some efficiencies. But then there was the cost of care, which was provided in our centers. And we get a lot of efficiency out of that number. Not only because we can, as Patrick spoke about before, we can control and coordinate that care more closely. But there's also an administrative component in there as well. Where we get some margin lift as the business scales. So we get some out of that line item. Then when you think about the G&A, obviously, we had some activities in the past related to compliance and other things. That we've been able to scale down going forward. So where we're investing in G&A really today is around improving operations. And if we start to look at that G&A line item as a percentage of revenue or even on a PMPM basis, we think you'll continue to see improvements in the next couple of years in that line item. So again, really focus more on the EBITDA percentage target than anything else. But those are probably the two line items where we'll get the biggest lift. Jamie Perse: Got it. Thank you. Operator: And this does conclude the question and answer session of today's program as well as today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.
Operator: Welcome to the Rubis 2025 Half Year Results presentation. [Operator Instructions] Now I will hand the conference over to the speakers to begin today's conference. Please go ahead. Clemence Mignot-Dupeyrot: Good evening, everyone. I'm Clemence Mignot-Dupeyrot, Head of Investor Relations. I am here today for Rubis's H1 2025 Results. I am with Clarisse Gobin-Swiecznik, Managing Partner; and Marc Jacquot, CFO. Clarisse will start the conference. Clarisse Gobin-Swiecznik: Ladies and gentlemen, good evening. To kick off this presentation of our H1 results, let me very quickly remind you what we do. Our business is about distributing energy while supporting mobility solutions. In Europe, we distribute and sell LPG, and we also produce and sell photovoltaic power. In Africa, we distribute and sell bitumen to road contractors in West Africa and fuel and LPG in East Africa. In the Caribbean, we distribute and sell fuel and LPG. Those products reached a wide range of customers, both individuals and professionals while the distribution is supported by a reliable and most of the time in-house logistics. For H1 2025, this diversified business model delivered a steady performance. In a global economic environment marked by uncertainty, our results for the first half of 2025 standout with growth in volumes and margins across all regions and product lines. Photosol continues to progress according to plan on track towards 2027 objectives. Our group EBITDA grew by 3% and the net income group share by 26%, driven by a stronger operational performance, better FX management and stable emerging currencies. Cash flow generation remains steady at EUR 276 million for H1, which is a key highlight of this publication. All of this gives us confidence in reaching our full year guidance, even in a less favorable USD-Euro exchange rate environment in H2. The following slide highlights our balanced growth across product lines and geographies. It showcases the strength of our commercial strategies, our agility, and seamless execution. Looking at our H1 performance by business line, you can see that in Retail & Marketing, all products delivered both volume and margin growths. LPG was driven by a very strong commercial momentum in Europe. In fuel distribution, the expected pricing formula adjustment in Kenya took the first step in March. The second step implemented in mid-July will show in our H2 performance. In bitumen distribution, demand in Nigeria is strongly picking up. The sharp decrease in unit margin visible here is purely a basis effect linked to the 2024 currency devaluation. We already mentioned it in Q1, Marc will elaborate further on this point. As for Support and Services, which covers supply to the distribution business, and the SARA refinery performance remains overall stable. Finally, the renewable business is expanding as planned with a sharp increase in both assets in operation and secured portfolio, in line with the remark we presented at last year's Photosol Day. In conclusion, this first half results are yet another demonstration of the group's ability to deliver consistent commercial and operating performance, cycle after cycle. And when you combine that resilience with discipline and proactive financial management, the outcome is clear, the strong and steady cash flow generation is fully in line with our historical standards. Marc Jacquot: Thank you, Clarisse. Good evening to all. Let's start with the big picture for the first half. Our EBITDA is up 3% year-on-year and flat on a comparable basis. As Clarisse already mentioned, this is driven by strong LPG performance in Europe, while in Africa, Kenya improved volumes and margins in the retail segment, and bitumen return to growth in Nigeria. Net income is up 26% to EUR 163 million, reflecting the absence of FX losses. CapEx related to the distribution business remains well under control, roughly stable at EUR 73 million while they are increasing in renewable to EUR 85 million, which is a concrete and positive sign that our growth projects are now materializing and are being steadily derisked. Nearly 85 megawatts were put in operation over H1 and 290 megawatts are now under construction. Corporate net debt is stable at 1.4x despite a negative trend in working capital over H1 which confirms our strong financial position. And finally, cash flow from operations remained strong at EUR 276 million for the first half year, supported by the good operating performance and the absence of FX losses. All in all, that's a solid performance. Now let's take a closer look at our activities. Retail & Marketing delivered a solid performance across the board with EBITDA increasing by 3% year-on-year. In Africa, we have three things to highlight. First, retail. Retail is contributing well and the impact of the new pricing formula in Kenya is expected to be fully visible in the second half. Second, aviation, which is more volatile, is facing higher pricing competition, leading us to reduce our volumes for the moment in Kenya. And the third one is bitumen. Bitumen margins increased less than volume and this is a basis effect from 2024 when naira devaluation impact affecting the financial results below the EBITDA was passed through to customers. Now let's look at the Caribbean. The Caribbean region was broadly stable, which is in line with our expectations. Guyana slowed down a bit with the election coming up in September, creating some kind of wait-and-see behavior among our B2B customers. In Haiti, the measures we have taken in our logistic management are starting to pay off, even if volumes remain a bit soft. Jamaica is normalizing with supply conditions slightly less favorable than last year. Now Europe. In Europe, the momentum is particularly good as a result of our challenger positioning combined with the excellence drive of our commercial teams and a colder winter this year. Looking at Support and Services, it remained stable, which is normal as this segment usually flexes with our Retail & Marketing activities. Now the renewable electricity production, what we can say is that the power EBITDA stands at EUR 22 million, which is up 38% year-on-year. In line with our road map, our development expenses have increased, reflecting the acceleration of the growth of this business, resulting in a consolidated EBITDA at EUR 10 million. In conclusion, this is a robust operating performance, attesting to the strength of our product and geographical diversification. Let's have a look at our financial results. Let me highlight just a few items here. The net income group share is up 26% or on a comparable basis, 18%. This is the result of lower expensive local debt levels and reduced FX exposure. When analyzing our income statement, let me remind you that the share of net income from associates in H1 2024 included Q1 results from Rubis Terminal. Interest costs are down, thanks to lower debt in Kenya and more favorable interest rates. As you know, last year, Rubis recorded significant FX losses, particularly in Kenya and Nigeria. In H1 this year, local currencies were more stable and the strategies we put in place to mitigate the FX risk have proven efficient, and we didn't incur any FX loss. As for taxes, nothing major to flag, the OECD global minimum tax is now fully integrated in our normal run. Overall, Rubis demonstrated agility and delivered solid financial results, fueling its cash flow momentum and supporting its balance sheet. Now a word on our financial debt. Total net debt stands at EUR 1.4 billion, with corporate debt at EUR 910 million, maintaining a healthy leverage of 1.4x at corporate level. Our liquidity level is high with more than EUR 180 million under RCF in addition to our EUR 530 million cash on balance sheet. The main variation of this debt this half came from the steady operational cash flow of EUR 390 million, which is up 11%, reflecting the good operating performance combined with the absence of FX losses. A negative impact from change in working capital of EUR 68 million after a very positive effect in H2 '24 as a consequence of lower trade payables. CapEx of EUR 164 million, which is higher than last year with the ramp-up of Photosol, hence, our usual June dividend that we paid to shareholders, but also to minority interest and general partners. Nonrecourse debt increased by EUR 63 million, in line with the renewable investments. All in all, our balance sheet remains solid with ample liquidity to support our future growth. Clarisse Gobin-Swiecznik: Thank you, Marc. Before we open the floor to Q&A, let me wrap up. So first, we saw Rubis commercial and operating performance. Second, our seamless execution and agility deliver reliable cash flows through the cycle. Finally, these H1 achievements make us confident, we are on track to reach our 2025 targets even in the less favorable euro-dollar context in H2. With a healthy balance sheet and a stable leverage ratio, we confirm we are aiming at EUR 710 million to EUR 760 million EBITDA within the framework of assumptions you have here on the slide. Thanks a lot for your attention. We are ready to take your questions. Operator: [Operator Instructions] Marc Jacquot: We have no audio questions for the moment. I propose you begin by the written questions on the webcast. Clemence Mignot-Dupeyrot: So we have 2 questions on the webcast from Auguste Deryckx of Kepler. Question number one is group EBITDA was stable on a comparable basis despite 5% volume growth, what are the key headwinds preventing stronger margin conversion? Marc Jacquot: What we can say on the margins, as I mentioned, the LPG margins were stable over the first half. And in the fuel distribution business, so the unit margin decreased by 1% in H1. And this decrease came exclusively from the Caribbean, especially from Jamaica. In Jamaica, the supply is not in Rubis' hands. And last year, we had very favorable condition for this supply. And this semester, actually, those conditions normalized, I would say. So that's the first explanation. Second one is on the bitumen, bitumen distribution business. So the volume growth in Nigeria resumed, as we explained. And H1 2024 was high due to the FX pass-through and the significant decrease in margin is explained by the basis effect after H1 2024 devaluation, after considering the guidance. Clemence Mignot-Dupeyrot: We have 2 questions considering on euro and USD FX. So question number one is -- but both questions have the same answer. Question number one is what level of FX rate and hyperinflation assumptions underpin the guidance, the EBITDA target of EUR 710 million to EUR 760 million. And what contingency levers do you have if the macro backdrop worsens. And another question from Emmanuel Matot is what is the total negative impact we can expect for 2025 on your EBITDA? Marc Jacquot: So regarding the guidance and the hyperinflation embedded in the guidance. We have the same level of hyperinflation in the guidance than in 2024, meaning a positive impact of EUR 25 million -- EUR 24 million on the EBITDA, EUR 22 million on the EBIT and minus EUR 10 million at a net income group share level, okay? So this is our assumption, and it will be -- and this is something that we will know only at the closing. So there is a lot of uncertainty in the hyperinflation. So we cannot commit on this number. In terms of impact of U.S. dollar, euro, the initial assumption we have was the euro-dollar level of the beginning of the year, meaning an exchange rate of $1.05 okay, for EUR 1. Now we are at $1.17 or $1.16 depending of the day. What we can say is that the good performance of the H1 will compensate the favorable impact related to the U.S. dollar impact. The margin we have in U.S. dollar is concerned, actually, I would say, 2/3 of our business, okay? So you can calculate what is the impact yourself on for H2. Operator: [Operator Instructions] Clemence Mignot-Dupeyrot: So we have another question online from [ Jean-Luc Romain ]. Could you please give us an idea of what the renewable EBITDA is before development costs? Marc Jacquot: So the renewable EBITDA before development cost is what we call the power EBITDA, the power EBITDA amounted to EUR 22 million in H1. Clemence Mignot-Dupeyrot: We have another question from [ Thomas Trotter ] saying about the aviation business. Are any of your markets showing activity in SAF, sustainable aviation fuel and is that a market Rubis might get into? Clarisse Gobin-Swiecznik: We are more or less agnostic to the type of fuel we distribute. We adapt to the demand of our customers. We would be able to distribute SAF and we do, in some places, especially in the Caribbean, but it's mainly a question of offer and demand, and there is not a lot of offer to date. We are, in any case, adapting ourselves to the demand from our customers. Clemence Mignot-Dupeyrot: Another question from Mr. [indiscernible] about Photosol portfolio evolution. It is not on the slide you have here in the presentation that is in the webcast, which you can find it on our website. Operator: [Operator Instructions] Clemence Mignot-Dupeyrot: We have another question from Emmanuel Matot at ODDO online, asking us if we have any impact of U.S. tariffs during the summer? Clarisse Gobin-Swiecznik: Rubis geographic and operational model makes it largely insulated from the direct effects of tariffs. We are not present in the U.S. nor in China, and we do not depend in any case of U.S.-based or China-based suppliers in our distribution business. On the indirect side, the products and services we offer are essential, particularly in the energy space. As such, demand tends to be relatively inelastic, meaning it remains quite stable even during periods of price volatility or economic slowdown. So I would say we have no effect of tariffs on our P&L or results. Clemence Mignot-Dupeyrot: Another question from [ Roger Degree ]. Can you update us on the CapEx plans and specific projects for the next year or 2 in the energy distribution business? Marc Jacquot: Roger. What we can say on the Photosol CapEx, this level, as you know, will increase in line with the ambitions communicated to the market at Photosol Day. So this is a EUR 1.1 billion CapEx in the 2024, 2027 back-end loaded. And for 2025 it should be in the range of EUR 150 million to EUR 160 million. Talking about Rubis Energy, so the distribution business, we should be in the normalized level in the -- I would say, EUR 185 million on the run rate. Clemence Mignot-Dupeyrot: Another question online. Can you give us an update on the shareholder structure? So the answer is public. The shareholding structure as of today is, the largest shareholder is Mr. Patrick Molis with more -- a bit more than 9%. Then you have the Bolloré Group through Plantations des Terres Rouges, a bit above 5%. You have Mr. Sämann 5% or so, Groupe Industriel Marcel Dassault a bit above 5%, and then the rest of the shareholding is structure an overall split between different shareholders. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing remarks. Clemence Mignot-Dupeyrot: Thanks a lot for being here. We will be on the road on the days to come. So do not hesitate to reach out to us if you want to schedule a meeting or if you have questions, you know where to reach us. Thanks a lot, and have a nice evening.
Operator: Greetings, and welcome to Limoneira's Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Deirdre Thomson with ICR. Thank you. You may begin. Deirdre Thomson: Good afternoon, everyone, and thank you for joining us for Limoneira's Third Quarter Fiscal Year 2025 Conference Call. On the call today are Harold Edwards, President and Chief Executive Officer; and Mark Palamountain, Executive Vice President and Chief Financial Officer. By now, everyone should have access to the third quarter fiscal year 2025 earnings release, which went out today at approximately 4:05 p.m. Eastern Time. If you've not had the chance to review the release, it's available on the Investor Relations portion of the company's website at limoneira.com. This call is being webcast, and a replay will be available on Limoneira's website. Before we begin, we'd like to remind everyone that prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. Such statements involve a number of known and unknown risks and uncertainties, many of which are outside the company's control and could cause its future results, performance or achievements to differ significantly from the results, performance or achievements expressed or implied by such forward-looking statements. Important factors that could cause or contribute to such differences include risk details in the company's Form 10-Qs and 10-Ks filed with the SEC and those mentioned in the earnings release. Except as required by law, we undertake no obligation to update any forward-looking or other statements herein, whether a result of new information, future events or otherwise. Please note that during today's call, we will be discussing non-GAAP financial measures including results on an adjusted basis. We believe these adjusted financial measures can facilitate a more complete analysis and greater understanding of Limoneira's ongoing results of operations, particularly when comparing underlying results from period to period. We have provided as much detail as possible on any items that are discussed on an adjusted basis. Also, within the company's earnings release and in today's prepared remarks, we include adjusted EBITDA and adjusted diluted EPS, which are non-GAAP financial measures. A reconciliation of adjusted EBITDA and adjusted diluted EPS to the most directly comparable GAAP financial measures are included in the company's press release, which has been posted to its website. And with that, it is my pleasure to turn the call over to the company's President and CEO, Mr. Harold Edwards. Harold Edwards: Thank you, Deirdre, and good afternoon, everyone. During the third quarter, we made significant strides in unlocking long-term value through our two-part value creation strategy: agriculture production optimization, and land and water value creation. As we enter the fourth quarter and turn our attention to fiscal year 2026, we're excited about the profitable growth opportunities ahead. In the third quarter, we continued to navigate challenging lemon market conditions with pricing pressures in the first 2 months, though we saw improvement in the final months as we captured higher prices for fruit held in storage. Our fresh utilization was lower due to the strategic timing, but we remain confident in achieving our volume goals for both lemons and avocados in fiscal year 2025. In addition, we expect pricing to improve in fiscal 2026 due to anticipated shortages in several international areas. Our strategic partnership with Sunkist for citrus sales and marketing remains on track to drive $5 million in annual cost savings and EBITDA enhancements starting in fiscal year 2026. This partnership will unlock access to new high-quality customers while creating the operational efficiencies we've discussed. We expect lemons to return to profitability with more normalized pricing and fresh utilization levels in fiscal year 2026. Our avocado business continues to expand, with pricing and volume on plan during the quarter. We anticipate a significant increase in avocado production as our newly planted acreage begins maturing in fiscal year 2027 and beyond. We have 700 acres of nonbearing avocados estimated to become full-bearing over the next 2 to 4 years, enabling strong organic growth. This will be a near 100% increase in avocado producing acreage. Our Real Estate Development continues to exceed expectations. Harvest at Limoneira is selling homes ahead of schedule, and we continue to expect future distributions from our real estate projects to total approximately $155 million over the next 5 fiscal years. Today, I'm also excited to announce our exploration of development options for our Limco Del Mar property. This 221-acre agricultural infill property bordered by developed areas in the city of Ventura presents an opportunity for residential development that directly addresses Ventura County's critical housing shortage. As a historically local company, Limoneira is dedicated to helping solve this housing crisis. We believe that a strong community needs homes for everyone, and we're ready to do our part. The Limco Del Mar Ranch is ideally suited for efficient, well-planned infill development that may stimulate economic growth, create jobs and contribute to vibrant livable communities. We're committed to conducting a comprehensive community-based planning process, including complete CEQA, which is the California Environmental Quality Act review, City of Ventura City Council Review, a SOAR, Save Open-space and Agricultural Resources vote and the LAFCO, Local Agency Formation Commission, review process for annexation to the City of Ventura. Our goal is to create a pathway to design, permit and develop new homes that will meet the needs of Ventura County's residents. We continue to advance our water monetization efforts. In January 2025, we sold water pumping rights in the Santa Paula Basin for $30,000 per acre foot across three transactions, generating $1.7 million in proceeds and recording $1.5 million of gains. In summary, we're executing a comprehensive strategy that positions us for long-term growth. Our citrus operational enhancements through the Sunkist partnership, expanding avocado production, accelerating real estate development, adding new housing development opportunities and ongoing water value creation, all contribute to building sustainable long-term shareholder value. And with that, I'll now turn the call over to Mark to discuss our third quarter results. Mark Palamountain: Thank you, Harold, and good afternoon, everyone. Before I begin, I would remind you it is best to view our business on an annual, not quarterly basis due to the seasonal nature of our business. Historically, our first and fourth quarters are the seasonally softer quarters, while our second and third quarters are stronger. For the third quarter of fiscal year 2025, total net revenue was $47.5 million compared to total net revenue of $63.3 million in the third quarter of the previous fiscal year. Agribusiness revenue was $45.9 million compared to $61.8 million in the third quarter last year. Other operations revenue was $1.5 million for the third quarter of fiscal year -- fiscal years 2025 and 2024. The decline in Agribusiness revenue stems primarily from continued pricing pressure in the lemon market during the first 2 months of the quarter, though we saw improvement in July. Additionally, our fresh utilization was lower as we held lemons longer in storage to capture higher prices during the final month of the quarter. Looking beyond this year, the citrus sales and marketing plan we announced with Sunkist is anticipated to enhance our resilience to market volatility by creating a more efficient cost structure, leading to an expected $5 million in EBITDA improvement during fiscal year 2026. Agribusiness revenue for the third quarter of fiscal year 2025 includes $23.8 million in fresh packed lemon sales compared to $25.8 million during the same period of fiscal year 2024. Approximately 1.4 million cartons of U.S. packed fresh lemons were sold during the third quarter of fiscal year 2025 at a $17.02 average price per carton compared to 1.4 million cartons sold at an $18.43 average price per carton during the third quarter of fiscal year 2024. Brokered lemons and other lemon sales were $3.8 million and $9.8 million in the third quarter of fiscal years 2025 and 2024, respectively. The company recognized $8.5 million of avocado revenue in the third quarter of fiscal year 2025 compared to $13.9 million of avocado revenue in the same period of fiscal year 2024. Approximately 5.7 million pounds of avocados were sold in aggregate during the third quarter of fiscal year 2025 at a $1.50 average price per pound compared to approximately 8.9 million pounds sold at a $1.57 average price per pound during the third quarter of fiscal year 2024. The California avocado crop typically experiences alternating years of high and low production due to plant physiology and was the primary reason for lower volume this year compared to last year. Both avocado pricing and volume were on plan, and we achieved our volume goals for fiscal year 2025. The company recognized $1.7 million of orange revenue in the third quarter of fiscal year 2025 compared to $1.2 million in the third quarter of fiscal year 2024. Approximately 94,000 cartons of oranges were sold during the third quarter of fiscal year 2025 at an $18 average price per carton compared to approximately 43,000 cartons sold at a $26.98 average price per carton during the third quarter of fiscal year 2024. Specialty citrus and wine grape revenue were $600,000 for the third quarter of fiscal years '25 and '24. Farm management revenues were $100,000 in the third quarter of fiscal year 2025 compared to $3.2 million in the same period of fiscal year 2024. The decline was due to the termination of our farm management agreement effective March 31, 2025. Total costs and expenses for the third quarter of fiscal year 2025 decreased to $48.1 million compared to $54.3 million in the third quarter of last year. Operating loss for the third quarter of fiscal year 2025 was $600,000 compared to operating income of $9 million in the third quarter of the previous fiscal year. Net loss applicable to common stock after preferred dividends for the third quarter of fiscal year 2025 was $1 million compared to net income applicable to common stock of $6.5 million in the third quarter of fiscal year 2024. Net loss per diluted share for the third quarter of fiscal year 2025 was $0.06 compared to net income per diluted share of $0.35 for the same period of fiscal year 2024. Adjusted net loss for diluted EPS for the third quarter of fiscal year 2025 was $400,000 or $0.02 per diluted share compared to adjusted net income per diluted EPS of $7.8 million or $0.42 per diluted share in the same period of fiscal year 2024. A reconciliation of net income or loss attributable to Limoneira Company to adjusted net income or loss for diluted EPS is provided at the end of our earnings release. Non-GAAP adjusted EBITDA for the third quarter of fiscal year 2025 was $3 million compared to $13.8 million in the same period of fiscal year 2024. A reconciliation of net income or loss attributable to Limoneira Company to adjusted EBITDA is also provided at the end of our earnings release. Turning now to our balance sheet and liquidity. Long-term debt as of July 31, 2025, was $63.3 million compared to $40 million at the end of fiscal year 2024. Debt levels as of July 31, 2025, less the $2.1 million of cash on hand resulted in a net debt position of $61.3 million at quarter end. In April of 2025, we received $10 million of our share of a $20 million cash distribution from our 50-50 real estate development joint venture with The Lewis Group of Companies. The distribution came from the joint venture's available cash and cash equivalents, which as of July 31, 2025, totaled $36.4 million. Now I'd like to turn the call back to Harold to discuss our fiscal year 2025 outlook and longer-term growth pipeline. Harold Edwards: Thanks, Mark. We continue to expect fresh lemon volumes to be in the range of 4.5 million to 5 million cartons for fiscal year 2025, and avocado volume is approximately 7 million pounds for fiscal year 2025. Fiscal year 2025 avocado volume is lower than fiscal year 2024, primarily due to the alternate bearing nature of avocado trees. Looking beyond fiscal year 2025, we have strong visibility on multiple value drivers. First, we believe we are in a good position to divest additional real estate assets in fiscal year 2026. Second, we expect to receive an additional $155 million from our real estate projects over the next 5 fiscal years. Third, we have 700 acres of nonbearing avocados estimated to become full-bearing over the next 2 to 4 years, which we expect will enable strong organic growth in avocado production. Additionally, we plan to continue expanding our plantings of avocados over the next 2 fiscal years. Fourth, we expect lemons to return to profitability with more normalized lemon prices and fresh utilization levels in fiscal year 2026 in which we continue to estimate 4 million to 4.5 million cartons. Our partnership with Sunkist fundamentally strengthens our citrus business model, unlocking availability to new high-quality customers and driving an anticipated $5 million in annual cost savings beginning in fiscal year 2026. This partnership positions us for sustainable EBITDA growth and creates a strong foundation for long-term value creation. And fifth, the exploration of our Limco Del Mar property represents another significant value creation opportunity, addressing critical community needs with anticipated substantial returns for shareholders. In summary, we're executing on a comprehensive strategy across agricultural production optimization and asset monetization that positions us for both near-term resilience and long-term growth. We believe we have the asset base, strategic partnerships and operational improvements in place to deliver sustainable value creation while maintaining flexibility to capitalize on additional opportunities as they arise. Operator, we will now open the call to questions. Operator: [Operator Instructions] Our first question comes from the line of Ben Klieve with Lake Street Capital Markets. Benjamin Klieve: First, a couple of questions on the Limco Del Mar opportunity here. It's great to hear that, that's progressing. One very specific question on, is there any kind of expectations of costs flowing through the income statement on this, say, through '26, maybe associated with regulatory costs or consulting costs, anything of that nature? And then second, on a higher level, what's your vision for how this will get developed over the long term in terms of what Limoneira's role will be? I mean, are you going to be looking for kind of a Lewis Group type 50-50 partner? Do you want to maybe offload more of the kind of developmental burden on a partner? Kind of how are you thinking about that on a -- from a big picture perspective? Mark Palamountain: Great question, Ben. Thank you. So multiple pieces to that. So we'll start with the cost and the income statement. So as you know, we recently tendered from our position, we had 28% as the general partner and achieved up to 55%. It's good to know we have a bunch of local still involved in this. And so we've got support from all around. From a cost perspective, it will be similar to how we developed Harvest and the entitlement period. We're trying to be conservative, thinking 3 years on a minimum, 5 years out and $3 million to $5 million depending on that time frame. But the majority of those costs will be capitalized and will not run through the income statement and then as we develop the project. Now Limoneira being the community player behind all this, and Lewis has been a great partner and we'd love to have them involved at that point. Right now, it's just Limoneira running with the ball, and we've put together a great team of legal experts and development experts and county experts to really figure out what the community benefit is going to be and how we make this a benefit for everybody so we can move it across the line. And so at the end of the day, I think the $3 million to $5 million is a good number to hold on to. And we're working really hard. We've already started and had some good progress and good support as well. Harold Edwards: So Ben, I would also just add that there'll be two value triggers that happen along this journey. The first real value-creating opportunity will become evident upon entitlement. And so as mentioned in the description earlier, we'll go through a comprehensive CEQA review, a comprehensive SOAR vote. And then assuming that we are successful in winning a SOAR vote, and that vote will be comprised of the City of Ventura citizens voting to support the project. Assuming a majority of the citizens vote yes, then we'll work with the Local Agency Formation Commission to annex the 220 acres into the City of Ventura. And at that point, it would become entitled. At that point, the value creation will be significant. But then the second chapter of that value creation will be in the actual development of the project. And as Mark pointed out, we've had a great relationship with the Lewis Group. The way that we've developed Harvest at Limoneira and Santa Paula has been extremely successful. But I would say when we get to the point of development, we'll assess what the best options are for the community of Ventura, but also for the Limoneira Company and decide at that point. Benjamin Klieve: Got it. That makes plenty of sense. Very good. We'll stay tuned for updates on that in quarters to come. I've got a question on the lemon side. Great to see fresh lemon prices rebound sequentially from a difficult second quarter. You guys talked about kind of a normalization of pricing going into next year as there's maybe some industry supply constraints that should be supportive. Given the reset that lemons -- the lemon market has had over the past few years, how do you kind of think about what normalized pricing is in this business today? And then kind of what are the different kind of sources of supply constraints that you see out there that are going to be helpful as you look into next year? Mark Palamountain: Yes. So Ben, we were pleasantly surprised into August into the lemon pricing. So as we mentioned, it lasted a little longer. Our average price in the quarter was -- in Q3 was just over $17. August, we saw prices in the low 20s, so almost a $4 to $5 jump. There was a bit of a shortage around on the East Coast. A lot of the imports that usually came to the U.S. went to Europe. And you mentioned some of those issues. And Turkey had a really challenging freeze, which it's always hard to get the best assessment, but could have gone all the way down to damaging trees, which would be 2 years of crop. And so -- and then also Spain had their own set of weather issues. So next year, we see Spain and Turkey being short, call it, 20% to 30%, which then, again, will allow some of our Southern Hemisphere friends to move fruit there. And all of our market is about balance, right? And so when us -- Limoneira coming back into the Sunkist, there's a lot more contracted business. And we've got those new customers in the quick-serve restaurant business, along with our existing customer base, we see a lot more potential for stability. And I think you'll see a price with a two in front of it. Right now, as I said, August was in the low 20s, call it, $23. And if you keep a higher price, and this has been historical since as long as I've been here, coming into the fall, you always have a dip into that winter. But if you have a higher entry point, obviously, you're going to have a lower low theoretically. And so that's sort of what is setting up. And we're at year 7 going into year 8 of a really challenging lemon environment. And usually, those cycles last that long. Will we have a mother nature event? We're not sure about that. But for the most part, that's what gives us confidence is the balance around the world, the lemons we've seen come out, including our own at a higher starting point going into next year. Benjamin Klieve: Got it. That would be great to see. Very good. One more for me, and I'll get back in queue. And it might be a little premature on the '26 outlook for avocados. But given the kind of biannual nature of the crop and the California harvest complete at this point, do you have any kind of rough ideas of what your expectations are for avocado volumes here looking into '26? Harold Edwards: So it's a little premature, but we're looking up into the trees right now. You're seeing a set. I would say that as this -- as we're counting pieces and assuming we hold on to the fruit, I would expect it to not be greater than this year. It looks like it's going to be similar to this year to less, but it's too early to really know that. So I wouldn't count on a big rebound in production. It's why we made our forward-looking comments that we believe our first big breakout year with volume improvement will be 2027. But more to come. Let's see what we come up with. And when we talk in the next call, we'll have a much better idea of what we're looking at for 2026 with avocados. Operator: [Operator Instructions] And we have reached the end of the question-and-answer session. I would like to turn the floor back over to CEO, Harold Edwards, for closing remarks. Harold Edwards: Thank you. I'd like to point out that as of this afternoon, we have updated our investor deck and it is now available on our website at limoneira.com. I'd like to thank you all for your questions and your interest in Limoneira. Have a great day. Operator: And ladies and gentlemen, this concludes today's conference, and you may disconnect your line at this time. We thank you for your participation. Have a great day.
Operator: Good day and thank you for standing by. Welcome to Idorsia's TRYVIO Investor Q&A Webcast and Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Idorsia's Chief Executive Officer, Srishti Gupta. Please go ahead. Srishti Gupta: Thank you, Nadia. Good afternoon and good morning, everyone, and welcome to our webcast to discuss TRYVIO and its role in the treatment landscape for difficult-to-control hypertension. After decades of limited progress in hypertension research, we are now entering an exciting new era, led by TRYVIO, the first innovation in hypertension in over 2 decades. It is the first and only hypertension therapy to target the endothelin pathway. Ahead of the European Society of Cardiology, ESC, meeting, we published an on-demand investor webcast, sharing our perspectives on TRYVIO's ability to address a significant unmet need and difficult-to-control hypertension. Since then, we've engaged with leading hypertension experts at both ESC and the American Heart Association's Hypertension Scientific session. We've also met with many of you in the investor community as the back-to-school season kicks off in the U.S. Today, we'll address the key questions we've been hearing in those discussions and then open the lines to take your questions on TRYVIO. Joining me are Martine Clozel, our Chief Scientific Officer and a recognized leader in the endothelin system; Alessandro Maresta, Global Medical Affairs Therapeutic Area Head for cardiovascular, renal and metabolism; Michael Moye, President of Idorsia's U.S. Operations; and Julien Gander, our Chief Legal and Corporate Development Officer. Next slide, please. Before we begin the Q&A, please note that our remarks today include forward-looking statements informed by our research, physician feedback, advisory boards and market insights. As always, we encourage you to consider both risks and opportunities when evaluating Idorsia. Next slide, please. TRYVIO in the U.S. and JERAYGO in Europe represents the first systemic hypertension treatment to target a new pathway in more than 30 years. This pathway is the endothelin pathway. That brings us to the key question investors are asking. Why is addressing the endothelin pathway such a meaningful innovation and differentiator in hypertension. Martine, can you share your perspective? Martine Clozel: Thank you, Srishti. Endothelin upregulation is a central driver of hypertension. It plays a role at very early stages of hypertension during the progression of hypertension and at the stage of end organ damage in hypertension. But endothelin upregulation has remained unaddressed until TRYVIO. The fact that endothelin regulation was left unimposed up to TRYVIO explains why so many hypertensive patients, despite their treatment or combination of sometimes many antihypertensive drugs, could not be controlled, and their blood pressure remained higher than the target blood pressure threshold. This was particular true for certain groups of patients whose hypertension is not obviously difficult to control: African-American, elderly, postmenopausal women, obese patients, and those patients with CKD type 2 diabetes, heart failure or sleep apnea, all of which are actually associated with endothelin upregulation. Endothelin probably also explains why the patients with difficult to control hypertension are at higher risk of death, strokes and renal failure, almost double the risk compared to well-known -- to well-controlled patients. Indeed, endothelin is a multifunctional peptide, via both its receptor, ETA and ETB, it promotes vasoconstriction, vascular and cardiac hypertrophy, fibrosis, inflammation, catecholamine release, aldosterone release and is increased by salts, thereby mediating high blood pressure, endothelial dysfunction and organ damage. Aprocitentan blocks the actions of endothelin via both its receptors and therefore, is a multifaceted drug. In healthy volunteers with no underlying disease, even doses 50x higher than the therapeutic dose up to 600 milligrams, TRYVIO had no effect on blood pressure. TRYVIO is only active on an upregulated endothelin system like in hypertension. We proved this in Phase II and in Phase III. The lack of interference with physiology explains its very good safety and tolerability in pathology. Srishti Gupta: Thank you, Martine. That's very clear. Endothelin plays a key role, it's not been tackled until now. And by targeting the endothelin system, TRYVIO is bringing a completely novel and different approach to patients with hypertension. Alessandro, let me turn to the PRECISION study. This was a registration trial with the design agreed upon with the FDA. Can you walk us through the key highlights from that study and what they mean for TRYVIO? Unknown Executive: Of course, Srishti. First of all, I would like to mention that the compelling efficacy and safety of TRYVIO is well established in labeling and further reinforced by its recent inclusion in the ACC AHA hypertension guidelines. So TRYVIO achieved a meaningful reduction in blood pressure within 2 weeks. This is very important in patients with resistant hypertension that are at risk of cardiovascular events, and the blood pressure was sustained over 48 weeks with a decrease of 19 millimeters of mercury by the end of the study. Talking about resistant hypertension, the design of the Phase III PRECISION study was especially rigorous with an 8-week running period, a standardized triple fixed dose background therapy with confirmation of compliance and inclusion of only of patients with true resistant hypertension. This trial enrolled high-risk subgroups where classical anti-hypertensive are least effective, including Black patients, all the adults, postmenopausal women, obese patients and those with chronic kidney disease, diabetes, heart failure or sleep apnea, all conditions, as you heard from Martine, associated with endothelin overactivity. Looking at safety. TRYVIO was well tolerated with only 2 treatment-related side effects, mild early and transient edema and a modest expected decrease in hemoglobin. No direct drug interaction observed a significant advantage for patients on multiple therapies like antihypertensive patients. Importantly, no signal we've seen for hyperkalemia, hypotension, headaches nor heart rate increase. Finally, the label that the FDA approved is based on the totality of the data for adults whose blood pressure remain inadequately controlled on other antihypertensive, a broader population compared to enrolled -- in the one enrolled in PRECISION. In addition, the label includes the relevance of lowering blood pressure for reducing the fatal and nonfatal risk of cardiovascular events, especially strokes and myocardial infarction. Srishti Gupta: Alessandro, people can follow the on-demand webcast to get more details on the data for TRYVIO. But as a cardiologist, can you perhaps give us some context on the current landscape for not well-controlled hypertension? Alessandro Maresta: Sure, Srishti. So today, paradigm in hypertension relies on a different classes of antihypertensive, of those addressing the renin angiotensin aldosterone system, calcium channel blockers and diuretics, which by the way, they stimulate the RAAS system. But if blood pressure remains uncontrolled, a mineralocorticoid receptor antagonist such as spironolactone can be added, but many patients do not tolerate it, mainly due to hyperkalemia, worsening of renal function, gynecomastia and in addition, we observed a high discontinuation rate. So despite all the classes of antihypertensive drugs, millions of patients remain uncontrolled and TRYVIO offer a solution with a completely new mode of action. Srishti Gupta: Thank you, Alessandro. That certainly highlights the significant unmet need that a safe and effective drugs like TRYVIO can address in the current landscape. What about compounds in development? Alessandro Maresta: Yes, Srishti, there are several products in development, but most of them are still targeting the RAAS system, including the aldosterone synthase inhibitors. These drugs are still in development, and we don't know yet what their label will look like. But what we know is that the studies were not as robust as PRECISION in enrolling true resistant hypertension patients. And there are safety concerns such as hyperkalemia, hyponatremia and decrease in renal function, particularly if combined with other drugs that are targeting the RAAS system. And this is where TRYVIO stands apart. It addressed the endothelin pathway, a fundamental driver of disease, that other treatments don't reach with a proven efficacy and a good safety and tolerability profile. Srishti Gupta: So TRYVIO is differentiated to the current and potential emerging treatments. Which patient populations do you see TRYVIO being used for? Alessandro Maresta: So if we take into consideration the new mode of action, the efficacy and safety profile and the FDA granted label, TRYVIO is the ideal choice for many patient groups. I can list for you some: patients with risk factors for hypertension, which will be difficult to treat because they are endothelin-dependent; black, elderly obese patient, patients with sleep apnea, type 2 diabetes, early heart failure and chronic kidney disease. Then we have patients that are not adequately controlled despite 2 lines of hypertensive therapies and patients who cannot tolerate certain classes of drugs because of their side effects. There are also the patients that we have studied so they're truly resistant hypertensive patients that are not controlled despite treatment with 3 or more therapies at their maximum tolerated dose. And then I would like to tease out the patients with chronic kidney disease stage III and IV and resistant hypertension because for these patients that have currently no alternatives. In all these patients, TRYVIO represented an obvious choice with very little competition. Srishti Gupta: Thank you, Alessandro. So there's a large addressable population of patients with hypertension that is not adequately controlled. Michael, given that the U.S. market is essential to realizing TRYVIO's full potential, can you walk us through the key drivers that support our $5 billion peak sales estimates? Michael Moye: Yes. Thanks, Srishti. Our forecasts are grounded in extensive market research and analytics to understand both the size of the opportunity and how physicians intend to use TRYVIO. Next slide, please. So today, of the 40 million treated patients in the U.S., there are roughly 26 million patients treated with 2 or more therapies. And 30% to 50% of those are inadequately controlled despite receiving treatment and therefore, eligible for TRYVIO according to the FDA label with the only contraindication being pregnancy and sensitivity to aprocitentan. This population is expected to grow, given the aging demographics, higher rates of comorbidities linked to endothelin function and increasing recognition of the severe consequences of uncontrolled hypertension. Importantly, these consequences are already reflected in the FDA indication that removes any need for a separate outcome study. We estimate that around 7 million patients as we move to the middle of the slide -- the 7 million patients are easily identifiable and are well defined a good area to focus on first coming into the market. Patients with endothelin-driven comorbidities often face restrictions with other therapies. Chronic kidney disease, as you've heard, is a prime example -- it's a prime example. Patients with hypertension and CKD are often treated with 2 or more agents yet few effective options exist. TRYVIO is approved for patients with an eGFR as low as 15 and has demonstrated excellent safety and tolerability with no hyperkalemia and no hypotension. Other identifiable groups include patients who can't tolerate certain classes of drugs and those with true resistant hypertension. So we now have real-world efficacy and safety outcoming the mirror of what we saw in PRECISION. These drive adoption and penetration assumptions. So as you can see, they range here from 12% to 22%. So our insights are informed by over 1,000 qualitative and quantitative interactions with multi-specialty physicians, including top hypertension centers. Physicians consistently recognized TRYVIO's efficacy, safety and its unique mechanism of action when they're addressing -- that address what additional RAAS blockade cannot. In comparison with emerging therapies, TRYVIO is viewed favorably by these physicians, particularly for patients with CKD and based on the impact on both blood pressure and uACR measures. And finally, the payers, which we know are all very important, have responded very positively, highlighting the robust primary endpoint of more than 15-millimeter drop from baseline, the statistical strength and the sustained efficacy through the duration of the PRECISION study as very compelling reasons for coverage. We have set a WACC at $775 a month and we're focused on a very favorable gross to net as a first-in-class differentiated therapy. TRYVIO is currently being reimbursed with reasonable utilization management criteria, which supports our commercial model. Srishti? Srishti Gupta: Thank you, Michael. Beyond the U.S., we also see an additional upside from geographic expansion. Aprocitentan has already improved at JERAYGO in the EU and the U.K., and there is significant opportunity in Japan and China. We also see that we can get further value through IP extension strategies, for example, with fixed-dose combinations with the SGLT2 inhibitors and indication expansion such as exploring renal protective benefits in CKD. Of course, realizing the full potential of TRYVIO will depend on securing the right partner, which is why we're actively engaged in these discussions at this time. Julien, could you share a little bit more about how we're thinking about partnering discussions? Julien Gander: Yes, happy to. Look, we've been very consistent in saying that we lead where we demonstrate scientific or commercial advantage and strategically partner where external expertise, scale or speed adds value. So specifically on TRYVIO, partnering TRYVIO remains a key strategic priority for us. We are actively engaged in discussions with potential partners, which reflects the interest in the assets and the opportunity TRYVIO represents. While this process takes time, we're encouraged by the progress and look forward to updating you as we move forward. In the meantime, I can tell you, we continue to work very diligently and at high speed to maximize the value of TRYVIO. We've seen some of this in the past weeks and months. I think of the REMS removal, the collection of early, very positive real-world experience, the inclusion of TRYVIO in the ACC AHA hypertension guideline. And very recently, the recent initiative announced with Duke and Stanford University. Srishti Gupta: Thank you, Julien. Having addressed some of the key questions that we have received around TRYVIO, I think it's a good time to open the lines for additional questions. Nadia, can you please go to the next slide and open the line, please? Operator: [Operator Instructions] And we're going to take our first question. It comes from the line of Joris Zimmermann from Octavian. Joris Zimmermann: This is Joris Zimmermann from Octavian. I have two questions. One will be on partnering that you just highlighted, Julien. Is there any timelines you could give us? Or at least do you still expect to close a deal this year? And then the second question would be until you have found the right partner and signed an agreement, and given the limited resources you can currently deploy in the U.S., where will you put your focus in terms of the aprocitentan launch. Srishti Gupta: Thank you, Joris. Julien, will you respond to the questions? Julien Gander: Yes, very happy to. Thank you, Joris. Look, I mean you will understand that we cannot really comment on specific timelines. But what I can say, and I can ensure that the partnering aprocitentan is really a key priority for us. And to your point, we resource this project accordingly. We, of course, want to move very quickly and also considering the time advantage we have towards emerging therapies. But you will understand that actually, our focus is not only just speed, but it's also securing the right partners to maximize TRYVIO commercial success. To your second point, Idorsia is indeed has limited capacities, but I think considering these constraints, we've done a lot to make sure that the product is advancing, is prepared to be launched. And the product is commercially available, and we have very good early evidence, and we'll continue those efforts, and we are hoping to give you an update as soon as we can on achieving this goal of partnering. Srishti Gupta: Thank you, Julien. Michael, maybe I'll have you add to that with your presence at the AHA -- recent AHA meeting and some of the other work that we're doing on retail distribution. Michael Moye: Yes. Thanks, Srishti, and thanks for the question. Yes, we -- despite these -- the resource constraints, we are quite busy continuing our kind of launch and market prep. So Srishti, as you said, we're at the major congresses. So we have a really strong presence there. We're working with a lot of the top KOLs and a lot of the top hypertension centers. You heard about the Duke, Stanford relationship that come out. We are -- have really finalized a lot of the core materials. So we have a full digital presence. Our consumer and HCP websites are up and running. We've got print materials and things out there. And then the last couple of things. We're continuing our payer discussions, which continue to go really well. And then as Srishti made reference to at the end, the pharmacy distribution. So once the REMS was removed, we're able to move in addition to having a specialty pharmacy, we are quite literally right now coming online with full retail distribution across all retail pharmacies in the U.S. So yes, despite the resources, we're making great progress, again, across KOLs, congresses, payer discussions and pharmacy distribution. Srishti? Srishti Gupta: Thank you, Michael. Nadia, we'll take the next question. Operator: [Operator Instructions] We have a follow-up question from Joris Zimmermann from Octavian. Joris Zimmermann: Okay. Sorry. I hope I didn't jump the line now. But two more questions. I mean you talked about the patient populations and that you see a very broad target population. But maybe you can give us an idea based on this broader label that you got versus the study inclusion criteria, what are the kind of -- where do you see the quickest uptake in the market? Which type of patients do you think will be the ones that physicians consider prescribing aprocitentan first? And then also, maybe you could give us a little bit an idea of the hurdles that you foresee as well. Srishti Gupta: Joris, thank you for the question. Michael, would you like to walk a little bit through how we think about the targeting of the patient populations in the U.S. and how we might access them with the centers of excellence. Michael Moye: Yes. So when we look at that and we look at both our research and our interaction with the physicians, we're definitely seeing the data across all the subgroups has been one of the things that's jumped out of physicians. So you heard a little bit in our opening that clearly, the CKD is a differentiated piece and that we see that as a great opportunity. The other thing about the subgroups that we're seeing kind of across these multiple comorbid patients, you heard about patients challenge with hypertension management, black patients, obese patients, again, patients with CKD. The thing about the profile that continues to jump out is the fact that we don't -- we have efficacy and safety across all these subgroups. We don't have any real exclusions or contraindications and especially we don't have any drug-drug interaction problems, obviously, with these patients being on multiple medications. So when we think about those different subgroups and those comorbid patients that are at more risk, including the CKD patients, we see consistently the one pill, one dose, once daily, good tolerability, no drug interactions. That allows -- those factors are what the physicians are pointing out to us that allow us to treat these high comorbid risk subgroups. Srishti Gupta: Thank you, Michael. And Joris, in terms of your second question, I'd like to turn it over to Alessandro. Alessandro has been attending a lot of the KOL meetings in all over the United States over the last couple of months, meeting physicians, understanding how they think about TRYVIO. So Alessandro, can you talk a little bit about how you think about the hurdles that physicians are thinking about as they are deciding on prescribing TRYVIO. Alessandro Maresta: Thank you very much, Srishti. I think that, in my opinion, the best -- the most important hurdle is the new mode of action. The physicians are used to the RAAS system, are used to calcium channel blockers and now they need to realize and understand that there is a new kill of the block that is an endothelin receptor antagonist, and that endothelin receptor antagonist can be very, very beneficial in the subgroup of patients that I and Michael highlighted. So basically, I see this as the major hurdles because the results are really impressive. The safety profile is also very, very good. And we have a clear understanding on which are the patients that would benefit the most from this -- from TRYVIO. And last but not least, there are many, many patients that despite they add on 2, 3 or even 4 drugs, they are still not at goals. And these patients, they need -- they deserve treatment. So I don't see many hurdles in front of us. Srishti Gupta: Alessandro, thank you for that. And it underscores the importance for us of finding a partner who can help us on the broad outreach and the medical education required to enhance the importance of the end -- addressing the endothelin upregulation that occurs in a lot of hypertension. So this is definitely something we are thinking about and focused on as we move forward. Joris, thank you for the questions again. Operator: Thank you. Dear speakers, there are no further questions for today. I would now like to hand the conference over to your speaker, Srishti Gupta, for any closing remarks. Srishti Gupta: Thank you, Nadia. So this concludes today's call. Thank you for joining us and for your continued interest in Idorsia. Our next scheduled update will be on October 30 when we report our third quarter results and will provide a comprehensive update on QUVIVIQ performance. Operator, you may close the line. Operator: This concludes today's conference call. Thank you for participating. You may now all disconnect. Have a nice day.
Operator: Good morning, and welcome to the Lucid Diagnostics Investor Conference call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Matt Riley, Lucid Diagnostics Senior Director of Investor Relations. Please go ahead. Matthew Riley: Thank you, operator. Good morning, everyone. Thank you for participating in today's conference call. Joining me today on the call Dr. Lishan Aklog, Chairman and Chief Executive Officer of Lucid Diagnostics.Before we begin please note that today's call will include forward-looking statements. These statements are based on our current expectations and assumptions and actual outcomes to differ materially. Today's remarks may include commentary regarding among other things, the September 4 contractors Advisory Committee meeting convened by MolDx participating Medicare administrative contractors the reconsideration of local coverage determination L39256 for EsoGuard, our reimbursement and market access strategy, potential regulatory and operational milestones and other matters related to our business and future performance. PAC meetings are advisory in nature and do not establish coverage determinations. Important factors that could cause actual results to differ are described in our filings with the SEC, including Part 1, Item 1A, Risk Factors in our most recent annual report on Form 10-K as updated by subsequent quarterly reports on Form 10-Q and current reports on Form 8-K. We encourage you to review these disclosures carefully. Except as required by law, we disclaim any intention or obligation to update or revise any forward-looking statements made on this call, whether as a result of new information, future events or otherwise. I would now like to turn the call over to Dr. Lishan Aklog, CEO of Lucid Diagnostics. Take it away, Lishan. Lishan Aklog: Thank you, Matt, and good morning, everyone. I appreciate you all joining us today. So as Matt said, we thought it would be helpful to hold an update call to discuss last week's MolDX CAC meeting in some detail. If you are one of the over 200 individuals who listen to the meeting, it should be no surprise that there is a broad agreement that it was an overwhelmingly positive meeting. Although going in, we were highly confident, we really believe in our data, and we knew that there was a broad clinician support for EsoGuard. It really far exceeded our own expectations. I participated in, or witnessed many such panels over the years, and I -- I'd be hard-pressed to say it could have gone any better. The 11 medical experts who participated in the meeting really expressed unanimous agreement on a variety of key matters, the urgent unmet clinical need, the strong body of clinical evidence supporting EsoGuard and really explicitly said that Medicare should cover it so they can offer it to their patients to detect precancer and that this was all consistent with established guidelines. They really positioned EsoGuard as the missing link that many of them have been waiting for literally for decades after they had already established this paradigm for preventing esophageal cancer through the early detection of precancer. Dr. Mike Smith, who's the Associate System Chief of Gastroenterology at Mount Sinai and the incoming President of the American Foregut Society, one of the leading societies focused on esophageal disease. He really summarized the sentiment quite well when he stated that EsoGuard is a no-brainer that it represents best practice, and it had a remarkably high benefit-to-risk ratio. So before we dive into the highlights of the discussion, let's spend a few minutes on the purpose of the meeting itself. I spent a lot of time during last month's earnings call on the entire LCD process and the history leading up to the CAC meeting, and I certainly won't repeat all that. But just briefly, MolDX has published a final local coverage determination in 2023 that clearly outlined coverage criteria for tests such as EsoGuard, but it was noncovered at that time since we didn't have sufficient data at that time to warrant coverage. As you may know, we submitted a request for reconsideration of this local coverage determination to the LCD and our complete -- what was now our complete evidence package in late 2024. This reconsideration and clinical evidence package was reviewed during the first half of this year. and the MolDx participating Medicare contractors, the MACs called this CAC meeting, Contractor Advisory Committee meeting as what we believe is really the final stage in the process of proceeding to a coverage of EsoGuard. The Director of the MolDx program, he chose to chair this meeting himself, I clearly explained the purpose of the meeting from the onset. He noted that the only things that can inform their review of the LCD process, their writing of policy in this context is peer-reviewed, published literature and the proceeds -- the information offered by medical experts during one of these public CAC meetings, a public meeting that's part of the public record. And he explicitly stated that the goal of the meeting was to have these experts provide primarily clinical context on the public record to supplement the peer-reviewed published literature. It's also critical to note, as he did, that the meeting was not simply put forth by the MAC that he's the Chief Medical Officer of Palmetto GBA, but it brought all of the MolDX participating MACs together, including Noridian, which is the MAC that has oversight over our laboratory in Orange County, California. Let me talk a little bit about why that's important that all the MACs were there. The MolDX program effectively operates by consensus. Even though the MolDX group that is housed within the Palmetto GBA MAC does the heavy lifting with regard to the analysis and much of the writing of the coverage determinations. Historically, all 4 of the -- now 4 of the MolDx participating MACs all typically put out identical local coverage determinations. So it's important at the tail end of this process after the MolDX group has done its work that all of the MACs come together for -- to achieve a consensus with regard to issuing a coverage determination. And that's why it was important that this was -- as noted, it was a multi-jurisdictional CAC meeting. The panels were all invited medical experts. They were a carefully selected group of 8 physicians, and they covered a broad spectrum of specialties as well as practice -- the type of practice that they operate under. Let's just go through them a little bit real quickly. If you look at the academic gastroenterologists on the list, I mean there's literally a who's who of international experts in the field and leaders, particularly in the areas of esophageal precancer and cancer. This included 3 physicians who are -- who have been instrumental in the authoring of guidelines in the area of esophageal precancer testing. Dr. Nicholas Shaheen is a very -- is an internationally renowned expert in this field from the University of North Carolina, and he's the co-author of the American College of Gastroenterology or the ACG guidelines, which are really at the heart of -- sort of at the center of how we view the target population of patients who should be tested. It also is the guidelines that were included within the criteria of the LCD verbatim as well as in other criteria such as the NCCN criteria. Other co-authors of guidelines included Dr. Prasad Iyer, who is a Professor and Division Chief at Mayo Clinic; Dr. Sachin Wani, also Professor of Medicine at the University of Colorado. They are both co-authors and Dr. Wani was the lead author on the American Gastroenterological Association. Also included other gastroenterology leaders in the field. Dr. Michael Smith, who's Associate System Chief of GI at Mount Sinai is the incoming President of the American Foregut Society. The American Foregut Society is the leading society that brings surgeons and gastroenterologists together who are entirely focused on diseases of the esophagus. And at that society, AFS has been very instrumental and supportive, as Dr. Smith mentioned during his comments in pushing payers, including commercial payers to provide coverage based on their own experience with it. Dr. Amitabh Chak from Case Western, also a professor there is the current President of the ASGE, the American Society of Gastrointestinal Endoscopy. So literally a who's who of academic Gastroenterology. I forgot to mention Dr. Steve Meltzer from Johns Hopkins participated as well. The group was supplemented by 2 pathologists, Dr. Booth from WashU in St. Louis and Dr. Gibson from Yale. -- and a surgeon, a GI surgeon, foregut surgeon, Dr. Christy Dunst, who offered -- she's the next President of the American Foregut Society. She's at Hoag Digestive Health Institute, and she's playing a central role in the Hoag Health System, bringing in EsoGuard as part of a comprehensive program across hundreds of primary care physicians within that group. And last but certainly not least, is Dr. Jamie Glover, was a primary care physician based in Colorado, who was a very potent advocate from a primary care point of view of endoscopic non-endoscopic screening in general as well as the EsoGuard test. And then Dr. Paul Panzarella also played an extremely important role. He was a private practice gastroenterologist in Orlando. So that was the panel. 11 folks were actually quite pleasantly surprised that they were able to get through 2 hours and 17 questions with that many panelists, but the moderator did an excellent job. It was really, by every measure, a very substantive 2-hour discussion. So let's talk a little bit about what they discussed. And before going into sort of specific commentary, we should -- just as a reminder, there are 2 main categories of data that's used as part of an evaluation of a test such as EsoGuard. And those are clinical validity and clinical utility. Clinical validity is the intrinsic performance. Does the test work? Does it find these precancerous conditions? And does it find cancer with a high level of accuracy? And that certainly was a central part of the conversation. The number, if you listen to the call that came up repeatedly was EsoGuard's 99% negative predictive value. Multiple physicians highlighted that number as a key determinant of why EsoGuard is a reliable rule out test. This was an extensive discussion on how reliable is EsoGuard as a rule out test. Focus here was that if you have a negative test, if you, the physicians who are participating here, have a negative test, can you feel confident that nothing further needs to be done in that patient that you've ruled out the serious conditions of esophageal precancer and cancer. And there clearly was. I won't go through all the quotes from the meeting, but there was clearly a strong consensus that, that was the case. I think Dr. Smith again summarized it pretty succinctly. He said the test is negative, you're done. And that's a really important -- the first step in the assessment of the data is demonstrating that this test, which is designed, as those of you who listened heard, as a rule-out test, it's -- the test was developed to have maximal negative predictive value, maximal sensitivity, and it certainly performs in that regard, and there was a full consensus that, that was the case. There was also similarly a discussion on the rule-out nature of this. And it was important to clarify that EsoGuard is a ruling test. It's not a rule out test. It's designed to rule out serious disease in the vast majority of patients who are within this well-defined group of patients of approximately 30 million patients who have these risk factors and have symptomatic heartburn and that it does so -- it avoids the need for endoscopy in the vast majority of those patients. But the rule-out test is the endoscopy itself, and there was a good amount of discussion that the EsoGuard enhances the rule-out test by increasing the yield of the endoscopy two to threefold. And so any questions around whether we were ruling things out with EsoGuard or how EsoGuard fit within this rule and rule paradigm was very clearly outlined and it was an area of significant discussion that -- where there was a strong consensus on that. Related to that was a very important consideration when one evaluates the accuracy and the evidence around diagnostic test. And that is what is the risk of a false negative and what's the risk of a false positive. And that's not always the same for tests that may have the same accuracy. What you do, what the situation, what risk the patient is exposed to if they have a false negative or false positive is not the same. And they -- again, if you had a chance to listen, they went into that in some detail. And the -- so let's just -- let's first start on the false positives. If you have a patient who has a positive EsoGuard test and they are sent for an endoscopy and they have a false positive, that patient was not exposed to any additional risk because they are getting a test that they otherwise would have received. So there's no incremental risk to that. And the physicians clearly stated that repeatedly, especially the gastroenterologist outlined that. That's different than other tests for example, test for -- to screen for lung cancer or test to screen multi-cancer detection test for blood, where a false positive can lead to invasive procedures that otherwise would not have been performed, biopsies and other head-to-toe kind of scans that can lead to risk to the patients. It also was highlighted that these -- we're detecting primarily precancer here. So a false positive test doesn't trigger the same type of anxiety that potentially can in tests that are primarily focused on cancer. So the whole question of the risk of a false positive and the essentially 0 -- well, extremely low or 0 risk of a false positive given that endoscopy is safe even if it is invasive, was very well established by the panel. The same is true about the risk of a false negative. If you have a test that's primarily focused on detecting cancer, and you miss one, that carries significant risk. The risk of -- especially if your test is an alternative to a test that the patient would otherwise have received. And as the panelist described with a lot of clarity, that is not the case with EsoGuard. These are typically patients who would not have undergone any testing. And so a false negative is -- even though the false negative -- the likelihood of a false negative is only 1% or so. So that is a low-risk false negative because, a, the patient wouldn't have received the test anyway. So there's no incremental risk to having had this test. But most importantly, the fact is that essentially all of those patients are going to be precancerous patients. The likelihood of missing a cancer. First of all, EsoGuard has, to date, not missed a cancer, 100% sensitivity there. And the likelihood of missing a cancer in that 1%, the likelihood that, that 1% would be a cancer is vanishingly low, and they outlined that quite clearly. Another area within the clinical validity data that was part of a question that was brought up, and we think importantly brought up by MolDX was around the ability of the test, the accuracy of the test across the spectrum of conditions that we're looking for. This relates to the issue of short segment versus long segment, Barrett's esophagus. And that was a central part of the discussion. And the highlight there is that EsoGuard performs equally across the spectrum. It has a high sensitivity and negative predictive value for cancer for the later-stage precancers, dysplasia for early-stage precancer, so-called Barrett's esophagus, nondysplastic Barrett's esophagus for metaplasia and even in those patients who have just a small patch of abnormality as little as 1 centimeter, so-called short segment Barrett's esophagus. And various physicians, Dr. Shaheen and Dr. Smith both highlighted that, that is, in fact, critical. Dr. Shaheen pointed out that the vast majority of the disease of the patients that we're trying to find and put into surveillance so we can detect the later-stage precancers and treat them before they develop cancer that the vast majority of that disease is, in fact, short-segment disease. And Dr. Smith followed up with some statistics on that, which is that up to 70% of the target population that you're trying to identify has short segment disease. And that 50% of the cancers have short segment -- 50% of the cancers arose in a patch of disease that would qualify as short segment disease. So what was clearly established during this meeting by the experts is that a test to be appropriate for use and to be -- to have sufficient clinical validity here has to have excellent performance across the spectrum from short segment disease all the way to cancer, and there was a strong consensus that EsoGuard does, in fact, have that. So that's clinical validity. And actually, in some ways, that's the more straightforward part because that's very much just baked into the data, and that is -- it was an opportunity for these expert clinicians to highlight the areas there. Frankly, the area of the data category that was really most important to discuss during this meeting was the other bucket, the clinical utility data. And the reason for that is that unlike a study for a drug or some other studies where you can sort of -- where all of the data is essentially included in one big sort of hairy randomized clinical trial, a lot of the evidence in these kinds of tests are -- represent sort of a chain of evidence around the utility of the test, how does the test perform in a real-world use and what utility is it offering even if it -- even if it's sort of established to be highly accurate. And a meeting like this is actually quite critical to have the clinicians sort of work through that chain of evidence to establish the overall clinical utility. And I thought everyone sort of would agree that they did really an excellent job of that. The questions started, a good chunk of them, the first 4 questions were actually not related to EsoGuard at all. What the moderator wanted to establish was why has this paradigm, which the gastroenterologists, including gastroenterologists on the call who are actually writers of the guidelines that urged endoscopy for now a couple of decades in this target in this well-defined target population. Why did it fail as a screening test? Why do only approximately 10% of eligible high-risk patients that they undergo endoscopy during this decades of recommendations from guidelines. And they nailed this. I mean they really established a wide set of reasons as to why this is the case. Dr. Glover was quite articulate in describing the difficulties that physicians, family physicians have in getting patients to agree to invasive testing, the hassles, the expense, the invasiveness et cetera, as obstacles -- intrinsic obstacles to getting people to use that test such as endoscopy for this type of screening application. So all sorts of issues around patient compliance were clearly identified. There was some excellent conversation around endoscopy deserts about the fact that in rural North Carolina, where Dr. Shaheen practices or in rural Colorado, where some of Dr. Glover's patients come from, just simply don't have the endoscopy resources, sufficient physicians who could perform these tests even if they did refer them to that. Dr. Panzarella pointed out that as in private practice GI that he couldn't -- even if -- even if the primary care physician sent them all these patients who are recommended for testing that he simply could not incorporate them into his practice. So all of the physicians across multiple specialties, academic GI, private practice GI surgery and primary care all agreed that there was a significant unmet need that they had already established the paradigm. The paradigm is completely straightforward. They know who these patients are. They are patients who have a symptomatic heart burn and have 3 out of 6 well established risk factors. When you have that, you have about a 10% chance of having a precancerous condition and that those patients should undergo screening. And as they progress from early precancer to late precancer, they can undergo an ablation procedure, which can eliminate the progression -- prevent progression to cancer. Everybody agrees on that. What they also agreed is that there's a missing link that they needed, which is a non-endoscopic approach and that EsoGuard is that missing link and provides the opportunity to now pull people into the pipeline so they can get tested and we can proceed to find this disease. The chain of evidence continues from that. So you start from, okay, there's this unmet need. Do physicians use the EsoGuard test appropriately to send the appropriate patients to endoscopy and those who don't need it away. And that data is published. There's published data on that, but they highlighted the fact that, yes, EsoGuard provides near perfect concordance with -- the physician referrals have a nearly perfect concordance with the results of the test. What I mean by that is that 100% of the patients who are who are positive on EsoGuard get referred for endoscopy. Dr. Glover and Dr. Panzarella, both concurred that, that was the case in their existing practice. And as importantly, essentially none of the negatives, 99% do not -- of the negatives do not get referred for endoscopy. That's a very important consideration. I said this on several previous calls that payers care about that. They don't want to pay for a test and then have you do the endoscopy anyway. And there was some actual interesting conversation around whether they should limit payment for endoscopy on someone who had a negative test. So that shows you kind of in the real world, how this is front and center on the minds of these patients. So that's the physician behavior part of it, physician referral part of it. Another very important part, which was a central part of the discussion as well, was how do patients respond. If a patient is referred for endoscopy, they don't get the endoscopy, then the test doesn't really have much utility, does it? So that was an important part of the conversation. And the fact is, again, there is published data on that. We've demonstrated that about 85% of patients with a positive EsoGuard study within a window of time that we assessed did they actually get the endoscopy that they were referred for. That's a very high number, higher than other types of tests in which a follow-up endoscopy is indicated and the physicians concurred with that. Dr. Glover, particularly the primary care physician was quite, again, potent on that and that she explained that most of our patients were reluctant to undergo endoscopy, but the positive EsoGuard patients she had to our -- it really facilitated her ability to get them to do so. Dr. Panzarella said, every single patient that he's had, who's had a positive has agreed to an endoscopy. So extremely important. They also highlighted published data in the literature that says historically, that rate of patients agreeing to have an endoscopy is poor. It's about 40%. So EsoGuard has intrinsic utility and that it at least doubles the likelihood that a patient who has a positive biomarker test on their own tissue is much more likely, twice as likely to proceed with the next step than someone who's just being recommended to test based on risk factors alone. And then the -- the next area is, okay, now you get the endoscopy, what is the value of EsoGuard. I already hinted at this. Again, lots of discussions around this, widespread consensus that EsoGuard enhances the value of the endoscopy, the rule out test. So again, here -- again, we have published literature, but the clinical context that they provided was critical. They all agreed that the 2.5 to 3x increase in the diagnostic yield of endoscopy was extremely important in the use of the -- of this invasive test and of those resources. So all of that lined up well. There was other conversations which were a little bit in the weeds, I won't get into that related to whether a large test from the -- a large study from the U.K. was generalizable to the U.S. in terms of demonstrating that if you do non-endoscopic testing in general, you can find a lot more disease. That study showed that practices that used it had -- we were able to find 10x as much disease. And the physicians highlighted that, that is certainly generalizable to the U.S. and EsoGuard would certainly do as good, if not better, than that 10x difference because EsoGuard is a vastly superior test to the test that was used in that study. In fact, Dr. Shaheen was one of the -- with the lead author in a study in the U.S. that demonstrated the poor performance of that test, the Cytokine device with an immunochemical test. So again, strong consensus on that. So that really -- a little bit in the weeds there, but it really represents that chain of evidence of clinical utility that really is at the heart of this meeting. Frankly, that's why we believe this meeting was called to get the physicians to flesh that out and to really lock down that chain of evidence on the intrinsic utility of the EsoGuard test and why it's really not just reasonable, but reasonable and necessary, which is the criteria for Medicare. Another important part that came up repeatedly kind of peppered throughout the meeting was guidelines. There is strong support by the major societies, the American College of Gastroenterology, the American Gastroenterological Association in their guidelines and practice updates on non-endoscopic testing such as EsoGuard as well as on the overall paradigm of this test. Once patients are identified who have esophageal precancer, everything from that point on, we like to talk about sort of EsoGuard hand the baton on to existing data has been well established by, frankly, many of the folks who are on this call. So the idea that once you know someone has this precancerous condition, Barrett's esophagus, that doing surveillance on them with endoscopies and intervening on them with ablation works. And that there is a full consensus around that. And the societies recommend that. And in fact, the payers pay for that. They pay for those endoscopies and that ablation. And so the fact that, that's well established within guidelines was crystal clear. The fact that it wasn't a coincidence that MolDX invited the actual authors of these guidelines to be there to testify to that fact. And as I mentioned, all of them -- all the major ones were present and reiterated that point. So all of that points to the -- what they're looking for is that there is a high or remarkably high benefit-to-risk ratio for this kind of test. So that is really the substance of the clinical data. But there was also extremely important element of this, which was around the clinical -- real-world clinical experience. That's why the MolDX group invited primary care physicians and a private practice gastroenterologist. And they very much explain their own experience and the value that EsoGuard has provided within their practice. Dr. Panzarella discussed how he utilizes the test in his own practice, actually not just from primary care physicians, but patients who are referred to him for endoscopy, and he can identify there's a lot of overlap between the risk factors of patients who are referred for endoscopy with those who -- sorry, referred for colorectal cancer screening and those who should undergo that, and he's incorporated that into his practice over the last couple of years. But I think at the end of the day, one of the major highlights was Dr. Glover, the primary care physician. I think as those of you who have been following us know that the vast majority of these patients never ever see a gastroenterologist and getting primary care physicians to buy into this paradigm and buy into this type of testing and to EsoGuard in particular, is extremely important, and Dr. Glover provided a very, very potent demonstration of that. She's -- she acknowledged that she's a skeptical physician and bases her decisions on adopting new technologies based on guidelines. And she offered a very powerful anecdote. She had her very first 2 patients once she had read the data, understood the guidelines and said that this is something that she knows her patients would benefit from, particularly because of the issues with compliance for referring for invasive tests that those first 2 patients, one of them was negative. She felt perfectly comfortable on the negative patient, telling them because of the high negative predictive value that they were good to go, that they didn't -- that she was confident that they did not have precancerous or cancerous skin addition. But the more potent story, of course, was one of those first 2 patients who was a positive on EsoGuard. That patient underwent endoscopy by one of her local gastroenterologists, and it showed initially high-grade dysplasia or a late-stage precancer which is great. Everyone was happy. Wow, it was great. We found this late-stage precancer. The right thing to do for that is to send them to an advanced endoscopist, gastroenterologist who can do the appropriate eradication treatment and make sure that, that high-grade dysplasia, which is at high risk for developing progress into cancer, it is eliminated. And so absolutely coincidentally, that patient was sent to Dr. Wani, who is one of the other panelists here. And Dr. Wani, as he acknowledged, took that patient and with the expectation that he would be going in to treat high-grade dysplasia, and he found that the patient had the earliest stage precancer known that we know, called a T1A cancer, a very small, little patch of cancer that hasn't even penetrated through the superficial layers. And he was able to remove that with endoscopy and cure the patient. And here's a -- again, one anecdote, but anecdotes can be powerful. Here's a patient in whom EsoGuard clearly found the earliest-stage cancer in a patient who we know at some point in time, was it a year, 2 years ahead, unclear, but would have certainly progressed to invasive cancer if this hadn't been detected early. So you can't find that in a published peer-reviewed paper. That's why this meeting was called. It was for those types of insights and that type of clinical context. And really, we believe that the clinicians hit it out of the park by providing real strong clinical context for what we really have always believed is very strong clinical data. So what happens from here? So this meeting, as Matt pointed out in the beginning, is an advisory meeting. It was meant for the MolDX directors, including Dr. Bien-Willner, who was leading the call from Palmetto as well as his colleagues at the other 3 to provide them with the context. And Dr. Bien-Willner at the very end, made it very clear what the goal is here, which was to get that clinical context and that he was grateful for their input and that -- and he said it would be helpful in their process of reviewing this request for reconsideration. So we were extremely happy by that -- those closing remarks. So from this point on, the next steps are very straightforward. It includes a -- the next step was the publication of a draft LCD, draft local coverage determination that is basically a response to a request for reconsideration that says, yes, we agree. The data is robust. The clinical context provided by the CAC meeting was excellent and sufficient, and we are proposing in a draft coverage to reverse the noncoverage aspect of this and provide coverage to EsoGuard. As we said before, that is the milestone because if they chose not to do that, they wouldn't publish a draft LCD. So the publication of a draft LCD is a firm indication that they are -- they intend to cover this. There is, as I mentioned before, a process that has to continue from that. There's a public comment period, a 45-day window that includes a public meeting, which -- where input is incorporated, and that results in a final LCD. And then subsequently, the EsoGuard test would be included in the articles and we have coverage. We stated this before, but there's a 1-year window prior to -- look back prior to the date of the final LCD where we can submit claims under the LCD and get paid. So we believe we're in those final steps. Now how long it's going to take? That's the $64 million question. We think we're pretty close. We're pretty soon. Everything about the process of how it was set up, the comments during the meeting from MolDX leadership gives us a high level of confidence that this is in the final stages that there's -- that they're strongly inclined to proceed accordingly. The analysts have put some time lines on what they think the time line is for us to receive a draft LCD, and we would concur with those time lines. So let me end there and just summarize by saying we weren't sure what to make when this notice went out, but pretty soon after, based on consultations with MolDX leaderships and others, we were happy actually that this meeting was put into place, and we expected it to be positive and to highlight and give a public forum for the quality of the data and the clinical context. We're extremely happy with the selection of the experts, and that was a really excellent group of diverse group of folks. And we went in quite optimistic. And as I said, the meeting really exceeded our expectations and really, we believe it puts us in a great position to move on towards Medicare coverage in the very near term. As we've talked about before, I won't go into much detail, but Medicare is important for us for 2 reasons. Although our current Medicare population of the patients we've been doing to date has been low. We've never really made any effort to find Medicare -- to find Medicare patients. Many of our patients tend to be on the younger side because we've had a high number of them within our Check Your Food to firefighter events. But we know about half of the patients in the target population are Medicare. As we said on our earnings call, we are moving towards trying to move that 10% number towards that 50% number and having the -- really even the prospect of near-term Medicare coverage is helping us do that. As we also discussed, certainly, when it comes to the larger commercial payers, Medicare is an important milestone. Medicare has established pricing, which we think is important and Medicare coverage really sets the bar for the larger plans. We still think we will continue to have success with the regional plans while we're waiting for Medicare coverage, but Medicare coverage is extremely important for us on the commercial side as well. And we -- I think we'll look back at this meeting as a real inflection point in our pathway to provide broad patient access and to really be in a position to ramp up our commercial activity to take advantage of this really large total addressable market. So with that, I'll ask the operator to open it up for questions. Operator: [Operator Instructions] With that, our first question comes from the line of Mark Massaro with BTIG. Mark Massaro: Thanks so much for helpful discussion of the CAC meeting and congrats on a really positive toned meeting. One of my first questions is it really stuck out to me that there was consensus around only about 10% of these eligible patients are getting screened with standard of care endoscopy. If I have this right, I think that compares to around 40% to 50% of eligible people to get screened for colorectal cancer. So just at a high level, Lishan, you talked about EsoGuard having a remarkably high benefit-to-risk ratio. But if I have this right, if you could get 10% of people screened to anywhere near where colorectal cancer screening is at 40% to 50%, that would potentially represent a four to fivefold increase from where we are today. So I'm just trying to frame that. Am I on the right track in terms of just... Lishan Aklog: Yes, 100%, Mark. I mean actually, I think your numbers may be a little bit low on the colorectal side. I've heard numbers that even at the point of introduction of colorectal stool DNA testing that, that number was at 50% or maybe even a bit higher, and we're higher than that based on the volume of testing patients who undergo colorectal screening. So I would say even it's probably higher than that, that we're at 10% and colorectal is 60%, 70% or more. And even that 10% number, that there is a strong consensus there. But honestly, our personal opinion is that number is actually on the high side. If you look at the target population and you look at the number of endoscopies, upper endoscopies performed a year, just all of them. You just look at administrative data and you just look at all the numbers there. it doesn't add up actually that it's even 10% because we know there are 30 million people who are recommended for -- by the most strict guidelines by the ACG guidelines, 10% of that would be 3 million. There are only about 1 million-plus upper endoscopies. And the vast majority of those are not screening endoscopies. The vast majority of those are people undergoing upper endoscopy for evaluation of their refractory heartburn or other -- esophagitis or other conditions. So we'll go with that 10%. It's perfectly fine, but we think that real number is actually much, much lower than that. And so you're right, the increasing that 10%, let's just say, to 30% in the coming years would have a massive impact. I didn't -- I forgot to quote Dr. Panzarella, but he pointed out and said he liked sports metaphors and pointed out that the number of people who die from colorectal cancer could fill a football stadium, but the number who die from esophageal cancer would fit a basketball arena, and that's a lot of patients. And so going from 10% to 30% would represent thousands of lives saved a year. And so I don't -- I think, again, the experts nail that with regard to the huge benefit-to-risk ratio that we have the opportunity to perform. And I think as you're hinting at here, even higher opportunity than even in colorectal cancer because -- for a couple of reasons. One, because there was already significant penetration of endoscopy -- colonoscopy there. And frankly, another reason is that colorectal cancer picked up early and Stage 1 actually is curable while Stage 1 esophageal cancer, the vast majority of time is not curable. Mark Massaro: Yes, that makes sense. Another thing that stuck out to me was Dr. Jamie Glover talking about how it's really just general health anxiety, which I thought was interesting. And the reasons for noncompliance to endoscopy procedure burden, some of these folks, especially people that are obese or smoking, there's a laundry list of things for them to do. The PCP doesn't have enough time to go through the laundry list. The patient feels stressed out that they can't manage all of the things on the laundry list. So I guess one of my questions is how do you try to get -- and this might be a marketing question, but how do you try to promote getting screened for esophageal cancer or Barrett's when there -- the population that you guys are testing has multiple risk factors, right? And it also occurred to me that some of these patients, of course, you've been talking about this for years, have no symptoms of GERD. -- right? And so how do you position this test such that the PCP can prioritize this test because it's almost like, in some ways, this might be competing with colorectal cancer screening or lung cancer screening or other types of tests on the laundry list that need to be done in a given patient encounter. Lishan Aklog: Okay. So a lot to unpack there, but great question. So first of all, let's just -- let's put one thing to rest, which is the asymptomatic patients because as you know, that came up, right? And you're right. And the panelists acknowledged that there are a large number of patients who either have well-controlled symptoms on PPI medications or just have no symptoms at all. And the questions asked by the moderator did attempt to tease that out, if you remember, like, well, your guidelines right now only refer to symptomatic patients, but we're going to miss half these patients. And I thought the panelists did an excellent job of saying, yes, but you got to start somewhere. The symptomatic patients are going to be easier to get them to proceed. we'd love. And certainly, at some point in the future, we've talked about this on multiple calls that we do expect that there'll be an expanded clinical opportunity in patients who are asymptomatic. As you know, Mark, there's an $8 million grant funding an NIH study right now that's looking at that, and the pilot data from that looks pretty promising that patients who are asymptomatic have almost the same prevalence of precancer and EsoGuard works equally as well in those. So that's for the future. So right now, the focus is on those who have symptoms. I think as it relates to kind of the dynamics within the primary care office, let me just talk about that a little bit. I think from a marketing and a commercial point of view, we don't have any concerns about that. We've been marketing this to primary care physicians at a low -- kind of at a low level for many years now. And it's just not an obstacle. When we walk in and say, our team walks in and said, reminds them of the relationship between cancer -- between heartburn and cancer and the guidelines and the availability of a non-endoscopic test, getting them to move from that to, okay, let's look at our EHR and let's find the patients who fulfill this and let's get them tested. It's not a hurdle to get them to agree to start doing that. But there are some details there that are important that actually came up, particularly, as you mentioned, with Dr. Glover. The issue is not so much prioritizing it because primary care physicians are actually quite good at running through the checklist and like, okay, when is your next mammography? Should we do stool DNA testing? Do you need a colonoscopy? Should you get a PSA? -- that's kind of their bread and butter of what they do. And so adding this to that list is not -- in terms of the conversations and discussion is not hard. But what she clearly pointed out is that if the -- if what they're asking their patients to do is an invasive upper endoscopy that she gets nowhere with that. She has no -- the patients are just reluctant to get that. And then as I mentioned, there were all the other factors that interfere with their ability to implement that. So the notion of offering patients pre-cancer testing is something that is easily incorporated in the practice, but the utility comes from EsoGuard being non-endoscopic and straightforward and something that patients are willing to have. I think Dr. Panzarella might have mentioned this if he hasn't -- this is true, that the patients that he refers for EsoGuard and EsoCheck, the cell collection part, they universally agree to do it. There's just -- there's a high compliance with getting people to do that. I think as you know, that's actually not always the case with regard to other even noninvasive tests like stool DNA testing. The other part, which I'm glad you brought this up that came up because the MolDX, the MACs and Dr. Bien-Willner were very interested in the implementation side of things. And it was critical to -- again, the 2 of them provided that highlight that it's been easy for them to incorporate this into their practice. Dr. Glover pointed out that she is looking forward at some point to having her and her team perhaps offer the test themselves, but the fact that Lucid clinical personnel who are highly trained make themselves available to do the test on whatever interval of time, she can collect sufficient patients to do that, greatly facilitates the ability to do that. Dr. Panzarella concurred, right? He's a GI practice. He's done it. He's actually did mention, but he's done it himself. He himself had the test. So he can do them in between. But one of the things that is strong -- that facilitates that is that the Lucid clinical team comes once a month to his practice to test people. And actually, this is in Florida, where some of you who followed us know we have a mobile van and the mobile van pulls up to his practice and tests patients once a month. So the logistics, the implementation part, which was an area of questioning here. It's important for the MAC directors to hear that, it was a very critical part of the clinical utility and why we have, frankly, no concerns. Sorry, one other thing that they mentioned is a hurdle. I believe Dr. Smith did, and I forget one of the other physicians did as well, is like one of the reasons why they're not doing this more is they don't have coverage. Dr. Smith has done a bunch of -- has participated in a bunch of testing by overseeing firefighter events here in New York City, but the obstacles for him to bring it into his large -- into a large medical center where he's the associate system chief has been one of those is coverage. And he pointed out that they need to have coverage in order for them to implement it broadly within their practice, and that's why his group, the AFS has been a very strong forceful voice in that. So once we have coverage, I really, really sincerely don't see any meaningful obstacles to us getting primary care physicians to use this and to drive patients into this paradigm of testing. Mark Massaro: Okay. Great. And maybe one last 2-parter for me, and then I'll hop off. There was a lot of discussion, as you pointed out, about these endoscopy deserts, patients having to drive like 1.5 hours, 2 hours to get a scope and EGD. Do you have a sense for the location of these -- because presumably, you could set up a shop to help provide an alternative to people having to drive a couple of hours for an endoscopy. And then my second part question, I think it was Dr. Smith talked about how EsoGuard could be used as a point-of-care test in primary care physicians in offices. I thought this was really interesting. And so really, my question is, where do you see the bigger opportunity? Is it primary care? Is it GI offices? Is it both? Lishan Aklog: Yes. Okay. Let's -- maybe again just because that's how my brain works. Let's go backwards. So it's all of the above, right? You saw that on this call. You saw a primary care physician has incorporated in her practice. You saw a busy private practice gastroenterologist who's incorporated in his practice, and you saw Dr. Dunst, who's leading a team to incorporate it within a large health system with 200 primary care physicians. And you saw another physician leader who is frustrated that he can't bring it into his practice because of lack of coverage across one of the largest systems in the Northeast in Mount Sinai. So it's all of the above, but the patients are not seeing gastroenterologists, right? So the focus is on primary care physicians, but that includes the kind of the Dr. Glover model of solo or small practices where a lot of patients get their care, but it also includes the Dr. Dunst and Dr. Smith model, which includes health systems that have primary care physicians network that you can move within and getting them to be done there is relevant. That's what Dr. Smith mentioned with regard to point-of-care testing is happening today. That's not -- there's nothing new about that. That's -- he sees the value in that, in that we can -- we don't need to send patients to a tertiary center or to a specialist to have the EsoGuard test done. It can be done as a point-of-care test within a physician's office, including a primary care physician's office. If the primary care physician wants to have their own personnel trained to do the cell collection, great. Our team will go in and train them to do that. If the primary care doctor wants our team to offer that, same thing. Great. We'll offer that as a service using a mobile van or using our satellite model where our nurses come in on regular days to do testing. If they want to do a hybrid, that's fine, too. If they want to transition from us to doing more of theirs, which some of the practices are talking about, all of that is within the realm of possibility. And so that gets to the heart of, I think, your first question, which is around the rural -- the endoscopy deserts mostly in the rural areas. Yes. So there are large areas of the country where there are -- we know this about all specialists. There's nothing unique about that for endoscopy. If you're in much of America, once you get into experts and beyond, where there's still a large population, finding a specialist is often difficult. Often it requires a significant drive and the ability to have testing within a primary care office or, let's say, an internal medicine practice there as opposed to having to have people drive to go see a specialist is extremely important to provide broad patient access. And we have real-world examples of this. I'll give you one in particular. When we started in Arizona, we started with some physical Lucid test centers. And there were several of them and people would come, get referred to our physical centers to get tested by our nurses. And that worked fine. And the catchment area there was maybe 45 minutes, people would be willing to drive, but that was probably about it. And a lot of people within 45 minutes of a metropolitan Phoenix, but that still doesn't cover a lot of folks. Frankly, the way this whole idea of having patients go -- having our nurses go to the physician offices and offer the cell collection there arose from an unmet need where there are patients throughout rural Arizona, Globe and like I think Lake Havasu and other places where physicians are like, yes, I'd love to do this, but my patients are not going to drive to Phoenix. So our team said, well, okay, we'll come to you. And so now they have scheduled testing days at these rural or somewhat more remote practices outside of metropolitan areas, and it works great. The nurses show up. We try to get the physicians to fill up a day. Our nurses can do up to 30 of these in a day, and that would be sort of an ideal day. And it's very economical for us, and it gives us a much broader geographic range in order for us to be able to provide wide access. And so all of that, that whole model is well worked out and will be critical once we get broader coverage to put our foot on the gas and expand the use as discussed. So hopefully, that answers all -- that was a multipart question, but hopefully, that covers that. Mark Massaro: It does. Thanks so much, congrats guys. Operator: And your next question comes from the line of Kyle Mikson with Canaccord. Kyle Mikson: Congrats on the positive CAC meeting tone was great. Maybe just taking a step back and thinking about the -- any kind of prior comments that were made just thinking about what's kind of changed here because that's sort of the key going forward. Lishan, could you just speak to how the group's comments? I know a lot were KOLs, obviously, different from prior MAC feedback and responses to the comments after the original LCD, how that -- why you're more confident now? Lishan Aklog: Yes, yes. Well, it's because there were different meetings. So I think what you -- I assume what you're referring to, Kyle, is the first CAC meeting that occurred in 2021, in the fall of 2021. That meeting occurred after we had submitted our -- both our pricing and coverage dossier and after we had actually already received pricing from MolDX -- but before we had any data, all we had at that point was a single paper, the original paper in Science Translational Medicine, and we had expressed our intent to go out and expand our clinical evidence. So the purpose of that meeting was to say, okay, we have an area of testing here that looks extremely promising. It's an area we're probably going to have to -- we're going to have to deal with at some point. And the contractors were basically saying the MolDX program was basically saying, should we even get into this space at all? Or should we just wait until somebody has sufficient data and then they can come back to us at all? Should we bother drafting an LCD to help guide those who are looking to advance tests in this situation? So that meeting is a little bit different. It was a little less organized to be blunt. Dr. Bien-Willner did not moderate that one. So it's a little bit -- there was some conflation between surveillance and -- sorry, between risk stratification and screening. There was at least one common member, Dr. Meltzer was on that call, one of Dr. Iyer's colleagues from Mayo Clinic was there, but it was similar. There were only 4 panelists at that. But that was actually a very positive meeting because even though some of the logistics were a little bit difficult, the widespread consensus from that meeting was, yes, we believe in non-endoscopic testing as an important biomarker testing as an important advance. And yes, you guys should take the time to proceed along this way and not simply wait for somebody to come and show up with a full clinical evidence package. So with nothing -- that CAC meeting, we believe, is what triggered their decision as a group of MACs to actually proceed with the LCD process at all and to actually write a draft LCD that came out 5 months later. And that one met a few problems and required some comments and those problems were all fixed and that ended up in a final LCD. So many aspects of the conversation from this meeting and that meeting were very similar in the -- in addressing the unmet need, the failure of endoscopy, the -- all of the underlying information around the kind of the brutal nature of esophageal cancer and the paradigm that these gastroenterologists have established and the societies have established, all of that was quite common. But the purpose of that meeting is should we get started? -- in this at all. And the answer from that meeting was yes. And this meeting was -- they were obviously already done that. This meeting is like, should we get this thing wrapped up honestly, that's how I would view it. And so it went beyond simply is there a need for this? They already established that by publishing the LCD and establishing the coverage criteria. It was included, is there clinical validity and clinical utility actually in EsoGuard. And so that's how I would correlate those 2 meetings. Great question. Kyle Mikson: Okay. That was great. I think what the -- I feel like the education and usage was -- has matured basically in those 5 years, 4 years or so. So that's a good commentary. Now just on the -- clearly, during the meeting, the EsoGuard was spoken as being like an effective rule-out test given the high NPV. Dr. Panzarella, Chak, Shaheen, Glover, they all kind of spoke about this, obviously, it was one of the questions. The current LCD, though, does mention a test should be highly specific. And given EsoGuard's specificity has never been above, let's call it, like 82% or so, do you think that's something that will have to improve over time? And could that -- being a rule-out test rather than a fully rule-in rule out, would that limit the market opportunity or the ability to widen the funnel for TIs or endoscpist? Lishan Aklog: Okay. Great. So let me -- again, just in my practice here, the answer to the last question is no, it doesn't limit it. And that was, frankly, the point of a multipart question about making the distinction between rule-in and rule out, right? So the question -- so the whole point of that conversation, and you saw how Dr. Bien-Willner kind of navigated that conversation around -- and I was happy that he did this, making a distinction between rule in and rule out and focusing on NPV and PPV although specificity, obviously is mentioned, but specificity is what drives your PPV. And the way these rule-in tests are designed are to -- sorry, rule-out tests are designed are to rule out patients have a maximal sensitivity and a maximum negative predictive value. Dr. Shaheen mentioned, look, it's got to be 98% or higher for this to work. You can't have a false negative rate that's much higher than 1% or 2%. And then there was plenty of discussion around what is a sufficient specificity and resulting positive predictive value for a test like this that's designed and operates and its utility is based on its ability to rule out tests and that the 30-ish -- right around 30% positive predictive value is really actually very good in that for a variety of -- by a variety of metrics, one of them being that as was discussed, it increases the yield of the standard of care endoscopy by 2.5 to threefold. The positive predictive value of an endoscopy, the gold standard, as they mentioned, is 10%, right? Because that's what the prevalence of the population. So if you just do endoscopies on patients like they had recommended for the last couple of decades, you're going to have a 10% positive predictive value. The specificity of endoscopy is not good. this test increases that by 2.5 to threefold to 30%. And as you balance NPV versus PPV, that's very good. The PPV also is quite strong when you look at the positive predictive value of other tests that are focused on identifying cancer, whether it be lung cancer testing or mammography, even colorectal cancer testing. This is really a very good PPV. So that goes to the heart of the question specifically. As it relates to the market opportunity, no, this test is -- the whole paradigm here is to hand patients to find these patients that we're not finding and hand them over basically pass the baton on to the existing paradigm of surveillance endoscopy of nondysplastic early-stage precancer and ablation and intervention for late-stage precancer to prevent cancer. That's the paradigm. And this test as a rollout test with a PPV that increases the yield of the endoscopy serves that purpose today. There's no gap in that market opportunity. The market opportunity that we've quoted is based on the 30 million patients who are indicated for testing and every single one of them is indicated for testing would qualify for testing under EsoGuard under this paradigm. Now look, in the future, you're right. In the future, there is always opportunities to improve the test. When you design a test like this, your first shot is what was done with this test by Dr. Markowitz and Dr. Chak and their team at Case Western, which is to get the maximal NPV and a very good PPV. But over time, you -- and we already have -- we're already working on this. You look for ways to say, "Hey, are there ways for us to improve the specificity and increase the PPV even further. And there is a way to do that. And there's a history of this. This is exactly what Cologuard did from Cologuard to Cologuard Plus don't know, 8 to 10 years between those 2 products, they came up with improvements. The improvements in sensitivity and negative predictive value, frankly, are not that much. A little bit -- a few points on advanced adenomas and cancers. The big improvement was more on specificity and positive predictive value to -- from a more of a health care economics point of view to really cut down the number of endoscopies and so forth, the yield of endoscopy even further. So that's true. The era long term, I think Dr. Shaheen may have touched on this, the ultimate holy grail goal sure would ultimately be to have a completely non-endoscopic approach to rule in and rule out. And we may reach that point as these biomarkers improve where you can do the test and feel comfortable that you roll people in and you rule people out and the patients who are being rolled in are going to have -- are going to be heading into a definitive treatment. That certainly is the ultimate goal. But the current breakdown NPV and PPV is excellent and serves the purposes of the current market opportunity extremely well. Operator: [Operator Instructions] Our next question comes from the line of Mike Matson with Needham. Michael Matson: Congrats. It was clearly a very positive meeting. So there was an interesting question that came up on the call from someone at CMS or I guess maybe it was one of the MACs, I'm not sure, but they said something about -- they were asking something about not allowing EGD in patients that have a negative EsoGuard result. Did I hear that correctly? Lishan Aklog: Yes. But it was interesting. Again, it gives you guys a bit of a -- I thought it was interesting. It doesn't really have any impact on us, frankly, but it does give you a little impact -- a little inside view, inside baseball view on how payers think about this stuff, right? So the question was really, well, if you guys are so confident that a negative, which you should be, that a negative EsoGuard test rules out disease, then we shouldn't pay for the endoscopy of a test -- if a patient is negative. It's effectively what the director, I believe, from CGS was asking. And that's a perfectly reasonable question. I mean we're fine with that. We have -- we're highly confident. It doesn't affect us at all. We've shown that a negative EsoGuard test results in 99% concordance for physician practice, they don't refer those patients to endoscopy. And so they're just saying, we shouldn't have to pay for that, right? But there was a little bit of pushback, but -- and the pushback was reasonable, not because the gastroenterologist had any concern about the false negative, the negative predictive value. They were just concerned that as bureaucracy go, if there was sort of some kind of blanket exception to anyone who's undergone an EsoGuard test can sort of never get an endoscopy. They were worried that you would inadvertently pull in other patients who clearly need endoscopy for other reasons, not for screening, but for other reasons, for evaluation of refractory GERD, for esophagitis, for EE, -- there's just a whole sorts of other things. And they were just nervous that such a criteria would be -- would have inadvertent consequences. And frankly, that's something that the payers will work out with the GI societies as it relates to that. But it has no impact on -- frankly, on us or on EsoGuard. Michael Matson: Okay. Got it. And then just wondering, does MolDx consider economics at all? In other words, I guess, what if they're like, well, this is a good test and it all makes sense to cover it, but we're worried that the $1,938, dollars is just too much or it's going to end up costing the system too much money. I mean it's hard to make that argument, I guess, when you consider the fact that they'll be preventing a lot of endoscopies potentially in some of these patients, which are clearly more than that. But just wondering if they weigh that stuff at all or if it's really... Lishan Aklog: So the straight answer to your question is no. So Medicare is not allowed to consider economic factors in making coverage determinations. They're only allowed to base their coverage determinations on what's "reasonable and necessary". That's the criteria. So they are not. But a couple of -- it's a great question because it does a couple of additional points there. One is that they're the ones who came up with the 1938 price. Remember, that's Medicare's price. And it's the same group. It's the same MolDX group that recommended that price. So at the beginning, 5 years ago, when we started this process, we submitted in addition to a coverage dossier, we submitted a pricing dossier, and they did a full analysis of what would be a justifiable cost based on the -- on a variety of factors and came up with that price. So the health care economic impact is not a factor in their decision with regard to coverage. However, it is with commercial payers. And so we have a very robust talk track and arguments that we can make on the health care value proposition for EsoGuard testing. And it's good. So it's not -- we have modeling that demonstrates that EsoGuard testing even though endoscopies are not widely used and certainly a cynical payer can -- there's this very, very crass and cynical argument that death is sort of cheap, right? But it really isn't because patients who are diagnosed with esophageal cancer, 80% of them die. But before they die, they spend a lot of money, which is now pushing a couple of million dollars before they die to the health care system. So it's actually quite expensive. So our modeling is quite straightforward. It shows that with the typical parameters and parameters that other payers can adjust on their own based on their own patient populations that EsoGuard testing is a net economic positive. One of the things that we've learned in our -- just -- I'll use this as an opportunity to highlight something, we have extensive conversations now with the commercial payers. And in their case, as I said, the issues of economics come up. And one of the things that's been very gratifying in our recent conversations is that they don't do what you sort of said, to kind of take the cynical approach, which is -- we're not paying for these endoscopies anyway. So we're not going to kind of give you credit for avoiding endoscopies in 70% to 80% of these people because we're not paying for them anyway because the patients are not getting them. That actually hasn't been the conversation that we actually have been quite pleasantly surprised now that we're kind of in the meat of these policy discussions now, and that's only been true for the last few quarters because now we have the full data package to engage in these conversations that to the contrary, we've gotten strong feedback that, yes, there's an economic value in the fact that you're avoiding endoscopies that should be performed in these patients based on guidelines. So that's very encouraging as it relates to our ongoing conversations. So that's a bit of a long-winded answer. I thought I'd throw some of that in there. But the straight answer to your question is Medicare does not take economics into consideration. Michael Matson: Okay. Got it. And then just finally, I don't know if you're able to answer this, but because of the 1-year look-back window, assuming you get the MolDX coverage, how many Medicare tests or claims do you have that would fall within that period? I mean, I guess you don't know it depends on when this happens. But then also, let's just put aside the number, how does the mechanics of it work if you had 1,000 tests that were in the window and you submitted all of them? I mean would you kind of get it all at once? Or would it be spread out, do you think multi... Lishan Aklog: Yes, yes. So let me answer the last part. The mechanics are straightforward. Once you have final -- once so we can submit the 1-year look back -- and this is from the horse's mouth because I inquired on this in my conversations with the leadership directly. So the 1-year look back is dated from the date of the final. You start submitting after you get the final, there's this last step where CMS Central is a little bureaucratic step where you end up in the sort of list of articles, so where our code is actually listed after the final LCD. And that's when you start submitting. Once you submit, the mechanics is straightforward, you get paid. simple as that. Whatever the 1-year backlog is, you get paid. Medicare is actually a pretty good payer in terms of their -- they don't have long lead times. So when you submit, you typically get paid rather quickly. The number of patients, a little bit hard to say. I'll see if Dennis is willing to maybe flesh that out a little bit because we have this program now where we are pushing our team to target Medicare patients. So over the coming months, the kind of the success of that and whether we're at 10% versus 15% or 20% or pushing higher than that will determine the number of claims outstanding claims that, that 1-year backlog look back will have. And so you can kind of do the math. Look at the percentage -- look at our total volume, look at the percentage of the volume that is Medicare, you can project what that would be in the coming months. And then Medicare will pay at the Medicare rate and pay promptly at said Medicare rate once we're -- once this whole thing is final. Dennis, I don't know if you'd like to flesh that out a little bit more. Dennis McGrath: Yes, I can give you some perspective. If it were the 2024 year would have been somewhere between $6 million and $8 million. In the first half of this year, it's probably about $2 million. And as Lishan said, we're going to start focusing on Medicare patients. So if it's in the 2025 window that all of those claims will get paid, it will be higher than $2 million. So that's probably as general as we can probably make it. Operator: And your next question comes from the line of Jeremy Pearlman with Maxim Group. Jeremy Pearlman: Just one quick question. So it seems like the meeting went really well. But just to play devil's advocate, let's just say I've heard crazier stories, you don't get the positive draft letter. -- is there an appeal process? How -- what would be your steps unfortunately, that came about? Lishan Aklog: Yes. Look, I mean, I think it's fine to be -- to play devil's advocate. Nothing is certain when you are -- when things are out of your hands. I'm not sure it's worth kind of speculating what that is. Yes, there are lots of that to appeal to make that case. It's not really worth speculating on what that would be. We're really confident. It's just it's a matter of when, not if. I'll just point out. I mean let me just point out one other -- there's lots of reasons. Hopefully, I've articulated why we're confident of that. I can't predict the timing precisely because that relates to internal logistical aspects here. I would say that the fact that the director of the program moderated this meeting and everyone could sort of see his demeanor through the meeting and in his closing remarks says a lot about the fact where this is on the kind of the priority list. I think some of the other analysts who are heavily focused on diagnostics will point out that, that is not typically the case that typically the running of these meetings is delegated to other medical directors. So look, I mean, this is just our opinion. We not -- we have no inside information on this, but it would certainly indicate that there's a priority here and that, that can move -- that it will move expeditiously. And the outcome it's pretty hard to find another example. Again, I'm quoting some of your colleagues here of a test that's recommended in guidelines that has in a meeting of nearly a dozen medical experts across specialties, including the ones who wrote those guidelines unanimously offering clinical support for the public record, which was the design of the meeting. The purpose was to get their opinion on the public record. It seems pretty hard to fathom that we won't end up where we believe we're going to end up. Operator: And your next question comes from the line of Ed Woo with Ascendiant Capital. Edward Woo: Congratulations on the meeting as well. I have another quick question. So there won't be any consideration in terms of your current coverage reimbursement rate from Medicare that's already been disclosed. There won't be any changes or discussion into that? Lishan Aklog: No. This is entirely -- coverage and payment are completely different pathways. The payment rate has been established based on -- we went through the -- just to get in the weeds, we went through the CLFS process many years ago that culminated in MolDX recommendation of this price of 1938. That price is locked in. And this process is completely -- the coverage process is completely separate from that. Great question, but thanks for a chance to clarify that. Edward Woo: Thank you very much and I wish you guys good luck. Operator: I'm showing no further questions at this time. I would like to turn it back to Dr. Lishan Aklog for closing remarks. Lishan Aklog: Well, great. Thank you, everybody, for taking the time. I guess we're an hour and 20 minutes into this. So there's clearly a lot to talk about. As always, just great questions to get the weeds on some of this. But hopefully, it provides you with sort of a foundation as to why we believe this was an extremely positive meeting and why we're incredibly optimistic about the near-term prospects here and what that means for EsoGuard for our ability to offer this and expand access to it and for Lucid as a company and for its commercial potential moving forward. So hopefully, you got a sense of that and understand the underlying reasons why that underpin that confidence. And let's go. We're looking forward to moving forward. So I appreciate you all taking the time on this one-off call. And for those of you who have been patient enough to stay to the end, hopefully, it was informative and worthwhile and look forward to kind of keeping you abreast of this through our news releases and other channels that we've talked about. So thanks again. I really appreciate the time. Feel free to reach out to -- just sorry, one more logistical thing. The meeting will have a recording. So anyone who didn't listen to the meeting, we're not sure. typically, it gets posted within a couple of weeks of the meeting. We can -- if you're looking for that link, you can reach out to Matt Riley, can provide you with that link when it becomes available. We do have an unofficial transcript for anyone who might want to read through that. I would encourage you to contact Matt as well. And we're very grateful to our analysts who've already written some very useful summaries on the -- really on the substance of the meeting, which is hopefully helpful as well. So thanks again, everybody, and have a great day. Operator: Thank you. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good day and thank you for standing by. Welcome to Idorsia's TRYVIO Investor Q&A Webcast and Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Idorsia's Chief Executive Officer, Srishti Gupta. Please go ahead. Srishti Gupta: Thank you, Nadia. Good afternoon and good morning, everyone, and welcome to our webcast to discuss TRYVIO and its role in the treatment landscape for difficult-to-control hypertension. After decades of limited progress in hypertension research, we are now entering an exciting new era, led by TRYVIO, the first innovation in hypertension in over 2 decades. It is the first and only hypertension therapy to target the endothelin pathway. Ahead of the European Society of Cardiology, ESC, meeting, we published an on-demand investor webcast, sharing our perspectives on TRYVIO's ability to address a significant unmet need and difficult-to-control hypertension. Since then, we've engaged with leading hypertension experts at both ESC and the American Heart Association's Hypertension Scientific session. We've also met with many of you in the investor community as the back-to-school season kicks off in the U.S. Today, we'll address the key questions we've been hearing in those discussions and then open the lines to take your questions on TRYVIO. Joining me are Martine Clozel, our Chief Scientific Officer and a recognized leader in the endothelin system; Alessandro Maresta, Global Medical Affairs Therapeutic Area Head for cardiovascular, renal and metabolism; Michael Moye, President of Idorsia's U.S. Operations; and Julien Gander, our Chief Legal and Corporate Development Officer. Next slide, please. Before we begin the Q&A, please note that our remarks today include forward-looking statements informed by our research, physician feedback, advisory boards and market insights. As always, we encourage you to consider both risks and opportunities when evaluating Idorsia. Next slide, please. TRYVIO in the U.S. and JERAYGO in Europe represents the first systemic hypertension treatment to target a new pathway in more than 30 years. This pathway is the endothelin pathway. That brings us to the key question investors are asking. Why is addressing the endothelin pathway such a meaningful innovation and differentiator in hypertension. Martine, can you share your perspective? Martine Clozel: Thank you, Srishti. Endothelin upregulation is a central driver of hypertension. It plays a role at very early stages of hypertension during the progression of hypertension and at the stage of end organ damage in hypertension. But endothelin upregulation has remained unaddressed until TRYVIO. The fact that endothelin regulation was left unimposed up to TRYVIO explains why so many hypertensive patients, despite their treatment or combination of sometimes many antihypertensive drugs, could not be controlled, and their blood pressure remained higher than the target blood pressure threshold. This was particular true for certain groups of patients whose hypertension is not obviously difficult to control: African-American, elderly, postmenopausal women, obese patients, and those patients with CKD type 2 diabetes, heart failure or sleep apnea, all of which are actually associated with endothelin upregulation. Endothelin probably also explains why the patients with difficult to control hypertension are at higher risk of death, strokes and renal failure, almost double the risk compared to well-known -- to well-controlled patients. Indeed, endothelin is a multifunctional peptide, via both its receptor, ETA and ETB, it promotes vasoconstriction, vascular and cardiac hypertrophy, fibrosis, inflammation, catecholamine release, aldosterone release and is increased by salts, thereby mediating high blood pressure, endothelial dysfunction and organ damage. Aprocitentan blocks the actions of endothelin via both its receptors and therefore, is a multifaceted drug. In healthy volunteers with no underlying disease, even doses 50x higher than the therapeutic dose up to 600 milligrams, TRYVIO had no effect on blood pressure. TRYVIO is only active on an upregulated endothelin system like in hypertension. We proved this in Phase II and in Phase III. The lack of interference with physiology explains its very good safety and tolerability in pathology. Srishti Gupta: Thank you, Martine. That's very clear. Endothelin plays a key role, it's not been tackled until now. And by targeting the endothelin system, TRYVIO is bringing a completely novel and different approach to patients with hypertension. Alessandro, let me turn to the PRECISION study. This was a registration trial with the design agreed upon with the FDA. Can you walk us through the key highlights from that study and what they mean for TRYVIO? Unknown Executive: Of course, Srishti. First of all, I would like to mention that the compelling efficacy and safety of TRYVIO is well established in labeling and further reinforced by its recent inclusion in the ACC AHA hypertension guidelines. So TRYVIO achieved a meaningful reduction in blood pressure within 2 weeks. This is very important in patients with resistant hypertension that are at risk of cardiovascular events, and the blood pressure was sustained over 48 weeks with a decrease of 19 millimeters of mercury by the end of the study. Talking about resistant hypertension, the design of the Phase III PRECISION study was especially rigorous with an 8-week running period, a standardized triple fixed dose background therapy with confirmation of compliance and inclusion of only of patients with true resistant hypertension. This trial enrolled high-risk subgroups where classical anti-hypertensive are least effective, including Black patients, all the adults, postmenopausal women, obese patients and those with chronic kidney disease, diabetes, heart failure or sleep apnea, all conditions, as you heard from Martine, associated with endothelin overactivity. Looking at safety. TRYVIO was well tolerated with only 2 treatment-related side effects, mild early and transient edema and a modest expected decrease in hemoglobin. No direct drug interaction observed a significant advantage for patients on multiple therapies like antihypertensive patients. Importantly, no signal we've seen for hyperkalemia, hypotension, headaches nor heart rate increase. Finally, the label that the FDA approved is based on the totality of the data for adults whose blood pressure remain inadequately controlled on other antihypertensive, a broader population compared to enrolled -- in the one enrolled in PRECISION. In addition, the label includes the relevance of lowering blood pressure for reducing the fatal and nonfatal risk of cardiovascular events, especially strokes and myocardial infarction. Srishti Gupta: Alessandro, people can follow the on-demand webcast to get more details on the data for TRYVIO. But as a cardiologist, can you perhaps give us some context on the current landscape for not well-controlled hypertension? Alessandro Maresta: Sure, Srishti. So today, paradigm in hypertension relies on a different classes of antihypertensive, of those addressing the renin angiotensin aldosterone system, calcium channel blockers and diuretics, which by the way, they stimulate the RAAS system. But if blood pressure remains uncontrolled, a mineralocorticoid receptor antagonist such as spironolactone can be added, but many patients do not tolerate it, mainly due to hyperkalemia, worsening of renal function, gynecomastia and in addition, we observed a high discontinuation rate. So despite all the classes of antihypertensive drugs, millions of patients remain uncontrolled and TRYVIO offer a solution with a completely new mode of action. Srishti Gupta: Thank you, Alessandro. That certainly highlights the significant unmet need that a safe and effective drugs like TRYVIO can address in the current landscape. What about compounds in development? Alessandro Maresta: Yes, Srishti, there are several products in development, but most of them are still targeting the RAAS system, including the aldosterone synthase inhibitors. These drugs are still in development, and we don't know yet what their label will look like. But what we know is that the studies were not as robust as PRECISION in enrolling true resistant hypertension patients. And there are safety concerns such as hyperkalemia, hyponatremia and decrease in renal function, particularly if combined with other drugs that are targeting the RAAS system. And this is where TRYVIO stands apart. It addressed the endothelin pathway, a fundamental driver of disease, that other treatments don't reach with a proven efficacy and a good safety and tolerability profile. Srishti Gupta: So TRYVIO is differentiated to the current and potential emerging treatments. Which patient populations do you see TRYVIO being used for? Alessandro Maresta: So if we take into consideration the new mode of action, the efficacy and safety profile and the FDA granted label, TRYVIO is the ideal choice for many patient groups. I can list for you some: patients with risk factors for hypertension, which will be difficult to treat because they are endothelin-dependent; black, elderly obese patient, patients with sleep apnea, type 2 diabetes, early heart failure and chronic kidney disease. Then we have patients that are not adequately controlled despite 2 lines of hypertensive therapies and patients who cannot tolerate certain classes of drugs because of their side effects. There are also the patients that we have studied so they're truly resistant hypertensive patients that are not controlled despite treatment with 3 or more therapies at their maximum tolerated dose. And then I would like to tease out the patients with chronic kidney disease stage III and IV and resistant hypertension because for these patients that have currently no alternatives. In all these patients, TRYVIO represented an obvious choice with very little competition. Srishti Gupta: Thank you, Alessandro. So there's a large addressable population of patients with hypertension that is not adequately controlled. Michael, given that the U.S. market is essential to realizing TRYVIO's full potential, can you walk us through the key drivers that support our $5 billion peak sales estimates? Michael Moye: Yes. Thanks, Srishti. Our forecasts are grounded in extensive market research and analytics to understand both the size of the opportunity and how physicians intend to use TRYVIO. Next slide, please. So today, of the 40 million treated patients in the U.S., there are roughly 26 million patients treated with 2 or more therapies. And 30% to 50% of those are inadequately controlled despite receiving treatment and therefore, eligible for TRYVIO according to the FDA label with the only contraindication being pregnancy and sensitivity to aprocitentan. This population is expected to grow, given the aging demographics, higher rates of comorbidities linked to endothelin function and increasing recognition of the severe consequences of uncontrolled hypertension. Importantly, these consequences are already reflected in the FDA indication that removes any need for a separate outcome study. We estimate that around 7 million patients as we move to the middle of the slide -- the 7 million patients are easily identifiable and are well defined a good area to focus on first coming into the market. Patients with endothelin-driven comorbidities often face restrictions with other therapies. Chronic kidney disease, as you've heard, is a prime example -- it's a prime example. Patients with hypertension and CKD are often treated with 2 or more agents yet few effective options exist. TRYVIO is approved for patients with an eGFR as low as 15 and has demonstrated excellent safety and tolerability with no hyperkalemia and no hypotension. Other identifiable groups include patients who can't tolerate certain classes of drugs and those with true resistant hypertension. So we now have real-world efficacy and safety outcoming the mirror of what we saw in PRECISION. These drive adoption and penetration assumptions. So as you can see, they range here from 12% to 22%. So our insights are informed by over 1,000 qualitative and quantitative interactions with multi-specialty physicians, including top hypertension centers. Physicians consistently recognized TRYVIO's efficacy, safety and its unique mechanism of action when they're addressing -- that address what additional RAAS blockade cannot. In comparison with emerging therapies, TRYVIO is viewed favorably by these physicians, particularly for patients with CKD and based on the impact on both blood pressure and uACR measures. And finally, the payers, which we know are all very important, have responded very positively, highlighting the robust primary endpoint of more than 15-millimeter drop from baseline, the statistical strength and the sustained efficacy through the duration of the PRECISION study as very compelling reasons for coverage. We have set a WACC at $775 a month and we're focused on a very favorable gross to net as a first-in-class differentiated therapy. TRYVIO is currently being reimbursed with reasonable utilization management criteria, which supports our commercial model. Srishti? Srishti Gupta: Thank you, Michael. Beyond the U.S., we also see an additional upside from geographic expansion. Aprocitentan has already improved at JERAYGO in the EU and the U.K., and there is significant opportunity in Japan and China. We also see that we can get further value through IP extension strategies, for example, with fixed-dose combinations with the SGLT2 inhibitors and indication expansion such as exploring renal protective benefits in CKD. Of course, realizing the full potential of TRYVIO will depend on securing the right partner, which is why we're actively engaged in these discussions at this time. Julien, could you share a little bit more about how we're thinking about partnering discussions? Julien Gander: Yes, happy to. Look, we've been very consistent in saying that we lead where we demonstrate scientific or commercial advantage and strategically partner where external expertise, scale or speed adds value. So specifically on TRYVIO, partnering TRYVIO remains a key strategic priority for us. We are actively engaged in discussions with potential partners, which reflects the interest in the assets and the opportunity TRYVIO represents. While this process takes time, we're encouraged by the progress and look forward to updating you as we move forward. In the meantime, I can tell you, we continue to work very diligently and at high speed to maximize the value of TRYVIO. We've seen some of this in the past weeks and months. I think of the REMS removal, the collection of early, very positive real-world experience, the inclusion of TRYVIO in the ACC AHA hypertension guideline. And very recently, the recent initiative announced with Duke and Stanford University. Srishti Gupta: Thank you, Julien. Having addressed some of the key questions that we have received around TRYVIO, I think it's a good time to open the lines for additional questions. Nadia, can you please go to the next slide and open the line, please? Operator: [Operator Instructions] And we're going to take our first question. It comes from the line of Joris Zimmermann from Octavian. Joris Zimmermann: This is Joris Zimmermann from Octavian. I have two questions. One will be on partnering that you just highlighted, Julien. Is there any timelines you could give us? Or at least do you still expect to close a deal this year? And then the second question would be until you have found the right partner and signed an agreement, and given the limited resources you can currently deploy in the U.S., where will you put your focus in terms of the aprocitentan launch. Srishti Gupta: Thank you, Joris. Julien, will you respond to the questions? Julien Gander: Yes, very happy to. Thank you, Joris. Look, I mean you will understand that we cannot really comment on specific timelines. But what I can say, and I can ensure that the partnering aprocitentan is really a key priority for us. And to your point, we resource this project accordingly. We, of course, want to move very quickly and also considering the time advantage we have towards emerging therapies. But you will understand that actually, our focus is not only just speed, but it's also securing the right partners to maximize TRYVIO commercial success. To your second point, Idorsia is indeed has limited capacities, but I think considering these constraints, we've done a lot to make sure that the product is advancing, is prepared to be launched. And the product is commercially available, and we have very good early evidence, and we'll continue those efforts, and we are hoping to give you an update as soon as we can on achieving this goal of partnering. Srishti Gupta: Thank you, Julien. Michael, maybe I'll have you add to that with your presence at the AHA -- recent AHA meeting and some of the other work that we're doing on retail distribution. Michael Moye: Yes. Thanks, Srishti, and thanks for the question. Yes, we -- despite these -- the resource constraints, we are quite busy continuing our kind of launch and market prep. So Srishti, as you said, we're at the major congresses. So we have a really strong presence there. We're working with a lot of the top KOLs and a lot of the top hypertension centers. You heard about the Duke, Stanford relationship that come out. We are -- have really finalized a lot of the core materials. So we have a full digital presence. Our consumer and HCP websites are up and running. We've got print materials and things out there. And then the last couple of things. We're continuing our payer discussions, which continue to go really well. And then as Srishti made reference to at the end, the pharmacy distribution. So once the REMS was removed, we're able to move in addition to having a specialty pharmacy, we are quite literally right now coming online with full retail distribution across all retail pharmacies in the U.S. So yes, despite the resources, we're making great progress, again, across KOLs, congresses, payer discussions and pharmacy distribution. Srishti? Srishti Gupta: Thank you, Michael. Nadia, we'll take the next question. Operator: [Operator Instructions] We have a follow-up question from Joris Zimmermann from Octavian. Joris Zimmermann: Okay. Sorry. I hope I didn't jump the line now. But two more questions. I mean you talked about the patient populations and that you see a very broad target population. But maybe you can give us an idea based on this broader label that you got versus the study inclusion criteria, what are the kind of -- where do you see the quickest uptake in the market? Which type of patients do you think will be the ones that physicians consider prescribing aprocitentan first? And then also, maybe you could give us a little bit an idea of the hurdles that you foresee as well. Srishti Gupta: Joris, thank you for the question. Michael, would you like to walk a little bit through how we think about the targeting of the patient populations in the U.S. and how we might access them with the centers of excellence. Michael Moye: Yes. So when we look at that and we look at both our research and our interaction with the physicians, we're definitely seeing the data across all the subgroups has been one of the things that's jumped out of physicians. So you heard a little bit in our opening that clearly, the CKD is a differentiated piece and that we see that as a great opportunity. The other thing about the subgroups that we're seeing kind of across these multiple comorbid patients, you heard about patients challenge with hypertension management, black patients, obese patients, again, patients with CKD. The thing about the profile that continues to jump out is the fact that we don't -- we have efficacy and safety across all these subgroups. We don't have any real exclusions or contraindications and especially we don't have any drug-drug interaction problems, obviously, with these patients being on multiple medications. So when we think about those different subgroups and those comorbid patients that are at more risk, including the CKD patients, we see consistently the one pill, one dose, once daily, good tolerability, no drug interactions. That allows -- those factors are what the physicians are pointing out to us that allow us to treat these high comorbid risk subgroups. Srishti Gupta: Thank you, Michael. And Joris, in terms of your second question, I'd like to turn it over to Alessandro. Alessandro has been attending a lot of the KOL meetings in all over the United States over the last couple of months, meeting physicians, understanding how they think about TRYVIO. So Alessandro, can you talk a little bit about how you think about the hurdles that physicians are thinking about as they are deciding on prescribing TRYVIO. Alessandro Maresta: Thank you very much, Srishti. I think that, in my opinion, the best -- the most important hurdle is the new mode of action. The physicians are used to the RAAS system, are used to calcium channel blockers and now they need to realize and understand that there is a new kill of the block that is an endothelin receptor antagonist, and that endothelin receptor antagonist can be very, very beneficial in the subgroup of patients that I and Michael highlighted. So basically, I see this as the major hurdles because the results are really impressive. The safety profile is also very, very good. And we have a clear understanding on which are the patients that would benefit the most from this -- from TRYVIO. And last but not least, there are many, many patients that despite they add on 2, 3 or even 4 drugs, they are still not at goals. And these patients, they need -- they deserve treatment. So I don't see many hurdles in front of us. Srishti Gupta: Alessandro, thank you for that. And it underscores the importance for us of finding a partner who can help us on the broad outreach and the medical education required to enhance the importance of the end -- addressing the endothelin upregulation that occurs in a lot of hypertension. So this is definitely something we are thinking about and focused on as we move forward. Joris, thank you for the questions again. Operator: Thank you. Dear speakers, there are no further questions for today. I would now like to hand the conference over to your speaker, Srishti Gupta, for any closing remarks. Srishti Gupta: Thank you, Nadia. So this concludes today's call. Thank you for joining us and for your continued interest in Idorsia. Our next scheduled update will be on October 30 when we report our third quarter results and will provide a comprehensive update on QUVIVIQ performance. Operator, you may close the line. Operator: This concludes today's conference call. Thank you for participating. You may now all disconnect. Have a nice day.