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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.