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Operator: Thank you for standing by, and welcome to the Merit Medical Systems Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this conference call is being recorded and that the recording will be available on the company's website for replay shortly. I would now like to turn the call over to Martha Aronson, Merit Medical Systems' President and Chief Executive Officer. Please go ahead. Martha Aronson: Thank you, operator, and welcome, everyone. I am joined on the call today by Raul Parra, our Chief Financial Officer and Treasurer; and Brian Lloyd, our Chief Legal Officer and Corporate Secretary. Brian, can you please take us through the safe harbor statements? Brian Lloyd: Thank you, Martha. This presentation contains forward-looking statements that receive safe harbor protection under the federal securities laws. Although we believe these forward-looking statements are based upon reasonable assumptions, they are subject to risks and uncertainties. The realization of any of these risks or uncertainties as well as extraordinary events or transactions impacting our company could cause actual results to differ materially from the expectations and projections expressed or implied by our forward-looking statements. In addition, any forward-looking statements represent our views only as of today, October 30, 2025, and should not be relied upon as representing our views as of any other date. We specifically disclaim any obligation to update such statements, except as required by applicable law. Please refer to the sections entitled Cautionary Statement regarding forward-looking Statements in today's press release and presentation for important information regarding such statements. For a discussion of factors that could cause actual results to differ from these forward-looking statements, please also refer to our most recent filings with the SEC, which are available on our website. Our financial statements are prepared in accordance with accounting principles, which are generally accepted in the United States. However, we believe certain non-GAAP financial measures provide investors with useful information regarding the underlying business trends and performance of our ongoing operations and can be useful for period-over-period comparisons of such operations. This presentation also contains certain non-GAAP financial measures. A reconciliation of non-GAAP financial measures to the most directly comparable U.S. GAAP measures is included in today's press release and presentation furnished to the SEC under Form 8-K. Please refer to the sections of our press release and presentation entitled non-GAAP Financial Measures for important information regarding our non-GAAP financial measures discussed on this call. Readers should consider non-GAAP financial measures in addition to, not as a substitute for financial reporting measures prepared in accordance with GAAP. Please note that these calculations may not be comparable with similarly titled measures of other companies. Both today's press release and our presentation are available on the Investors page of our website. I'll now turn the call back to Martha. Martha Aronson: Thank you, Brian. Let me start with a brief agenda of what we will cover during our prepared remarks. As the recently appointed President and CEO of Merit, I'll begin my remarks with a brief introduction, thoughts on what attracted me to this opportunity and where I have been focused since joining the team. I will then provide a brief summary of the third quarter 2025 financial results, followed by a review of the team's progress in recent months in a few key operating areas. Then Raul will provide a more in-depth review of the quarterly financial results and the financial guidance for 2025, which we updated in today's press release. We will then open the call for your questions. Before delving into our third quarter results, I would like to take a moment to introduce myself and provide a few summary points on my background and where I have focused my time since joining the team. I joined Merit on October 3 with over 28 years of experience in the global health care industry. My experience includes multiple general management and functional leadership roles at several global companies following a short time in management consulting. I spent almost 2 decades at Medtronic, including several years living and working overseas. After Medtronic, I led global health care businesses with notable scale, including serving as Senior Vice President and President of North America for Hill-Rom Holdings and Executive Vice President and President of Global Healthcare for Ecolab. I've also served as a Board member at a number of companies, including CONMED, Methode Electronics, Clinical Innovations, Cardiovascular Systems, Beta Bionics, Hutchinson Technology, Bright Uro and Home Care. And in one instance, I served as Interim CEO. I believe my experience leading global businesses in the health care industry and advising companies across multiple sectors gives me the requisite background to lead Merit. I have admired the consistent track record of strong top line growth and profitability improvements that the employees and executive team here have achieved, particularly over the last 5 years. As I learned more about the company and in particular, the company's values, which we call the Merit way, these values resonated with me entirely. I've been heartened by the fact that these are not just words, rather the organization truly lives these guiding principles. We focus on the health of our employees so they can better serve our customers and in turn, our health care professionals are better positioned to care for their patients. We focus on excellence. We focus on agility or being responsive to customer needs. We take responsibility for our actions, and we work as a team. An organization that is committed to the Merit way and aligned on a mission to understand, innovate, deliver represents a powerful combination. I appreciate that the mission includes a significant focus on innovation given the importance of R&D and new technology in our industry. Suffice it to say, I'm excited to join Merit and truly honored to take on this role. While my official start date was just a few weeks ago, I have been actively engaging with external stakeholders, directors and members of Merit's executive and senior management teams since my appointment as the new President and CEO was announced on July 7. Since my official start, I've been spending time with our global leaders and their teams as I continue to learn the business. I'm inspired by their optimism about the future, and I'm impressed with the talent and passion of the employees that I've had the chance to meet. I see strong alignment in the shared purpose that this organization has in saving and improving lives each and every day. I've been fortunate to spend a lot of time with Fred Lampropoulos in recent months. We have visited a number of sites together, including Richmond, Dallas, Perland, Tijuana and Minneapolis, and I have spent time at our headquarters in South Jordan. I've also visited with each member of our Board of Directors individually to gather their thoughts and views on Merit, so I can better understand the things that we're doing well and what we can work to improve in the future. Fred and I have also spent time developing our transition plan with a keen focus on ensuring minimal disruption while establishing a process that enabled me to take over the day-to-day leadership of the company. I am confident we have a solid plan in place and importantly, alignment across the team as to key roles and responsibilities. To that end, it is important to understand that as part of this succession plan, Fred is now serving as the Executive Chairman of the Board through the remainder of this year. As we begin 2026, he will transition to non-Executive Chairman. Fred will continue to play a role in our evaluation of potential organic and inorganic opportunities. I appreciate Fred's willingness to continue to partner with me and the team on such an important part of the company's growth strategy. We need to continue to leverage his knowledge, experience and substantial relationships with physicians and customers around the world to ensure Merit remains focused on the right product opportunities and investment areas to support our long-term growth and profitability. With respect to where I'll be spending my time over the balance of my first 100 days, simply stated, I'll be continuing on my listening tour. I look forward to visiting our global sites, meeting the teams, seeing the operations at our manufacturing facilities and spending time with our global research and development team. I have a lot more to learn about our products, our people and our processes. But so far, all that I've learned gives me great optimism. I look forward to attending several key medical congresses, physician advisory boards and meeting as many of our key opinion leaders as possible. I also intend to dedicate a portion of my time in the coming months engaging with the investment community. All of these activities are centered around gathering as much feedback as possible and learning as much as I can, a tall task, but one that I'm extremely excited about. I feel very privileged to have this opportunity. I'm grateful to Fred and the entire Board of Directors for the trust, support and confidence in me as the right leader for the company's next stage of growth and development. Now turning to a review of our third quarter results. We reported total revenue of $384.2 million, up 13% year-over-year on a GAAP basis and up 12.5% year-over-year on a constant currency basis. The constant currency revenue growth delivered in the third quarter exceeded the high end of the range of the growth expectations that were outlined on the Q2 2025 earnings call. The better-than-expected constant currency revenue results were driven by 7.8% constant currency organic growth, which exceeded the 6% high end of the range, which was outlined on the second quarter call. With respect to the profitability performance in the third quarter, the company delivered financial results that significantly exceeded expectations. It was another quarter of notable year-over-year improvement in non-GAAP operating margin, which increased 51 basis points year-over-year to 19.7%. The team delivered nearly 7% growth in non-GAAP EPS, which exceeded the high end of expectations. And the company generated $53 million of free cash flow, an increase of 38% year-over-year. The third quarter results reflect continued strong momentum in the business this year. Despite the continued challenges related to the dynamic and uncertain global macro environment, the team is executing well. Over the first 9 months of 2025, the team has delivered total constant currency revenue growth of 12%, a non-GAAP operating margin of 20%, representing a 129 basis point increase year-over-year, and the team generated more than $140 million of free cash flow. These are impressive financial results to say the least. We have updated our financial guidance for 2025 in today's press release to reflect the strong financial results in the third quarter and our updated expectations for Q4. We remain focused on delivering continued strong execution, solid constant currency growth and strong free cash flow generation in 2025 as well as progress in our continued growth initiatives program and related financial targets for the 3-year period ending December 31, 2026. Turning now to a review of the company's progress in recent months in a few key operating areas. Let me begin with new product development, clearance and commercialization. In August, the company announced the U.S. commercial release of the Prelude Wave hydrophilic sheath introducer with SnapFix securement technology. The Prelude Wave is the latest innovation in Merit's comprehensive access portfolio, which includes a wide range of dilators, micro access systems, sheath introducers and guide sheath. Merit innovated the Prelude Wave, a next-generation sheath with a unique securement feature. Compared to the leading competitor, the Prelude Wave offers twice the lubricity, twice the resistance to buckling and kinking and requires 40% less insertion force. A first of-its-kind SnapFix technology provides twice the adhesive strength with a number of physicians rating its performance and ease of use superior to the leading competitor. This new product introduction represents another advancement in Merit's access portfolio, built to improve radio procedures and to aid in minimizing common vascular challenges. In September, the company announced that Embosphere Microspheres received CE Mark and are indicated in the European Union for use in genicular artery embolization or GAE, to treat patients with knee osteoarthritis. GAE is a nonsurgical option that provides fast and lasting pain relief in patients with mild to moderate knee OA. Data show that over 75% of patients treated with Embosphere for GAE achieved clinical success with significant reductions in knee pain sustained through 24 months. In addition to durable pain relief over time, Embosphere was associated with a decrease in pain medication use and improvements in quality of life measures. Compared to corticosteroid injections, GAE with Embosphere achieved consistently higher clinical success with greater improvements at 3 months in pain and quality of life. CE Mark of Embosphere for GAE presents an exciting opportunity to advance this treatment option and further interventionalists ability to offer the positive results they expect from the procedure. On October 1, the company announced that our Scout Radar localization technology has been used to treat 750,000 patients worldwide, a significant milestone for breast cancer treatment. As a market leader in wire-free non-radioactive localization technology, Merit's mission every month, but especially this month, is to reduce the burden that cancer places on patients and their loved ones. Radar localization helps physicians surgically remove abnormal breast tissue while reducing trauma to surrounding healthy tissue. A trusted solution for breast cancer care, Scout has been mentioned in more than 100 clinical publications with nearly 8,500 patients referenced throughout. As it is being used in 50 countries, more than 500 cases are performed each day, totaling 10,000 cases per month. Over 1,100 facilities worldwide choose Scout as their preferred method of wire-free localization. Every day, through products like Scout, we're able to help more patients become cancer-free, and we're proud to be a part of that. I would now like to provide an update on our recent progress towards our commercial and reimbursement strategies for the WRAPSODY CIE in the United States. Our Renal Therapies group has been impressively executing the U.S. commercial strategy for WRAPSODY CIE during the third quarter, and they continue to exceed our expectations with respect to leveraging the new access to customers from the early commercialization of WRAPSODY CIE to identify opportunities to drive adoption and utilization across the rest of our dialysis product portfolio. The team remains focused on engaging with new and existing customers to work through the VAC approval processes as well as working with the largest GPOs and some of the largest IDNs across the country. Physician training events are being held at centers of excellence with physician partners who are passionate about the product and educating their peers on the benefits of the WRAPSODY CIE. The team has also worked to ensure we were prepared to maximize the opportunity presented by WRAPSODY CIE's new technology add-on payment, or NTAP, effective October 1, 2025. By way of reminder, this add-on payment applies to WRAPSODY CIE procedures conducted in the hospital inpatient setting. We have conducted sales force trainings and prepared reference materials to support discussions with customers and prospects. Our RTG team is focused on ensuring hospitals have the requisite information and understand the process for submitting claims for hospital inpatient use when the WRAPSODY CIE procedure is provided to a patient. We have been pleased by the initial market response in terms of access, adoption and utilization for customers using WRAPSODY CIE in the hospital inpatient setting following the NTAP effective date. With respect to our progress towards securing incremental payment for procedures in the outpatient and ASC settings, as projected on the last earnings call, Merit completed the application for TPT incremental payment under Medicare's OPPS system and submitted the application by the September 1, 2025 deadline. We continue to anticipate preliminary approval with an earliest effective date of January 1, 2026, and finalization in next year's rule cycle. Finally, we have made notable progress in expanding the body of clinical evidence for our WRAPSODY CIE in recent months. In August, we announced the successful enrollment of the first patient in the RAP North America registry study. Dr. Omar Davis, President and Medical Director at Bluff City Vascular, an investigator in the RAP North America Registry enrolled the first patient. The RAP North America Registry is designed to enroll up to 250 U.S. and Canadian patients on hemodialysis who experience obstructions such as stenosis or occlusion in the veins required for dialysis access. The RAP North America registry is intended to add to Merit's growing portfolio of clinical evidence supporting the WRAPSODY CIE. If completed as designed, it would represent the largest cohort of patients treated with an implantable device to restore vascular access for hemodialysis. On October 15, we completed enrollment in our RAP global registry study. This study was designed to enroll up to 500 patients outside of North America to evaluate real-world outcomes associated with the use of the WRAPSODY CIE. The primary endpoint of the study is 6-month patency, and we anticipate having data available in mid-2026. We look forward to one of the lead investigators in the study sharing the results at a medical meeting next year. Two other notable items I wanted to preview in the area of WRAPSODY-CIE clinical evidence and awareness. Tomorrow, October 31, Merit will be hosting an industry-sponsored breakfast symposium at the Controversies in Dialysis Access, or CiDA, Annual Meeting in Boston. CiDA is a high-priority conference for our unique dialysis access portfolio. The meeting is solely focused on dialysis access across all specialties. We are expecting 75 to 100 attendees and are very excited about the faculty selected to lead the session. We are also excited to participate in this year's Vascular Interventional Advances or VIVA meeting in Las Vegas, November 2 through 5. VIVA is the premier multidisciplinary educational event for specialists treating patients with vascular disease. We plan to release 24-month data for both AVG and AVF from our WAVE study at the VIVA meetings. We completed the last patient visits in the third quarter, and we look forward to having this long-term data presented at VIVA next week. Before I turn the call over to Raul, I want to discuss a strategic announcement we made subsequent to quarter end. On October 15, 2025, we announced that we had entered into an agreement to acquire the C2 CryoBalloon and related technology from Pentax of America, a subsidiary of Pentax Medical Inc., for a total purchase consideration of $22 million, $19 million of which would be paid in cash at closing. The C2 CryoBalloon delivers controlled freezing treatments to drive targeted ablation and precise destruction of unwanted soft tissue. The C2 CryoBalloon treats Barrett's esophagus as well as a less common disorder, GAVE or Gastric Antral Vascular Ectasia. The device freezes and eliminates abnormal cells while still maintaining the integrity of surrounding tissue structures. This proposed acquisition is intended to strengthen our position in the multibillion-dollar gastroenterology market and to provide opportunities to treat more patients from the effects of chronic gastroesophageal reflux disease or GERD and other gastrointestinal tissue disorders. While the total transaction size is relatively small, we believe this will be an important strategic acquisition as it is expected to expand the portfolio of solutions our endoscopy sales team has to offer customers. We have invested in this part of our business, both organically and inorganically over the last few years and are nearing an inflection point in terms of completing our integration and sales force alignment activities. We believe we are well positioned to accelerate growth and market share gain in the coming years. With that, I'll turn the call over to Raul for an in-depth review of our quarterly financial results and our updated financial guidance for 2025. Raul? Raul Parra: Thank you, Martha. I will start with a detailed review of our revenue results in the third quarter, beginning with the sales performance in each of our primary reportable product categories. Note, unless otherwise stated, all growth rates are approximated and presented on both a year-over-year and constant currency basis. Third quarter total revenue growth was driven primarily by 13% growth in our Cardiovascular segment and to a lesser extent, 4% growth in our Endoscopy segment. Cardiovascular segment sales exceeded the high end of the expectations we outlined on our second quarter call and endoscopy sales came in at the low end of our expectations. Our total revenue results included approximately $16 million of revenue from our acquisition of products from Cook Medical and BioLife of approximately $10.7 million and $5.3 million, respectively. Excluding sales of acquired products, our total revenue growth on an organic constant currency basis was 7.8% in the third quarter. Turning to a review of our third quarter revenue results by product category. Peripheral Intervention product sales increased 8% and represented the largest driver of organic Cardiovascular segment growth in the period. PI sales modestly exceeded the high end of our growth expectations in Q3. Growth in our PI business was driven by strong sales in our [ Ebola ] therapy, access and delivery systems categories, which together represented more than 75% of our total PI growth year-over-year. Demand of our Embosphere and QuadraSphere Microsphere products was notable in Q3. Access category growth was driven by demand for our WRAPSODY CIE and delivery system category growth was driven by demand for our SwiftNinja steerable microcatheter. Cardiac Intervention product sales increased 29% and 10.9%, excluding the contribution from the sales of acquired products representing the second largest driver of Cardiovascular segment organic growth in the period. This performance was well above the high-end organic growth expectations we assumed for Q3. Organic growth in our CI business was driven by strong sales in our EP, CRM and intervention categories, which together represented more than 2/3 of our total CI growth year-over-year. Demand for our Prelude SNAP, HeartSpan steerable sheath and our Ventrax delivery system were the largest contributors to EP CRM organic growth in Q3. Demand for our mean arterial pressure products, our PHD hemostasis valves and our basic inflation devices were the largest contributors to organic growth in the intervention category in Q3. Rounding out the Q3 performance across the rest of our Cardio segment, sales of our custom procedure solutions products increased 6%, above the high end of our expectations and sales of our OEM products increased 3%, modestly lower than our expectations. The softer-than-expected OEM performance in Q3 was entirely related to sales to OEM customers outside the U.S., which continues to see demand trends impacted by the macro environment. Sales to OEM U.S. customers increased in the high single digits year-over-year in Q3. Turning to a brief summary of our sales performance on a geographic basis. Our third quarter sales in the U.S. increased 12% on a constant currency basis and 7.6% on an organic constant currency basis, exceeding the high end of our organic growth expectations by 310 basis points. We were pleased to see continued strong demand from our U.S. customers in the third quarter. International sales increased 13% year-over-year and increased 8% on an organic constant currency basis. Sales results in APAC, EMEA and the rest of the world regions each modestly exceeded the expectations supporting our Q3 guidance range. With respect to China specifically, sales decreased 1%, which was softer than expected. We attribute the softness to broader macro environment as the VBP impact was better than expected in Q3. Excluding the VBP impacts in both periods, China sales increased 2% year-over-year in Q3. Turning to a review of our P&L performance. For the avoidance of doubt, unless otherwise noted, my commentary will focus on the company's non-GAAP results during the third quarter of 2025, and all growth rates are approximated and presented on a year-over-year basis. We have included reconciliations from our GAAP reported results to the related non-GAAP items in our press release and presentation available on our website. Gross profit increased approximately 19% in the third quarter. Our gross margin was 53.6%, up 267 basis points year-over-year and representing the highest gross margin in the company's history. The year-over-year improvement in gross margin was driven primarily by mix by product and by geography as well as improvements in pricing and freight and distribution expenses compared to the prior year period. As expected, tariffs were a material headwind to the year-over-year improvement in gross margin in Q3, representing a nearly 90 basis point incremental impact year-over-year to third quarter gross margins. Operating expenses increased 21%. The increase in operating expenses was driven by a 21% increase in SG&A expense and a 20% increase in R&D expense compared to the prior year period. Total operating income in the third quarter increased $10.4 million or 16% to $75.6 million. Our operating margin was 19.7% compared to 19.2% in the prior year period, an increase of 51 basis points year-over-year. Third quarter other expense net was $2.4 million compared to income of $0.9 million last year. The change in other expense net was driven by lower interest income associated with lower cash balances, offset partially by lower interest expense compared to the prior year period. Third quarter net income was $54.9 million or $0.92 per share compared to $51.2 million or $0.86 per share in the prior year period. Third quarter net income and EPS exceeded the high end of our guidance range by $3.2 million and $0.07, respectively. Turning to a review of our balance sheet and financial condition. We generated $52.5 million of free cash flow in the third quarter of 2025, up 38% year-over-year. As of September 30, 2025, Merit had cash and cash equivalents of $392.5 million, total debt obligations of $747.5 million and outstanding letter of credit guarantees of $3 million, with additional available borrowing capacity of approximately $697 million compared to cash and cash equivalents of $376.7 million, total debt obligations of $747.5 million and outstanding letter of credit guarantees of $2.9 million, with additional available borrowing capacity of approximately $697 million as of December 31, 2024. Our net leverage ratio as of September 30 was 1.7x on an adjusted basis. Turning to a review of our fiscal year 2025 financial guidance, which we updated in today's press release. For reference, we have included a table in our earnings press release, which details each of our formal financial guide ranges and how those ranges compared to our updated guidance ranges issued as part of our second quarter earnings press release on July 30, 2025. Our updated 2025 guidance assumes the following: GAAP net revenue growth of 11% to 12% year-over-year, which we expect to result from net revenue growth of approximately 10% to 11% in our Cardiovascular segment and net revenue growth of approximately 32% to 34% in our Endoscopy segment and a tailwind from changes in foreign currency exchange rates of approximately $6 million or approximately 45 basis points to growth year-over-year. Excluding the impact of changes in foreign currency exchange rates, we expect total net revenue growth on a constant currency basis in the range of 10.3% to 11.2% compared to 9.7% to 10.6% previously. Among other factors to consider when evaluating our projected constant currency revenue growth range for 2025 are the following items: First, the midpoint of our total constant currency growth range now assumes 13% growth in the U.S. compared to 12% previously and 8% growth outside the U.S., unchanged versus prior guidance. The 8% constant currency growth we expect outside the U.S. continues to assume low double-digit growth in EMEA, mid-teen growth in the rest of the world region and approximately 2% growth in the APAC region. Second, our total net revenue guidance for fiscal year 2025 also assumes inorganic revenue contributions from the business and assets acquired from EndoGastric Solutions on July 1, 2024, Cook Medical on November 1, 2024, BioLife on May 20, 2025, and proposed to be acquired from Pentax on November 1, 2025. Together, we expect inorganic revenue in the range of $59.9 million to $60.5 million in 2025. Excluding this inorganic revenue, our updated 2025 guidance reflects total net revenue growth on a constant currency organic basis in the range of approximately 5.9% to 6.8% year-over-year compared to 5.6% to 6.4% previously. Third, for the full year 2025 period, we continue to forecast U.S. revenue from the sales of WRAPSODY CIE in the range of $2 million to $4 million. By way of reminder, this range is driven by the initial ramp in WRAPSODY CIE sales for procedures in the hospital setting following the NTAP add-on reimbursement, which went into effect on October 1, 2025. With respect to profitability guidance for 2025, we now expect non-GAAP diluted earnings per share in the range of $3.66 to $3.79 compared to our prior guidance range of $3.52 to $3.72. The change in our non-GAAP EPS expectations for the 2025 year reflects the flow-through of the better-than-expected financial performance in the third quarter at both the low and high end of the non-GAAP EPS range, specifically $0.16 and $0.07, respectively. The low and high end of the updated non-GAAP EPS range also reflect the impact of a higher non-GAAP tax rate assumption and the previously announced expected dilution from the proposed acquisition of the C2 CryoBalloon, offset partially by lower expected dilution from our convertible debt. The high end of the non-GAAP EPS range also includes our updated projected impact of tariffs, trade policies and related actions recently implemented by the U.S. and other countries. Specifically, the high end of our updated guidance range now assumes tariff-related manufacturing costs in our cost of goods line of approximately $7.6 million compared to $7 million previously. This updated assumption is driven by a higher tariff impact realized in Q3, while our assumption for tariff impact in Q4 remains unchanged versus our prior guidance assumption. Importantly, the $7.6 million figure is based on available information as of October 30, 2025, and does not include any impact from new and/or additional tariffs or retaliatory actions or changes to currently announced tariffs, which could change the anticipated impact to our non-GAAP EPS in 2025. The ultimate impact from new and/or additional tariffs or retaliatory actions or changes to currently announced tariffs on our business will depend on the timing, amount, scope and nature of such tariffs, among other factors, most of which are currently unknown. The tariff situation and potential retaliatory measures by other countries remains highly uncertain and dynamic. As such, the low end of our guidance range continues to reflect additional tariff-related impact in 2025. Specifically, the low end of our EPS range now reflects a tariff-related impact on our 2025 cost of goods of $16 million compared to $26.3 million previously. This updated assumption for the low end of our guidance range reflects the actual tariff impact realized in Q2 and Q3 compared to the assumptions originally outlined on our Q1 earnings call in April. Our Q4 tariff expectation remains unchanged. Returning to a discussion of our updated 2025 financial guidance assumptions for modeling purposes. Our fiscal year 2025 financial guidance now assumes non-GAAP operating margins in the range of approximately 19.7% to 25% compared to 19% to 20% previously. Note, the change in our 2025 non-GAAP operating margin expectations is primarily attributable to the flow-through of stronger-than-expected financial performance in the third quarter of 2025. Non-GAAP interest and other expense net of approximately $8.3 million compared to $8 million previously, non-GAAP tax rate of approximately 23% compared to 22.5% previously and diluted shares outstanding of approximately 60.5 million. Note, our weighted average share count now assumes incremental dilution of approximately 0.6 million shares related to our convertible debt facility compared to 0.9 million shares previously. We now estimate incremental share dilution related to our convertible debt facility represents an impact of approximately $0.04 to our non-GAAP EPS in 2025 compared to $0.05 previously. Finally, we now expect to generate free cash flow of at least $175 million in 2025, inclusive of the expectation that we will invest approximately $90 million to $100 million in capital expenditures this year. We would also like to provide additional transparency related to our growth and profitability expectations for the fourth quarter of 2025. Specifically, we expect our total revenue to increase in the range of approximately 7% to 10.6% on a GAAP basis and up approximately 5.5% to 9.1% on a constant currency basis. The midpoint of our fourth quarter constant currency sales growth expectation assumes approximately 9% growth in the U.S. and 4% growth in international markets. Note, our fourth quarter constant currency sales growth expectations include inorganic revenue in the range of $8.5 million to $9.1 million. Excluding inorganic contributions, our fourth quarter total revenue is expected to increase in the range of approximately 3% to 7% on an organic constant currency basis. With respect to our profitability expectations for the fourth quarter of 2025, we expect non-GAAP operating margins in the range of approximately 18.8% to 20.8% compared to 19.6% last year and non-GAAP EPS in the range of $0.87 to $1.01 compared to $0.93 last year. That wraps up our prepared remarks. Operator, we would now like to open up the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Jason Bednar with Piper Sandler. Jason Bednar: Congrats, everyone, here on the strong results. And Martha, welcome and looking forward to working with you. I feel like got to start talking here about WRAPSODY to kick it off. You said you're pleased with the response so far on the inpatient side. You called it out as a notable contributor to PI growth. Can you give a bit more color here? It sounds like you're already tracking pretty well in that inpatient setting in the early days. And then maybe I'll just ask an open-ended question, if you could respond to questions that exist out there with respect to clearing the necessary criteria into secure TPT, particularly the cost criteria that requires a different price point than that [ 5,800 ] ASP that you've publicly discussed in past calls and which was used in the submission to secure NTAP. Martha Aronson: Jason, thanks very much. Appreciate the question and look forward to working with you as well. Yes, let me make a few comments on this. First of all, let me just say, I think we're all really pleased with the initial market response as it pertains to WRAPSODY CIE, right? If we look at access, adoption and utilization in the in-hospital setting, right? And so in that setting, in the hospital setting, effective October 1 was the new add-on payment. So we're certainly excited about that and a big shout out, frankly, to our team who's done a great job training physicians. I think you may have heard on a previous call, the goal was to train and have about 250 physician advocates. At the end of the quarter, we're at 200, and that has actually led to a total of over 500 physicians who have been trained in WRAPSODY. So we're very excited about that, and there continues to be even more work being done around building awareness for WRAPSODY-CIE. And you heard a little bit, there's going to be a symposium in Boston at the CETA meeting this week as well as next week at the VIVA meeting in Las Vegas, which I'm personally excited to attend. There will also be 24-month data shared. So I would just say stay tuned on that because you may see a press release or 2 coming out on some of that data next week. So I think it's also fair to say that I'm well aware there's been a considerable amount of discussion, if you will, out in the community about whether or not -- now I'm shifting gears, okay, from that -- we were just talking about the hospital setting, just so I'm really clear, right? We're talking about the hospital setting and the NTAP add-on payment that went into effect October 1. So now I'm going to switch gears to your second question, which I believe was about TPT, which pertains to the nonhospital outpatient and ASC settings, right? So as I said, I understand there's been a great deal of discussion on this. Let me try to be very clear and state quite simply, we believe we meet the required cost criteria. So our application for TPT included WRAPSODY’s list price of $8,000. Jason Bednar: Okay. All right. That's helpful. And I'll let others follow up on that. But I wanted to switch over to -- we had a lot of impressive pieces in the quarter here. Hard to pick what was most impressive, but I'll settle on gross margin to ask here. I think you beat the Street by almost 300 basis points. You referenced it's a record for the company. Maybe, Raul, if you can unpack a bit more the source of that upside, whether there's durability there. And then bigger picture, and sorry, I'm packing a couple in here, but we're officially in mid-50s gross margins. I'm doing some generous rounding, but you're drifting into the margin range where some peers currently operate. Do you still see gross margin headroom beyond the mid-50s? Or when we think about the margin opportunity for Merit going forward, it's going to require more SG&A leverage? Raul Parra: Yes. Great question, Jason. And thank you for highlighting the gross margin, right, and asking the question. I mean I think we're really proud of that. As you know, since Foundations for Growth and now CGI, we've really focused on expanding that gross margin and our approach of kind of throwing the kitchen sink at it has really worked. And so when we look at the compounding efforts from our sales force and our operations team to get to where we're at, we're really proud of those guys for all the hard work that they're doing. It's a tough job, but they've been able to really move the needle there. And so kudos to them. As far as the gross margin for Q3, it was really driven kind of, again, by the kitchen sink approach, right? So our sales force did a really good job on focusing on mix. not only by product but also by geography. And also the focus on improvements in pricing has really helped us out. Our operations group has been doing everything they can to hold the line on what's a really tough environment. Freight and distribution expense compared to the prior year also helped us out. And I also kind of want to highlight that they overcame kind of a 90 basis point incremental impact year-over-year on the gross margin, which could have been better, right, had it not been for those tariffs. As far as kind of the long-term vision, I'm not going to get ahead of myself on CGI. When we launched CGI, we were pretty clear that most of the improvement in operating margin would come from gross margin. And on the higher end, it would be more gross margin with some OpEx leverage. So I think that's the goal is to continue to drive gross margin to hit our CGI goals. And we're just -- we're focused on that. And we're not going to get beyond that. You've heard me say this before, we don't want to drop the football on the one yard line. So we're laser-focused on making sure that we stay within the CGI goals and focused on those. Operator: Our next question comes from the line of Robbie Marcus with JP. Lilia-Celine Lozada: This is Lilly on for Robbie. Martha, congrats on the new role. I know it's still early, but I'm going to try my hand at a question on 2026. There's clearly a lot of momentum in the business, new product rollouts, a lot of nice tuck-ins recently. Could you share some high-level thoughts on how you're thinking about next year? And if not quantitative, then any qualitative color on headwinds and tailwinds we should be keeping in mind would be helpful. Martha Aronson: Yes. Lilly, thanks for the question. And I think you're right. We're not going to really go into 2026 at this point, right? I mean, suffice to say, as you know, we've got CGI goals that are in place that go through the end of 2026. So my message here in month #1 has been really clear to the team that we want to just stay really focused on that. We want to stay focused on closing out a strong 2025. We've got CGI goals for 2026. And then frankly, as I'm just kind of getting in the seat here, I will then spend a lot of time with our newly structured executive leadership team and a newly structured operating committee, global operating committee to really do the work to start to think about our strategic goals beyond CGI. So that's really where our focus is at this time. Lilia-Celine Lozada: Got it. And then just as a follow-up, you've done a number of small tuck-ins over the last few quarters. So could you share your updated thoughts on M&A and cap allocation? Is this the cadence of deals that we should be expecting moving forward? And are there any areas that stand out to you as particularly interesting that you'll be focusing on? Martha Aronson: Yes. Look, I mean, here's what I would say, right? I mean Merit has really focused historically on both organic and inorganic growth, right? They really have used both very effectively, I think, to grow the business. So again, really early for me to say a whole lot on this topic other than I think we'll continue to look at the opportunities that come our way. We'll continue to think more about each kind of platform that we're in and where the strategic opportunities might be, again, to focus our R&D efforts, again, both internally and externally. So I don't see a major shift in terms of capital allocation strategy. I think this has been a company that's invested in R&D to grow the business. And again, I anticipate continuing to do that. Raul Parra: Yes. One thing I'll add is, obviously, free cash flow continues to be very strong. which helps us as part of these acquisitions and investments internally, like the distribution center and our R&D projects, as Martha was talking about. So we've generated almost $142 million in free cash flow this year with $57 million coming in Q3. So we're definitely driving free cash flow. That will help with the investments, capital allocation that we want to do, and we just got to stay focused on it. And we're -- we've got a minimum of $400 million of free cash flow to hit for CGI. We're well on our way to do that and excited about how strong our free cash flow continues to be. Operator: Our next question comes from the line of Jayson Bedford with Raymond James & Associates. Jayson Bedford: Welcome, Martha congrats to both of you on the progress here. Maybe a product line question. Cardiac Intervention has seen a real acceleration here in the last couple of quarters. I think you've called out EP and CRM as a driver. Are you just riding what is a faster growing end market? Or is there a unique kind of share capture dynamic going on? Raul Parra: Well, there's a couple of things going on. I think one of the things that's really helped is the focused sales groups. So having a more focused approach to our bags has really driven a lot of growth. You look at the Cook acquisition, part of the reason we did that was to allow more focus on our EP and CRM products. And we're clearly seeing those guys do a really good job of driving growth. So when you look at the performance in Q3, our Cardiac Therapies group did -- is just doing really good from an integration standpoint, not only selling the Cook products that we acquired, but also the products that Merit had, which is what we were hoping for. And then you look at our Vascular Therapies group, now that they don't have those products in their bag, they're allowed to focus more on the PI side of things, specifically kind of the biopsy drainage and embolic portfolio, which are -- some of those high-margin products that we really want our groups kind of pushing. And then lastly, you look at our Renal Therapies group, again, I know they're kind of tasked with selling reps through CIE, but they're also really focused on the rest of the portfolio that we have for them. And again, I think it's a team effort, and they've all been executing at a really good high level to deliver the growth rate that we've seen. I mean to look at our U.S. organic growth at 7.6% in Q3, and that's outstanding. Jayson Bedford: Okay. Fair enough. Maybe just a different type of margin question. SG&A was a bit higher than it's been in the past or at least higher than our model. Anything notable there in terms of either new reps? Is it integration or just simply a function of the gross margin is stronger, which allows you to invest a bit more in the business? Raul Parra: Yes, there's definitely some of that going on, Jason, right? I think we've talked about that. But there was a couple of kind of what I'll call kind of one-timers that we were obviously looking at. Obviously, with the higher sales than expected, we [ had ] commissions. So also, if you look at the performance of the company, a majority of -- a big chunk of the increase, I'll say, was the variable bonus accrual, truing that up to kind of the year-to-date performance of where the team is at. And then we also had a distributor buyout in Europe that came in earlier than anticipated. So rest assured, we're keeping an eye on the operating expenses and the amount we're investing. But we have been kind of candid and clear, I would say, and transparent about making sure that you guys understand that as the gross margin come in, there is a level of investment that we're making, but we're also very conscious about making sure that we're keeping an eye on it. Operator: Our next question is going to come from the line of Mike Matson with Needham & Company. Michael Matson: So I know it's still kind of early days with WRAPSODY, but I was wondering if you were seeing any of the expected benefit to the other dialysis products, kind of that portfolio strategy that you have there in that business? Martha Aronson: Yes. I mean I'd say we are, yes. I mean I think as Raul was just sharing, I mean, having these slightly more focused sales organizations, right, does enable the group to not only be focusing on WRAPSODY, but all the wraparound -- no pun intended, right, but all the wraparound products, all the additional products that we have in that bag. So I think we're really encouraged by that in the early days here. Michael Matson: Okay. And then just on the CryoBalloon, the C2 product, I'm familiar with Barrett's esophagus and the ablation procedure. But wondering if you could tell us how big that market is or the TAM there? Yes. I don't have that handy here, but I can get it for you. Obviously excited what the product can do. Yes. But just at a higher level, obviously excited that we continue to find products that we can drop in our endoscopy bag. This is the second acquisition here within the year. We've been looking for things to add to the endoscopy bag, quite frankly, for a long time and just finding assets that we can drop into that sales force is really exciting. I know they're excited about it. This product was really driven by our sales force. They really wanted this. They're really excited about what it can do for the rest of the portfolio. So we'll get to that TAM, but continue to be excited about the opportunity there. Operator: Our next question will come from the line of John Young with Canaccord. John Young: Martha, [indiscernible] sentiment and look forward to working with you. And maybe just starting on that, too, just what have you identified so far in terms of company excellence versus possible areas of improvement? Martha Aronson: Yes. Thanks, John, and I look forward to working with you as well. The first thing I have to say is having spent some time both leading up to my official start date and since then, I just have to say the passion that I've seen out of the employees here, everybody I've had the chance to visit with amongst the various sites and here in Salt Lake City, there's just so much dedication to taking care of our customers who we know are then helping patients. And I mean, we all -- when you're in this industry, right, everybody kind of says, "Oh, this is a great industry. We're helping people. But I have to say, you really feel it here. It's very genuine. I think the Merit way, which is the values of this company, it comes through loud and clear. And as I think I said in my prepared remarks, these aren't just words on a page. This is really how people feel. It is. It's health, it's excellence, it's agility, it's responsibility, it's teamwork. So I think I'm super excited about that. As I said, I'm also excited to really kind of dig in and get going with, as I said, a newly structured executive leadership team and kind of a newly formed global operations committee, right, which is sort of our top leaders all around the globe. And I do think we do have an opportunity as we continue to grow and scale globally, right, to really think about how are we ensuring really tight cross-functional collaboration and I would say, cross geographic collaboration. So those are kind of the things I'm looking at so far. And as I said, really excited to kind of dig in and we'll have 2026 while we're staying focused on CGI to really think about kind of what's next beyond '26. John Young: Great. And then just as a follow-up to Endoscopy, the softness in Q3 that you called out, I didn't hear any reasoning behind that, Raul. Was that seasonality? Or is there another factor going on there? Raul Parra: Yes. I mean there's always a level of seasonality. But honestly, the way we forecasted for our Endotek division, they're integrating an acquisition. We expected kind of -- it always -- when you're trying to combine 2 portfolios, there's always a level of distraction as you're learning to sell the new products. And so we really anticipated that to happen. And essentially, the Q3 sales trend was improved as expected. It was better than the first half of the year. And I think it will continue to accelerate from here as the sales force kind of starts to understand how to combine and sell these products. But they're hanging in there. Every month seems to get a little bit better, and that's kind of what our expectation was. Operator: Our next question is going to come from the line of David Rescott with Baird. David Rescott: Congrats on a good quarter here. A few questions from us, and I'll ask them both upfront. First, on China. I heard the call out around softer growth than expected, only down 1%, though not too terrible. But I'm just curious on what some of the dynamics are in that market that have played out so far in the second half of the year relative to what your expectations were heading into the second half, how you're feeling about the dynamics in that market over the next 12 to 18 months? That's the first question. And then second one on WRAPSODY. I know we'll probably find out around the TPT update in the coming days or weeks. So just curious if you could walk us through what the next day steps are, meaning that once you find out what the update is on reimbursement, where you go from there as you start to progress through or into, I guess, 2026? Raul Parra: I'll take China and then Martha, I think, is going to take the WRAPSODY question. So look, I think, first of all, I'll start with the highlight, right? I mean I think China has been a market that hasn't grown like we wanted to kind of from a reported or organic basis. I think the encouraging thing is that volume continues to be strong. I'll highlight that I'll point out, VBP was better than expected in Q3. I think we've seen that happen routinely in China. I think that's a positive sign for us. But really, it's -- the softness is coming just from the broader macro environment. And when we say that, we're really kind of talking about kind of OEM in China specifically being softer than anticipated. So I think as we look at the core business, which is China, excluding OEM, I think they're doing really well given the environment. And it's really just kind of the OEM component that kind of continues to drag it down a little bit. But overall, I think we -- just the China market overall, I think we're excited about what we can do there in the future. Other than that, I think it's no other things to kind of point out. Martha Aronson: Yes. And let me comment then on -- again, on WRAPSODY. So I think as I mentioned earlier, we are very confident we meet the required cost criteria. As I said, our application for TPT included our list price at $8,000. So as you said, we do expect to hear sometime in December with the earliest than possible effective date of January 1, 2026, and then a finalization during next year's [indiscernible]. Now I mean we know the U.S. government is in shutdown. So far, we haven't heard anything there that changes our expectations. Obviously, if we hear something, we'll let you know. But otherwise, we'll proceed from there. Operator: Our next question will come from the line of Michael Petusky with Barrington Research. Michael Petusky: I just wanted to real quickly drill down both on endoscopy and China, which have been sort of called out as maybe areas of relative weakness. Raul, have there been any key customer losses in either business, say, over the last 6 to 12 months? Raul Parra: Like I said, endoscopy, it's really just driven of the integration of the sales forces, Mike. So again, I wouldn't -- I've got nothing else to say other than the performance of endoscopy kind of continues to improve as they learn how to sell these products. So I think on a go-forward basis, we're excited about what they can do. And like I highlighted earlier, they're really excited about C2 and what it can do for not only our newly acquired products, but also kind of our legacy portfolio. So I think that will be a something that can hopefully generate additional growth to the core business and obviously deliver some additional growth on the noncore stuff. As far as China, I mean, it really -- there isn't anything that -- any red flags that I would call out. Again, I think when you kind of strip out the OEM piece, which, as you guys all know, I have been pretty adamant about OEM, just being a business that's very variable, right? I know when we were growing at 20%, 15%, I kind of told everybody, hey, don't get excited, right? I think a high single-digit business is kind of what we expect from OEM. You will have some quarter-to-quarter variability, some year-to-year variability. That's just the nature of OEM. So we don't have any concerns. I think when you look at the OEM business, year-to-date, they've grown at 9%, which is right in that high single digit. And when you look at China business, kind of the core business itself, again, I'll highlight that VBP was better than expected. Volume continues to be strong. So yes, I wouldn't call anything else out. I mean I think we're doing just fine. Michael Petusky: Okay. Great. And then a quick one for Martha. In terms of this next, I guess, at this point, roughly 60 days where Fred is the Executive Chair versus next year when he'll be nonexecutive Chair. I mean, what are the primary ways you're sort of utilizing them? Is it mostly just introductions to team and customers? Or are there other areas where you hope to utilize Fred over the next 60 days? Martha Aronson: Yes. So yes, Fred and I are, of course, in pretty regular communication. And I think one of the primary areas, as you all know, because you know him well, Fred is very, very knowledgeable in what technologies are around, right? And so he's really helpful as we think about, again, whether it's organic or inorganic technology opportunities. So that's really one of the primary areas where we are leveraging his expertise and experience. Operator: Our next question comes from the line of Jim Sidoti with Sidoti & Company. James Sidoti: Another question on the Pentax acquisition. How does that product differ from the product you acquired last year from EndoGastric Solutions? Is it the same treatment? Is it complementary? And is it approved in Europe as well as in the U.S.? Raul Parra: Well, I mean, it is a different -- it's in the same call point, Jim, which is why the sales force is excited about it. I think it allows the sales force to highlight the C2 Balloon while also talking about EGS, right? And so as you -- as they think about the full portfolio of products, now it allows them to be talking about multiple devices within the same call point that they're in. And so it really is a different product, but it's within the same call points. Martha Aronson: So Jim, it really -- yes, it really is different, right, in terms of, it's cryo, right? So it's using very, very cold. If you will, think of it, it's almost making ice, right? So you're delivering a frozen treatment, if you will, to drive a targeted ablation. So it is different. It destructs unwanted soft tissue. So I think the other thing that's exciting that could be some possibilities for us in the future is to see whether or not there are other applications of soft tissue beyond the current one that it's got approval for, right, which is in the gastroenterology space. James Sidoti: And in terms of approvals, is it just a U.S. product? Or do you expect it to be sold overseas as well? Raul Parra: It's sold overseas, too. Not materially, but it is. James Sidoti: Okay. Is that something that you think you could expand? Or do you think you'll focus on the U.S. market? Raul Parra: Jim, I think our approach is that we think we can take products just given our global footprint, our sales force, obviously, that's an opportunity that we think we can exploit. Obviously, it takes time now with MDR and all the regulatory kind of hurdles. We'll make the assessment as to what markets make sense. But we're always looking to take things internationally when we can. James Sidoti: And speaking of MDR, that expense has come down the past few quarters. Is there a light at the end of the tunnel for that? Or do you think it kind of levels out where it is spending right now? Raul Parra: I hope there is. I mean I think it's a long process. As you guys know, you guys have heard us complain about it, right? I mean I think to reregister products that have been in those countries for 10-plus years with no serious impact. As a matter of fact, helping patients has been really frustrating. But I think there is a light at the end of the tunnel. I think there's rumors of positive changes to MDR, how those play out is yet to be decided. But I think that the regulatory burden for Medtech devices is really hard. And I think Europe has seen the impact of those changes. And so hopefully, they come to some common sense there and they make some changes. But for now, the Merit way is just to be prepared and play by the rules. And so that's what we'll do. James Sidoti: All right. And then the last one for me, $140 million of free cash flow in the year-to-date, I assume you'll generate another chunk in the fourth quarter. Is that all going to go to debt pay down? Or do you have any other plans right now? Raul Parra: Yes. Well, we've got to convert, right? So there's really no debt to pay down, right? I mean I think for now, we'll continue to hang the cash on the balance sheet and look for acquisitions or investments here within Merit to deploy that capital. But we are calling for a minimum of $175 million of free cash flow for the year. So there is additional free cash flow that we think we can get. But yes, super excited about how strong it's been, given that we're also building the distribution center across the street, so. Operator: Thank you. And I would now like to hand the conference back over to Martha Aronson for closing remarks. Martha Aronson: Thanks very much. And just a huge thank you to all of our employees for all their hard work, and thank you all for joining us today on the call and for your interest in Merit Medical. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a great day.
Operator: Good afternoon, and welcome to WEC Energy Group's Conference Call for Third Quarter 2025 Results. This call is being recorded for rebroadcast. [Operator Instructions] In conjunction with this call, a package of detailed financial information is posted at wecenergygroup.com. A replay will be available approximately 2 hours after the conclusion of this call. Before the conference call begins, please note that all statements in the presentation, other than historical facts, are forward-looking statements that involve risks and uncertainties that are subject to change at any time. Such statements are based on management's expectations at the time they are made. In addition to the assumptions and other factors referred to in connection with the statements, factors described in WEC Energy Group latest Form 10-K and subsequent reports filed with the Securities and Exchange Commission could cause actual results to differ materially from those contemplated. During the discussions, referenced earnings per share will be based on diluted earnings per share, unless otherwise noted. This call also will include non-GAAP financial information. The company has provided reconciliations to the most directly comparable GAAP measures in the materials posted on its website for this conference call. And now it's my pleasure to introduce Scott Lauber, President and Chief Executive Officer of WEC Energy Group. Please go ahead. Scott Lauber: Good afternoon, everyone, and thank you for joining us today as we review our results for the third quarter of 2025. Here with me are Xia Liu, our Chief Financial Officer; and Beth Straka, Senior Vice President of Corporate Communications and Investor Relations. As you saw from our news release this morning, we reported third quarter 2025 earnings of $0.83 per share. With this solid quarter, we remain on track for strong 2025 results. Our focus on executing the fundamentals of the business is creating real value for our customers and stockholders. Today, we are reaffirming our earnings guidance for the year at a range of $5.17 to $5.27 a share. Of course, this assumes normal weather through the remainder of 2025. In addition, I'm excited to share our new 5-year capital plan. Let's start by talking about the economic growth that's driving the plan. We continue to see major business building a future in our region. Overall, our electric demand is expected to grow 3.4 gigawatts between 2026 and 2030, an increase of 1.6 gigawatts compared to the prior plan. Microsoft is making good progress on its large data center complex in Mount Pleasant, Wisconsin. The company has stated that the first phase of that project is on track to go online next year. In addition, Microsoft also recently announced plans for a second phase in Mount Pleasant that will be similar in size and power. Its projected investment is an incremental $4 billion on top of the original $3.3 billion investment. The economic development south of Milwaukee is supporting approximately 2.1 gigawatts of our overall 3.4 gigawatt demand growth. And as you recall, Vantage Data Centers has signed on to develop data center facilities on approximately 1,900 acres north of Milwaukee in Port Washington. Just last week, Vantage has announced that this campus named Lighthouse will be part of open AI and Oracle's partnership on the Stargate expansion. Vantage has reported that the site has the potential to reach 3.5 gigawatts of demand over time. Right now, we're focused on providing generation for an estimated 1.3 gigawatts of demand at the site in the next 5 years. The city of Port Washington approved Vantage is planned in August for the initial development on 670 acres. Vantage has stated that it expects to invest $15 billion in the project. The campus will feature 4 data centers and construction is planned to start this year. Vantage has announced that the facility could go online in late 2027 with this first phase of the project scheduled for completion in 2028. Of course, the growth of large customers is also fostering small commercial and residential development throughout our service territory. And Wisconsin's unemployment rate stands at 3.1% continuing a long-running trend below the national average. This significant economic development is driving our capital plan. As you may have seen from our announcement this morning, we expect to invest $36.5 billion in capital projects between 2026 and 2030, an increase of $8.5 billion above our previous 5-year plan. That's more than a 30% increase. With this updated capital plan, we expect asset-based growth at an average rate of just over 11% a year. We expect that strong asset base growth to support our updated long-term projected earnings per share growth of 7% to 8% a year on a compound annual basis between 2026 and 2030, This is based on the midpoint of our 2025 guidance. For the next two years, however, we expect to maintain our existing EPS growth rate of 6.5% to 7% on a compound basis and then accelerate starting in 2028 to the upper half of the new guidance range on a compound basis. As you are well aware, we're in the early stages of deploying the capital required to support the robust growth in our region, and it takes time to fully put the projects in service. The increase in our plan is driven by investments in regulated electric generation, transmission and distribution in Wisconsin and the pipe retirement program in Illinois. Let me give you a few more details. Over the next 5 years, we'll utilize an all-of-the-above approach for generation to support the economic growth and reliability by investing in new natural gas, batteries and renewables. The key for reliability is dispatchable resources. Between 2026 and 2030, we expect to invest an incremental $3.4 billion in modern, efficient natural gas generation versus the prior plan. This includes combustion turbines, reciprocating internal combustion engines or race units and upgrades to existing facilities. We also will continue to invest in renewable generation and battery storage increasing our projected investment by $2.5 billion over our prior plan. In addition, American Transmission Company plans to continue to invest in our transmission capabilities to serve our region's economic growth, connect new generation and strengthen the system. Part of that new transmission is planned to serve customers and new data center needs. Our plan calls for us to invest approximately $4.1 billion in ATC projects between 2026 and 2030. This represents a $900 million increase from the previous plan. And to help assure reliability and support economic growth, we're continuing to invest in our electric and natural gas distribution networks with an additional $2 billion in the plan. This includes significant investment in our pipe retirement program in Chicago. Recall that the Illinois Commerce Commission directed us to review -- directed us to focus on retiring all cast iron and ductile iron pipe with a diameter under 36 inches by January 1, 2035. We expect that over 1,000 miles of older pipe will need to be replaced. Turning to the regulatory front. I have just a few updates across our service areas. In Wisconsin, our proposed very large -- or BLC tariff remains with the Public Service Commission for a review. As we discussed earlier this year, this tariff is designed to meet the needs of our very large customers while protecting all of our other customers and investors. As currently proposed, and in our testimony filed earlier this month, the tariff would provide for a fixed return on equity in an updated range of 10.48% to 10.98% and an equity ratio of 57%. These financial terms have been agreed upon with the customers. The proposed terms of the agreements are 20 years for wind and solar and the depreciable lives for natural gas and battery storage assets. We worked with a very large customer in designing the tariff, including the financial parameters, and we believe the tariff is a key component to making Wisconsin a prime spot for data center investment. We have a procedural schedule and provided our direct testimony earlier this month. A commission order is expected by early May of next year for customers to take service in June. And in Illinois, we are continuing to coordinate with the City of Chicago under Pipe retirement program. As we are ramping up these efforts, we will continue to have regulatory reviews of the process. This includes the forecast in the general rate case proceeding, which we are planning to file in early 2026 for test year 2027. Of course, we'll keep you updated on any further developments. Now I'll turn it to Xia to provide you more details on the financial results and our financial plans. Liu Xia: Thank you, Scott. Our third quarter 2025 earnings were $0.83 per share $0.01 over third quarter 2024 adjusted earnings. Our earnings package includes a comparison of third quarter results on Page 16. I'll walk through the significant drivers. Starting with our utility operations, earnings were $0.12 higher when compared to third quarter '24 adjusted earnings. Weather positively impacted earnings by about $0.01 relative to last year. Compared to normal conditions, we estimate that weather had a $0.03 favorable impact in the third quarter of 2025 compared to a $0.02 favorable impact in 2024. Rate-based growth contributed $0.15 more to earnings and timing of fuel expense, tax and other items added another $0.07. These positive drivers were partially offset by $0.06 from higher depreciation and amortization expense and $0.05 from higher day-to-day O&M. In terms of our weather-normal retail electric deliveries, excluding the iron ore mine, we saw a 1.8% increase compared to the third quarter of 2024. This was led by the large commercial and industrial segment, which grew 2.9%. The residential and small commercial and industrial segments grew 1.3% and 1.4%, respectively. Overall, we are slightly ahead of our annual electric sales growth forecast. Looking ahead, with the updated load growth, we now expect our annual electric sales growth to be between 6% and 7% for the period 2028 through 2030, that's up from the 4.5% to 5% we previously forecasted. Turning to American Transmission Company. Capital investment growth contributed an incremental $0.02 to Q3 earnings versus 2024. And at our Energy Infrastructure segment, earnings increased $0.01 in the third quarter of 25% from higher production tax credits. 0next, you'll see that earnings from the Corporate and Other segment increased $0.11. This was largely driven by tax timing and higher interest expense. In terms of common equity, we issued about $800 million through the first 9 months via our ATM program as well as the dividend reinvestment and employee benefit plans. This largely satisfied our common equity needs for this year. As Scott noted, we're reaffirming our 2025 earnings guidance of $5.17 to $5.27 per share. This includes October weather and assumes normal weather for the remainder of the year. Going forward, with the updated capital plan, we expect our EPS growth to accelerate post 2027. Overall, based off the midpoint of the 25% guidance range, our long-term growth rate CAGR is expected to be 7% to 8% through 2030. Now let me comment on the financing plan that supports this growth and the new capital plan. As we have consistently guided you, we expect any incremental capital will be funded with 50% equity content. When compared to the prior plan, we added $8.5 billion of capital and about $4 billion of incremental equity content equally split between incremental common equity and hybrid or like-kind securities. So here are the details of the funding sources. Over the next 5 years, we expect cash from operations to be approximately $21 billion, funding more than half of our cash needs. Approximately $14 billion of the funding is expected to come from incremental debt, and the remaining cash is expected to be funded by approximately $5 billion of common equity. As a reminder, the cadence of common equity is a function of capital expenditures. For 2026, we expect common equity issuances to be between $900 million to $1.1 billion. In closing, as Scott discussed previously, the strong economic development and low growth in Wisconsin is the foundation of our new 5-year plan. With the asset base forecasted to grow at 11.3% a year on average, we expect to nearly double our asset base over the next 5 years. It's important to note that the bespoke assets allocated to our very large customers, are projected to represent 14% of our total asset base by 2030. As a reminder, the tariff is designed so these customers pay their fair share and are not being subsidized by other customers. We're very excited about our company's future and the investment opportunities ahead of us. With that, I'll turn it back to Scott. Scott Lauber: Thank you, Xia. Finally, a quick reminder about the dividend. As usual, I expect we'll provide our 2026 dividend plan and earnings guidance in December. We continue to target a payout ratio of 65% to 70% of earnings, and we're currently positioned well within that range. We expect to grow the dividend at a rate of 6.5% to 7%, consistent with our past practice. Overall, we're optimistic about our 5-year plan and the longer-term outlook. I think we're in the early stages of the growth cycle as we continue to see opportunities in economic development in our region, including data centers. We look forward to providing additional details on our plan in just over a week at the EEI conference. Operator, we are now ready for questions-and-answer portion of the call. Operator: [Operator Instructions] We'll take our first question from Shahriar Pourreza at Wells Fargo. Shahriar Pourreza: Just on the -- obviously, just on the updated growth outlook, I mean there is that inflection post 27. I guess some would be surprised it's more back-end loaded. Can you maybe just walk us through how the CAGR shapes kind of in that back half of the plan? Can it be accelerated? -- other incrementals? Is there an opportunity to smooth this out a little bit? Scott Lauber: Sure, sure. Great question. And remember, as we historically have done, we've always taken the midpoint of the current year's guidance, the 2025 guidance and looked at a compound annual growth rate I think it will help if I give you a little color of what we're seeing year by year and think about it as you look at our capital plan. So in the first year in '26, we're seeing $6.5 billion to $7 billion. I think as you start looking in '27 then, you can see our capital plans are ramping up to a little almost $7 billion and over $7.7 billion. When you have that, you're going to see part of those earnings coming in. So in 2027, we're seeing 7% to 8% probably on that annual basis year-over-year growth versus looking at it on a compound basis. And then when you look at those outer years, '28 through '30, I'm seeing closer to 8%. That's kind of where we're seeing. It just takes a while to ramp up really lines up well with what our capital plan is -- and that's how you get that compound growth rate that 7% to 8% at the upper end of our plan here. Does that add a little color? Shahriar Pourreza: No, it does. And is there any opportunity, Scott, to smooth it out a little bit? Or is this the plan is the plan. Scott Lauber: Well I think there's some opportunities that we could see as things potentially accelerate. There's a lot of stuff that we're asking for approvals for and the commission is doing a great job getting us approvals. There's just a lot of activity and we want to be very prudent -- what it takes to get approvals, what it takes to actually get everything to start building those plans. So I think there's opportunity there. We're just -- we don't like to have any white space, we want to make sure we can execute and we want to make sure we can deliver. And we feel this is very, very executable. Shahriar Pourreza: Perfect. I appreciate that. And then just my perennial question for you is just around the Point Beach conversations just with NextEra. I guess any sort of sense of timing around an announcement? Are you still to have an Analyst Day coming up in early December. Are you still thinking about year-end? Or are the conversations kind of shifting a little bit further out? Scott Lauber: Yes, that's a great question. And the conversations are still going on. They're maybe shifting a little bit further out. I just wanted you to know in this plan, we haven't assumed 1 way or the other. So we have no capital in here if we had to replace that capacity. In the end, we're really looking at what's the best for our end-use customers and what value we have for the customers. We just got to be very prudent. We have a lot of opportunities, we think, in fact, -- if we don't renew something, I think there's potentially capital upside. We're just going to really look at it from the perspective of the customer and what makes sense overall. Operator: We'll take our next from Julien Dumoulin-Smith at Jefferies. Julien Dumoulin-Smith: I am wearing the rally cap for you guys here today on this one. Scott Lauber: I appreciate that. Julien Dumoulin-Smith: Of course. With that said, there's a lot to take on here. Let me come back to the question on this Microsoft expansion in the second phase. Obviously, they made some headlines recently. How should we interpret that as being incremental or not to the plan if eventually there's something folds in there? I mean, to what extent is it or isn't it fully reflected here? Scott Lauber: So -- and we work with Microsoft, along with all the other customers in Southeast Wisconsin that we came up to that 2.1 gigawatts for Southeastern Wisconsin. And I can't really divulge individual customer information -- but let's just say I'm very confident in the growth we have in Southeastern Wisconsin, and I think there's more growth in the remaining 5 years when you think about the next 5 years of our plan. And I don't know if you had a chance to listen to the Microsoft conference call, they actually called out the growth in Southeastern Wisconsin. They call the data center Fairwater. It's the world -- expected to go online next quarter or this quarter, they announced it expects to go online next year. And they say it could scale up to 2 gigawatts alone. So I think -- and I can't speak for them, but when you look at the overall picture, I think there's a lot of opportunities as you think about the next 5 years also. Julien Dumoulin-Smith: Got it. Excellent. If I can needle you on a couple of details here. One thing that stood out here, you raised the transmission CapEx by slightly less than $1 billion. But I think the Port Washington transmission project itself with ATC was 1.3%. Is that fully in there? Again, I know it's a partial ownership for you guys, et cetera, but -- just wanted to clarify that here. Scott Lauber: Sure. And we're a 60% owner of American Transmission Company. So it's all kind of factored in here. I think there's maybe a little bit more upside as we see other data centers in there. I think it's probably the basic is factored in our plan. So there's probably a little more upside at that $1.4 billion. I think that even came out after the original ATC forecast was pulled together. So I think there's a little bit more runway there. Remember, there's only so much transmission you kind of do on the system at a time. So it's maybe limited a little bit by that. Julien Dumoulin-Smith: Got it. And sorry to one more here. The ramp in Illinois seems a little bit more than perhaps some were expecting. Again, it's a pretty healthy number here with the $1.5 billion. Can you speak a little bit to what's taking place there? And also, if you have any latest thoughts about what could happen with this Illinois legislation, if it has any meaningful impact for you guys? Scott Lauber: Sure, sure. It's very consistent with what we've been laying out that it's going to ramp up some in 2026, then in 27, and we expect we'll be up to about that $500 million in 2028 and going forward. Remember, we had about $90 million a year on the plan. So it falls in line between that $1.4 billion and $1.6 billion. We have $1.5 billion in here. So that all is kind of consistent with what we've been saying. The Illinois legislation, we'll see where that goes, is a little bit on the efficiencies in there. I don't think you'll have a significant effect on us, but we, of course, are watching it. Operator: We'll move next to Michael Sullivan at Wolfe Research. Michael Sullivan: Scott, I wanted to start with Slide 22. If you could just help on the just bridging the asset base growth to earnings growth? Is the delta there from 11% to 7%-8%? Is it all just equity dilution? Or is there anything else we should be thinking about it? And then on that same slide, of asset base with the bespoke customer? Is that like a proxy for like earnings attached to those projects as well? Scott Lauber: So a couple of items, and we'll let Xia address it, too. At a high level, the bespoke portion there that's to identify people had asked how much of the potential rate base in those outer years will be tied to that very large customer tariff. And that's the current projection. And it's about 14% of our asset base up in 2030, dealing with that, the renewables and other stuff that the VLC payer will cover. And then the 11.3% to our growth rate, a large of it is just dealing with choice. I think it looks like what we do with the financing and the dilution from the equity issuance. Liu Xia: Yes. I think roughly 3% is from the equity and the rest is the little bit holding company, Terry, Michael? . Michael Sullivan: Okay. That's very helpful. And then sticking with the financing plan, any sense of where you are in terms of capacity for junior subs and hybrids? Like are there any thresholds that eventually you run into at some point or still a lot of runway? Liu Xia: Still a lot of runway. And as you know, the agencies have a slightly different definition for the capacity, S&P uses percentage of the total capitalization and Moody's uses a percentage of the total debt capacity. The 5-year plan with the planned juniors sub, we still have billions of dollars of capacity left. So we're good. Operator: We'll take our next question from Nicholas Campanella at Barclays. Nicholas Campanella: I wanted to ask just a very large increase in the capital plan and the rate base growth following that. That's obviously coming with a financing need. And you are in a lot of different states and jurisdictions. I noticed that you also, as part of this plan, put some capital out of WEC infrastructure. Just wondering what the appetite is to recycle capital to replace common equity needs or other financing needs in the plan? Scott Lauber: Sure. That's a great question. And if there was an opportunity that came along, we, of course, would look at it. We just want to make sure that it fits our financial parameters. It will be good for investors. But we really like the performance of our -- of some of our smaller companies. They perform very well. They don't take a lot of work, and we continue to execute on them. We've got a great team there. So it's not like we're looking to sell them at all. But if an opportunity would exist, we would always look at that opportunity. We just want to make sure it's good for our investors. Nicholas Campanella: Okay. Great. And then I guess just as we think about the ability for current customers to gross up commitments in your territory or potential new customers? I guess one thing we've heard through this earnings season from some other companies, they talked about just available turbine capacity, what their advantage in the supply chain would be to kind of deliver on those incremental deals. How do you kind of think about that from the WEC side if Vantage was to come and do an increased commitment or Microsoft was to come or other large load customers. Do you have the turbines or maybe the renewable agreements to kind of execute on that? Scott Lauber: Sure. Great question. And we have a team that works with our very large customers and potential additional customers on how we could supply either an accelerated load on their basis or additional load or new growth. So we are working with them every day. We have a robust supply chain and working with developers to have a path to be able to serve that. So very -- feel very confident that the load will increase, and we could work with them. So we have been working with them behind the scenes for several years on this to stay ahead of it. What you're seeing in the plan, though, is what they have firm commitments to. Nicholas Campanella: Maybe if I could just sneak one more in quickly, just on Point Beach. Just recognizing the license extension there just recently happened in the last few months, what's just the state of urgency from state stakeholders to kind of further lock up this capacity through the end of the decade or the end of 2030 now? And is that something that you think we could see by year-end? Scott Lauber: So I mean, we've got the capacity, I think it's to 2030 and 2033. So we have a lot of time. We've been working with NextEra. We just got to make sure that we have the right agreement for our customers. But as I said, we do have access to other abilities if we need to replace that capacity. So we're working with them. We just got to get to a right position. And if we get there, great. If we don't get there, there's a lot of opportunities for us, too. Operator: Next, we'll move to Andrew Weisel at Scotiabank. Andrew Weisel: First question -- sorry, if I'm getting 2 Qs here, but for '28 to '30, are you implying 8% or like 7.5% to 8%? And if it is the latter, doesn't the math suggest that the overall 5-year period would be below the midpoint? Scott Lauber: Well, I don't think it will be below the midpoint. I think we're going to look at probably in that 8% area that will get us to the midpoint on a compound basis. Liu Xia: I think there's a little confusion, Andrew, in terms of the upper half on the slide. I think that's a compound number of the midpoint of 2025. What Scott is talking about is on an annual basis, if you look at from '27 to '28, '28 to '29, we're seeing that 8% range. And if you compound it back, that's the 7% to 8% of the midpoint of 2025. Andrew Weisel: Okay. Great. Just wanted to clarify. So it's about 8% for the later years, right? Liu Xia: On an annual basis. Andrew Weisel: Okay. Great. Just wanted to clarify that. Next question, on the CapEx update, first of all, very impressive numbers, a huge increase. What I want to understand, though, is it's an $8.5 billion increase. But when I add up the pieces on Page 18, I'm calculating a total of $8.1 billion. So I don't know if it's rounding or if there's some pieces missing, but can you help me bridge that gap? Where is the extra $400 million coming from? Scott Lauber: Yes. That's -- I mean we just kind of picked out a couple of the highlights there. I guess if you do the specific reconciliation with the bar chart, you have a little bit more gas distribution of a couple of hundred million. And then I think it's kind of cats and dogs and generation and everything else. We just called out the significant ones. Andrew Weisel: Okay. That's what I thought. I just wanted to be sure. Then lastly, in terms of demand, again, a big increase. You're forecasting 3.4 gigawatts by 2030, up from 1.8 gigawatts in '29 previously. Is that increase related to data center projects you've been talking about ramping up? Or is it some of the other manufacturing activity you've discussed in the past? I know there's a lot going on along the I-94 corridor. How much of that is like existing projects ramping versus new incremental projects coming online? Scott Lauber: Yes, great question. So when you look at it, it's about 1.6 gigawatt growth, 1.3 is the Vantage data center in Port Washington. And then in Southeastern Wisconsin, as you can imagine, a significant part is from the data center in Southeastern Wisconsin, but it really is all the customers in that area. We have Eli Lilly expanding. We've got Amazon. We've got other companies coming to the region. And then that's not even counting all the residential load we're starting to see in new construction starting in the area. So I think it's all of the above, but definitely significantly related to database or data center growth. Operator: We'll take our next question from Sophie Karp of KeyBanc. Sophie Karp: Comprehensive update today. So if I may just dig in a little bit on the data center announcements, right? There's been a slew of announcements lately, some assets traded hands. So I think there's some confusion, what's incremental, what's in the plan. So could you make it very clear to us what's actually in the plan of the recent gigawatts of announcements and what yet is not in the plan, I guess? Scott Lauber: Sure, sure. So what's in the plan, and we have Southeastern Wisconsin. So there's 2.1 gigawatts down there that includes the Microsoft, what they have told us to factor into this 5-year plan. And then in Northern in that Port Washington site, it's really -- I would look at it as being Vantage and Vantage has worked with Oracle. So those are the same megawatts at 1.3 gigawatts, okay? So Vantage/Oracle is 1.3 gigawatts. That's what's in the plan. What's not in the plan is there's additional land of about 1,200 acres in Port Washington that potentially could house another, what, 2 gigawatts plus of additional capacity. And then in Southeastern Wisconsin, when you think about the Microsoft site, there's additional 700-plus acres that they have there that I think could be for future development that also could add into the overall gigawatt usage. So I think there's a lot of opportunity for future growth here. I hope that help clarifies it. Sophie Karp: Yes. So it sounds like the plan as it stands right now is just like super conservative. Is this a fair way to say? Scott Lauber: Yes. We only put what the other -- what the customers are announced and provide us the information on. Sophie Karp: Got it. Okay. And my other question was this like when you -- it's very helpful color when you talk about 14% of your rate base being under the large load customer tariff by the end of 2030 or by 2030. What do you, I guess, expect -- and the economics are never pretty clear, right, is the premium economics on that chunk of rate base. What do you expect the economics to be for the rest of the rate base? Like when you formulate your plan, do you expect that, I guess, they will -- the overall average will be similar to what you have today, the trajectory of what you have today or for the lack of a better word, some deterioration in the economics of the rest of the rate base? Or do you expect the -- take the rest to be unaffected by the presence of this like new premium part of rate base? Scott Lauber: Right? So we assume the rest of the rate base earns the current authorized return that we currently have in all the -- each of the jurisdictions when you look at them separately. And then when you look at Wisconsin, the Wisconsin right now, we're at that 9.8% ROE and depending upon the utility, like a 57.5%, 58% regulated ratio on Wisconsin Electric that each of those earn their separate return. Remember, the foundation of our tariffs is that the large customers don't get subsidized or subsidize the other customers they -- each pay their fair share. So we keep them as separate. Operator: We'll take our next question from Ryan Levine at Citigroup. Ryan Levine: Two quick questions. Just in terms of the execution or state of conversations for some of the Vantage expansion beyond the 1.3, any color you could share around maybe the engagement level or the time line that conversations are progressing through? Scott Lauber: Sure. So we're always in our discussions with Vantage, Microsoft and potential others -- but right now, Vantage, as we said in the prepared remarks, are really concentrating on that first 1.3 gigawatts. I think they had a press release out there. They're going to have construction of about 4,000 construction workers out there when they're able to start construction. So I think everyone is concentrating on that. We'll have more discussions over the next -- probably next year. But I think everyone is just concentrated on the first part of the load, which is what we want to make sure we can achieve too. Ryan Levine: Okay. And then there was a lot of mention about Microsoft and Oracle. But beyond those 2 customers, the engagement level fairly broad? Or is it really focused on a more narrow group of potential customers for expansion? Scott Lauber: We have other customers that we're talking to, but those are the 2 main ones that are already in the area and made public announcements. We're talking to others. I don't want to jump that like -- I try to play it pretty close to let them make the announcements or them sign purchase cancellation agreements before we get ahead of our skis on potential. But we are talking to others. Ryan Levine: Okay. And then unrelated, just to clarify around your plan, is the assumption embedded in the plan conservative and that doesn't assume an outcome or doesn't assume the higher very large load tariff ROE and to the extent that you were to be successful in that application that, that would be additive to the plan or help provide additional buffer? Scott Lauber: No. I mean, we're assuming the very large tariff is implemented. What we talked about on the call, there is a range of ROEs, 10.48% to 10.98%, which we really stay with the fundamentals of making sure we don't have a secondary effect that hurts our other customers. And those are more on -- we're working individually, and we can't give more details, but on a higher return on some of it to that 10.98%. But more to come on that as we continue to work with our customers on it. Operator: We'll move next to Paul Fremont at Ladenburg. Paul Fremont: First question has to do with the Microsoft announcement where they canceled the Caledonia site. But what they said, I think, was that they would continue to look for alternative sites in Southeastern Wisconsin in your service territory. What other locations do they have land? Or do you potentially have land that you would be able to sell to them? Scott Lauber: Yes. Good question. So you are correct. They're looking for a different site than what was the original plan. We really don't have that significant type of land available elsewhere, but I don't know their specific plans. So I know they said they're looking at other places in Southeastern Wisconsin, probably more to come in that area. It's just good that they're -- this is really great for the area when you think about property taxes and good paying jobs. So I know they're early in their look, so we'll see where that goes. But once again, that's a potential for more upside on our load. Paul Fremont: Great. And the timing of how long it would take for them to find sort of a replacement type scenario, would it be like 12 months? Or what would you -- what would be sort of a reasonable assumption? Scott Lauber: Yes. And I can't talk for Microsoft, but they move pretty fast. I think a year is may be reasonable, but we'll see where it goes. Paul Fremont: Okay. My next question on Point Beach would be, if you're unable to reach an accommodation with NextEra, what type of generation would you build? And when would you have to start building it? Scott Lauber: Yes. That's a good question. And we'll look at it, but it would have to be something that would be dispatchable that we could cover the dispatch on. So it would have to be some type of gas. We'll see what the EPA rules. Do we eventually look at a combined cycle maybe and maybe some renewables in there. So we like the all-the-above approach. And I know some people don't like renewables, but when you think the gas prices at times when they're high, renewables are very popular when gas prices are high. And also, we look at all of the above mix. So if you think about it, the contracts are 2030 and 2033. So there's still plenty of time. And like we said, we work with all our large customers and our planning team is looking at how do we replace this, and I'm sure we have several options available. Paul Fremont: And then last question for me. When we look at the $4.8 billion to $5.2 billion of common equity, would some of that be junior subordinated debt? Or would any junior subordinated debt issuances be incremental? Liu Xia: It's the latter. The $4.8 billion to $5.2 billion would be common equity. Paul Fremont: And then is there junior subordinated debt contemplated then as part of your incremental debt? Liu Xia: Correct. As I said in the prepared remarks, we added $4 billion of equity content. So 2 more of common and the other 2 would come from the junior subordinated debt or like-kind securities. Operator: We'll take our next question from Anthony Crowdell at Mizuho. Anthony Crowdell: Just one quick one. I'm curious with all the load and growth that we haven't seen for years in this sector, I'm curious if this is making earnings forecasting and rate base growth forecasting easier or harder? Like is it chunkier with these large loads coming in, and it's becoming more of a challenge of forecasting out? Or is this all this load just such a tailwind and it's making life a lot easier on the forecasting? Scott Lauber: Well, it's sure nice to have load to drive the capital plan, which makes it a lot nicer. But there's a lot of stuff that we have to keep into account, including the timing of in-service, the timing of the load, and we have a whole team working at staying ahead to make sure we have the turbines and the renewable sites located. So we always like growth. We'll take on that challenge. It just takes a lot of people, a lot of bodies monitoring and keeping on top of everything. And the key is execution. So we have a whole group executing on the capital projects as we're -- as we got commission approval this summer, we're working on those projects right now. So it's just different. Let's put it that way. Operator: Next, we'll go to Steve D'Ambrisi at RBC Capital Markets. Stephen D’Ambrisi: I just had a quick one just about -- a lot of the questions today have been about 2 existing hyperscale sites expanding and when. But I think what's interesting to me is realistically, you guys are relatively unique in the fact that you don't really talk about a sales funnel of other customers. And so I guess what I would most be interested in is, do you think that getting the VLC tariff through the Public Service Commission will help potentially broaden the customer base? Like clearly, you've had success citing some of the biggest data centers in your service territories that we've seen across the country. And so just interested to hear about potential other people. Scott Lauber: Yes. That's a good question. I think the very large customer tariff, in fact, we attract some of our -- the first customer before we even had a tariff. So I think if you think about location, the ability for WEC and American Transmission Company to be able to deliver and provide the generation and renewables and transmission to help energize their sites and move fastly in the Wisconsin environment and in the MISO footprint, I think that is a great advantage. I think also being in Wisconsin, you got a cooler environment for air storage cooling. So I think that's -- it's an advantage, and we don't have the natural disasters that other parts of the country have. So I think all of those are positive. Our customers, our very large customers, we worked with them as we filed the very large customer tariff. So I think they considered and I've heard several times how it's fair. I think that's also a plus. Once it gets approved, I think that will definitely be helpful. I think the key is and all our large customers make sure that we do not affect any other customers' rates. So that was good as a foundation for it. So having it approved, I think, can only help, but we're really excited about the pipeline we are talking to now and the potential growth at the significant sites that we have already going in Wisconsin. Operator: We'll go next to Bill Appicelli at UBS. William Appicelli: Most of the questions have been asked. Just one question clarifying. Just on the step-up in the asset base growth. Was there any additional offsets there or anything that came out? Just thinking because the back of envelope math maybe would have supported given the $8.5 billion of CapEx, something maybe a little bit closer to 12%. So I'm just curious if there's anything else different in the bridge there. Scott Lauber: No. I think the only thing we took out is we don't have any investments in [ WECE ] for the most part. But overall, I don't think there's much other changes there. It's just more back-end loaded starting more in '27, I guess. William Appicelli: Okay. And then just what -- from an affordability perspective, what's embedded in this plan in terms of the -- on the electric side in terms of average annual rate increases for residential customers? Scott Lauber: So we will be filing a rate case in Wisconsin for our biannual process. So we're pulling those numbers together now that we'll file sometime in the end of the first quarter, most likely beginning of the second quarter. We're looking at inflation type increases, but it's early in the process now. The key is none of it is going to be costs that are coming in from any of the hyperscalers. They're paying their fair share. Operator: And our final question today comes from Carly Davenport with Goldman Sachs. Carly Davenport: I just had one clarification. Just on some of the other growth opportunities. As you think about the next 5 years, do you see incremental capacity and potential on the system for more load to be added in the course of the current plan? Or would that be largely beyond the 2030 time frame as you think about those opportunities? Scott Lauber: So I think as we work with these very large customers, I think at the end of our current 5-year plan, we potentially could see additional growth come in depending upon how they look at their individual development. So I think there's a potential for both on the current plan plus in the next 5 years. Carly Davenport: Great. I'll leave it there. Scott Lauber: Sounds good. Thank you. All right. That concludes our conference call for today. Thank you for participating. If you have more questions, feel free to contact Beth Straka at (414) 221-4639. Operator: And this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Greetings, and welcome to the Algoma Steel Group, Inc. Third Quarter 2025 Earnings Call. [Operator Instructions] [Technical Difficulty] being recorded. It is now my pleasure to introduce Michael Moraca, Vice President and Corporate Development and Treasurer. Please go ahead, sir. Michael Moraca: Good morning, everyone, and welcome to Algoma Steel Group, Inc.'s Third Quarter 2025 Earnings Conference Call. Leading today's call are Michael Garcia, our Chief Executive [Technical Difficulty] is being recorded and will be made available for replay later today in the Investors section of Algoma Steel's corporate website at www.algoma.com. I'd like to remind everyone that comments made on today's call may contain forward-looking statements within the meaning of applicable securities laws, which involve assumptions and inherent risks and uncertainties. Actual results may differ materially from statements made today. In addition, our financial statements are prepared in accordance with IFRS, which differs from U.S. GAAP, and our discussion today includes references to certain non-IFRS financial measures. Last evening, we posted an earnings presentation to accompany today's prepared remarks. The slides for today's call can be found in the Investors section of our corporate website. With that in mind, I would ask everyone on today's call to read the legal disclaimers on Slide 2 of the accompanying earnings presentation and to also refer to the risks and assumptions outlined in Algoma's third quarter 2025 management's discussion and analysis. Our financial statements are prepared using the U.S. dollar as our functional currency and the Canadian dollar as our presentation currency. All amounts referred to on today's call are in Canadian dollars unless otherwise noted. Following our prepared remarks, we will conduct a Q&A session. I will now turn the call over to Chief Executive Officer, Michael Garcia. Mike? Michael Garcia: Good morning, everyone, and thank you for joining us today. As we do each quarter, I'll begin with safety. Our commitment to workplace safety remains at the core of everything we do. I'm pleased to report that we maintained our strong safety performance this quarter, building on the improvements we achieved throughout 2024. With EAF Unit 1 ramping up and our accelerated transition to electric arc furnace steelmaking underway, we continue to prioritize the health and well-being of our workforce during this pivotal transformation. Before diving into the details, I want to highlight 3 important themes. First, the U.S. 50% tariffs have effectively closed that market to us, driving lower shipments and higher production costs as we've pivoted our entire go-to-market strategy. Second, we've secured the capital to strengthen our liquidity through $500 million in government support and an expanded USD 375 million ABL facility, extending our liquidity runway so that we can develop opportunities to diversify the business. Third, we have embarked on an operational pivot, accelerating our EAF transformation and focusing on products for the domestic market with the goal of significantly reducing our cash burn. The steel industry is experiencing significant disruption. The 50% U.S. tariffs implemented in June have effectively made that market no longer viable for Canadian steel producers, completely undermining our historically successful cross-border business model. These trade disruptions are reverberating globally, forcing producers worldwide to seek alternative markets, while macroeconomic uncertainty compounds the headwinds facing our industry. Our third quarter performance was in line with our previously disclosed guidance across both shipment volumes and adjusted EBITDA metrics. As expected, we experienced lower shipment volumes and realized pricing as well as elevated cost pressures, resulting in year-over-year declines in both revenues and adjusted EBITDA. A bright spot continues to be our fully modernized plate mill. Plate shipments totaled approximately 97,000 tons, roughly in line with the 103,000 tons in the prior quarter despite taking a planned 2-week outage during the quarter. We expect Q4 plate production to increase sequentially as we capitalize on our position as Canada's only discrete plate producer. Turning to our electric arc furnace project, the foundation of our future. I'm pleased to report continued progress. Since achieving first arc and first steel production in early July, commissioning and ramp-up activities for Unit 1 have progressed in line with expectations. The furnace and associated melt shop assets have demonstrated stable and reliable performance, achieving quality metrics across a broad range of plate and hot-rolled coil product grades. The Q1 power system and other critical process components continue to perform as designed, supporting consistent metallurgical quality and process control. As of September 30th, 2025, cumulative investment for the EAF project was $910 million, including $30 million during the third quarter. All material aspects of the project have been contracted, and we continue to expect final aggregate cost of completion will be approximately $987 million. We have announced a number of decisive actions to strengthen our balance sheet and liquidity, including $500 million of federal and provincial loan facilities. Rather than covering each in detail, I'll ask Rajat to take you through the specific steps and their impact on our financial flexibility later in the call. This government support directly addresses the sustained tariff environment that has forced us to reimagine our operating strategy. We are accelerating retirement of our blast furnace and coke oven operations as we ramp up EAF production through 2025 and 2026. We're strategically refocusing production on as-rolled and heat-treated plate products, along with select coil products primarily for sale in the Canadian market. We are uniquely positioned as Canada's only discrete plate producer, and this strategy aligns our production with domestic demand, while reducing exposure to volatile and oversupplied coil markets. Our focus aligns with infrastructure, construction and renewable energy growth sectors, preserving Algoma's relevance by supporting national industrial priorities. We remain focused on extending our liquidity runway to develop new opportunities, including advancing our energy strategy and pursuing product diversification initiatives. Rather than competing as a commodity producer in a tariff-distorted global market, we are positioning Algoma as a premium Canadian supplier of essential steel products. This repositioning achieves 3 outcomes. We supply Canadian industries with high-quality plate products needed for infrastructure, manufacturing and defense. We create operational stability that supports continued investment aligned with Canada's industrial needs. And we reinforce our role as a critical partner in Canada's industrial and defense capabilities. By concentrating on higher-value specialized products, we can strengthen customer partnerships and optimize margins. Combined with government support, this strategy positions Algoma not just to withstand current conditions, but to emerge as a stronger, more focused company. In short, we are evolving from a cross-border commodity producer to a Canadian-focused steel supplier with lower cost, lower emissions and greater resiliency. This transformation strengthens both Algoma and Canada's industrial future. Now I'd like to take a moment on a more personal note. As announced last evening, I will be retiring at the end of this year from Algoma Steel, concluding what has been an extraordinary journey with Algoma. I want to congratulate Rajat Marwah on his appointment as CEO effective January 1st, 2026, and Michael Moraca on his promotion to Chief Financial Officer. Rajat has been a trusted partner throughout our transformation. His leadership in finance, strategy and stakeholder engagement has been instrumental in securing the foundation we've built together. And I know Michael will bring the same discipline and strategic insight to the CFO role as he has demonstrated leading our integrated business planning and capital markets efforts. I'm proud of how far this company has come and confident that the management team under Rajat's leadership will continue to strengthen Algoma's position as a Canadian leader in sustainable steelmaking. I would like to pass it over to you, Rajat, to cover the financials and for closing remarks. Rajat Marwah: Thanks, Mike. Good morning, everyone. First, I want to express my deep appreciation for Mike's leadership. His vision and discipline have guided Algoma through one of the most significant transformations in our history. The foundation he built strategically, operationally and culturally positions us for long-term success. Talking about the results for the third quarter, adjusted EBITDA was a loss of $87.1 million. For the quarter, tariffs expense totaled $90 million, and we estimate Canadian sales prices were approximately 40% lower on account of tariffs, resulting in lower revenue of approximately $32 million. Cash used in operating activities was $117.3 million. We finished the quarter with $337 million of liquidity. We shipped 419,000 net tons in the quarter, a decline of 12.7% versus the prior year quarter. Lower steel shipment was the result of weakening market conditions, particularly due to Section 232 tariffs, which impacted the company's export sales and resulted in oversupply of the Canadian market at reduced transactional pricing. Net sales realization averaged $1,129 per ton compared to $1,036 per ton in the prior year period. The increase versus the prior year level reflects improvements in value-added product mix as a proportion of sales, which more than offset weaker market conditions. Plate prices continues to enjoy a premium relative to hot-rolled coils during the quarter. This resulted in steel revenue of $473 million in the quarter, down 12.2% versus the prior year period. On the cost side, Algoma's cost per ton of steel products sold averaged $1,282 in the quarter, up 24.2% versus the prior year period. Starting March 12, the company was subject to 25% tariff on outbound steel shipments to the United States, which increased to 50% in June. For the third quarter, tariffs costs were $90 million or $214 per ton, which was included in cost of sales. Excluding the impact of tariff cost of sales was only 3.6% higher versus the prior year period despite a 20% lower shipping volume and a higher mix of plate sales for the period. We will continue to focus and drive down the cost of sales as we make our strategic pivot to focus primarily on plate and selected coil products. Net loss in the third quarter was $485.1 million compared to a net loss of $106.6 million in the prior year quarter. The increase in net loss was driven primarily by the $503 million noncash impairment loss. As of September 30th, 2025, the company identified 2 impairment indicators, its market capitalization falling below the carrying value of its net assets and the impact of U.S. Section 232 tariffs. Accordingly, an impairment test was performed to assess whether the recoverable amount of the cash-generating unit exceeded its carrying value, which resulted in the noncash impairment loss. Cash used in operations totaled $117 million for the quarter compared to cash generated by operations of $26 million in the prior year period. Inventories ended the quarter at $790 million, up approximately $54 million from the second quarter, reflecting a physical build in raw materials and finished goods, partially offset by a $14.8 million noncash write-down of inventories to net realizable value. Looking ahead, we expect a significant inventory drawdown beginning in the fourth quarter and accelerating through 2026 as we exit the blast furnace and coke oven operations and transition to a far more efficient EAF-based supply chain. As Mike mentioned, we have announced a number of decisive actions to strengthen our balance sheet and liquidity. We increased our ABL credit facility from USD 300 million to USD 375 million with Export Development Canada joining as a new lender. More significantly, late last month, we announced binding term sheets securing $500 million in liquidity support from the governments of Canada and Ontario. We want to thank the government for their efforts in supporting Canadian industry, and we feel this package reflects their confidence in Algoma's strategic importance to Canada's industrial base. The financing includes $400 million from the federal large enterprise tariff loan facility and $100 million from the province of Ontario, consisting of a $100 million third lien secured tranche and a $400 million unsecured tranche with 6.77 million share purchase warrants at $11.08 per share. The facility carries a 7-year term at CORRA plus 200 basis points, stepping up after year 3 by 200 basis points annually. A combination of our strategic operational pivot, liquidity support, working capital efficiency improvements and continued effort on driving down cost is expected to extend our liquidity runway well into the future as we look to capture opportunities and diversify the business. In closing, as we look ahead, our direction is clear: complete the EAF ramp-up, pursue diversification opportunities and continue building on the strength of our exceptional team. The past several months have brought unprecedented trade disruption. But through it all, our people have maintained exemplary safety performance and advanced the commissioning of EAF Unit 1. We have taken decisive action to secure our future. The $500 million in government liquidity facilities, together with our expanded USD 375 million ABL facility, provide the resources and flexibility to complete this transformation with confidence. These arrangements reflect a shared commitment between Algoma and our government partners to preserve critical domestic steel capacity and industry resilience. By pivoting to become a domestically focused high-value steel producer anchored in plate and specialty products, we are creating a stronger, more resilient enterprise aligned with Canada's long-term economic and defense priorities. Our accelerated EAF transition is central to that vision, positioning Algoma as one of the North America's lowest cost and most sustainable producers. While near-term trade uncertainty will remain, we are building a company that is leaner, more focused and more competitive. When markets normalize, we expect to emerge stronger with improved margins and advanced cost structure and deeper alignment with national priorities. To our employees, thank you for your dedication and adaptability. To our government and financial partners, thank you for your confidence. And to our shareholders and customers, thank you for your continued support as we execute this pivotal transformation. The work we are doing today is preserving and modernizing a strategic national asset and laying the foundation for enduring value creation. We remain focused, disciplined and confident in the path ahead. Thank you very much for your continued interest in Algoma Steel. At this point, we would be happy to take your questions. Operator, please give the instructions for Q&A. Operator: [Operator Instructions] And our first question we will hear from Ian Gillies with Stifel. Ian Gillies: In the event we remain in this tariff environment, i.e., 50%, could you maybe just outline where you think the production profile ends up in 2026 and whether you think you can be at EBITDA breakeven in that scenario? And I think that would be helpful. Michael Garcia: Sure. This is Mike. I'll start and then hand it over to Rajat. Obviously, our original intention was to get to full production on the EAFs at the end of 2026, initial part of 2027. Because of what's happened to our business model with the 50% tariffs and the market dynamics, we've seen clearly that the right choice in front of us now is to execute a transition to full EAF production basically a year early. That's going to give us the best ability to deal with the current environment. So we are accelerating and pushing on that transition as we speak, and we need to execute it in the coming months and ramp up EAF as quick as possible because that will put us at the lowest cost, most flexible cost position, and it matches the available business we have right now. So as far as the specifics to your question of the ramp-up and where we would reach EBITDA positive or EBITDA neutral, I'll let Rajat address that. Rajat Marwah: Thanks, Mike. So as Mike mentioned, now we are looking at accelerating it. Our market in the U.S. is practically close to us closed. And what remains is in Canada, we have our plate mill being the only plate producer in Canada, we are taking advantage of that and trying to ship as much plate as we can in Canada. The market on the plate side itself is weaker with all the projects being announced, that definitely will help the market to get stronger. So from the way we look at it for next year, we will not be selling our 50% portion into the U.S., and we'll be maintaining our share in Canada for plate and coil. So that from a numbers perspective, could be as close as 1 million to 1.2 million tons for the year, if situation remains the way it is without taking any upside on investments coming into Canada on the plate side, defense side, infrastructure side. So that's where we see it going. And from an EBITDA perspective, once all the -- once the transition is fully complete, which probably will take 3 to 6 months after the shutdown of the blast furnace with all the cost moving into the P&L, we see that we start getting pretty close to EBITDA breakeven in those volumes. We will be making money on the plate side. Coil is still stretched with 50% tariff and the market in Canada is broken from that perspective because coil is being sold at 40% lower than the CRU, which is not making money for anybody. So that's how we see it, Ian, at a very high level. Ian Gillies: That's helpful. And just one quick one on the plate before I follow on to one other separate question. The plate production was down a little bit sequentially from Q2 to Q3. Is that just a function of reorienting demand and you expect that to maybe start rising, whether it be in Q4 or Q1 next year? Rajat Marwah: I think that's a big part of it, Ian. Another part of it is we did have more maintenance days in the outage I mean, in the quarter. So taking the maintenance -- the difference in the amount of maintenance days in the 2 quarters, they were roughly the same. But practically speaking, we're running our plate mill at full production other than the days we need to take for maintenance and the actual mix of the different type of plate products, how much heat treat is in there will affect the total volume numbers. Ian Gillies: Understood. And -- next question. I'm just curious what, I guess, capital infusions you'd expect to get in the next year or so as it pertains to insurance proceeds, where I believe there's still a bit left to come, government grants. And then I'm just curious if there's anything that could potentially come in on the tax side as well, just given losses incurred. Rajat Marwah: Sure. I'll ask Mike Moraca to take that question. Michael Moraca: Ian, look, on the insurance side, we do expect to somewhere between $30 million and $50 million more to come as we adjudicate through the claim. And then there is some other related cash flow items that you hit on. We will have a significant working capital release over the next 12 months, as we move to the EAF supply chain. It will be quite significant. I think we'll see something north of $100 million, $150 million, some in that range on the working capital side. And then as you alluded to, we will see some tax refunds as we really start to collect on the taxes that we paid in 2022 and have had obviously some net operating losses through the last little bit. So those are the big movers on the cash flow front. Rajat Marwah: Yes. And that's -- we see most of it coming next year, some of it in the first half, some in the second half depending upon timing. But there will be a big amount of inflow that will happen both on all 3 fronts, but big coming from working capital release as well as taxes coming in. And from a working capital perspective, we did mention earlier that there will be $100 million release happening this next year as we transition to EAF, we expect that to happen and more than that because we'll be running at lower levels. So we should see, as Mike mentioned, $150-odd million of reduction from the working capital and over $100 million or so coming from taxes. Operator: And our next question we will hear from James McGarragle with RBC Capital Markets. James McGarragle: Wish you all the best going forward. And then Rajat and Mike, congrats on the new roles. I just wanted to follow up on the -- some of the commentary you made on cash flow. So those numbers were into 2026, I believe. But then can you just give us an updated CapEx number and an updated net working capital number for what we can expect into Q4? Rajat Marwah: Sure. So on the working capital side, we normally build working capital in the last quarter, and it's primarily on the inventory side. So we will not see any build happening on the inventory side in the last quarter. We'll probably see some release coming on the inventories. And there will be other movements happening between receivables and others. But the big part of our change normally quarter-over-quarter in the last quarter, calendar quarter is inventories. So the release that we are saying of $100 million, $150 million will include some release coming in the last quarter. And on the CapEx side, we will see the CapEx coming down as we go into next year as the blast furnace and coke batteries shut down. We normally spend around $40-odd million in those facilities. So that in the maintenance CapEx will come down and will get further optimized during next year and year after. James McGarragle: And then I just wanted to follow up on one of the initial comments and the initial questions that were asked. You've given previously some targets, cost -- scrap plus targets on the cost side with regards to the new furnace that you're bringing on. So can you kind of give us an updated view on how you're thinking about that scrap plus cost targets given the impact from tariffs and that you might not be running that furnace at full capacity initially. So just how we can expect that to evolve into 2026 and then how you're thinking about those targets longer term? Rajat Marwah: So on the cost side, what we said is that it's scrap plus USD 220 roughly for sheet products and that will be slightly higher. It will be in the range of [ 220 to 250 ] for the initial period as we will be running the EAF at lower capacity than 1 EAF at full capacity. So we'll see that slightly higher. And then it won't be double, but it will be slightly higher. And then we see that coming down to around [ 220-odd ] once we have -- once we are running at least 2 million, 2.5 million tonnes. So that's how we see the change on the cost side. On the plate will be -- plate from a conversion perspective will be very similar, just that the variable cost will be higher. You have alloys and there is a little bit more processing that comes through. James McGarragle: And then I guess, in the current environment, do you think the Canadian market can support that 2.5 million tonnes that you think is necessary in order to achieve that cost-plus target? Or do you think something would have to change in terms of tariffs for the Canadian market to be able to support that 2.5 million tonnes? Michael Garcia: James, this is Mike. I think critical, part of this, the future of Algoma Steel is to be the foundation steel company for the future of the Canadian nation building agenda, if you will. We have the lowest cost, most flexible liquid steel base in the industry in Canada or we will soon be there once the transition to EAF is complete and we've ramped up in the next year. But I would say that, that market has not -- is not yet fully developed as we sit here in November -- almost November of 2025. So the market continues and will continue to develop. The nation building agenda that the new government has laid out is pretty clear in terms of everything that wants to be pursued around defense projects, infrastructure projects, shipbuilding, energy, manufacturing, reshoring, and this is all without kind of a return to a somewhat normal trade relationship with the U.S. This is all kind of future development and evolution of the Canadian market. So my answer is if all that comes to fruition and even just a portion of it comes to fruition, Algoma Steel will be far and away the most advantageous and the best position to take advantage of it. So I think the market is going to be there for us. If in the meantime or as part of that, there's a return to an improved trade relationship to the U.S., which gives us more access to the historical U.S. market, that will put wind in the sails of everything that we've talked about. It will open up the ability to get -- to take advantage of U.S. business. It will lift the margin across all of our business on both sides of the border. We still believe and are committed to being a strategic part of Canada's nation building agenda. So I don't think it would immediately mean and certainly not for Algoma Steel, it wouldn't mean a return of business as usual where we're just a commodity steel supplier looking for the best business, whether it's in the U.S. or Canada, we would be mindful of the strategic risk of just going back to the old business model. I know it's a little bit long-winded answer to your question. But yes, we believe in the future of the Canadian market built on the nation-building agenda that the government of Canada has laid out and our unique position as Algoma Steel to take advantage of that. Operator: And next, we'll hear from Ian Gillies with Stifel. Ian Gillies: Just in the Canadian market, are you seeing any positive implications yet from some of the trade barriers that have been instituted by the Canadian government? Or do they need to -- I guess, do the walls need to be taken up a bit higher? Michael Garcia: Yes. I think we've shared our frank views around -- with the government around opportunities we see for them to put those walls higher and put more teeth into moves that would strengthen the health of the Canadian market. Obviously, the government has a lot to think through when they hear feedback from the steel industry in terms of are there any other consequences to doing something like that, which they may not see as positive. But certainly, from a steel perspective, we think that there's more that they could do, and we've been very vocal about that with them. I will say what we are seeing is a tremendous amount of interest in understanding Algoma Steel's capabilities, both current and potential future capabilities. From every sector of the country, every sector of the economy, we've gotten phone calls, visits, inquiries in terms of what do you make? How can you make something for my steel uses? And if you can't make it today, what type of investment or how soon could you make it? And that's all very positive. Some of it is for business that's actually being made right now. Some of it is for future business that may be still a few years away. But the visibility, the intention and the interest in Algoma Steel and what role we can and will play in the future of Canada's nation building is definitely there, and we've already seen that for the last several months. Ian Gillies: I suspect this question is unanswerable, but do you have any sense of what you think the incremental plate demand could be or broader steel demand could be from these initiatives, maybe even just on projects announced or potential projects? Michael Garcia: You're right. That's hard to -- it's hard to give you a big number. I know that a lot of these -- for instance, the shipbuilding, we've had visits from major shipbuilders who are looking at the -- just the defense shipbuilding agenda over the next several years. And we can make all the ship needed in 10 -- Canadian war ships we could make the amount of plate needed for those 10 ships in 2 days. So it's not going to be one major program, which moves the needle. It's going to be a lot of demand throughout the entire economy and all types of projects. Certainly, the defense spending and ice breakers and pipelines will get a lot of visibility, but we need multiple projects. The plate market in Canada is roughly 600,000 tonnes to 700,000 tonnes right now. We're easily capturing 50% of that. And so it's a relatively small market, and it doesn't take hundreds of projects to start building that market up north of 1 million tonnes. It takes more than a handful, but it doesn't take hundreds. So we feel pretty bullish about the future prospects in plate, but it's hard to give you a specific number. Ian Gillies: And then last one for me, and this is probably for Rajat. Could you maybe provide a view on how you intend to start using the credit facilities as you start moving into a bit more cash burn given the implications, some could be picked, some of dilution, some carry interest. It's just -- I think that would be useful. Rajat Marwah: Yes, sure. So the way the facilities have been put together, we have a secured line that doesn't have any warrants attached to it. So the intention will be to draw that line first and then go into the unsecured line, where warrants are there. So that helps us to manage that. Most of it is [ spec ] for 2 years, and we will pick it, which makes sense, and then it goes to cash payments. The -- and from a use perspective, we have the ABL, which we want to keep as much as possible from working capital and other perspective and start using the other line. So we will be looking at it as we draw on what's the most and the best optimum use of cash is and which cash and based on our plan for next year and keep drawing. So we'll be quite mindful of how we are drawing it from that perspective. Operator: There are no further questions at this time. I would like to turn the floor back to Michael Moraca for closing remarks. Michael Moraca: Thank you, again for your participation in our third quarter 2025 earnings conference call and your continued interest in Algoma Steel. We look forward to updating you on our results and progress when we report our fourth quarter and full year results early next year. Thank you. Operator: And that does conclude today's teleconference. We thank you for your participation. You may now disconnect your lines at this time.
Operator: Good afternoon, ladies and gentlemen. Welcome to Savers Value Village's conference call to discuss financial results for the third quarter ending September 27, 2025. [Operator Instructions] Please note that this call is being recorded, and a replay of this call and related materials will be available on the company's Investor Relations website. The comments made during this call and the Q&A that follows are copyrighted by the company and cannot be reproduced without written authorization from the company. Certain comments made during this call may constitute forward-looking statements, which are subject to significant risks and uncertainties that could cause the company's actual results to differ materially from expectations and historical performance. Please review the disclosures on forward-looking statements included in the company's earnings release and filings with the SEC for a discussion of these risks and uncertainties. Please be advised that statements are current only as of the date of this call, and while the company may choose to update these statements in the future, it is under no obligation to do so unless required by applicable law or regulation. The company may also discuss certain non-GAAP financial measures. A reconciliation of each of these non-GAAP measures to the most directly comparable GAAP financial measure can be found in today's earnings release and SEC filings. Joining from management on today's call are: Mark Walsh, Chief Executive Officer; Jubran Tanious, President and Chief Operating Officer; Michael Maher, Chief Financial Officer; and Ed Yruma, Vice President of Investor Relations and Treasury. Mr. Walsh, you may go ahead, sir. Mark Walsh: Thank you, and good afternoon, everyone. We appreciate you joining us today. We are pleased with our third quarter results, particularly in the U.S., where our momentum remains strong. Comps continue to strengthen in Canada, but challenging macroeconomic conditions remain a headwind there. Let me start with a few highlights from the quarter. Sales in our U.S. business grew 10.5% with comp sales up 7.1%, driven by both transactions and average basket. These results underscore our strong operational performance as well as an accelerating secular thrift trend. Powerful results like these reinforce our enthusiasm for the long-term growth opportunity in the U.S. In Canada, our business made further progress, delivering 3.9% comp sales growth, an acceleration of 130 basis points from the prior quarter, marking the fourth consecutive quarter of sequential improvement. The Canadian macro environment remains very challenging, and we continue to lean into selection during the quarter while taking steps to better align production with demand trends going forward, which Michael will go over in more detail. We opened 10 new stores in the quarter and still expect to open 25 new stores in 2025. As a class, our new stores continue to perform in line with our expectations delivering strong unit economics. We remain confident in our long-term store growth opportunity and a targeted 20% store-level contribution margin. Turning to our loyalty program. We reached approximately 6.1 million total active members. Financially, we generated $70 million of adjusted EBITDA in the quarter or approximately 16.4% of sales. Additionally, our strong cash flow generation and an attractive debt market allowed us to opportunistically refinance our debt, which will significantly reduce our interest expense and give us a more flexible capital structure. Just as a reminder, we do not have any direct impact from tariffs. We continue to monitor pricing trends closely, and I feel very good about our competitive positioning and value gaps as new clothing and footwear pricing begins to increase in the U.S. Finally, based on our results year-to-date, we are tightening our revenue and earnings outlook for 2025. Michael will provide additional details on our outlook in his remarks. Parsing our results by geography, let's start in the U.S. where momentum is especially strong. We are thrilled to post a 7.1% comp, which I will point out is coming from a mature store base as the majority of our 2024 class will not begin to enter the comp base until the fourth quarter. This speaks to our compelling assortment at great value and the consumer-friendly shopping experience that we offer as well as the accelerating secular adoption of Thrift. As we've noted in previous calls, we continue to see growth in our younger and more affluent customer cohorts. In Canada, the economy remains challenging, but it has not impacted everyone the same. For example, tariffs and trade tensions have disproportionately impacted certain regions such as Southwest Ontario, a key market of ours where the automotive industry is a large portion of the local economy. Meanwhile, unemployment is above 7%, and the lower income consumers have seen little or no disposable income growth plus higher-than-average inflationary pressure in nondiscretionary categories like food, shelter and transportation. Against this backdrop, we are leading with a compelling selection, which helped drive positive comps over the past year, although we do think that the near-term Canadian comp upside will be limited by macro pressure. Throughout the third quarter, we actively worked to calibrate production and meet demand, making careful and targeted adjustments in response to sales trends. Exiting the quarter, Canadian comps leveled off at the lower end of our expected range, and we continue to drive improved gross margins also at the lower end of our expected range. We remain laser-focused on giving our Canadian consumer great value through sharp pricing and compelling selection. We are controlling what we can control, and we will manage the Canadian business with the expectation that macro conditions may limit our growth in the near term. Moving on to new stores. We continue to be pleased with the results we are seeing. And as a whole, they are performing in line with our expectations. As new stores continue to mature as expected, they are beginning to contribute to an inflection in our profitability. We are especially pleased that our U.S. and Canadian segments had year-over-year profit growth this quarter for the first time since 2023, and we expect to return to profit growth at the enterprise level in the fourth quarter, putting us on track for our previously stated goal of annual profit improvement in 2026. We opened 10 new stores during the quarter and are on track to open 25 new stores in 2025. As the 2026 lease pipeline has started to round out, we're expecting a roughly similar number of openings next year, but the focus of our new store growth going forward will even be more U.S.-centric as we believe the secular adoption of Thrift remains in the early innings, and we still have a significant amount of geographic white space. To this end, we're excited to enter new markets in 2026, including North Carolina and Tennessee. Store growth remains the highest return and most important use of our capital, and we could not be more pleased to bring our compelling value proposition to more consumers throughout the U.S. Finally, we recently released our 2025 Impact and Sustainability report, which can be found on our Investor Relations website. We are a mission-driven business, championing reuse and looking to inspire a future where secondhand is second nature. This report highlights the impact and circularity ingrained in our model, and I am proud that over the past 5 years, we have kept 3.2 billion pounds of usable items out of landfills and paid our charitable partners over $490 million. We hope you will take the time to review the report and our commitment to community impact, sustainability and sound corporate governance. I would like to conclude my remarks by thanking our more than 22,000 team members for their hard work and commitment. As a team, we are more energized than ever as we see the fruits of our labor with more people choosing us every day, whether it'd be due to our treasure hunting experience, exceptional assortment at sharp value or to contribute to the circular economy. 2025 continues to be a success. While macro pressures persist, I believe that our value proposition positions us well. Now I'll hand the call over to Michael to discuss our third quarter financial performance and the updated outlook for the remainder of 2025. Michael Maher: Thank you, Mark, and good afternoon, everyone. As Mark indicated, we had a strong third quarter. Total net sales increased 8.1% to $427 million. On a constant currency basis, net sales increased 8.6% and comparable store sales increased 5.8%. We are especially pleased with our double-digit growth in the U.S., where net sales increased 10.5% to $235 million. Comparable store sales increased 7.1%, driven by both transactions and average basket. We also saw our fourth consecutive quarter of sequential improvement in Canada, where net sales increased 5.1%. On a constant currency basis, Canadian net sales increased 6.1% to $161 million and comparable store sales increased 3.9%, fueled by an increase in transactions and average basket. While we are pleased with another quarter of positive comps, we believe that ongoing macro pressure places a near-term ceiling on Canadian comp store sales. Given the sluggish Canadian economy, we do not assume that conditions will change materially in the near term. Cost of merchandise sold as a percentage of net sales increased 80 basis points to 44.1% due to the impact of new stores and deleverage due to higher processing in Canada, partially offset by growth in on-site donations. Gross margins improved by roughly 100 basis points over the first half of the year, and we materially narrowed the gap versus last year as we lapped new store growth. We expect this trend to carry into the fourth quarter as new stores continue to ramp. As Mark previously indicated, Canadian comp sales trends have leveled off at the lower end of our expected range with a corresponding impact on gross margins as we work to balance production levels throughout the quarter. Salaries, wages and benefits expense was $85 million. Excluding IPO-related stock-based compensation, salaries, wages and benefits as a percentage of net sales increased 220 basis points to 18.8%. The increase was driven primarily by new store growth, an increase in annual incentive plan expense and higher wage rates. Selling, general and administrative expenses increased 19% to $100 million and as a percentage of net sales increased 200 basis points to 23.3%, primarily due to growth in our store base. SG&A expenses also included a $4 million impairment charge for the planned closure of 6 underperforming stores during the fourth quarter. This includes 3 of the 2 Peaches stores that we converted during the second quarter, whose post-conversion results were not meeting our expectations, along with other store in the U.S., and 2 in Canada. We concluded the closure of these 6 stores would be EBITDA-accretive in 2026, and we expect nearby stores to absorb much of the sales volume from the closed locations. Our store fleet remains healthy with almost all comp stores generating positive EBITDA. In addition to the impairment charge, SG&A also included $2.1 million of debt refinance costs and the year-over-year change in fair value of acquisition-related contingent consideration. Depreciation and amortization increased 6% to $18 million, reflecting investments in new stores. Net interest expense increased 12% to $17 million, primarily due to the impact of unwinding our interest rate swaps last year, partially offset by reduced debt and lower average interest rates. As we disclosed during the quarter, we took advantage of a strong market and refinanced our debt. As a result of the refinancing, we expect interest expense savings of approximately $17 million on an annualized basis. For modeling purposes, this translates to an estimated interest expense of $14 million for the fourth quarter and $52 million for fiscal 2026. We incurred a $33 million loss on extinguishment of debt as part of the refinancing. GAAP net loss for the quarter was $14 million or $0.09 per diluted share. Adjusted net income was $22 million or $0.14 per diluted share. Third quarter adjusted EBITDA was $70 million and adjusted EBITDA margin was 16.4%. U.S. segment profit was $48 million, up $3 million versus the prior year period, primarily due to increased profit from our comparable stores, partially offset by the impact of new stores. Canada segment profit was $45 million, up $0.4 million versus the prior year period due to improved comparable store performance, partially offset by deleveraging of cost of merchandise sold as a percentage of net sales, primarily associated with our efforts with Canadian production levels to maintain demand as well as a weaker Canadian dollar. This marks our first year-over-year increase in both U.S. and Canadian segment operating profit since 2023, highlighting our imminent inflection in total company profitability as new stores continue to mature. Our balance sheet remains strong with $64 million in cash and cash equivalents, and a net leverage ratio of 2.7x at the end of the quarter. Our updated capital structure gives us increased liquidity through a $55 million expansion in our revolver capacity, extended debt maturities through 2032 and significant flexibility to pay down debt in the future. Our strong cash flow generation will enable us to further deleverage our business as we target a net leverage ratio of under 2x within the next couple of years. We are also pleased to announce that our Board of Directors approved a new $50 million share repurchase authorization. We will continue to take a balanced approach to capital allocation as our strong financial model allows us to fund organic store growth, reduce debt and opportunistically repurchase shares. Finally, I'd like to discuss our updated outlook for the remainder of fiscal 2025. Our U.S. business remained strong entering the fourth quarter, while in Canada, macro pressures continue to weigh on results. We've made strides in better calibrating sales and production and are planning for Canadian macro conditions to remain challenging for the near term, with roughly flat Canadian comps in the fourth quarter. Our updated full year outlook for 2025 now includes the following: net sales of $1.67 billion to $1.68 billion, reflecting a weakening of the Canadian dollar since last quarter; comparable store sales growth of 4.0% to 4.5%; net income of $17 million to $21 million or $0.10 to $0.13 per diluted share; adjusted net income of $71 million to $75 million or $0.44 to $0.46 per diluted share; adjusted EBITDA of $252 million to $257 million; capital expenditures of $105 million to $120 million; and 25 new store openings. Our outlook for net income assumes net interest expense of approximately $62 million and an effective tax rate of approximately 41%. For adjusted net income, we are assuming an effective tax rate of approximately 26%. This concludes our prepared remarks. We would now like to open the call for questions. Operator? Operator: [Operator Instructions] First, we will hear from Randy Konik at Jefferies. Randal Konik: I guess, first, why don't we just kind of unpack Canada a little bit further. You gave us some good color on the -- in the script around the top line continuing to improve. You talked about the macro, so maybe unpack that a little more. And then you talked about some processing impacting, I guess, the margins a bit. That sounds like something that can be corrected, obviously, and fixed and improved from an efficiency standpoint going forward. Maybe give us a little more color there working on the processing side. Mark Walsh: Randy, thanks. Look, from our perspective, a little recap. From our perspective, the third quarter was definitely another step forward in Canada. We'd like to highlight the fourth quarter of sequential comp improvement and more significantly, the first quarter of profit growth since 2023. Look, that said, the macro challenges do persist. There's stubborn unemployment and inflationary pressures on consumables we're not planning for that to change. I mean we see from an unemployment perspective in the Greater Toronto market, probably it's just around -- just below 9%. And in Windsor, it's over 10%. It's an important market for us, just to give you some context. So as we think about the third quarter, more progress, but a lot more to do, and we landed Canada at the lower end of our expectations. But tactically, we remain focused on delivering sharp value, that AUR of USD 5 and measuring our price gaps to protect and gain share where we can. And I think in an environment of limited growth and higher wages, we've got to improve productivity through process improvements, resulting in cost reductions while not impacting the consumer proposition. Rest assured, Michael and Jubran's team are all over this challenge. And lastly, just from a -- the impact from a corporate perspective because I think it's important. From a strategic enterprise perspective, we're going to deploy 75% to 80% of our growth capital in '26 and beyond to the U.S. where we do have tremendous white space and momentum. It's very important to note. So I'll let, Jubran, sort of dive into a little more around selection and some of the other questions you asked. Jubran Tanious: Yes. Hi, Randy, and thanks, Mark. Well, it really comes down to the 3 or 4 things that we can control. And to be clear, and I think Michael mentioned this earlier, as we sit today, we are balanced between sales and production and feel very good about that going forward. But again, around controlling the controllables. I mean the first thing is providing the selection and value that our customers expect. And we believe we're doing that. In fact, our own internal surveys tell us that customer perception of both price and selection has increased year-over-year as we look to put out the right items in the right amount at the right price. The second thing that we can control, and Mark alluded to this, is being as efficient as we possibly can be in delivering that selection to our customers. Again, ours is a labor-intensive model, but our teams do an excellent job at executing as efficiently as possible. And frankly, we'll continue to do that through the remainder of the year. And we are relentless about looking for tactical and innovative ways to improve labor efficiency. So we've got a few things in the hopper that we're looking forward to as we get into 2026. And then finally, growing on-site donations. We've talked about this in the past. It's really about how you show up to the donor in terms of being reliably fast, friendly and convenient. That is something that we control entirely. And we measure it not just in terms of on-site donation growth, but also donor sentiment and satisfaction. And our own internal voice of the donor surveys tell us, that overall satisfaction is north of 90%. So we feel good about that. So yes, overall, in terms of controlling the controllables, I think we're doing that amidst an otherwise challenging macro. Randal Konik: Yes. Super helpful. I guess last question. Obviously, this U.S. business feels really good. Any color you can give us on the traffic or the transactions that are being done with existing customers versus new to file. I'm sure that you're getting a healthy amount of new customers entering the business. It'd just be helpful to get some perspective there. And any kind of feel for what the awareness level is for the banner in the United States right now? Obviously, again, it seems like we're still very early innings in this U.S. story going forward. Mark Walsh: Yes, Randy, great question. Look, transactions and basket definitely drove comps, and we have seen a nice increase in our loyalty platform in the U.S. That momentum is continuing. Beyond that, we love what we're seeing from a consumer and who's entering the mix. High household income cohort continues to become a larger portion of our consumer mix. It's trade down for sure. And our younger cohort also continues to grow in numbers. We couldn't ask for a better outcome. And I think it's largely driven by a great store experience, merchandise mix that's unusual and powerful and great value. And that all drives -- that all feeds into the secular momentum. Consumers are liking what they see. And needless to say, we're very pleased with that trajectory. Operator: Next question will be from Matthew Boss at JPMorgan. Matthew Boss: So Mark, could you elaborate on the cadence of same-store sales over the course of the third quarter in the U.S.? Maybe just comment on what you're seeing in October? And then you mentioned the value gap. So how you see your value proposition positioned in the U.S. maybe against the broader marketplace? Mark Walsh: Yes. Thanks, Matt. So I'll start with the value gap. I'll let Michael do the October cadence and what we're seeing. We're very -- we spend a lot of energy and time understanding where we are relative to our competitive set. And we define our competitive set in 2 ways. One is obviously thrift competitors and the other is discount retail. And we gather a ton of information, as I've said in previous calls, we can tell you in our [indiscernible] store, what's happening down the street at TJX or other discount retailers, we try to get between 40% and 70%, maintain that gap, continue to give our thrifters value that is brings them back and is compelling. And I think we're doing that both in the U.S. and in Canada. We look at these metrics in both countries. We're really driven by these metrics, and we want to make sure that we're always delivering that price-value gap to our customers everywhere they shop in the Value Village Savers chains. Michael Maher: Matt, it's Michael. So your question about the cadence of our comps. So as we expected, the comps were strongest in July, eased slightly in August and September as we expected because we are starting to go up against tougher compares last year. As we've kicked off the fourth quarter, what we're seeing thus far is continued strength in the U.S. We continue to be really pleased with the momentum there and continued moderation in Canada. Now we have had a warmer-than-usual start to the fall that weighed on our results a little bit in late September and early October. Over the last week or so, as the weather is cooled, we're starting to see that improve. But as I mentioned in my remarks, we're assuming roughly flat low growth in Canada for Q4 and planning conservatively given what we see in terms of the macro. Matthew Boss: Great. And then, Michael, on gross margin, maybe could you help break down the drivers of the 80 basis point contraction in the third quarter? Maybe just some gross margin puts and takes that we should consider for the fourth quarter, anything to be mindful of for next year at this point? Michael Maher: Yes, you got it. So as we mentioned on the last call, we expected to narrow that gap from the first half, and we did. The biggest driver of the gap year-over-year continues to be new store growth. That gap is shrinking and progressed -- as the new stores are progressing in line with our expectations. The other driver in this quarter was the Canadian processing. As we've mentioned, comps being at the lower end of our expected range. We were very careful, very deliberate about reducing processing to ensure we didn't repeat the mistakes of last year and prematurely choke off demand. And so that did weigh on our margins in the quarter. But as Jubran mentioned a little bit ago, we exited the quarter essentially at equilibrium with processing demand -- processing and demand lined up well. And then to a lesser extent, the 2 Peaches. I mentioned the underperformance of those 3 stores that we've elected to close. So -- those were the big factors. I expect the gap to last year to continue to narrow, Matt, in Q4. We are continuing to move through the new store pipeline. Those new stores continue to mature and ramp very nicely, and that's helping to drive and lead us toward that inflection that we talked about. And being a better equilibrium in Canadian processing, both of those should contribute to a further narrowing of the gap in the fourth quarter. Operator: Next question will be from Brooke Roach at Goldman Sachs. Brooke Roach: Mark, I was hoping to get your thoughts on new market expansion for the Savers brand given the announcement to enter Tennessee and North Carolina. What did you learn from the 2 Peaches stores that you're closing that can help you ensure that new market expansions will be successful? Jubran Tanious: I can jump in. Mark Walsh: Sure Jubran, why don't you in jump in. Jubran Tanious: Yes, sure. Brooke, this is Jubran. I can help provide some color. Yes, we converted the 2 Peaches stores per plan, and it's really pretty straightforward. I mean we had 3 of them that we converted, and frankly, didn't like the performance on them. So we acted quickly to close them. But I think your broader question is in kind of higher level, our strategic goal was always to enter the U.S. Southeast, where we previously had no presence and we wanted to take advantage of all that white space. So while we're closing these 3 acquisition locations, the local supply that we now have in our mix will help us feed those new organic stores in 2026, where I think Mark mentioned that we will be opening our first store in Tennessee, our first stores in North Carolina and an additional store in the Atlanta market. Very excited about these locations. These are, again, exciting centers that we think are going to show strong -- of our first stores in those states. So we continue to stay enthusiastic about our expansion opportunities in the Southeast. Brooke Roach: Great. And then maybe a follow-up for Michael. As you contemplate the modestly lighter EBITDA margin guide that you've provided for the back half of this year, how should we be thinking about the path back to EBITDA margin expansion into 2026? Do the recent pressures in the Canadian business impact your view on the cadence and magnitude of improvement that you could see into next year? Michael Maher: Yes. Thanks, Brooke. This really doesn't -- nothing has changed our view of the near or longer-term financial algorithm. So just as a reminder for everyone, we see over the long term, high single-digit total revenue growth, which will be driven primarily by new stores. Now next year, and I'm not guiding to next year, but do remember that next year, we go back to a 52-week year after a 53-week year this year. So that 2 points we picked up this year, we're going to give that back next year. But that aside, continue to see over the long term low single-digit comps. And I think what we're seeing now is probably reasonably representative of how that's going to shake out by country with Canada in the low-single digits and the U.S. somewhere in the mid-single digits, averaging out to roughly low single. So we still see high-teens EBITDA margins in the long-term algorithm. That's not going to be a step change. We've been saying that for a while. I don't expect to see that happen next year. We've got to continue building out the new store pipeline and letting that mature. But we continue to believe, as we said before, that EBITDA margins are at their trough this year. And so we would expect to see some modest growth in 2026. Operator: Next question will be from Mark Altschwager at Baird. Mark Altschwager: Just following up on the U.S. momentum. Can you talk about the opportunity in pricing given the quality of supply you're seeing and the inflation you're beginning to see within the U.S. apparel market? Mark Walsh: Yes, look -- Mark, this is Mark. So we are starting to see new apparel and footwear price increase. And we're -- how we're approaching that is if the gap widens significantly beyond that 40% to 70% range that I articulated, it gives us an advantageous optionality, whether we choose to just gain share or some modest price -- strategic price increases or both. It's just going to highlight our well-positioned price value equation within that market. So we see that as a big opportunity for us moving forward. Mark Altschwager: And just on Canada, you've made a handful of comments here as we think about Q4 and into 2026. But I guess, guiding flattish Q4, I think you just said low-single digit is kind of your baseline expectation for next year. I mean I know you're not guiding, but comparisons do begin to get tougher next year as you cycle the recovery or the improvement you delivered this year. So maybe just help us understand the factors that could drive sort of a stable low single in Canada given the macro headwinds you outlined. Michael Maher: Yes, Mark. So I think the assumption is that we're going to continue to focus on the things Mark talked about earlier in terms of sharp value, great execution, we are seeing sort of stability there. The macro is growing, albeit slowly. And so we do think that we can sustain low, and we're going to plan for conservatively low single-digit comps in Canada and hopefully outperform that, but we'll stay cautious in terms of the planning. And like I said, we continue to see really strong momentum in the U.S. And so we're more in the mid-single-digit range there, comfortably in the mid-single-digit range in Q3, obviously. And so we remain confident that we can average that out and something around a low single-digit overall comp. Operator: Next question will be from Bob Drbul at BTIG. Robert Drbul: Just a couple of follow-up questions. On the 2 Peaches, the stores that you updated and then closed, I guess, what have you guys learned from -- like why do you think that didn't work for those stores? And I guess the other question I have is just on the new markets, Tennessee, North Carolina and the other store in Atlanta. Can you just talk about the entry and how you're approaching the market and any marketing around those stores and that initiative? Mark Walsh: So Bob, it's Mark. On the Tennessee and North Carolina stores, we'll take the same approach that we have in all of our new store openings. We've got great real estate, great traffic patterns around it. putting that community donation center, first and foremost, as part of that facility critical for us in the long term. And then you start with -- we typically start with an event and then we do paid search around it. And that's been very successful for us throughout our last 3 years of openings in the U.S. So we feel confident about our approach, and we don't see why it would be any different or the success rate of that approach would be any different in North Carolina and Tennessee. On the issue around 2 Peaches, look, as Jubran mentioned, we converted those stores 3 months ago. I think we looked at them out of the chute. We did not like the way they were performing. We wanted to get to a better place from a 2026 perspective on EBITDA and it being accretive. And we decided to close them, and we made a quick decision based on what we thought was the base case in terms of potential growth within those 3 environments. So we decided to move on. We feel good about that decision, and we like the fact that we're setting ourselves up for 2026 accretion versus continuing to fight a fight that we didn't think was going to be that fruitful. Jubran Tanious: And the only -- Bob, the only other thing I would add to Mark's comments is we've got our first stores in Tennessee, North Carolina, a new one in Atlanta. What we didn't mention is sitting behind that is a pretty growing robust pipeline of other attractive locations that are sitting a little bit behind those stores but are equally attractive in terms of site quality, demographics, trade area that we would be operating in. So like Mark said, pretty excited about the future for us in the Southeast. Operator: Next question will be from Michael Lasser at UBS. Michael Lasser: So the macro is getting worse in Canada, why are you not seeing the trade down? And if the macro remains challenged in 2026, how far are you willing to sacrifice the profitability of the U.S. business to support the Canadian segment? Mark Walsh: I'll answer that first part of the question. I think Michael will tackle the second part. We are actually seeing trade down in Canada. Similar to the U.S., I just didn't mention it because we were -- the original answer was focused on the U.S. But like the U.S., our key cohorts, U.S. -- I mean, the high household incomes and younger consumers, they're both growing in Canada as well. So we're actually really pleased about how the loyalty base is morphing in Canada as well, and we are, in fact, seeing trade down. Probably not to the same degree as we are in the U.S., but we are certainly seeing it. Michael Maher: Yes, Michael, this is Michael. Can you -- I didn't quite follow the second part of your question about Canadian versus U.S. profit in '26. Can you repeat that? Michael Lasser: Yes, you took down the guide because of a slowdown in the Canadian business for the fourth quarter. If we assume that continues into next year, do you have to sacrifice some of the improving profitability in the U.S. business to support the Canadian business? Or alternatively, if you experience deleverage on the Canadian business, to what degree is that going to eat into the profitability of the U.S. business? Michael Maher: I see. Yes. Well, we're not ready to guide for '26 specifically yet. I guess what I would say though is, and Mark mentioned this earlier in his remarks that in -- or in response to the first question, we're planning for in the near term, at least a slow growth business. And that means really tight execution, but also a really aggressive posture on costs in Canada. And so we believe that at a low single-digit growth rate, which we think is sustainable into next year, in Canada that we can be disciplined enough on costs to still achieve our bottom line objectives as well. And then, of course, in the U.S., really happy with the top line momentum there. That is also our investment, our growth market. And so we're investing -- our new store growth is going to be disproportionately in the U.S. going forward. But nothing we see at this point changes our view in the near or longer term about financial algorithm. Operator: Next question will be from Peter Keith at Piper Sandler. Alexia Morgan: This is Alexia Morgan on for Peter. My first question is a clarification on guidance. Could you elaborate on the key drivers behind the narrowing of your EBITDA guidance and lowering the range at the high end? Was that primarily due to Canada? Or are there other factors that went into that recalibration as well? Michael Maher: Yes. Canada is the largest factor. So that was really the biggest variable going into the back half of the year for us. We were going up against some really challenging business from a year ago. As we mentioned, we saw the comp settle out at the lower end of our expectations there. And processing had to follow, but it did follow. And so we had some additional pressure on margin in the third quarter. And so that is the biggest driver of sort of the narrowing of the guide toward the lower end on EBITDA. To a lesser extent, it's the 2 Peaches performance that we talked about earlier. Alexia Morgan: Okay. And then one more on tariffs. I know you're not exposed to tariffs, but considering just the price increases being seen broadly across the industry, have you noticed any interesting mix shift in your sales? Or are there certain categories of yours that you think might be outperforming and indirectly benefiting from prices raising across the industry? Mark Walsh: We have not seen that phenomenon in our sales metrics. Operator: [Operator Instructions] Next, we will hear from Owen Rickert at Northland Capital Markets. Owen Rickert: Just quickly on the automation front, have you started to see any tangible benefits from the new centralized processing centers and automated book systems? And maybe secondly, what's the latest thinking around CapEx as you continue to roll those out? Jubran Tanious: Why don't I take the CPC, you can talk CapEx. Owen, this is Jubran. Yes, the CPCs, the automated book processing -- we have made progress in terms of efficiency and effectiveness on those quarter after quarter after quarter. So pleased with the progress. What I will say is I don't think that we will ever get to a place where we say we've arrived. There's still a tremendous amount of opportunity that we see. And I don't mind sharing, I spend quite a bit of my own time and focus on this topic where as we think about 2026, the opportunities that we have to become more efficient, more effective in those facilities, we think that there's a lot of opportunity there. I can't get into at this -- I don't have the liberty of getting into the specifics on that, but we got quite a few different tactics in the hopper that we think are going to play well for us in the future. Michael Maher: Yes, Owen, this is Michael. Owen, on your second question about CapEx. So again, we'll give more specifics when we guide for next year. But we have said that the current level at roughly a high single-digit percentage of revenue is probably pretty indicative of where we'll be as long as we are in this growth mode. And most of that investment is going to be in growth and in new stores. It may include amounts for additional enablers like off-site processing facilities or other technology investments as well. But overall, that's probably a reasonable envelope. Operator: At this time, Mr. Walsh, it appears we have no other questions, sir. Please proceed. Mark Walsh: We'd like to thank everyone for their time today and their interest in Savers Value Village, and we look forward to connecting with you after our fourth quarter. Thanks again. Operator: Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your line.
Operator: Ladies and gentlemen, welcome to AIXTRON's analyst conference call Q3 2025. Please note that today's call is being recorded. [Operator Instructions] Let me now hand you over to Mr. Christian Ludwig, Vice President, Investor Relations and Corporate Communications at AIXTRON for opening remarks and introductions. Christian Ludwig: Thank you very much, Gunner. A warm welcome also from my side to AIXTRON's Q3 2025 Results Call. My name is Christian Ludwig. I'm the Head of Investor Relation and Corporate Communications AIXTRON. With me in the room today are our CEO, Dr. Felix Grawert; and our CFO, Dr. Christian Danninger, who will guide you through today's presentation and then take your questions. This call is being recorded by AIXTRON and is considered copyright material. As such, it cannot be recorded or rebroadcast without permission. Your participation in this call implies your consent to this recording. Please take note of the disclaimer that you find on Page 1 of the presentation document as it applies throughout the conference call. This call is not being immediately presented via webcast or any other media. However, we will place a transcript on our website at some point after the call. I would now like to hand you over to our CEO for his opening remarks. Felix, the floor is yours. Felix Grawert: Thank you, Christian. Let me also welcome you to our Q3 '25 results call. I will start with an overview of the highlights of the quarter and then hand over to our CFO, Christian, for more details on our financial figures. Finally, I will give you an update on the development of our business and our guidance. Let me start by giving you an update on the key business developments of the second quarter on Slide 2. The important messages for Q3 '25 are our free cash flow in the quarter was EUR 39 million, totaling EUR 110 million in the first 9 months '25, while inventories are down to EUR 316 million, coming from EUR 369 million at the year-end '24. This shows we are well on track with our strategy to rebuild our cash position after we had depleted that with the construction of our 300-millimeter cleanroom, the innovation center in the years '23 and '24. In Q3, we recognized new orders of EUR 124 million, which lead to an equipment order backlog of EUR 287 million, where we have achieved a book-to-bill of 1.04. We concluded the quarter with revenues of EUR 120 million. With that, we were in our guided range of EUR 110 million to EUR 140 million. The gross margin reached 39% in Q3 and averaged 37% in the first 9 months. This figure includes a one-off expense related to our implemented personnel reduction earlier in the year. Adjusted for this effect, the gross margin after 9 months came out at 38%, slightly below previous year's 39%, mainly due to volume shifts and FX headwinds. As the market remains soft, we had to adjust our fiscal '25 guidance 2 weeks ago. We are now expecting revenues in the range between EUR 530 million and EUR 565 million, which corresponds to the lower half of the initial guidance of EUR 530 million to EUR 600 million, and a gross margin of now 40% to 41%, down from previously 41% to 42%, and an EBIT margin of now around 17% to 19% from previously 18% to 22%. AI continues to be the main end market driver, especially for our Optoelectronics segment. Automotive-driven power electronics demand, on the other hand, remains soft. Christian will now provide a detailed look into our financials on the following pages before I take over with an update. Christian? Christian Danninger: Thanks, Felix, and hello to everyone. Let me start with the key points of our revenue development on Slide 3. In a soft market environment, we achieved revenues of EUR 120 million, down versus the EUR 156 million last year, but well in the guided range of EUR 110 million to EUR 140 million. For the first 9 months, revenues came in at EUR 370 million, down about 9% year-over-year. A breakdown per application shows that 66% of equipment revenues after 9 months come from GaN and SiC power, 14% from LED, 16% from Optoelectronics and a 5% contribution from R&D tools. The aftersales business contributed to total revenues with EUR 80 million. The aftersales share of revenues after 9 months was up by 2 percentage points year-over-year to about 22%. Now let's take a closer look at the financial KPIs of the income statement on Slide 4. I already talked about the revenue line. Gross profit decreased year-over-year in Q3 '25 to EUR 246 million. Gross profit in the quarter was negatively affected by approximately EUR 8 million due to volume shifts from Q3 into Q4 and around EUR 2 million due to FX effects. Subsequently, the gross margin in the quarter came in at 39%, down 4 percentage points versus the prior year. After 9 months, gross profit was at EUR 136 million, 15% below last year's figure. At 37%, our gross margin after 9 months was 2 percentage points lower than after the same period last year. But please recall, as stated in our Q1 release, this includes a one-off expense of a mid-single-digit million euro amount in connection with the implemented personnel reduction in the operations area. Adjusted for these effects, the gross margin after 9 months would be around -- at around 38%. For the remainder of the year, we calculate with an average U.S. dollar-euro exchange rate of 1.15 and the continued weakness of the Japanese euro rate. Due to high expected revenues in foreign currency in Q4, we expect an additional around EUR 3 million negative impact in revenues and gross margin with the larger part resulting from the U.S. dollar and the smaller part from the Japanese yen. Together with the above-mentioned EUR 2 million effect realized in Q3, this totals to approximately EUR 5 million negative FX impact, which corresponds with the 1 percentage point gross margin adjustment of our guidance. OpEx in the quarter were slightly up by 4% year-over-year to EUR 31 million, primarily driven by higher R&D spending compared to the previous year. For the first 9 months, OpEx came in at EUR 94 million, a reduction of minus 6%, driven primarily by around 13% lower R&D expenses. R&D expenses were down mainly due to reduced external contract work and consumables costs. As stated before and visible in Q3 numbers, R&D costs in H2 will be higher than the H1 number. So for the full year, we expect R&D costs to be slightly lower than in 2024. EBIT for the quarter is EUR 15 million, a significant drop versus Q3 2024. The main drivers besides the already mentioned negative factors impacting gross profit is a negative operating leverage effect resulting from lower revenues. The weaker performance in Q3 led to an EBIT of EUR 42 million for the first 9 months, a decrease of 30% year-over-year. This translates into an EBIT margin of 11%. Again, please record the one-off expense in connection with the personnel reduction I've mentioned before. Adjusted for this effect, the 9-month EBIT margin would be around -- at around 12%. Now to our key balance sheet indicators on Slide 5. On a more positive note, working capital has continued to come down -- has come down by around EUR 100 million since end of fiscal year '24. Several balance sheet items contributed here. We continued to decrease inventories to EUR 316 million compared to EUR 369 million at the end of 2024. Year-over-year, inventories have been reduced by EUR 111 million as we continue to work through the surplus accumulated last year. And as stated before, we expect further inventory reductions to materialize throughout 2025 and into 2026. Trade receivables at the end of September were at EUR 129 million compared to EUR 193 million at the end of 2024. The reduction versus year-end is mainly the result of the collection of the payments related to the large shipments end of 2024. Advanced payments received from customers at quarter end were at EUR 73 million, a nice recovery of about EUR 20 million versus end of last quarter, but still down about EUR 9 million from end of 2024. This is primarily driven by some cutoff date effects and some regional shifts in the order book. Advanced payments now represent about 25% of order backlog. The fourth key element of working capital, trade payables, has now come down to EUR 24 million from EUR 34 million at the end of 2024. This reflects a now fully adjusted supply chain situation with significantly reduced purchasing levels. Adding it all up, our operating cash flow after 9 months improved to EUR 128 million, a strong improvement of EUR 100 million versus last year's EUR 28 million. On the back of the improvement in operating cash flow, free cash flow improved even more. It came in at EUR 110 million after 3 quarters compared to negative EUR 58 million last year. This was supported by a strong reduction in our CapEx. With EUR 18 million after 9 months, our CapEx was significantly lower than last year's number of EUR 86 million. This is primarily due to the now completed investment in the innovation center. As of September 2025, our cash balance, including other current financial assets improved to EUR 153 million. This equals an increase of EUR 88 million compared to EUR 65 million at the end of fiscal year 2024, despite the dividend payment of about EUR 17 million in Q2. As stated before, a key priority remains the rebuilding of a strong cash position. Our financial decisions continue to be guided by this objective to ensure a robust liquidity foundation for the future. This has served us well in the past, and we see ourselves well on track towards this target. With that, let me hand you back over to Felix. Felix Grawert: Thank you, Christian. Let me continue with an update on key trends in our different markets, starting with optoelectronics and lasers. In optoelectronics, AIXTRON has seen a continued recovery in demand for datacom applications, which began earlier this year and has been reaffirmed in Q3. This trend is expected to continue into '26 and beyond. Our customers are increasingly transitioning to 150-millimeter indium phosphide substrates and photonic integrated devices, PIC devices requiring advanced epitaxial performance. This segment is technology-wise very demanding. It requires excellence in the uniformity, doping control and defect management, areas where our G10-AsP platform excels. Historically, AIXTRON has held a market share of over 90% in this domain served by our G3 and G4 planetary reactors. The G10-AsP is now establishing itself as the tool of record to the laser market, replacing legacy systems at leading customers. Q3 shipments and scheduled Q4 deliveries underscore our strong market position with repeat orders from key customers such as Nokia. Additionally, VCSEL demand is recovering, driven by LiDAR modules and automotive applications. We, therefore, expect that tools for the various laser applications will contribute significantly to our full year order intake and also into next year '26. Now let me move on to our LED business. We are seeing first encouraging signs of reinvestment in red, orange, yellow -- ROY LED applications. Utilization rates for red, orange, yellow LEDs have been high throughout the year with double-digit system shipments for mini LED applications driven by demand for RGB fine pitch displays. Notably, some TV manufacturers such as Samsung are shifting to full RGB backlighting, boosting micro LED demand. While overall micro LED demand remains moderate, medium-term drivers are positive. We've received multiple orders for our G10-AsP platform, primarily for red pixel production in next-generation AR devices. The recent announcement of Meta's AR glasses based on micro LED technology signals a broader trend with more OEM products expected in '27 and '28. Our G5+ and G10-AsP platforms are ideally suited for these applications, which require ultra small pixels and defect-free epitaxial die. The launch of Garmin's first micro LED watch is likely to further stimulate demand across blue, green and red micro LED segments. In solar, after years of moderate investment, we are now seeing renewed interest, including multiple orders for low earth orbit -- LEO satellite applications in constellation projects. LEO satellites are those that orbit the earth at altitudes of about 2,000 kilometers. They enable both fast communication as well as high-resolution earth observation by operating in a zone just above the earth's atmosphere, where they can maintain strong signal connections with ground stations. These satellites work in interconnected constellations of hundreds of thousands of satellites of hundreds or thousands of satellites to provide global coverage, examples are Starlink or OneWeb. We anticipate this trend to continue in the years '26, '27 and '28. Let me now come to gallium nitride power. AIXTRON continues to lead GaN power segment with over 85% market share across all wafer sizes and power ranges. Although demand is softer compared to last year, we are seeing solid volume orders for both 150- and 200-millimeter solutions, particularly from Asian customers with ramp-up plans extending into '26 and '27. We've also strengthened our partnership with imec. Together, we are accelerating innovation at both the architecture and device level. imec has been using both our G5+ as well as the G10-GaN platform for its 150- and 200-millimeter partner programs for quite a while. And we have now shipped a 300-millimeter gallium nitride platform to enable broader access to imec's recipes. We see first power semiconductor manufacturers adopting 300-millimeter GaN technology such as Infineon Technologies. Regarding the overall GaN market, we are still dealing with a moderately oversaturated installed base, requiring some more time to absorb existing capacities. This digestion phase is expected to continue for some quarters before a broader recovery sets in. With that, let me come to silicon carbide. While end-user demand remained soft, we observed moderately increased utilization rates at some of our customers. On the one hand, this is due to new EV models being launched, which drive demand. On the other hand, SiC is starting to enter the AI data center value chain, especially in voltage classes of 1,200 volts and above. You have seen the new NVIDIA power architecture, which relies exclusively on wide band gap power devices. At the International Conference for Silicon Carbide and Related Materials -- in short, ICSCRM in Busan, Korea early in Q3, various industry players confirmed midterm adoption of super junction silicon carbide technology. This technology basically means that instead of one thick silicon carbide epi layer deposited today, we will see in the future multiple thinner silicon carbide epi deposition steps. These thinner epitaxial layers require enhanced uniformity and shortened process time. Our G10 silicon carbide platform is well positioned to meet these needs, offering superior productivity due to the benefit of the batch concept, especially for thinner layers. We are proud to have shipped our 100 G10-SiC CVD system, marking a major milestone and reinforcing our leadership in the silicon carbide power segment in this quarter. The silicon carbide market is still undergoing a longer digestion period, particularly in western-oriented regions. As a result, there are no major decisions for new fab investments on the agenda these days. In summary, we can say that the soft market period still continues in almost all markets, apart from the laser market, driven by the hunger for data from AI applications. A demand pickup will not materialize in '25, and visibility in '26 is still limited. With that, let me now move to our guidance. Due to the market situation just described, we had to adjust our guidance for 2025, 2 weeks ago. Based on the current soft market environment and assuming an exchange rate of USD 1.15 per euro for the remainder of the year, we now expect the following outlook for '25. We expect to generate revenues in the range between EUR 530 million and EUR 565 million, which corresponds to the lower half of the initial guidance, which was initially EUR 530 million to EUR 600 million. FX effects led to an approximately 1 percentage point reduction of gross margin and EBIT margin. As a result, we expect now a gross margin of around 40% to 41% and an EBIT margin of around 17% to 19%. The guidance for the gross margin and EBIT margin includes a one-off expense of a mid-single-digit million euro amount in the relation to the implemented personnel reduction in the operations area earlier this year. The measure will lead to annualized savings in the mid-single-digit million euro range in the future, which corresponds to an improvement in the gross margin and EBIT margin of around 1 percentage point. As previously stated, we expect our tools to remain exempt from U.S. tariffs. However, we continue to closely monitor the impact of U.S. trade policies on the global economy and stand ready to implement any necessary measures to ensure the best possible outcomes for our customers and stakeholders. Let me, at this place, also give you a first outlook for the next year 2026. We clearly see that the medium and long-term drivers for AIXTRON's growth such as demand for GaN and SiC power devices, LED and micro LED applications, lasers and LEO solar applications remain intact. However, visibility for the fiscal year '26 remains low. And as of today, we do not see signs of a demand recovery yet. Therefore, our view today is that 2026 revenues are likely to be slightly below those of '25, maybe flat. Furthermore, assuming an exchange rate of USD 1.15 per euro, we expect the EBIT margin not to come out below the range of the current year, maybe better. As always, we will give you a firm guidance with the release of our financial year results end of February 26. With that, I'll pass it back to Christian before we take questions. Christian Ludwig: Thank you very much, Felix. Thank you very much, Christian. Operator, we will now take the questions. Operator: [Operator Instructions] The first question comes from Janardan Menon from Jefferies. Janardan Menon: I just wanted to touch upon your final comments on 2026 to start off with. You said that 2026 is likely to be flat or down, but it sounded like you expect Opto to be up, and your trend -- when I look at your Q3, GaN seems to be doing quite well, while SiC is down quite sharply. So would it be fair to say that at current visibility, you would expect Opto to be up, SiC to be down and GaN to be somewhat flattish. Is that a view that -- which would be sort of a preliminary view for next year? Felix Grawert: It's a good -- I think you got a perfect read on this one. Let me try even to quantify it for you. I think roughly in terms of percentage of revenues, we expect as a percentage of total revenues next year, we're expecting to gain about 10 percentage points for Opto, 10 percentage points gain for GaN and minus 20 percentage points in silicon carbide. So a pretty weak year for SiC, but very strong year for the Opto segment. It used to be a smaller segment. So adding 10 percentage points of the total is quite a significant one. This also helps on the margin. You have seen my comment related to margin quality. And GaN also as a percentage gaining a bit. Janardan Menon: Just a follow-up. On the SiC side, yes, I understand that demand is quite weak right now. There's quite a bit of supply out there and automotive is still sluggish. But listening to companies like STMicro and all who are under quite severe margin pressure on the silicon carbide side, they seem to be accelerating their 6-inch to 8-inch transition because they see that as a way to improve their profitability. And ST specifically said that they'll do it within -- through the course of '26 and by early '27. I would assume that that would be true for other parts of the installed base as well given the price pressure on silicon carbide. Do you not see this as a driver at all for your silicon carbide revenue? And do you really need the end demand to recover before any improvement happens? Felix Grawert: I think you catch it very well. Yes, the 6- to 8-inch transition is going very fast, especially at outside of China players. I think worldwide outside of China, we see the 6- to 8-inch transition progressing at rapid speed, as you have indicated with one company name, and we see the same in other players. In fact, we do hear from some of our customers that while end customer revenue is flat or down, the unit numbers are going up and unit numbers is, of course, what we as an equipment maker like, because in the end, it's about wafers and increasing numbers of wafers. So in fact, we expect that by the end of '26, the transition in the Western world, as I may call it now, including Japan, is probably concluded '27, '28, I would expect the volume to be completely going on 8-inch. We do see on 8-inch also much better quality wafers, which helps the customers in terms of yield. That's one of the cost reduction drivers. Also 8-inch substrates are getting good pricing now. Initially, they used to be very expensive. Now the pricing for 8-inch substrates is going well. And that, at some point, means the excessive overcapacity that I was speaking about at some point will be digested. I would not dare at this point to give an exact prediction because there's multiple variables that we are just discussing. But I think we can clearly see at some point, the overcapacity will be digested and then there will be new demand. Janardan Menon: But that transition doesn't mean buying new 8-inch machines from you, is it to generate revenue for you? Felix Grawert: At some point, it will mean buying new demand and new tools when the existing overcapacity is consumed. Right now, we talk about existing overcapacity, which is just being converted. Operator: Next up is Martin Marandon-Carlhian from ODDO BHF. Martin Marandon-Carlhian: The first one is on something that you put on the press release on gallium nitride. You talked about utilization rate rising in data center. And I was wondering what does it mean exactly? I mean, does it mean that you already anticipate orders in the near term linked to the new 800-volt architecture from NVIDIA? Does that mean something else? Felix Grawert: Let me explain what we mean by that. Thanks for the question. What we have seen is we have seen in the years, especially '23 and '24, we have seen quite a number of gallium nitride orders, which were happening a bit ahead of the wave, such that, I would say, early '25 at the existing volume customers, we have seen quite a significant overcapacity of installed base also in gallium nitride. That was the reason why in '25, compared to '24, our gallium nitride shipments have been slowed down quite a bit, because our existing and established volume customers literally had also in GaN, not only in SiC, but also in GaN, some overcapacity to be digested. So as we started into '25 at some of our customers, also in gallium nitride, we have seen installed base utilization to be quite low. Now towards the end of '25 and looking into '26, we see that a much larger fraction of the installed capacity is being utilized at the existing GaN customers, while those who newly entered the GaN market in '24 and '25 in previous earnings calls, you may have recalled that we said -- well, there's still new players entering the market to gallium nitride. And those new entrants at this point in time are still in the qualification or in the device and the sampling phase of their technologies to their end customers. You have seen the numbers that I was just commenting towards the question that Janardan was asking. We expect the GaN segment for us to be slightly up next year. Again, it's an indication, qualitative indication. as we see that utilization is increasing, and we expect due to the increasing utilization, some expanding orders from some customers kicking in. The broad market recovery, as I've indicated, with the real volume pull, we don't expect in '26. We rather expect that in '27, '28, but some increasing orders in '26. Does that answer the question? Martin Marandon-Carlhian: Yes, that's very clear. But just a follow-up on this. I mean, why would you anticipate more of that volume in '27 and '28? Because we read that this new architecture from NVIDIA is supposed to be for Rubin Ultra, which is launched in H2 '27. So I was expecting capacity maybe to come a bit earlier than this. So does this mean that maybe it will not be 100% GaN for some steps at the beginning, the 50 and 12-volt steps and it will go gradually. I mean just can you explain a bit why it should come more gradually, let's say? Felix Grawert: So this is based on our current view, what we have and the signals we get from our customers. I share the view that the new 800-volt architecture will lead to significant volumes around '27, '28. This is also our view, I share that. Now for us, it's always very difficult to predict the exact timing when customers will place the orders for new equipment because we do see certain trends, but we cannot look into the exact budgets and plans of our customers. Therefore, at this point in time, we can only comment on what we are currently seeing. If later on in the year, volume kicks in and orders accelerate, we are very happy to it. We don't see signs to that yet. Martin Marandon-Carlhian: Great. And maybe a last question on GaN. I mean, you all is saying that the GaN market will be close to $500 million this year with that data centers really being really a contributor. What would you guess would be the size of the data center market for GaN compared to the overall size of the market this year, like $500 million? Felix Grawert: So I do not have the exact timing for my message in mind. We have looked at a midterm perspective, I think somewhere triangulating '28, '29, '30, something a little further out. And in this triangulation that we've done, the data center opportunity with an upside of about 50% on top of the market without the data center opportunity. You may recall that we have a slide out there in the investor deck, which on the X-axis has 3 time horizons. I think '20 to '23, I think '24 to '26 and whatever '28 to '30, something like this. And on the Y-axis, the different voltage levels, low voltage, medium voltage and then very high voltage. And there, we have put the AI data center opportunity, and this is the market that I'm referring to. Martin Marandon-Carlhian: Maybe last question for me on the gross margin. I mean the current guidance implies record gross margin in Q4. Just can you help us maybe see the main drivers of this? Christian Danninger: Yes. Martin, Christian here. I'll take that one. I mean, like in the last years, the Q4 will be the strongest quarter just by volume, purely shipments. Beyond that, we expect an improved product mix, especially a higher share of final acceptance revenues coming with high margins and also some fixed cost degression effects. A little bit of color on the product mix. We expect a big share of G10 family products, around 50% of Q4 revenue so that you get an idea. So also looking at the -- comparing this with the last year, these margin ranges appear achievable for us. Operator: Next up is Didier Scemama from the Bank of America. Didier Scemama: I've got a couple of questions maybe clarification on the comments you made earlier on '26. And perhaps my math is not right, so please don't shout at me if I'm wrong. I think you said the SiC part of the business would be down 20 percentage points in terms of group sales. I mean, by my calculation, that would imply a pretty minor revenue contribution in '26. So is that correct? And then equally, Optos up, I think you said 10 percentage points within the group, that's going to put it at something like EUR 150 million next year. Is that the right ballpark? Felix Grawert: I would say right ballpark, right indications, Yes. As far as we can say. I mean, it's very early, but we really want to give you some… Didier Scemama: Yes, of course. Felix Grawert: Yes, exactly, yes. Didier Scemama: No, that's incredibly helpful to me perfectly honest. So I guess the question, when I look at the comments you put on the 9-month report, you said about 50% of the bookings came from power electronics. So I have to assume that the rest mostly come from Optos because LEDs, et cetera, is fairly de minimis, which if you compare to what you said last year, means that the bookings in Optos are probably up meaningfully, which is again consistent with what you said. So perhaps when you look at history, Optos, like all the other segments have tended to be incredibly cyclical. So would you think that there is duration in that growth in optoelectronics beyond '26? Or do you think that the big CapEx cycle we see currently for silicon photonics and lasers is going to be as we've seen in the past, a big year and then it falls off a cliff. Felix Grawert: I think you asked the trillion, the multitrillion dollar question, how long the AI bubble will last. I do not have the crystal ball for you, right? If I would, I might not be sitting in this place right now. Didier Scemama: Okay. Well, yes, I mean, honestly, I wish you good luck. Felix Grawert: I think it fully relates given the serious note, yes. Some joking aside, a big part of the laser part is, in fact, coming from the datacom, right? And the datacom, again, is driven by the AI and the AI data center build-out. So it's really hinges on that one, to a very big part, probably 50%, 60%. So it really depends on how exactly that's progressing. But we can only see what we have now in our visibility. But a longer-term view 2, 3 years out, I think it's as difficult as for everybody predicting the AI trend. Didier Scemama: No, for sure. And if I may, as a follow-up, I mean, you mentioned Nokia/Infinera as a customer for your G10 platform for their peak products. Can you give us a few more examples of key customers for that division so that we understand the underlying dynamics, please? Felix Grawert: Unfortunately, I cannot, because we keep customer names always strictly -- very strictly confidential as under NDA. We stick to that. We are extremely sensitive to that. I can give you a qualitative indication. Imagine you think who may be the top 10 providers for data communications devices for AI, you can assume that at least 80%, 90%, maybe 100% of those guys are our customers currently placing order with us and 90% of those are placing orders for the G10-AsP. Maybe I can give you that indication. And I really mean it as I say it. Operator: Now we're coming to the next question. It comes from Madeleine Jenkins from UBS. Madeleine Jenkins: I just had one on utilization rates. You mentioned that the GaN power were increasing. Could you quantify that at all? And also, I guess, get a sense of what your silicon carbide utilization rates are at kind of Chinese and then Western customers? Felix Grawert: So I understand your question about detailed utilization rates. We don't have those. And we could also not share them if we would have them. But what we can say is that based on spare part orders, based on service orders, we see a trend here, which is a good utilization increase for the GaN power, which leads us to expect some volume expansion orders in '26 at a moderate level as we have indicated. At the same time, in silicon carbide for the overall market, I think towards the beginning of the year, we have seen very low utilizations with very low -- I mean, clearly far below 50% means far more than 50% of the capacity installed in the market was standing idle early in the market. And maybe we are now approaching a 50%, 60%, 70% utilization in silicon carbide. So we do see it increasing, but we are still far from a level on a market level where customers are really going into reorders and expansion orders. I think that's not yet on the agenda. Madeleine Jenkins: Then I guess all your kind of new orders in silicon carbide specifically, are those kind of new customers in China? Is that the right way to look at it? Felix Grawert: Yes. We did have significant orders and shipments in '25 in silicon carbide into China, quite a diverse set of customers, highlighting the success of our G10 silicon carbide platform. So I think we've managed to establish that platform very well in the China market. That was all relating to the earlier question by Janardan. That was all for 8-inch or having 8-inch in mind. However, we are all aware of the large overcapacity in silicon carbide in China. Also the China silicon carbide business at this point in time has slowed down. I think the market overall is digesting the existing overcapacity. However, I think we all see the very nice success of Chinese electric vehicles. At some point, the overcapacity will be digested and there will also be new orders. Madeleine Jenkins: Then just a quick final question. Do you have a sense of kind of how much of your current gallium nitride revenues this year, let's say, are for data center applications? Felix Grawert: That's honestly very difficult to predict. Sorry for having only a vague answer, because our gallium nitride customers, I think we all have a couple of very big names, leading power electronics makers in mind, right? They use our platform essentially our tools, essentially for all the applications across the board. On our tool in the same configuration, you can produce a 20-volt, 100 volt, a 650 volt and even if you want a 1,200-volt device without any change in configuration. And therefore, we, as a maker, just send the tool as it is and the customer can do whatever the customer wants with it without a modification in those power ranges. Therefore, it's for us very difficult to predict. If there would be a different configuration by voltage range, then at least we would have an indication. But therefore, it's difficult for us to say. Sorry for that one. Silicon carbide is different, right? 6- to 8-inch, right? It's always the customer needs a configuration and we see spare parts orders or parts orders, and we can at least give you here in the call a qualitative indication for the GaN, it's really one size fits all. And yes, customer takes it and then we don't know. Operator: Next up is Ruben Devos from Kepler Cheuvreux. Ruben Devos: I just had a follow-up on silicon carbide. I think you touched upon it already, but it was around your comments on benefiting over proportionally when the cycle would return. I think you talked about a more diverse set of customers. So that might be an explanation, right? But just curious around what degree of confidence you have, right, to make that statement of outgrowing the market. And even outside like automotive, how does the pipeline shape up thinking about industrial as well in silicon carbide? Felix Grawert: Thanks a lot. I think your question hints very well towards the future direction of silicon carbide. Let me go a little deeper to expand on it, maybe some of the backgrounds, the technical backgrounds are interesting. So the first generation of silicon carbide devices, which we have seen, I would say, in the last 5 years with a very simple MOSFET consisting essentially of just one thick layer, one thick epi layer. Now what I mentioned, the next generation of devices, which to the expectation of all market participants will be the main volume in the next wave. Everybody expects the next wave of growth, '27, '28, exact timing to be TDD to be super junction MOSFETs. So this is a device where this thick layer is split into 3 or 4 thinner layers. So each of them about 1/5 or 1/4 thick of the initial one. And it's not just one big epi, but the wafer would be put into a tool 4 times. So you make 1 thin layer, then you do some device processing and then the wafer returns to the silicon carbide epi tool comes the next thin layer and so on multiple times. And this super junction technology shifts the operating point from one thick layer, which, let's say, has in the past been deposited, let's say, in about 1 hour to 2 hour processing time, now into multiple thinner layers and depending on which type of equipment, let's say, it now takes 15, 20, 30 minutes instead of 1 or 2 hours. So the wafer gets into the equipment multiple times. And with that, the complete dynamics about the productivity of the tool, the key KPIs and so on is shifting because essentially, it's a very different operating point. You can buy -- in an analogy, you can buy a car which is perfect as a city car, small and nice and fits into parking lots, but doesn't drive very fast, you don't care. And a perfect travel car for long-distance travel or a nice sports car for going up the mountain pathways or driving races, right? And each of the operating points has a different optimum. And this new operating point about thin layers to our calculations and also to the feedback we receive from customers is very beneficial for the batch tool which we are offering. This is the reason why we've made these positive earlier statements. With that, let me come to the second part of your question. The other part of the market, which may provide further growth, I think it's still a little further out than '27, '28 is the market for industrial applications. That market could probably towards the end of the decade grow very big. What we are talking here is about the following. Today, we use the silicon carbide devices mainly in switch mode power supplies or like power devices for the car in the main inverter and in voltages, 650 to 1,200 volts. We can also make silicon carbide devices, which have 3,000 volt or 6,000 volt or 10,000 volts, much, much higher voltage classes. And the industry is working on. That was, for example, one of the elements in the NVIDIA power architecture. I think everybody here in this call has the chart of the architecture. If you look at the chart of NVIDIA, on the very front end, you come from the grid and you enter the grid into the data center at voltages around 14 kilovolts, and that's 14,000 volts. And this down conversion from over 10,000 volts eventually down to 1,000, this is done by silicon carbide and then from 1,000 to 1 is done by gallium nitride. Now you cannot only use the silicon carbide in the data center for these high voltages, but in the entire grid. And we all know as more and more renewables are being used worldwide, I think China leads the pack with driving down the cost of solar and wind, but the whole world is following. And we need much more active grid stabilization, load management, active management and so on and so forth. So the grid, the worldwide power grid will experience over the next 2 decades, massive investments into switching infrastructure. Today, this is all being done by transformers. I think everybody knows next to the highway like these transformer stations standing. In the future, many of those will be done by active switching, and this will all be done by silicon carbide power devices. So all the leading grid suppliers, whether this is Siemens and ABB, Schneider Electric, General Electric in the U.S. are working on such devices. And it's a nice end segment for silicon carbide to come. However, I think this is a longer-term trend. I would not put the years '27, '28 on it. I would rather put '29 onwards as a nice trend for the turning of the decades on this trend. Ruben Devos: Just my second question related to optoelectronics, basically. I think you've called co-packaged optics as a key driver for indium phosphide adoption. How quickly would you expect the market to move there from pilot into volume co-packaged optic deployment? And you've very helpfully framed the tool market size for silicon carbide and gallium nitride in your slide deck. So may I opportunistically ask whether you've done a similar exercise for the G10 arsenide phosphide platform. Felix Grawert: Thanks a lot. I take the suggestion. It's a good one. Let's take that on our action item list that he smiles around me here in the room, yes. It's a good one. We don't have it yet for today, so I cannot give it to you maybe in the next earnings call. Now to your question about the sizing and what we see. For the optoelectronics market, unfortunately, it is much more difficult to predict than for the GaN and for the silicon carbide market. Let me try to illustrate to you why. In GaN and SiC, we talk at least for the low volume segment for pretty standardized segments and types of devices, right? For GaN, we talk 20 volt, 100 volt, 650 and then exotic 1,200. Silicon carbide, 650, 1,200 and now I was talking a bit about the very high voltages. So you can put it into 2 or 3 classes. Unfortunately, the optoelectronic market is extremely fragmented. We both see that in the number of players. I don't know there may be a couple of hundred optoelectronics producers and companies, while in power electronics, we talk probably about like maybe a dozen or 2 dozen, 3 dozen maybe at most, yes. So it's extremely fragmented. And such are the different technologies, which is competing with each other. The good thing is this is physics. They all have in common. As of today, they need a wide band gap semiconductor, gallium arsenide or indium phosphide for generating the light. But then the way the light is being processed, whether this is on an indium phosphide or gallium arsenide-based photonic integrated circuit or whether the light coming on is put into a silicon photonics. You can use silicon -- silicon dioxide waveguides and switching devices. This is extremely diverse and therefore, very difficult to predict. I wouldn't dare at this point to make a prediction where it goes. We are aware that all the guys who are working on the leading-edge CMOS nodes and also doing heterogeneous integration, all of them work on multiple technologies because even for the big guys in the industry, things at TSMC, it's difficult to really say, well, this technology is winning out against the others. Operator: Next up is Andrew Gardiner from Citi. Andrew Gardiner: I just had one on the margin outlook into next year that you provided us, Felix, saying that you thought EBIT margin next year would be in line, perhaps better year-on-year. Can you just sort of give us some of the drivers there in terms of gross margin? I mean, obviously, you've given us the mix in terms of Opto and GaN up and SiC down. How would you sort of quantify that in terms of magnitude of gross margin change next year? And also, you've done a sort of a workforce reduction earlier this year. Given the still slow market in SiC, do you see any need to continue to reduce OpEx? Or are we far enough through this down cycle now where you just sort of have to -- you weather it because you can see the long-term opportunity. So really there's not much change -- incremental change in terms of OpEx into next year? Felix Grawert: Yes. Thanks a lot for the question. I think part of the answer you've given, let me try to give an end-to-end consistent picture. So we were referring to EBIT margins really to bottom line. I have not given indication on the gross margin, no quantitative, right? So I was really mean EBIT margin. And I think there's three drivers behind our indication towards. So we wanted to give you a very clear indication that the margins is not getting worse despite the top line suffering probably a bit. And I think there's three drivers behind it. On the one hand, we see margin-wise, a bit stronger product mix. I indicated the gain of Opto, that helps a lot. And secondly, we will see the full year effects of the headcount reduction, which we conducted early in '25. '25, there's also cost and restructuring costs. In '26, we get the benefits of that. And the third topic is we use the slow period of the cycle right now for some operational improvements, be it working on our storage topics, be it working on logistics topics, be it currently working on our operational efficiency. So we have quite a bunch of these things ongoing, which are just making our operations more fluent, which reduce the external spend that's going out the door all the time. And we expect some of those effects to kick in. And based on those 3 effects altogether, we expect, yes, in terms of absolute terms and a stable bottom line or percentage-wise, stable or even improved bottom line despite the probably slightly weaker top line. But I think that's important in the end for you guys also then to everybody here in this call to give an indication where does it lead on the profitability. Operator: The next question comes from Adithya Metuku from HSBC. Adithya Metuku: Firstly, I just wondered if you could give us some clarity on what drove the push out this year, which end market drove the reduction in outlook for the year? Felix Grawert: Sorry, I didn't -- acoustically, the line was very bad. I didn't get the question. Could you repeat it, please? Adithya Metuku: Sorry, apologies. I was just wondering if you could give us any color on what drove the reduction in guide in 2025? Where did you see this push out, which end market? Felix Grawert: Okay. Sorry, I get it. Honestly, this was all across the board, except for the laser market. I think the laser market we've indicated is strong and continues to be strong and this is growing into next year, as we have just discussed. We have seen a weaker-than-expected GaN in silicon carbide. Initially, as we started into the year, it's always very difficult, right, to predict the full range. And we have put the full guidance range accounting early in February '25. So looking now 7 months back. In our full guidance range, we have accounted for both a slow market scenario, which now is unfolding. So therefore, we now look at the lower half of the guidance. And early in '25 with the upper end of the guidance, we have also taken into account a more positive market environment. As we all see, the more positive market environment for power semis for electric vehicles is not yet unfolding. So the upper half, therefore, had to be corrected now down to the lower half. We are narrowing down at the lower half of the guidance. Adithya Metuku: Then just on the LED and the micro LED market, you talked about seeing signals of improvement. I just wondered if you could give us a bit more color on what exactly you're seeing, especially on the LED side? Is it driven by China? Is it anything construction related? Just any color you can give us on these two end markets in terms of the signals of improvement. Felix Grawert: Yes. Thanks a lot. So on the LED market, this is typically almost exclusively China-only market. I think we can say, because of cost and volume effects. We all know, right, China is very, very strong these days on the display making. It used to be, as you have indicated in your question, historically, there used to be a lot of the LEDs going into construction, right? In China, they put these big, big walls on the skyscrapers. But as we all know, the China housing bubble has collapsed, right? That was also the reason why the segment was bad for us for 2 years. Now we are seeing the classical LED market coming back with, we call it fine pitch displays means and especially display backlighting. Local dimming, local backlighting of display, you can achieve magnificent effect by either having white LEDs behind your LED display, you can create a beautiful black or you can produce quite some nice bright colors on it with that one, and that's even going now into -- turning into RGB. The good news is it is revenue already today. The bad news is it makes it much more difficult for micro LED to gain ground in the televisions because the normal displays are already getting much improved quality. So let's see what it means for the micro LEDs. The other point, which I was indicating, we still see that on micro LED, research work is ongoing. We've seen some first devices. I was relating in my prepared notes to the Garmin watches, which is the first micro LED watch coming out at quite high prices and unfortunately, with low battery lifetime. So we are seeing that coming. And we see a lot of companies currently doing work on AR glasses and VR glasses. You may have seen the glasses launched by Meta. There's much more stuff in the preparation. I think this is a new device category, which will really come into the market quite soon. And yes, we see some moderate demand for that also next year, as I've indicated in my prepared notes. But again, it's far away, to be clear, it's far away from the micro LED massive investment wave that all of us 2, 3 years we were expecting where we would expect that micro LEDs are penetrating everything from smart watches to notebook displays and televisions, right? That one we are not seeing yet. We still see the research ongoing. So some -- many companies are still working on it, but we don't have a clear in our view when exactly that's coming. Adithya Metuku: Just one last question. With TSMC getting out of the GaN market, I just wondered, do you see a market for secondhand tools for your GaN epitaxy tools? And would that affect demand maybe next year or the year after? How do you see the implications of TSMC getting out of the GaN market? Felix Grawert: Honestly, I see it as a bit of a reshuffle, which happens normally in all the markets where there's a bit of a slowdown in the market. I think we see the same in silicon carbide, some players are exiting, some others use the opportunity to buy some used tools to get a hold of in or to get used tool and then newly to enter the market, I think it's a normal play that happens in a softer market environment. For the overall market and for us, this has essentially no implication because whether a used tool is installed or whether a tool is installed at company A or changes the ownership and is later on installed within the factory of company B, it doesn't change the overall installed capacity in the market or doesn't change the market dynamics. So for us as an equipment maker, we are -- we support customers when they need help in either way, sometimes for moving tools, for reinstalling tools, but it doesn't change or doesn't impact the market. Operator: The next question comes from Michael Kuhn from Deutsche Bank. Michael Kuhn: I'll start with, let's say, the usual update on 300-millimeter GaN. I think it's quite well known that Infineon is quite advanced in that context. And obviously, no big surprise there, cooperating closely with you in that regard. So when should we expect tool orders to arrive and, let's say, outside Infineon, what's your view? How many companies are currently working on the transition and preparing orders? Felix Grawert: So I think with 300-millimeter GaN, the market unfolds pretty much as we have expected. If you recall, we stated earlier that we see the 300-millimeter GaN as a subsegment of the overall GaN market, initially targeting the lower voltage classes means 100 volt, 20 volt, maybe 200 volt. Maybe at a later time, also 650, but really starting at the lower voltage classes. And we get confirmation from many customers what we had expected early on that customers are really targeting to switch and to reuse existing silicon MOSFET or silicon IGBT capacities and to rededicate existing fabs for gallium nitride. Of course, customers need to buy new epi tool because the silicon epi tool is a completely different tool from a gallium nitride epi tool. So in any case, there's a new tool demand for gallium nitride tools. However, the market adoption and the customer decision to the largest part depends on the installed base of factories. So customers who have today their silicon MOSFETs running in a 200-millimeter silicon fab are likely to switch to a 200-millimeter GaN tool. Customers who today are running their silicon MOSFETs in a 300-millimeter fab will want to switch and rededicate their 300-millimeter fab to a 300-millimeter GaN fab. So that is the market dynamic. And I think based on that dynamic, we never comment on customers unless we have a joint press release with customers. So allow me to describe the trend without names as we always try to do. So we really see customers who have installed 300-millimeter silicon capacity are switching now and starting to switch and have plans. There are many, many, many other customers who have 200-millimeter silicon fabs continue to work on gallium nitride 200-millimeter. And as a result of that, our strategy going forward is that we will support both groups of customers. So GaN 300 is not displacing GaN 200. We have our GaN 300-millimeter road map. We are very happy with the results that the 300-millimeter tool is giving. But at the same time, we also maintain an active 200-millimeter GaN road map where we also work on improvements. We have multiple very close customer collaborations on 200-millimeter tool improvements or even next-generation tools for 200 millimeters. Michael Kuhn: Then on cash flow and working capital, given that you don't expect top line growth next year, how much more would you think you can further optimize working capital? Because I think you mentioned you see further potential also into 2026. Christian Danninger: Let's focus maybe on the inventories because the rest of the working capital is always a little bit arbitrary, the receivables and the down payments. But on the inventories, our key ambition is to drive them down further. It's a little bit difficult yet to predict, not knowing the exact product mix and so on, but like at first, like high level expectation would be another 20% down. Felix Grawert: I would be more ambitious. Let's check. So I would say by the end of this year, I would expect inventory EUR 275 million, plus/minus EUR 15 million. To give you a number, let's see how close we come. Maybe next year, EUR 200 million. Let's see, something like this. Christian Danninger: Let's see. Michael Kuhn: Looking forward to it. Maybe you can do a little bet between the 2 of you who comes closer. Operator: There are no further questions. Felix Grawert: Good. Perfect. And I think we had a lively discussion. We very much appreciate as you see. And yes, stay tuned. I think this is a good exchange. And I think we all see each other latest in the February call for the full year results. Christian Danninger: Exactly. We will be on the road at various conferences. So I guess a lot of you at one of the conferences. And for those we don't catch before end of the year already in Merry Christmas. Felix Grawert: In October. Okay. Cheers, guys. Christian Danninger: Thank you. Bye-bye.
Operator: Good afternoon, and welcome to the Travere Therapeutics' Third Quarter 2025 Financial Results Conference Call. Today's call is being recorded. At this time, I would like to turn the conference call over to Nivi Nehra, Vice President, Corporate Communications and Investor Relations. Please go ahead, Nivi. Nivi Nehra: Thank you, operator. Good afternoon, and welcome to Travere Therapeutics' Third Quarter 2025 Financial Results and Corporate Update Call. Thank you, all, for joining. Today's call will be led by Dr. Eric Dube, our President and Chief Executive Officer. Eric joined in the prepared remarks by Dr. Jula Inrig, our Chief Medical Officer; Peter Heerma, our Chief Commercial Officer; and Chris Cline, our Chief Financial Officer. Dr. Bill Rote, our Chief Research Officer, will join us for the Q&A. Before we begin, I'd like to remind everyone that statements made during this call regarding matters that are not historical facts are forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of performance. They involve known and unknown risks, uncertainties and assumptions that may cause actual results, performance and achievements to differ materially from those expressed or implied by the statement. Please see the forward-looking statement disclaimer on the company's press release issued earlier today, as well as the Risk Factors section in our Forms 10-Q and 10-K, filed with the SEC. In addition, any forward-looking statements represent our views only as of the date such statements are made, October 30, 2025, and Travere specifically disclaims any obligation to update such statements to reflect future information, events or circumstances. With that, let me now turn the call over to Eric. Eric Dube: Thank you, Nivi, and good afternoon, everyone. The third quarter marked exceptional progress across our three key priorities: delivering strong commercial execution in IgA nephropathy, preparing for a potential FDA approval in FSGS, and successfully advancing the manufacturing scale-up of pegtibatinase to support restarting enrollment in the pivotal HARMONY study in 2026. The core driver of our performance is FILSPARI's continued growth in IgA nephropathy, where we delivered sustained commercial excellence in the third quarter. Physicians continue to confidently adopt FILSPARI as a foundational nephroprotective therapy for their patients. This confidence reflects consistent real-world outcomes, robust long-term data reinforcing FILSPARI's differentiated profile and its recent inclusion in the KDIGO guidelines for earlier first-line use to optimize nephroprotection in IgAN. Additionally, in August, the FDA approved a modification to the FILSPARI REMS program, removing the embryo-fetal toxicity REMS and reducing the liver monitoring frequency to quarterly, which aligns with routine clinical practice and our clinical trial experience. This change not only simplifies care for physicians and patients, but also reinforces FILSPARI's long-term safety profile. Our U.S. performance continues to be complemented by strong progress from our partners globally. In Europe and the U.K., CSL Vifor is expanding access, following full regulatory approvals and the progress has been culminated in the recent achievement of a meaningful market access milestone. In Japan, Renalys completed enrollment in its registrational trial in IgAN and remains on track to deliver top line data in quarter 4. The company also reached an agreement with the PMDA of Japan to initiate 2 Phase III trials for sparsentan in FSGS and Alport syndrome and recently announced its planned acquisition by Chugai, a leading innovator in renal and rare disease research in Japan. Together, these milestones underscore FILSPARI's expanding global footprint and the growing excitement around its long-term potential to transform care for renal rare kidney diseases. Beyond our progress in IgAN, addressing the urgent need for an approved medication in FSGS is both central to our mission and represents the next pillar of growth for Travere. Today, there are no FDA-approved medicines for this disease. Patients often experience rapid disease progression with many reaching kidney failure within just a few years of diagnosis, often requiring a transplant. Even then, the disease recurs in approximately half of transplant recipients. The consequences are devastating for patients and their families. Earlier and more effective treatment is desperately needed, which is why the opportunity to bring FILSPARI forward in FSGS is so meaningful for this community who have waited far too long. In September, the FDA communicated that an advisory committee is no longer needed for our sNDA in FSGS. We have been pleased with the progress of our review and our ongoing engagement with the agency to date. Pending approval, FILSPARI will become the first and only approved medication for FSGS, representing a landmark moment for this community, and given the urgent need for an effective approved medication, a transformational opportunity for Travere. Our teams are fully prepared to execute a rapid launch upon approval, building upon the commercial foundation we've established in IgA nephropathy. Beyond FILSPARI, we have successfully manufactured the first commercial scale batches of pegtibatinase and are looking forward to an expected restart of the pivotal HARMONY study of pegtibatinase in classical HCU next year. PEG-t remains a promising potentially disease-modifying investigational therapy that could address a substantial gap for patients living with this rare metabolic disorder. I'll now turn the call over to Jula for a clinical update. Jula? Jula Inrig: Thank you, Eric. One of the most significant milestones this quarter was the inclusion of dual endothelin angiotensin receptor antagonism in the updated KDIGO guidelines for IgA nephropathy, a strong external validation of FILSPARI's role as foundational treatment. KDIGO includes FILSPARI as a first-line option for patients who are at risk of IgA nephropathy progression, recognizing it as the only therapy with proven efficacy versus optimized RAS inhibition. The guidelines also recommend simultaneous treatment of the 2 drivers of IgA nephropathy progression, targeting both the upstream immune activation that causes pathogenic IgA deposition and the downstream glomerular injury that leads to nephron loss. This holistic framing of disease management aligns with FILSPARI's mechanism of action as the only fully approved non-immunosuppressive nephroprotective treatment, which can be combined with immune-targeted medications to optimize long-term outcomes for patients living with IgA nephropathy. Across our KOL engagements following the publication of the guidelines, nephrologists have described the new KDIGO framework as a true paradigm shift that validates early and comprehensive intervention. We believe this recognition cements FILSPARI's position as foundational care in IgA nephropathy, guiding a new era of evidence-based treatment sequencing. A further testament to our leadership in rare kidney disease is our focus on data generation and dissemination, as exemplified by numerous scientific presentations and engagements at recent congresses, including our 11 upcoming presentations at ASN Kidney Week. A few highlights of this data include the Phase II SPARTAN trial in RAS inhibitor naive patients with IgA nephropathy, demonstrating that irrespective of baseline proteinuria levels. FILSPARI consistently reduced proteinuria and led to significant reductions in urinary biomarkers of disease activity, including reductions in immune system and complement activation markers, indicating potential disease-modifying qualities of FILSPARI. We also have two new presentations from the Phase III PROTECT trial in IgA nephropathy. One, evaluating efficacy across historical histopathology from kidney biopsies and another assessing outcomes based on time from IgA nephropathy diagnosis. Both presentations reinforce the SPARTAN findings and align with the KDIGO recommendations, showing that earlier treatment of patients with FILSPARI can lead to greater nephroprotection. We also continue to generate and present real-world and long-term data across a broad spectrum of IgA nephropathy disease severity, demonstrating FILSPARI's consistent benefit in reducing proteinuria and preserving kidney function. In FSGS, as Eric highlighted in his opening remarks, we are pleased with the progress of our review. The agency remains engaged on our submission. And from our perspective, the process continues to be similar to our experience during the IgAN NDA review. Ahead of a potential approval in January 2026, our Medical Affairs teams are deeply engaged, expanding disease education, strengthening nephrologist awareness around the importance of proteinuria in FSGS disease progression and responding to queries regarding how the DUPLEX data could translate into real-world benefit for this underserved patient population. At ASN, we are presenting several new analyses from the DUPLEX study, including a late-breaking analysis that demonstrates that patients treated with FILSPARI achieved proteinuria levels of less than 0.7 grams per gram more frequently versus maximum labeled dose irbesartan. And patients who achieved this threshold had a lower risk of kidney failure, irrespective of treatment arm. This analysis demonstrates further alignment and supports the conclusions of the PARASOL working group that lower levels of proteinuria translate into meaningful improvements in kidney outcomes. We also have data that extrapolates the antiproteinuric treatment effect of FILSPARI versus irbesartan seen in the 2-year DUPLEX trial into longer term kidney failure outcomes from the U.K. Rare Disease Renal Registry or RaDaR. And we also have subgroup analyses of pediatric patients and patients with collagen 4 genetic mutations, demonstrating a consistent antiproteinuric treatment effect with FILSPARI versus irbesartan in these 2 high-risk difficult-to-treat patient populations. With no approved medicine for patients with FSGS today, the opportunity to bring FILSPARI forward is both urgent and transformative. The supportive data from DUPLEX and our regulatory momentum give us confidence in the path ahead. With our goal to provide FILSPARI as a foundational treatment for patients with IgA nephropathy and ultimately those with FSGS, we are pleased that the FDA approved modifications to our REMS program, removing the embryo fetal REMS and reducing the frequency of liver monitoring to quarterly. The feedback we have heard from nephrologists is that these changes are welcomed. The monitoring frequency aligns with how they care for their patients in clinical practice. And these changes can help increase access for the subset of patients for whom monthly testing was an impediment. Turning to our pegtibatinase development program for the treatment of classical HCU. We recently presented long-term data at the ICIEM Congress from Cohort 6 in our Phase I/II COMPOSE open-label extension. At the 2.5 milligrams per kilogram twice weekly target dose, patients treated with pegtibatinase achieved sustained and clinically meaningful reductions in total homocysteine and methionine over an additional year of follow-up, remarkable results in the context of an open-label study. Importantly, we have successfully manufactured the first commercial scale batches of pegtibatinase and have generated data to support FDA interactions. This progress positions us for an expected restart of enrollment in the pivotal Phase III HARMONY study next year, reinforcing our commitment to advancing the only investigational therapy with disease-modifying potential for patients with classical HCU. I will now turn the call over to Peter for a commercial update. Peter? Peter Heerma: Thank you, Jula. I am very pleased to share that the third quarter marked another period of strong commercial performance and continued momentum for FILSPARI in IgA nephropathy, reinforcing its position as a foundational therapy. FILSPARI net product sales reached approximately $91 million in the third quarter, representing another quarter of strong growth, driven by consistent demand and deepening engagement among new and experienced prescribers. Demand for FILSPARI remains robust with 731 new patient start forms received during the quarter despite experiencing summer seasonality as is typical in the summer months. In fact, in September, we recorded our highest daily patient start form rate since launch and we are seeing that trend continue into October. Throughout the quarter, we saw durable utilization among existing nephrologists and a continuation of new prescribers. Importantly, we are seeing a steady increase in the number of practices treating multiple patients with FILSPARI, which highlights growing confidence in the therapy's profile and real-world performance. As the IgA nephropathy treatment landscape evolves, we continue to hear consistent feedback from the nephrology community, reinforcing that physicians view FILSPARI as the preferred novel therapy, not only because of its proteinuria efficacy. But because it delivers a meaningful long-term improvement in kidney outcomes while allowing patients to maintain a normal lifestyle through a once-daily oral regimen. And we are encouraged by the response of the nephrology community to the modification of our REMS program. This simplification makes FILSPARI treatment even more convenient, particularly for newly diagnosed or lower-risk patients as quarterly monitoring is consistent to nephrology clinical practice. We are pleased to see continued uptake of FILSPARI among patients with lower proteinuria levels, reflecting growing recognition that patients above 0.5 gram per gram remain at risk of progression in alignment with our broader label and the KDIGO guidelines. Patient satisfaction is strong as evidenced by consistently high compliance and persistence. As we continue to expand FILSPARI's reach, our patient services and fulfillment programs remain an important contributor. We have maintained broad payer coverage with easing of prior authorization requirements to reflect FILSPARI's broader label, long-term evidence and positioning in the guidelines. Turning to FSGS. If approved, FILSPARI will become the first approved medicine for FSGS, a leading cause of kidney failure. Given the high degree of overlap between the FSGS and the IgA nephropathy prescriber base, we will be able to build upon strong brand awareness and familiarity of FILSPARI with many physicians that have already had experience with the product. Given the high unmet need for an approved medication and the progressive nature of FSGS, we believe this could be an even bigger opportunity with a more rapid uptake versus our launch in IgA nephropathy. We know the FSGS community is eagerly awaiting an effective medicine. And we will be ready to launch in January, if approved. In summary, the third quarter represents another quarter of exquisite execution and continued growth for FILSPARI in IgA nephropathy. The combination of clinical product differentiation, early intervention, strong prescriber confidence and a consistent patient experience continues to drive momentum and position FILSPARI as a foundational and nephroprotective choice among IgA nephropathy therapies. With our strong commercial foundation and expanding real-world experience, we remain confident in FILSPARI's ability to deliver sustainable growth and long-term leadership in rare kidney disease care. I am sincerely proud of the continued performance of our commercial teams and the dedication they bring every day to support patients and physicians. Their success in establishing FILSPARI in IgA nephropathy gives us great confidence in our ability to execute effectively in FSGS, and we will be ready if approved. Let me now turn the call over to Chris for the financial update. Chris? Chris Cline: Thank you, Peter, and good afternoon. This quarter, we delivered another strong set of financial results with continued significant revenue growth and disciplined financial investments. As Peter mentioned, our top line expansion reflects the strength of our underlying FILSPARI business and the consistent execution across our key commercial initiatives, momentum that we believe sets us up for durable growth ahead. We also further strengthened our financial foundation by repaying our remaining 2025 convertible notes and significant value was generated from our partnerships, including the recently achieved $40 million market access milestone from CSL Vifor and the announced acquisition of Renalys by Chugai, both great examples of how our collaborations continue to create value and validate the potential of FILSPARI globally. Starting with revenue. In the third quarter, we generated U.S. net product sales of $113.2 million. FILSPARI continued to grow significantly in the third quarter, generating $90.9 million in U.S. net product sales, which represents an increase of more than 155% year-over-year. From a gross to net perspective, FILSPARI had a onetime benefit of less than $2 million during the quarter. And we continue to anticipate higher discounts in the fourth quarter. Elsewhere, DILI contributed $22.3 million in U.S. net product sales. And we also recognized $51.7 million of license and collaboration revenue, which results in total revenue of $164.9 million for the quarter. Included in the license and collaboration revenue line this quarter is a $40 million market access milestone that was achieved by CSL Vifor. We recently received payment, which will be reflected in our cash balance in the fourth quarter. Also included in the license and collaboration this quarter is $9.3 million in noncash revenue that resulted from the relinquishment of our option to acquire Renalys in anticipation of their agreement to be acquired by Chugai. Moving to operating expenses. Our research and development expenses for the third quarter of 2025 were $51.9 million compared to $51.7 million for the same period in 2024. On a non-GAAP adjusted basis, R&D expenses were $47.8 million compared to $48.4 million for the same period in 2024. Selling, general and administrative expenses for the third quarter were $86.5 million compared to $65.6 million for the same period in 2024. On a non-GAAP adjusted basis, SG&A expenses were $63.5 million for the third quarter compared to $49.7 million for the same period in 2024. The increase in SG&A is primarily attributable to investments in preparations for a potential launch in FSGS in January, increased amortization expense related to FILSPARI royalties as well as an increased investment in supporting commercial efforts for FILSPARI in IgA nephropathy following full approval. Total other income net for the third quarter of 2025 was less than $1 million compared to $1.3 million for the same period in 2024. Net income for the third quarter of 2025 was $25.7 million or $0.29 per basic share compared to a net loss of $54.8 million or $0.70 per basic share for the same period in 2024. On a non-GAAP adjusted basis, net income for the third quarter of 2025 was $52.8 million or $0.59 per basic share compared to a net loss of $35.6 million or $0.46 per basic share for the same period 2024. As of September 30, 2025, we had cash, cash equivalents and marketable securities totaling approximately $254.5 million. This balance reflects our repayment of the remaining $69 million in 2025 convertible notes. And as I highlighted earlier, it does not yet reflect the proceeds of the $40 million milestone payment from Vifor and it also does not yet include any proceeds from the recently announced acquisition of Renalys by Chugai. As we move forward, we are well positioned to sustain our momentum in IgA nephropathy, execute a successful launch in FSGS if approved and advance the reinitiation of enrollment in our pegtibatinase Phase III study next year. Importantly, we're doing all of this from a position of financial strength with no near-term need for additional capital to execute on our core objectives. This foundation gives us confidence in our ability to execute on our key priorities and continue advancing our mission for patients. I'll now turn it over to Eric for his closing comments. Eric? Eric Dube: Thank you, Chris. In Q3, we made tremendous strides across all of our programs. And I am proud of how every employee shows up with passion and focus to advance our mission. One great example is our pegtibatinase team, who has diligently solved scale-up challenges so that we are positioned to restart the HARMONY trial next year. October is HCU awareness month. And it is a fitting reminder of how much work is still needed to allow families affected by HCU to live with a little less worry and a bit more hope. We've entered the final months of 2025 confident in our ability to sustain FILSPARI's growth in IgAN to successfully execute on a potential approval and launch in FSGS and to advance our pipeline with focus. We have the right people, a strong financial foundation and the momentum to bring incredible innovation to the rare disease communities that have been waiting far too long. I'll now turn the call over to Nivi for Q&A. Nivi? Nivi Nehra: Thank you, Eric. Operator, we can now open up the line for Q&A. Operator: [Operator Instructions] We will now take the first question from the line of Joe Schwartz from Leerink Partners. Joseph Schwartz: Congrats on another strong quarter of execution. With the new label approved in August, can you quantify either qualitatively or quantitatively the early impact of the REMS adjustment? Are you seeing new prescribers or a new patient base that might have been more reluctant previously. It seems like with such a strong beat this quarter, you might not be seeing any competitive impacts? Or are you seeing any at all and it was just offset by the updated label? Any color you could provide would be great. Eric Dube: Thanks, Joe. Peter, why don't you take that question? Peter Heerma: Yes. Thanks, Joe. It's a good question. I think you're asking two questions. One is what is the impact of the REMS modification so far? And two, are you seeing any impact of competitive dynamics? I think overall, I would say we see very consistent demand since we had our full approval last year. And that consistency have not been impacted by launches of new products that came into the marketplace. So I think very robust continuation of growth. I think to your first question with regards to the REMS modification, I think that is certainly a tailwind that we are having and that has been very positively received by the nephrology community. What we are seeing is that we have a continuation of new prescribers, while we also continue to expand within experienced prescribers. And I think especially the REMS modification from a monthly base to a quarterly base in the first year really helps for those patients that are not as sick at the higher proteinuria levels, but still are at significant risk of progression of disease. Those patients may not see the physician on a monthly base or may not do traditional testing on a monthly base, but certainly do it at a quarterly base. So I think the timing of the REMS modification fits very nicely in the expansion of the patient population that we are seeing. Joseph Schwartz: Any insight into any competitive pressures at all? Or have you not detected any? Peter Heerma: Yes. As I mentioned, we have seen very consistent demand. I would say Q3, we saw less of an impact of seasonality than we saw last year and that in a more competitive landscape. So I would say that gives you a color of our execution and performance in Q3. Eric Dube: Yes. That's great, Peter. And the only thing that I would offer in addition, Joe, is that not only did we see the modification of REMS, as you alluded to, which makes it just that much easier for physicians and patients. But we also saw the publication of the KDIGO guidelines that further reinforce the positioning of FILSPARI. And I think both of those in combination, of course, with the phenomenal execution of Peter's team continues to reinforce our strong position within this market. Operator: Laura Chico from Wedbush. Laura Chico: Just two quick ones for me. First, with respect to FILSPARI at this point, do you have a sense as to what the typical baseline proteinuria level is at start of prescribing? I think Peter made a comment about perhaps some patients coming in now with a lower level. Second, are you detecting any off-label use in the FSGS setting at this point? Eric Dube: Thanks, Laura, for those questions. I'll take the second one regarding FSGS. We do see some limited prescribing and use in FSGS. We, of course, do nothing to promote that. But we are seeing some physicians make that choice. I will turn it over to Peter to ask your question or answer your question about baseline UPC. Peter Heerma: Yes. Thanks, Laura. So what we have seen since we had a full approval last year in September is that we have seen consistently the baseline proteinuria levels are well below 1.5 gram per gram. And it's what you would expect. I mean, the larger patient population, about 65% of the patient population have proteinuria levels below 1.5. And we're making good inroads in penetrating that market segment. And what you would expect is that you will see a continuation of lower proteinuria levels at initiation. Operator: Anupam Rama from JPMorgan. Anupam Rama: Congrats on the quarter. Just in the context of the beat that you guys had here with FILSPARI, how do we think about sort of the quarter-over-quarter declines in patient start forms? I know you mentioned some summer seasonality, but there were those tailwinds from guidelines and REMS. What are the considerations there? Anything to note on gross to net or inventory? Eric Dube: Yes. Maybe I can frame this and then have Peter and Chris offer anything further. I think the strong performance in demand in Q3 really reflects that underlying expectation. And I'll have Peter talk about some of the trends within the quarter that we saw. But it really is about the seasonality. While we didn't see as much impact this year as we did last year, we certainly did see some of that in terms of the slower months. Peter, maybe you can allude to that. And Chris, you can talk about the gross to net impact in Q3. Peter Heerma: Yes. Happy to comment on that, Anupam, and thanks for that question. I'm actually really pleased with the performance and the demand we saw in Q3. In particular, what I outlined during the call, September, we had the strongest daily patient start form generation and that trend has continued in October. So I think very strong demand. And as I mentioned earlier, we have seen less of an impact of seasonality in a more competitive environment. So I think the performance is really strong. And yes, I couldn't be more proud of the team to continue to execute in the way they do. Chris Cline: Anupam, on the gross to net factor for this quarter, we did highlight that there was less than $2 million benefit. And really, that's just working through the first year here in Part D and having the true-ups as we go throughout the year. Looking ahead, we've guided to throughout the year that the back half may have higher gross to net. That remains the same for the fourth quarter. But we're still right around that guidance of around 20% for the year. And the fundamentals, as Eric and Peter highlighted, very strong. So we're looking forward to the end of the year here. Operator: Tyler Van Buren from TD Cowen. Unknown Analyst: This is Francis on for Tyler. What can we expect in terms of communication leading up to the FSGS PDUFA date in January? Is it possible that you'll disclose if and when you're in labeling discussions? Eric Dube: Francis, thanks for the question. It's been our practice not to comment on ongoing FDA interactions. And like we did during our IgAN review, we'll be entering a quiet period as we approach the PDUFA date. So you wouldn't expect any updates from us during that time. But we will provide and look forward to providing updates on January 13. Operator: Yigal Nochomovitz from Citigroup. Yigal Nochomovitz: So I wanted to ask about REMS and KDIGO. I'm just curious, when you're in the field now with the new message around the reduced REMS and the better KDIGO guidelines, how many of the practitioners are sort of aware of these changes or were informed outside of the channels through Travere? Or is it really that the information is coming from Travere in terms of learning about the better REMS and the KDIGO? Just how is that information flowing? It would be interesting to understand a little better. Eric Dube: Yes, Peter, do you want to take that? And then, Jula, do you have anything further from your engagement with KOLs? Peter? Peter Heerma: Happy to take that one. I mean it was a year ago that KDIGO disclosed the draft guidelines. And I think familiar, the key opinion leaders and the thought leaders, they were well familiar with the KDIGO guidelines. But what we are seeing now is the full publication that it really trickles down to the community nephrologists as well. And so that publication really helps there. And our team is certainly -- it fits nicely in our educational efforts with physicians. With regards to the REMS modification, that is really up to us to communicate to physicians. And like I said in the prepared remarks, I'm really pleased with the reaction and the response we got from physicians of that modification in the first year and how this fits very nicely with their clinical practice, not having to have that monthly monitoring, but doing it at a quarterly base from the get-go. And like I said -- I mean, this is something that they are doing on a quarterly basis anyway. So there is no additional burden for the physician, neither for the patient. Yigal Nochomovitz: Then on pegtibatinase, just very quickly, is the scale-up basically a completed project now? Or is there any more work to do to make sure you have enough supply for the whole HCU market? Eric Dube: Thanks, Yigal. Bill, why don't you take that one? William Rote: Certainly. Well, we're very pleased to have completed our first commercial batches. This enables us to engage with the FDA as was planned, which enables the restart of the study in the next year. We will continue additional manufacturing campaigns in parallel with the study running to do the further characterization work that's required for the BLA and to build stock for launch. But the key milestone is getting to this scale of manufacture, so that we can restart enrollment in the Phase III study. Operator: Gavin Clark-Gartner from Evercore. Gavin Clark-Gartner: I'm sorry to go back to kind of the net price discussion. But even if I take a couple of million out there for the onetime net price boost, I think the revenue was still a little bit higher than some investors were anticipating based on the PSS trajectory. I'm just curious like is this volume of PSS trajectory that you got, like this quarter and last quarter, which is fairly consistent. Is the revenue growth you're seeing based on that something we should be extrapolating going forward? And like how much is the Q4 gross to net impact? Eric Dube: Thanks, Gavin. Chris, why don't you take that? Chris Cline: Sure. So I think one of the things that Peter has mentioned along the way is that we've continued to refine our pull-through process and we've really made good progress there. So I think that's part of what's driving the revenue growth that has been able to outpace the PSS growth over time. We've also seen very strong compliance and persistence. I think, again, that's another testament to the overall profile for FILSPARI. On the gross to net front, we haven't broken it down specifically by quarter. But the third quarter was similar to the second quarter, slightly lower. We would expect that to increase in the fourth quarter. And overall for the year, we're expecting to come out right around the 20% mark. So that's about as much of the guidance as we can provide at this point. But hopefully, that gives you a better sense for how to model that out, Gavin. Operator: Mohit Bansal from Wells Fargo. Mohit Bansal: Congrats on the progress. So in FSGS, I think we might see some data from Novartis soon with atrasentan from their basket trial. Can you talk about advantages you see with a dual ERA mechanism in this indication compared with an agent like atrasentan, which doesn't have the RAS inhibitor component, especially this being an indication where there is not as high background use of RAS inhibitors compared with IgAN? Eric Dube: Thanks for the question. Jula, why don't we have you answer that? Jula Inrig: Certainly, it is quite important in FSGS, which is a true podocytopathy that's at the heart of the disease to target it with both endothelin and angiotensin II together to have the greatest nephroprotective potential. And we also see that with the magnitude of proteinuria reduction we see in this patient population of FILSPARI being used. We see about a 50% reduction in proteinuria that's durable out to 2 years. And that's where we have the confidence that this is the right way to target these patients to provide them long-term kidney protection. I understand there might be some use of single agents. I won't comment on the lack of data that we have regarding atrasentan. We really haven't seen anything to date. So I can't comment on what that gap might leave behind when you don't target both mechanisms. We know when we target both mechanisms, we have -- we get more patients into complete remission as well as greater reductions in proteinuria and FSGS, and that's what really matters. Operator: Prakhar Agrawal from Cantor. Prakhar Agrawal: So Novartis during their earnings said that they have 20% NBRx share, 10% of that is coming from Venrefa and the rest is from Fibralta. So maybe if you can expand on where you are seeing Venrefa and Fibralta as gaining share? And then another follow-up on IgAN. You said September was the strongest month, and October you're also seeing good consistent demand. So should we expect the new patient start forms to increase sequentially in 4Q? Eric Dube: Thank you for the questions. Peter, why don't you take those? Peter Heerma: Yes, I'm happy to take that question. I mean what we have seen -- and I mentioned that before, is that we see very consistent and steadily growing demand since we had our full approval in September last year. And the launch of atrasentan or iptacopan has not really changed that. I mean, iptacopan was launched basically at the same time as we have full approval. Atrasentan was launched like 6 months ago. But it hasn't really changed our trajectory and our continuation of the momentum. So I couldn't be more pleased with the execution and what we are seeing. And I think now with the REMS modification as well as the KDIGO guidelines, I think those are additional momentum builders for us. And so I remain very confident in a more competitive landscape. Eric Dube: Yes. And just to add with regard to whether you can expect sequential increase we've not provided guidance. What Peter shared in the past is, I think, two really important components of that. One is we expect that demand to be above 700 in terms of that quarterly demand. We certainly have seen that as he talked about. But also we think about the large opportunity to be able to have these patients move from RAS inhibition to dual inhibition with something like FILSPARI or the addition of ERA. Most of these patients still are on only RAS. So there is a tremendous opportunity for growth. We're clearly making that progress. We're seeing those occur. And I don't want to speak about other companies' performance. They're clearly helping to be able to increase the shift from RAS inhibition. But as you can see, we've not really seen an impact from their launches. Operator: Maurice Raycroft from Jefferies. Maurice Raycroft: Congrats on the quarter. You mentioned that your increased SG&A for the third quarter includes additional investment in preparation for a potential FSGS launch. Can you talk more about how you're prepping for the launch and how we should think about SG&A expectations going forward? Eric Dube: Sure. Peter, why don't you take the question with regard to how your team is preparing for the approval? And Chris, you can talk about SG&A. Peter Heerma: Yes, Maurice, first of all, I think it's good to realize that this is basically the same prescriber base in FSGS as what we have seen for IgA nephropathy. Basically, the only nephrology segment that we haven't called upon is the pediatric nephrologists. But overall, there's a high level of overlap. So we build upon strength and high brand familiarity. We will have an incremental increase in our commercial footprint to really continue that momentum in IgA nephropathy while also enabling the early uptake that we are envisioning for FILSPARI. So we are building upon strength. And like I said, we have that incremental increase of our commercial footprint. Chris Cline: Maurice, as you can take from Peter's comments, with bringing on some additional sales team members and some other support services here, we do expect to see an incremental increase in SG&A. We started to onboard a number of those people this quarter. But really, you'll see more of that effect in 4Q and going forward. And then around the time of launch, you would also anticipate that we'll have an increase in investment level as we're really making sure that we're providing the right resources to have a very strong start out of the gate early next year. So incremental increases as we go, but we are building from a very strong base. And we're going to be able to leverage a lot of synergies from Peter's team that's performing quite well right now. Operator: Jason Zemansky from Bank of America. Jason Zemansky: Congrats on the great progress. I wanted to revisit the efforts to now completely remove the REMS. I guess, first, given the acceleration in patient starts here and therefore, overall exposure to FILSPARI, have your time lines changed at all? And then I guess, any other updates on this front now that the original REMS modification has occurred? Eric Dube: Thanks, Jason. Bill, why don't you take that question? William Rote: Sure. And we're excited about the REMS modification that was granted in August. And I think we've seen the tailwinds that that provides and the positive feedback from physicians and patients. Our strategy has always been for ultimate removal of the REMS. And with our prior interactions with the agency, we've approached it with a 2-step process with seeing the frequency change first and then removal second. As we've noted in the past, the FDA has been anchored on our PMR study, which requires exposure across about 3,000 patients for 2 years. So our process really hasn't changed. Consistent with our approach, we'll continue to engage with the agency and align with them on our next steps. Operator: Alex Thompson from Stifel. Alexander Thompson: Maybe a follow-up on the commentary on some off-label FSGS use. I wonder if you could comment as to whether those patients are coming in at about 2x the IgAN dose or if they're still early in their treatment course and maybe not titrate up fully yet. Eric Dube: Alex, thanks for the question. So we do have limited insight into some of that information. And I would not want to generalize around the dosing at this point. I think what's important is that upon an approval, we would make sure that physicians are appropriately educated on the label, on the target dose. And of course, as we have with IgAN, we've got strong patient services support for the patients and their offices to ensure that they're at the appropriate dose. Operator: Joe Pantginis from H.C. Wainwright. Joseph Pantginis: So first, I want to talk more about the expenses that you mentioned earlier, but to the totality of the expenses going forward. I won't ask you to project profitability timing. But I guess, can you directionally speak to especially R&D going forward as you're going to bringing PEG back into the clinic and how we should sort of view that offset by FILSPARI revenues? Secondly, I'm just curious with regard to Renalys and Chugai, any change in time lines for development of sparsentan in Japan, South Korea and Taiwan? Eric Dube: Joe, thanks for the questions. I'll quickly address the last one and then turn it over to Chris to answer the questions on expenses. No change in time lines. We've been incredibly impressed with the speed and quality of work from Renalys and we have a high regard for Chugai Pharmaceuticals. We would expect that they would be just as focused when they initiate the FSGS and Alport syndrome programs. We can't speak for them. But what I can say is what we've seen thus far has been very impressive. Chris? Chris Cline: Joe, on the R&D front for operating expenses, we're in the midst of the budgeting process now. So I'll be able to come back with a little bit more clarity on that post 4Q. But you are right that we do expect to have additional investments for pegtibatinase as that clinical operation really ramps up once we restart. And we're looking at investments there to have that be the fastest enrollment and time line to top line data while maintaining quality that we can. For sparsentan, there are -- as you might imagine, with DUPLEX and PROTECT, we do see a ramp down in activity in that. But there are also other evidence generation efforts that could potentially be helpful both in IgA nephropathy, but then also in FSGS pending approval here where we believe we can help generate even more value. The last thing I'll highlight with FILSPARI that's still going to be an investment is going to be the transplant studies that recently kicked off and are in the recruiting phase now. So there are still investments that we need to make on the R&D front. But to your point or question around the context of the revenue, we expect revenue to continue to grow very nicely and be able to support our efforts here. Operator: Ladies and gentlemen, this concludes the question-and-answer session of today's conference call. I'll hand the call back over to Nivi. Nivi Nehra: Thank you, everyone, for joining today's call. Have a great rest of your day. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: " Adhir Kadve: " Louis Tetu: " Laurent Simoneau: " Brandon Nussey: " Richard Tse: " National Bank Financial, Inc., Research Division Thanos Moschopoulos: " BMO Capital Markets Equity Research Paul Treiber: " RBC Capital Markets, Research Division David Kwan: " TD Cowen, Research Division Suthan Sukumar: " Stifel Nicolaus Canada Inc., Research Division Operator: Good afternoon, ladies and gentlemen, and welcome to the Coveo Second Quarter Fiscal 2026 Financial Results Conference Call. [Operator Instructions] This call is being recorded on October 30, 2025. I would now like to turn the conference over to Adhir Kadve, Head of Investor Relations. Please go ahead. Adhir Kadve: Good afternoon, everyone, and thank you for joining us. With me to discuss Coveo's Fiscal second quarter 2026 results are Laurent Simoneau, Coveo's Co-Founder and Chief Executive Officer; Louis Têtu, Coveo's Executive Chairman; and Brandon Nussey, Coveo's Chief Financial Officer. A reminder that some remarks made today will be forward-looking statements within the meaning of applicable securities laws, including those regarding our plans, objectives, expected performance and our outlook for the third fiscal quarter and full year fiscal 2026. These are forward-looking statements given as of October 30, 2025. And while we believe any statements we make are reasonable, they are based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from those expressed or implied. Coveo disclaims any intent or obligation to update our forward-looking statements, whether as a result of new information, future events or otherwise. Further information on factors that could affect the company's financial results is included in filings we make with Canadian securities regulators, including in the Risk Factors section of the company's most recently filed annual information form as well as the key factors affecting our performance section of the company's most recently filed MD&A, both of which are available on our SEDAR+ profile at sedarplus.ca and on ir.coveo.com. Additionally, some of the financial measures and ratios discussed on this call are either non-IFRS measures, ratios or operating metrics used in our industry. A discussion on why we use these metrics and where applicable, reconciliation schedules showing IFRS versus non-IFRS results are available in our press release and our MD&A issued today. Finally, please note that unless otherwise stated, all references and financial figures made today are in U.S. dollars. Our presentation slides accompanying this conference call can be accessed on our IR website under the News and Events section. I will now turn the call over to Louis to review our platform and strategy, followed by Laurent, taking us through our operational and strategic highlights of our second quarter, and we'll end off with Brandon, taking you through the financial details and provide our outlook for Q3 and fiscal 2026. We will then open the line to your questions. With that, over to you, Louis. Louis Tetu: Thanks, Adhir, and thanks to everyone joining us this evening. I'm pleased with our results this quarter. Our SaaS revenue, total revenue and adjusted EBITDA all came ahead of our guidance, and we delivered another quarter of revenue growth acceleration. Generative AI, agent AI and AI-powered experiences represent the most significant opportunities of our time. And while most enterprises are still chasing tangible results, Coveo's customers and partners are already realizing meaningful ROI from our platform, and our results this quarter really show that. Laurent and Brandon will comment on these results. I want to focus on helping investors understand our views on the fast-evolving dynamics of the AI, Gen AI and agent tech market backdrop, in particular, why we believe that this continues to build an important opportunity ahead of us and why we believe Coveo will continue to stand out, thanks to unique technology and real results. First, a reminder of the fundamental thesis around which Coveo is built. powering every point of experience with AI grounded in enterprise data. The importance of AI and digital cannot be understated. It changes everything because it enables digital experiences to become hyper-personalized, prescriptive and now thanks to generative AI, conversational, insightful and advisory. Think of it this way. When buyers, customers, employees or citizens can go online, express their detailed context and then obtain powerful recommendations and advice that is relevant to them. They buy more, they learn faster, they solve issues on their own and become more proficient and productive. In addition, on the business side, when AI models can deliver these experiences while at the same time optimizing business metrics such as revenue, cost or margins, you get quantum leap in business performance. If online, my brand can sell you something that delights you while simultaneously getting rid of my excess inventory, pushing my campaign or maximizing my margin. And then if I can do this for 1 million other consumers on that same day, I'm redefining my business. If I can answer your very intricate customer question, even the most complex one and do this for 1 million other customers on that same day, I'm redefining my business. This is what the Coveo AI platform can do grounded in your secure enterprise data. For our customers, most of which are leading brands and enterprises across the world, the debate is not whether they want to adopt AI in their digital experiences. Their debate is that they're convinced they never want to compete against any business who does. And so it really becomes a question of what it takes and who can deliver now. We've seen many such stories recently where our customers have been able to quantify significant improvements in revenue, self-service or cost reductions and fast. In particular, I want to highlight a story published in Forbes just 3 weeks ago on October 5 about the deployment of Coveo at SAP Worldwide. SAP reports measuring a reduction of 1.6 million cases annually in their global support organization, thanks to Coveo's ability to make generative AI work at high precision on their secure data. The data Coveo stitches in context for millions of users comes from dozens of secure internal sources at SAP and more than 10 million documents across the world. Coveo grounded generative AI provides direct responses to questions while showing exactly which SAP document sources the information came from, similar to how GPT works, but trained on SAP's specific knowledge. According to their calculations, this accounts to more than EUR 100 million in annual savings. And SAP isn't stopping a cost reduction. The company is now using behavioral analytics to intervene before customers encounter problems. Such results are not only impressive, but more importantly, few companies such as Coveo can deploy and measure. And this kind of capability is what will fuel our growth. What we're seeing in the market is extremely encouraging. First, enterprises are awash in AI talk. They are drowning experiments. They're parsed for results. Boards are now asking harder questions about AI, looking for measured outcomes on the P&L. And at the same time, every company fears not being at the forefront of AI innovation. In such an environment, showing results in a practical easy platform to deploy has become immensely valuable. We've said it before. The launch of ChatGPT almost 3 years ago was more than the launch of generative AI. It was the true catalyst that woke up the world on the power of AI, but both the nature of it and the hype confused the business world. What our customers have realized after trusting their own IT to figure out how and where to deploy AI is that the intuitiveness of ChatGPT in particular, masks the complexity of deploying it successfully on their own secure enterprise data. That's precisely the plumbing and intelligence that Coveo provides. For most companies, it's been a journey of experimentation with innovation and also a journey of education. Today, we're talking to market more proficient about the necessary capabilities much more appreciative of the importance of a platform such as Coveo that can connect to any data, not confined to a specific data platform, an AI stack that can deliver the highest levels of relevance precision enterprises need into any application, whether it's website, commerce, contact center, Internet, portals and now into any agency framework, but also an ability to deliver using your own trained LLM. While this may sound perhaps quite technical, making AI models work at high relevance precision on enterprise data is the primary differentiation that Coveo brings, a decade-long cumulative innovation that is tough to replicate at maturity and the difference between delivering results versus claiming you will or failing to deploy in production. This is the reason why today, several of the leading global technology companies use Coveo and why some of the largest commerce brands use our platform. And Laurent will discuss transactions with some of these leading brands. The other good news is that this same need around data grounding precision and relevance is unfolding in agent tech. I want to refer you to our recent announcement of how Coveo unlocks custom actions for AI agents and how, for example, Coveo for Salesforce Agentforce sends queries to the Coveo AI platform to return higher precision results but from all connected content sources. We basically enable any AI agent to operate within the guardrails of all secure and governed enterprise content shaped by the user's reality. This announcement is important and was personally endorsed by the President and GM of Applications and Industries at Salesforce. We believe that the market will continue to move towards us as we chase real-world results, that it's only a matter of time and that maturing buyer knowledge plays in our favor. We've said many times on previous earnings calls that we believe Coveo will be a market taker in this industry. We started applying AI to large-scale search relevance and personalization problems in 2012, building on our history of leadership in enterprise search. And we have built arguably the industry's deepest technology platform to ground AI models and broad enterprise data. And that's why we can deliver on the extreme relevance, precision and scale that enterprises require, something others have underestimated and can't deliver on. With that, Laurent, take it away. Laurent Simoneau: Thanks, Louis, and hello, everyone. To quickly summarize our key results. Subscription revenue for the Coveo Core Platform was ahead of guidance, accelerated to 17% and represented the highest growth rate we have seen in nearly 5 quarters. Adjusted EBITDA was also above our guidance range at $0.6 million. The results we delivered this quarter, along with the accelerated growth we have achieved, underscore Coveo's pivotal role in the era of agentic and generative AI. They reaffirm that our platform and solutions are not only highly relevant, but foundational for this new wave of innovation. Throughout the quarter, my discussions with customers, partners and the demand signals we're seeing from some of the world's most forward-thinking organizations have reconfirmed that search remains a fundamental enabler of any reliable ROI-generating agentic or generative experience. As a platform that powers search with the most relevant content, Coveo continues to be mission-critical to our customers' ability to deploy agentic and generative AI solutions that deliver tangible business outcomes and solve real-world problems like we highlighted earlier on with SAP and the impact we're driving with many others. That said, I'd like to address upfront why our Coveo Core net expansion rate was 105% this quarter compared to 108% last quarter. The difference is primarily due to a renegotiated customer contract with Salesforce, representing approximately 3% of our ARR. This onetime renewal adjustment by Salesforce simply reflected their internal mandate to run Salesforce on Salesforce and Data Cloud. We view this as a unique situation, and I want to emphasize that this does not reflect the solid underlying momentum we're seeing with our customers. Our customers are large global enterprises that operate with content across a diverse technology stack. And while it may be feasible for Salesforce to run at Salesforce, this is not the case for the vast majority of our customers. So net-net, we view this as an isolated event. Salesforce does remain a customer and a strategic partner for Coveo. This was highlighted in our October 14 press release featuring Illumio, an early adopter of Coveo for Agentforce. By leveraging the strengths of Coveo, Illumio has improved content retrieval accuracy, enabling more relevant answers, better agent actions and ultimately a stronger self-service outcome. Illumio measured 95% success rate with Coveo in their formal evaluation, resulting in an accelerated go-live. Illumio is just one example. Others, including Xero Software, Palo Alto Networks, CrowdStrike, Workday and Intel have not only extended their engagement with us, but are also leveraging Coveo to drive generative search and support their agentic road maps. These customer stories give me confidence that we're on the right path and have a great future ahead. Commerce remains our fastest-growing segment and drove nearly 50% of new business bookings this quarter. Within commerce, our SAP partnership continues to show momentum, influencing 50% of commerce bookings. Customer wins in commerce included the European DIY retailer, HORNBACH, Solar, Carlton One and several others. We're quite excited about commerce moving forward, and we continue to anticipate this will be our fastest-growing use case, where we see significant opportunity ahead. This segment is benefiting from multiple tailwinds, including our leadership position in B2B commerce and the accelerating convergence of commerce and knowledge into a single integrated capability. Let me expand with a customer example. Today's commerce platforms simply are not optimized to handle the inherent complexities of B2B commerce. They struggle to index the countless combinations and permutations that arise from a B2B merchants unique pricing models, customer entitlements and real-time inventory data query time. What starts as a modest SKU catalog can quickly multiply in size and complexity. The Coveo platform is designed to operate at this scale. Good example is Cardinal Health, a global leader in health care services and products. Cardinal Health manages a vast portfolio with several hundred thousand SKUs and more than 100,000 different pricing structures. This dynamic environment results in an effective record count in the tens of billions and a level of complexity that few, if any, platforms can manage efficiently. Cardinal Health chose Coveo platform for its ability to deliver fast, personalized and relevant results at scale. Another tailwind is one where Coveo's deep knowledge expertise is now unlocking powerful new value in commerce as the line between commerce and service queries blurs. A good example of this would be Bunnings Warehouse, a leading Australia-based home improvement retailer where Coveo powers both product discovery and support experiences through one unified AI platform. This convergence creates a major opportunity for enterprises, and Coveo is uniquely equipped to lead the way. Our generative AI solutions, which represented more than 35% of new business bookings this quarter reflected continued strong momentum. I am encouraged by the progress we are making. This was one of our best quarters for customer adoption and revenue growth since launching the product. We welcomed several new customers, including Halliburton, one of the world's largest oil and gas equipment manufacturers as well as Deckers Outdoors, Intermountain Healthcare and the BMR Group. We also saw meaningful expansions from existing customers such as NVIDIA, Intel, GE, UKG, HP Enterprise, and Freedom Furniture who continue to increase their investments in our generative AI solutions. We're especially proud of these expansions. They come from customers who have experienced the value of Coveo's generative AI firsthand and continue to deepen their adoption, clearly validating the ROI our solution deliver. On the innovation front, we've been testing, validating our agentic RAG and conversational capability with some of our closest customers and continue to make excellent progress. Within our commerce use case, we're moving forward with key capabilities such as conversational commerce, content intelligence and more. These areas will help drive next wave of differentiation for Coveo. Finally, at an operational level, as we regularly do, we're making sure our investments are directed at the best areas of return. We're moving quickly to optimize our go-to-market investments in light of some of the recent dynamics to ensure we continue to build momentum. In this respect, we're pleased to welcome Pranshu Tewari, who will be joining Coveo as Chief Marketing Officer, effective November 10. Pranshu brings extensive experience in enterprise SaaS, having held senior executive positions at Mendix and Dell Software Group. Improving Coveo's market awareness and presence is an important objective of the company, and I welcome Pranshu’s expertise in helping in this area, among others. Lastly, John Grosshans will be departing from Coveo effective November 1. We thank John for his contributions, and we wish him continued success in his future endeavors. To wrap up, our market is dynamic, and I continue to be confident in our path ahead. Based on our innovation, the strong results we are delivering to our customers and partners and a healthy pipeline of future business. With that, I will pass it to Brandon, who will discuss our financial performance. Brandon? Brandon Nussey: Thanks, Laurent. I'm pleased to report that our Core Coveo Platform grew 17% year-over-year, driven by continued momentum of our generative AI solutions, commerce use cases and expansion within our base. Before we get into details, I will quickly summarize our Q2 fiscal '26 results. SaaS subscription revenue was $35.9 million and grew 15%. Within this, revenue for our Coveo Core Platform was $35.0 million and was up 17%. Revenue from the Qubit Platform was $0.9 million in the quarter and was down 24% year-over-year. We continue to expect that this revenue will fully churn by the end of our fiscal year. Total revenue was $37.3 million, up 14% over last year. And our NER for the quarter on the Coveo Core was 105% -- up from 104% a year ago, but down sequentially for reasons discussed shortly. Gross margin and product gross margin were 79% and 82%, respectively, similar to the prior period. Adjusted EBITDA was slightly ahead of our guidance range at $0.6 million versus $1.5 million a year ago. Cash flow from operating activities were negative $10.8 million versus a positive $1.4 million last year due mainly to the timing of working capital. We ended the quarter with $108 million in cash and no debt. Digging into the quarter in further detail, we saw success in our long-term growth drivers again this quarter. Generative AI solutions saw another record quarter with both customer and revenue growth of approximately 150% compared to the prior year. Importantly, we continue to maintain near perfect retention rates with NER from these solutions at more than 150%. This means customers are adopting, getting value and expanding their usage, which is a great long-term signal for us. In commerce, which once again was our fastest-growing use case, we delivered one of our best quarters ever for new business bookings. Commerce momentum continues to accelerate, driven in part from our ongoing successful partnership with SAP, and we remain confident it will be a key driver of our growth going forward. We continue to see encouraging signs from our existing customers and capturing the white space in our customer base remains an important growth driver for us. Our investments in our account management function continue to show a positive impact, and the results are generally tracking to our plans. This is also having a positive impact to our revenue retention rates, broadly speaking. While the quarter contained many positives, we navigated a couple of near-term dynamics as well. The renegotiated contract with Salesforce that Laurent spoke to will serve to reduce our NER and ARR growth rates by approximately 3% with the effect on recognized revenue spread over the next 4 quarters. This is an isolated customer-specific item and importantly, excluding this customer, churn was the lowest we've seen in the past 7 quarters. Additionally, after several quarters of record new business, in Q2, we saw some deals that were forecasted to close move to our Q3 and beyond. The good news is that some of these deals have already closed in October, getting Q3 off to a good start. With others, however, we observed that additional stakeholder approvals were required as our solutions become more strategic for these customers. I'd like to emphasize, we haven't seen these go to competitors. They simply require more time. In light of this, we're taking a prudent approach to our second half bookings assumptions. So bringing this together, we now expect to land at the low end of our previously issued guidance range for revenue for the fiscal year and are bringing down the top end of the guidance range accordingly. In Q3, we expect SaaS subscription revenue of between $35.7 million to $36.2 million and total revenue of between $37.1 million and $37.6 million. For the full year of fiscal '26, we expect SaaS subscription revenue of $141.5 million to $142.5 million, adjusted from $141.5 million to $144.5 million. And total revenue of $147.5 million to $148.5 million, adjusted from $147.5 million to $150.5 million. With roughly 3% impact from the renegotiated customer contract, along with measured second half bookings expectations in mind, we now expect to exit the year with roughly mid-teens ARR growth. Improving our rule of metrics remains a top priority, and we're committed to doing so. As you've seen from us historically, we will remain disciplined operators, and we'll continue to be diligent about deploying our capital. To that end, we're making proactive targeted investment adjustments within our go-to-market organization to ensure resources are aligned with our highest return opportunities and to quickly adapt to the dynamics we saw in the quarter. We continue to see strong performance in several of our key growth drivers, and we're focused on giving those the investment they need to scale efficiently. Consequently, despite lower revenue expectations, we're maintaining our adjusted EBITDA guidance of approximately breakeven for both the third quarter and the full fiscal year. We still expect to deliver positive operating cash flow for the full year, adjusted from approximately $10 million as we incorporate the impact of the renegotiated customer contract, assumptions around second half bookings and some onetime costs associated with the go-to-market adjustments we discussed above. In summary, our reported revenue growth rate of 17%, which was improved from 11% a year ago, was driven by the building momentum we're seeing in our long-term growth drivers. We continue to see many positive signs surrounding those growth drivers, and we have many things to be proud of this quarter. Despite the short-term challenges encountered in the quarter, we continue to see many opportunities ahead. And with that, operator, you may open the line to questions. Operator: [Operator Instructions] We'll take our first question at this time from Richard Tse with National Bank Capital Markets. Richard Tse: I was wondering if you could update us on any plans to shift to a sort of consumption-based pricing model that would potentially create a revenue lift. And I ask that because Louis, when you talked about SAP, it sounds like it's a substantial kind of savings that they're getting from your sort of Coveo. And are you kind of harvesting sort of full value from these relationships? Louis Tetu: Richard, so here's what's happening. In our business, those are obviously massive customers. And so we're very proud that we're now -- we have multiple examples where we're completing the cycle of essentially selling to the customer, deploying on a global basis. I mean, SAP is a massive deployment on a worldwide basis. And then completing the cycle of measuring. As we said about the SAP announcement, SAP measured, and it's -- you can find it in the Forbes article, measured a reduction of 1.6 million cases annually. And the number they measured was more than $100 million of savings. So I understand the gist of your question that when you think about this, the value that we provide is, in a way, for now, still somewhat in commensurate with the price we charge. We view that as a positive tailwind moving in the future. The more we bring and measure those proof points, Richard, the more we gain price power for our solutions. Our solutions today are consumption-based pricing. You can see that, obviously, as we said, they generate much more value. And as we accumulate these proof points, and we have many more that you can -- some of which you can see on our website, I think that bodes well for, again, price power progression. Richard Tse: I just have one other question. So in your MD&A on Page 8, you sort of talked about incorporating AI into some of your products. So can you maybe help me understand the divide in terms of where your IP is versus the use of external IP when it comes to AI with respect to that comment in the MD&A? Laurent Simoneau: Yes, Richard, this is Laurent here. So, we are an AI platform company here. We have multiple models that we build ourselves, that we manage, that we maintain, that are targeted towards relevance. We also include large language models when required in multiple use cases. And -- because we're built with interoperability in mind, we have the ability to either use our own models or leverage something that is best-of-breed or that in certain use cases that is that run at lower cost, and that may be what's used here. So we have a wide variety of AI usage. A lot of this is based on our IP. But as always said, we're pragmatic and we're leveraging what's the best for our customers. Operator: Our next question comes from Thanos Moschopoulos with BMO Capital Markets. Thanos Moschopoulos: Regarding the commentary on some deals that have been delayed, are there any common themes there, be it with respect to the verticals where you're seeing that, the geographies, the type of use case? Is it driven by budgetary scrutiny initiatives? Or is it more about the client deciding strategic approach of whether to custom build internally versus a platform like yours? And any common themes you'd call out in that regard? Louis Tetu: Yes. Great question, Thanos. I don't think there's any vertical themes or anything like that that was common. What we are finding, and maybe it relates a bit to Louis's comments earlier that as we deploy and -- initially deploy and start to measure what ends up happening is customers will come back and look to buy more from us. And that will tend to be then a transaction size that's above what we historically have been doing on average. And as it gets further and further deployed, it's -- we found in some cases that we're bumping into additional stakeholder groups inside of these customers that increasingly where we need those approvals. So, it's really a function of us becoming a little more strategic at our customers is what we're seeing in many of these instances. And with that comes a few more steps in the sales process. So, as I said on the prepared comments, these are deals we continue to work. They're still in our pipeline. They're just taking us a little bit more time to get them done. Thanos Moschopoulos: Just to clarify, so is this primarily impacting then expansion deals? Or in some cases, you brought in to do proof of concept, but then when people see the savings and how that expands, it goes to a bigger deal than initially contemplated for new logo? Louis Tetu: Yes. I mean, not to say we don't see it on some of the new opportunities as well. I do think we've always taken a proof-of-concept type approach to winning new logos. And so, we do see just the stuff we do is strategic to these folks. So, we might see a little bit of it there, but yes, definitely on the expansion side as well. Thanos Moschopoulos: Last one for me. Do you have plans to backfill the COO role? Or will the responsibilities be reallocated amongst existing executives? Laurent Simoneau: Yes. So, first of all, we have a great team of leaders today that are running the operations with a lot of maturity and stability. And yes, we expect to fill a CRO role in the coming months. Operator: [Operator Instructions] Our next question comes from Paul Treiber with RBC. Paul Treiber: I was just hoping you could elaborate a bit further on the change in the relationship with the contract with Salesforce. What drove the change in terms of -- like is it specific use cases that they felt they could use internally developed software versus using Coveo? Or is it something else that drove the change? Laurent Simoneau: Thank you, Paul, for the question. So look, it's really a commercial imperative from their side to run as much as they can Salesforce on Salesforce. We are disappointed, but we believe it's isolated. We have not heard that from other prospects or customers because, quite frankly, it's hard to consolidate everything on one single platform, right? It's very hard. So Salesforce remains a customer of Coveo. Our partnership remains unaffected by this. You've seen PR and endorsement from the President of Applications at Salesforce. So we expect this to be an isolated event. Paul Treiber: Just another question, the AWS outage, did that have an impact on your business in October when that happened? Do you expect any impact? Or were you resilient to it? Laurent Simoneau: So thank you for this question. So, the short answer is we have 0 downtime on what matters, which is search and queries because we built a resilient platform understanding that while rare, these events may happen once in a while. Our customers select us for a long period of time. They love the fact that we are resilient to a lot of these events that may happen and that may have a big impact, especially our commerce customers. So yes, thank you for your question. We were proud of the team and the architecture to support this situation. Operator: Our next question comes from David Kwan with TD Cowen. David Kwan: I was wondering just more on the Salesforce, I guess, renegotiation. Can you comment when, I guess, the renewal hit? I assume it was -- it sounds like -- I'm guessing the second half of the quarter. And then of the $2 million reduction in the high end of the guidance range, how much of that was related to Salesforce versus the adjustment in terms of your booking’s assumptions? Brandon Nussey: David, yes, look, it was a September 30 renewal. And as you can probably appreciate, there's lots of discussions in the back half of the month that got us to that point. So, it was a late in the quarter renewal. And as it pertains to the guidance, look, it's -- you can do the math, 3% of the ARR. The good news is we're still within our guided range. I think that speaks to some of the underlying momentum we have had that we can absorb this. But at the same time, second half revenues are impacted primarily by this event. David Kwan: That's helpful. And as it related to the, I guess, the EBITDA guidance, you guys have talked about, I guess, trying to make up for some of that lost revenue just on better cost optimization. I just wanted to clarify, I guess, it sounds like -- it doesn't sound like there's much of an impact as some of the growth investments that you're planning to make this year to help drive an acceleration in growth. Is that correct? Brandon Nussey: Yes. Look, that's a constant exercise to optimize your spend, especially as we've been building our go-to-market function up to increase presence and coverage and so on. So that's a constant exercise of making sure we've got the chips on the right spot on the table. And so, there's a little bit of that happening. But to your point, it's not going to impact the big picture. We have been building on that line. We're in a good spot now. It's just making some tweaks here and there to make sure that we are optimizing that investment and getting the unit economics we expect out of it. David Kwan: Just one last question. Just wanted to get a sense for the commerce business, just trying to compare the opportunity in the B2B market versus the B2C. Laurent Simoneau: Yes, David, Laurent here. So, what's very interesting in the B2B market first of all, is the scale of a lot of our customers from a combination of catalog size and entitlements, think about pricing and think about availability of products and so on. So, you start with that foundational -- so that's a foundational challenge that we address at a scale that is quite unique in the market. And then what is -- was quite exciting for us is that now these customers are starting to experiment with convergence between classic commerce and also some knowledge functions. So we're seeing their own customers, their own shoppers starting to ask queries that maybe commerce, maybe support and having the convergence of those 2 together opens up a lot of possibility from an experience standpoint. And we believe that we're uniquely positioned to address both sides at the same time. Operator: [Operator Instructions] Our next question comes from Suthan Sukumar with Stifel. Suthan Sukumar: For first question, I want to touch on the sales front. What would you call out as having changed the most sequentially with respect to your customer conversations for new deals with respect to initial scope, use case adoption? And can you provide an update on the ongoing ramp-up and efficiency of your recent sales hires? Laurent Simoneau: So thank you for your question, Suthan. I think that we're seeing -- one of the things that we're seeing is that deals are becoming larger and therefore, sometimes more complex. And as Brandon said, now happens that they take a little bit more time in some cases. So that's something that overall, I think it's positive, but has changed a little bit the texture of the deals that we're seeing. And of course, commerce is quite robust, and we are seeing these -- again, this convergence of commerce and knowledge as a next step of initial commerce deal potentially that is something that we are seeing as something that is evolving. Brandon Nussey: Yes. Susanne, on the efficiency question, look, as you can probably guess, pleased with some areas, work to do in others. I think that's natural as on the journey we are on. And so we're reacting to the data as we see it and making the adjustments you'd expect us to. But overall, headed in the right direction and pleased with the progress. Suthan Sukumar: Great. For second question, I wanted to touch on the SAP relationship. This -- to me, it sounds like this is humming quite well. Can you provide an update on sort of their broader agentic AI strategy with Joule? And what's your level of exposure there and how you expect to be working with them on that? I'm just kind of curious if the model here will be similar to what you guys have in place with Agentforce? Or could this be a different model altogether? Laurent Simoneau: Yes. So, we have a relationship -- multiple relationships with SAP. SAP is a very important customer of Coveo. As you saw with the with the Forbes article and the amazing case study on their SAP for Me portal. So, there's SAP the customer. There's SAP to partner with I would say, a focus on e-commerce, but it's now expanding into the other dimensions of CX starting with customer service. So, we have a partnership also with them on that. So, SAP's strategy is to bring Joule as the front end from a copilot/agentic perspective on top of those different properties that they have from a product portfolio perspective, but they also want their own customers to use Joule on top of their own customer-facing assets such as SAP for Me. It is planned that Coveo will play a pivotal role into this Joule version on top of SAP for Me of the agentic version. Coveo will bring the consistent relevant content that we're bringing on the SAP for Me classic portal available also into this Joule interaction point, so customers will be able to ask a question on Joule that is consistent with what they saw on the SAP for Me portal. So that's something that is happening right now that is being built and optimized. And we expect that once we have that, it will be hopefully an amazing example for SAP customers to adopt in the future. Operator: That appears to be our last question. I'll turn the conference back to Laurent Simoneau, Co-Founder and Chief Executive Officer, for any additional remarks. Laurent Simoneau: All right. So, thank you again, everyone, for joining and to our shareholders for your continued support. We look forward to updating you at our next earnings call after our Q3 results. Thank you. 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 Westwood Holdings Group's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Jill Meyer, Chief Legal Counsel. Please go ahead. Jill Meyer: Thank you, and welcome to our third quarter 2025 earnings conference call. The following discussion will include forward-looking statements that are subject to known and unknown risks, uncertainties and other factors, which may cause actual results to be materially different from those contemplated by the forward-looking statements. Additional information concerning the factors that could cause such a difference is included in our press release issued earlier today as well as in our Form 10-Q for the quarter ended September 30, 2025, that will be filed with the Securities and Exchange Commission. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You are cautioned not to place undue reliance on forward-looking statements. In addition, in accordance with SEC rules concerning non-GAAP financial measures, the reconciliation of our economic earnings and economic earnings per share to the most comparable GAAP measures is included at the end of our press release issued earlier today. On the call today, we have Brian Casey, our Chief Executive Officer; and Terry Forbes, our Chief Financial Officer. I will now turn the call over to Brian Casey. Brian Casey: Good afternoon, and thank you for joining us for Westwood's Third Quarter 2025 Earnings Call. I'm pleased to share this quarter's results and key developments as well as our outlook for the remainder of the year. Before we dive into the details, I'd like to highlight several key points from the quarter. Our enhanced midstream income ETF, MDST, surpassed $150 million in AUM. We recorded positive net flows in energy and real assets. Our private fundraising continues to exceed our annual goal by a significant margin. WEBs launched 11 new sector ETFs. Income Opportunity maintained its top decile since inception ranking and earned a Morningstar Ratings upgrade to four-stars. We've all witnessed a broad market rally this quarter, driven by sustained enthusiasm for artificial intelligence, strong corporate earnings and a pivotal interest rate cut by the Federal Reserve. Strength in cyclical areas like industrials and consumer discretionary all pointed to widespread confidence in economic growth. However, large cap gains remain highly concentrated in a handful of mega cap stocks. For small caps, the long-awaited rotation of leadership from large-cap giants to smaller companies finally showed up. And once the Fed cuts rates in September, the bond market responded by sending treasury yields lower. High-yield and corporate credit outperformed government bonds as recession fears eased and gold broke through $4,000 given the prospect of lower real yields and global U.S. dollar weakness. Turning to our long-term performance. Our investment professionals delivered solid results across multiple strategies and asset classes. In our U.S. value strategies, our SMidCap strategy continues to post strong rankings and is firmly positioned in the top third over trailing 3-year periods. Our multi-asset strategies continue to deliver compelling results. Our income opportunity and multi-asset income funds achieved top third rankings for the trailing 3-year period and top half over the trailing 5-year period in the Morningstar universe. Our Income Opportunity Fund, WHGIX, also recently received a Morningstar Ratings upgrade to four stars. Within our salient strategies, our energy products continue to perform very well. Our MLP SMA strategy remains ahead of the Alerian Midstream Index across trailing 3-year and 5-year periods. Enhanced Midstream Income, MDST and Enhanced Energy Income, WEEI, have delivered solid yields to income-focused investors with MDST maintaining an annualized indicated dividend yield exceeding 10%, while WEEI has an indicated dividend yield of over 13%. As seasoned value investors, we seek to unlock opportunities in mispriced, misunderstood and often less popular names. In times like these, fundamentals are often brushed aside, allowing for emotion and momentum to dominate. But as students of market history know, this stage of the current market cycle typically precedes periods when quality and value regain momentum. On balance, we remain cautiously optimistic with below-trend growth, sticky inflation and elevated market valuations concentrated in a handful of mega cap tech stocks. We believe that investment opportunities are shifting. Undervalued segments, especially small-cap stocks and the broader value style are beginning to look more attractive. As markets evolve and investors rotate away from the most expensive segments, our focus on high-quality businesses with attractive relative valuations positions us well. Quality and attractive relative value have consistently outperformed across market cycles, and we fully expect this dynamic to reassert itself as the market environment matures. Our distribution channels delivered impressive results in the third quarter, building on the momentum we've established throughout the year. Year-to-date net sales through September 30 improved versus last year by 17% and by 57% versus 2023. Our intermediary and institutional channels have contributed equally to this performance. Our institutional channel had negative net flows this quarter, primarily driven by sub-advisory business rebalancing. Our pipeline remains robust across value and energy strategies with several new opportunities added during the quarter. Looking ahead in the institutional space, we anticipate winning more mandates in SMidCap for defined contribution plans, supported by the largest national consultants. We continue to have constructive meetings regarding our managed investment solutions capability, and there's continued interest in our energy offerings for both public and private strategies. We anticipate continued stability with our existing clients as we expand our presence with public plans, OCIOs and single multifamily offices. The intermediary channel had particular success with our private fundraising initiative, which has so far exceeded our 2025 annual goal by 1.5x through September 30. And our private funds have earned approval on several broker-dealer platforms, further expanding our distribution capabilities. Our energy and real asset strategies continue to lead Westwood in both gross and net sales in 2025, and our enhanced midstream income ETF, MDST continues to gain approvals from major national platforms. Putting it all together, the tailwinds in energy, combined with the breadth of Westwood offerings are appealing to intermediary clients, particularly in the family office and RIA space. Our well-rounded offerings within the multi-asset and tactical suite of products are well positioned to ride out equity market volatility. Our Wealth Management business is on track to meet our client retention goals for the calendar year. We've reduced costs versus last year, and this trend will continue throughout the rest of the year. The operational efficiencies we're building will underpin early wins in 2026, and we're continuing to evaluate the best path to enhance our services as we move into 2026. Beyond our core business performance, several transformative initiatives and milestones demonstrate our continued commitment to innovation and strategic growth. Our ETF platform expansion. Our MDST ETF reached a significant milestone, surpassing $150 million in assets under management. MDST was the second best-selling fund compared to peer midstream funds in September, accounting for approximately 30% of midstream product ETF flows. Since inception, MDST has consistently delivered on its objective to provide a steady stream of monthly income with an annualized distribution rate exceeding 10%. The fund's rapid growth and enthusiastic investor engagement underscore the increasing demand for innovative income-generating strategies in today's evolving market environment. WEBs innovation, Westwood and WEBs Investments launched 11 new sector funds during the quarter. The new WEBs defined volatility sector ETFs, a suite of 11 funds, which apply the defined volatility strategy to individual sectors within the S&P 500. By expanding this suite, we can offer investors more precise control over risk and sector exposure using a transparent framework that adjusts portfolio exposure based on real-time market volatility. Each fund tracks a defined volatility index created by Syntax with each index providing investment exposure to an underlying select sector SPDR ETF. The WEBs flagship ETFs, DVSP and DVQQ, which launched late last year, demonstrated the effectiveness of a volatility managed approach this past quarter. These ETFs also implement a rules-based strategy of volatility-adjusted exposure, adding market exposure when volatility is low and reducing market exposure when volatility is high. After underperforming their underlying ETFs, SPY and QQQ during a very choppy first half that experienced elevated market volatility, our defined volatility approach really proved its worth this quarter. As volatility calmed down, DVSP outperformed SPY by 636 basis points and DVQQ outperformed the QQQ by 726 basis points. In summary, we remain confident in our strategic positioning and the value we provide to our clients. Our year-to-date performance demonstrates meaningful progress with net sales improving. Our diversified platform spanning traditional value strategies, innovative ETF products, energy and real asset solutions, custom index solutions, private investments and wealth management services positions us to take advantage quickly of evolving market dynamics. With strong long-term performance rankings across our multi-asset and energy strategies, growing momentum in both institutional and intermediary channels and innovative new products gaining marketplace traction, we believe Westwood is well positioned to deliver value to our clients and shareholders. Thank you for your continued support and confidence in Westwood. I will now turn the call over to CFO, Terry Forbes. Terry Forbes: Thanks, Brian, and good afternoon, everyone. Today, we reported total revenues of $24.3 million for the third quarter of 2025 compared to $23.1 million in the second quarter and $23.7 million in the prior year's third quarter. Revenues were higher than both periods due to higher average assets under management. Our third quarter income of $3.7 million or $0.41 per share compared with $1 million or $0.12 per share in the second quarter on higher revenues and unrealized depreciation on private investments, partially offset by higher income taxes. Non-GAAP economic earnings were $5.7 million or $0.64 per share in the current quarter versus $2.8 million or $0.32 per share in the second quarter. Our third quarter income of $3.7 million or $0.41 per share compared favorably to last year's third quarter income of $0.1 million due to 2025's higher revenues and unrealized depreciation on private investments and changes in the fair value of contingent consideration in 2024, all partially offset by higher income taxes in 2025. Economic earnings for the quarter were $5.7 million or $0.64 per share compared with $1.1 million or $0.13 per share in the third quarter of 2024. Firm-wide assets under management and advisement totaled $18.3 billion at quarter end, consisting of assets under management of $17.3 billion and assets under advisement of $1 billion. Assets under management consisted of institutional assets of $9 billion or 52% of the total, wealth management assets of $4.3 billion or 25% of the total and mutual fund and ETF assets of $4 billion or 23% of the total. Over the quarter, our assets under management experienced net outflows of $0.7 billion and market appreciation of $0.7 billion, and our assets under advisement experienced market appreciation of $30 million and net outflows of $3 million. Our financial position continues to be solid with cash and liquid investments at quarter end totaling $39.2 million and a debt-free balance sheet. Happy to announce that our Board of Directors approved a regular cash dividend of $0.15 per common share payable on January 2, 2026, to stockholders of record on December 1, 2025. That brings our prepared comments to a close. We encourage you to review our investor presentation we have posted on our website, reflecting quarterly highlights as well as a discussion of our business, product development and longer-term trends in revenues and earnings. We thank you for your interest in our company, and we'll open the line to questions. Operator: [Operator Instructions] Our first question comes from the line of Macrae Sykes of GAMCO. Macrae Sykes: Congratulations on the ETF success. That was where my question is. If you could just talk about how you're leaning into the success to leverage it further at this point. It seems like you're accelerating your inflows. So what are you doing to make that even more fruitful? And is there any capacity constraint with respect to the capital coming in and investing it? Brian Casey: Mac, thanks for your question. Yes, so we have worked really hard to grow our ETF business, and we've done it through a lot of the traditional channels. And as you know, each of the various platforms have different thresholds that you have to meet in order to get your ETF onto the platform. And some of them have fairly low bars where you need $25 million in assets and a certain number of shares traded per day. And some have very high bars with a high level of assets and a lot of shares traded per day. So we've been doing it that way. And we've got, of course, our distribution team is out calling on both RIAs and the platforms. So we've had some success there, and I'm really pleased to report that we are very close to gaining access to one of the largest wirehouse platforms in the world. And we've worked really hard to get there, and we feel confident that, that will happen over the next month or 2. Operator: Thank you. I would now like to turn the conference back to Brian Casey for closing remarks. Sir? Brian Casey: All right. Well, thanks, everyone, for listening to our call today. Certainly, the outflows this quarter were disappointing, but fortunately concentrated in our large cap area, which is our lowest fee product. Our pipeline for new business remains very strong at $1.6 billion. We have a one but not yet funded mandate of close to $450 million for our SMidCap product. Our private fundraising is going exceptionally well, and we'll have more to report to you early next year. And we continue to look for opportunities to launch ETFs that are income focused and leverage our broad investment capabilities. And performance for our MIS client in real assets and infrastructure product has been excellent, and our prospect list has really grown, and we feel really close to landing our first institutional client. And then in closing, I do want to acknowledge the passing of our dear friend and colleague, Rolanda Williams. Rolanda joined Westwood 26 years ago as our receptionist. And through her unwavering dedication, sharp intellect and warm spirit, she rose to lead support for our sub-advisory client business and her journey was a testament to her strength, resilience and commitment to excellence, and Rolanda was really more than a colleague. She was a force. Her presence lit up every room, her laughter was contagious and her kindness touched everyone who had the privilege of knowing her. She was deeply loved and her legacy will live on in the hearts of all of us at Westwood, and we extend our heartfelt condolences to her family and loved ones. Rolanda will be profoundly missed but never forgotten. Thanks for listening to our call today. Please reach out to me or Terry, if you need anything. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Øyvind Paaske: Good afternoon, and welcome to the presentation of Akastor's third quarter results. My name is Oyvind Paaske, CFO, and I'm joined today by our CEO, Mr. Karl Erik Kjelstad. We are also pleased to have HMH with us from Houston, represented today by Eirik Bergsvik, CEO; and David Bratton, SVP Finance. As usual, Karl will begin with some key highlights, followed by Eirik and team, who will present the HMH update. I will then take you through Akastor's consolidated financials before handing it back to Karl. Toward the end, we'll open for questions through the web-based Q&A solution where you can post questions at any time. With that, I'll turn it over to Karl. Karl Kjelstad: Thank you, Oyvind, and good afternoon and good morning to our U.S. participants, and thank you so much for joining us for this earnings call. Let us start on Slide 2 with the key highlights for the third quarter. Akastor continued to be in a solid financial state. We have a positive net cash position and no draw on our corporate RCF. With this, we are very pleased to announce another cash distribution to our shareholders, this time, NOK 0.4 per share, supported by the realization of our holding in Odfjell Drilling. This is aligned with our strategy to return excess capital to shareholders while maintaining a sound capital structure. Turning to HMH. The company continues to deliver robust financial performance and demonstrate resilience even in a challenging offshore drilling market. Despite headwinds affecting service activity and spare part sales, HMH achieved adjusted EBITDA of USD 42 million, a solid quarter with a margin of 19%. Importantly, the company also delivered a strong cash flow, underscoring the quality of its operation and its ability to generate value also in a demanding environment. The value of our shareholding in HMH now represents 77% of our total net capital employed with a book value of NOK 3.4 billion at the end of this quarter -- of the third quarter or NOK 12.5 per Akastor share, somewhat higher than last quarter due to positive earnings in the period. Then AKOFS Offshore. AKOFS Santos vessel was formally awarded the 4-year MPSV contract in the quarter, expected to commence in January 2027, safeguarding long-term earnings for AKOFS. AKOFS' earnings for the quarter were impacted by the planned 45-day yard stay required to complete the 5-year classing of the AKOFS Seafarer vessel. Except for this scheduled yard stay, all vessels, including Seafarer, delivered strong operational performance. It's again worth noting that our current book value of AKOFS, where the value related to our equity holding in the third quarter was reduced in nil, reflects a conservative measure driven by historic cost and the company's negative earnings to date. This does not, in any way, fully capture the underlying asset value of AKOFS. We continue to see significant upside potential and remain focused on ensuring this value is increasingly recognized and understood. DDW Offshore, all vessels recorded 100% revenue utilization through the quarter, delivering an EBITDA of NOK 43 million. The book value of our investment in DDW Offshore stood at NOK 1.2 per Akastor share based on an average book value per vessel of $11 million. Finally, the third quarter, we completed the sale of our remaining shares in Odfjell Drilling in line with Akastor strategy of realizing assets to enable capital distribution to shareholders. This transaction generated proceeds of NOK 118 million in September bringing the total proceeds from the sale of Odfjell shares during 2025 to NOK 222 million. Slide 2. I would like to have a few more comments on the Odfjell investment. Back in 2018, we in Akastor made initial investment of USD 75 million in Odfjell Drilling through a preference shares and warrant agreement structure, supporting the acquisition of Stena MidMax that today is called Deepsea Nordkapp. In November 2022, we sold the preference shares back to Odfjell Drilling for $95 million, while we retained the warrants. In May 2024, we exercised these warrants and received just over 3 million ordinary shares and during the second and third quarter '25, we realized these shares generating, as mentioned, NOK 222 million. All in all, these investments have delivered a total return of about NOK 750 million, corresponding to 2.2x multiple or an IRR of about 19% in Norwegian kroner terms. Needless to say, we are pleased with the outcome of this investment and also a bit sad to sell the shares as we see -- as we have great belief in Odfjell Drilling going forward, but we are pleased to be have been able to yet another distribution to our shareholders following the realization. With that, I'm pleased to introduce HMH's CEO, Eirik Bergsvik, that will take us through HMH's third quarter results. So Eirik, the word is yours. Eirik Bergsvik: Thank you, Karl Erik. Good day, everyone, and thank you for joining us on the call. I'll begin by sharing a summary of our third quarter highlights and then provide some perspective on our current market conditions. After that, David will take us through the financials in greater detail. Starting with our results for the third quarter. We reported revenue of $217 million, which is up 3% year-on-year. Our EBITDA for the quarter came in at $42 million, representing a decrease of 8% compared to the same period last year, but up 16% versus prior quarter. This resulted in an EBITDA margin of 19.3%. Our performance this quarter on cash was strong. We generated $35 million in unlevered free cash flow this quarter, primarily driven by improvements in working capital management and the collection of project milestone payments. Order intake for the quarter totaled $171 million, down versus last year as expected as offshore activity works through the current white space. I want to take a moment to thank the global HMH team. Our team continues to work hard to advance our strategic initiatives focused on strengthening margins and driving operational efficiency. This is positioning us well for the continued growth in the future. Now turning to current market conditions. We are seeing continued signs of stabilization and improvement in broader contracting and utilization trends with deepwater offshore markets, benefiting both our customers and HMH. Speaking with our customers, despite the pipeline for early 2026 jobs still being limited, they are seeing significant opportunities for contract activity in mid-2026 and early 2027. Provided oil prices remain reasonably stable, our customers are anticipating a gradual move toward a tighter market with improved backlog as we approach the inflection point sometime in 2026. With that, I'll hand it over to David to walk through the financials in more detail. David Bratton: Thanks, Eirik. I'll begin with the total company results and then move into the segment details. Revenue for the quarter was $217 million, up 3% year-on-year and up 7% quarter-on-quarter, primarily due to aftermarket services, partly offset by a decrease in projects and products. Adjusted EBITDA in the quarter was $42 million, down 8% year-on-year, primarily due to spares and product volume, partly offset by an increase in contract services and increased 16% quarter-on-quarter, driven by contract services and a rebound in spares from prior quarter, partially offset by a decrease in projects. The adjusted EBITDA rate was 19.3% in the quarter. Orders for the quarter were $171 million, down 12% year-on-year and down 1% quarter-on-quarter, driven by a reduction in projects and spare parts due to the continued white space in the offshore market. This was partially offset by an increase in service orders. Finally, on cash flow, unlevered free cash flow in the quarter was positive $35 million in the quarter, driven by project milestone collections and strong working capital management. We ended the quarter with $57 million in cash and cash equivalents on hand. Next, I'll walk you through the product line results in more detail. In aftermarket services, revenue was $105 million in the quarter, up 26% year-on-year and up 14% quarter-on-quarter, driven by contract services. Aftermarket service order intake was $99 million in the quarter, up 42% year-on-year, mainly driven by contract services, partially offset by lower field service and repair activity. Quarter-on-quarter order intake increased 25%, supported by digital technology orders and contract services with some offset from field service and repair activity. Spares revenue was $58 million in the quarter, down 6% year-on-year, driven by softer global offshore activity, but up 12% quarter-on-quarter due to higher output of our topside spares volume compared with the prior quarter. Spares order intake was $56 million, down 18% year-on-year and down 13% quarter-on-quarter, driven again by the lower offshore spares order volume partially offset by an increase in international land spares activity. In Projects, Product and Other, revenue in the quarter was $54 million, down 16% year-on-year, driven by lower product volume and down 8% quarter-on-quarter, driven by a decrease in projects, partially offset by increased product volume. Lastly, moving to net interest-bearing debt. We ended the quarter with $57 million in cash and cash equivalents and a net debt of $144 million. Overall, as Erik said, we're proud of the team's performance this quarter and continue to advance strategic initiatives to strengthen our margins and improve operational efficiency. And with that, I'll turn the call back over to the team in Oslo. Øyvind Paaske: Thank you, David. I will then take you through the Akastor's financials, starting on this Slide 10 with our net capital employed. The carrying value of HMH, where Akastor's net capital employed corresponds then to 50% of the book equity value in the company increased by NOK 54 million compared to Q2, driven by positive net profit in the period. The net capital employed related to NES remained stable, while [ DDW ] declined somewhat in the period, driven by lower net working capital, which was turned to cash in the period. The net capital employed of AKOFS was reduced to 0 in Q3, as Karl mentioned, down from NOK 79 million in Q2, reflecting our share of the net loss for the third quarter. As Karl noted, continued losses have gradually reduced our book value, which by the end of Q3 then stood at 0. This means we now carry no value of our equity holding in AKOFS in our books. Again, we emphasize that this outcome is driven by accounting principles based on our historical cost and does not reflect the underlying asset values. We do carry the shareholder loans provided to AKOFS Offshore totaling NOK 418 million at the end of the period. These loans are included in our reported net interest-bearing debt. The value of our listed holdings, which per end of Q3 included ABL and Maha Capital decreased by a total of NOK 134 million in the period related then to the sale of Odfjell Drilling, partly mitigated by increased share price in Maha. The negative value of other, which includes smaller financial investments, pension accruals and other provisions was reduced by NOK 20 million in the quarter, and the balance here mainly relates to pension obligations. In total, our net capital employed decreased by NOK 209 million in Q3, primarily driven by the sale of Odfjell as well as the net losses in AKOFS Offshore. Then over to our net cash position and an overview of development in the period. In Q3, our total net cash increased by NOK 134 million, reaching NOK 279 million at the end of the period. This improvement was primarily driven by the divestment of Odfjell Drilling shares and positive operational cash flow in DDW, partly offset by the dividend of NOK 0.35 per share, which we paid out in July. The Q3 net cash position includes a net debt position of NOK 169 million in DDW Offshore, improved from NOK 228 million last quarter due to positive cash flow during the period. Total net interest-bearing debt at quarter end stood at a net cash position of NOK 970 million, which includes interest-bearing positions towards AKOFS Offshore and HMH as well as the remaining seller credit to Mitsui of NOK 39 million, which are to be settled in Q4. Looking ahead, the cash balance in Q4 will be impacted by the seller credit payment as well as the approved dividend payment totaling about NOK 110 million scheduled for payment in November. Our external financing facilities remained largely unchanged from last quarter, except for a cancellation of an undrawn NOK 70 million share financing facility following the divestment of Odfjell Drilling. The DDW term loan was reduced to approximately $24 million after scheduled installment during the period. We are in discussion to refinance this term loan and expect completion of this in Q4. Our corporate RCF remained fully available and undrawn at the end of Q3, and we have agreed with our banks to extend this facility to June 2027 with only final documentations remaining. At quarter end, total available liquidity was NOK 816 million, including NOK 69 million of cash held through DDW. That then includes the undrawn RCF with NOK 300 million. Then our consolidated P&L. As a reminder, most of our holdings are not consolidated in our group financials. Therefore, the consolidated revenue and EBITDA represent a small portion of our total investments. DDW Offshore delivered revenues of NOK 128 million for the quarter with all vessels on contract throughout the period. EBITDA was NOK 43 million, up year-on-year and quarter-on-quarter, driven by higher fleet utilization. EBITDA was, however, impacted by some FX effects and certain nonrecurring vessel costs. Other revenues were NOK 2 million, while other EBITDA was negative NOK 16 million. As a result, consolidated revenue and EBITDA for the quarter ended at NOK 130 million and NOK 27 million, respectively. Our net financials contributed positively by NOK 54 million, driven by value increases across most holding, including the Odfjell Drilling and Maha Capital. FX accounting effects were negative NOK 23 million, reflecting a smaller weakening of the U.S. dollar versus the Norwegian kroner. Net interest and other financial income added NOK 4 million, bringing total net financial items to a positive NOK 38 million for the quarter. Share of net profit from equity accounted investments was neutral overall with AKOFS contributing negatively by NOK 81 million, while HMH contributed positively by the same amount. And with that, I'll pass the word back to Karl for the last section. Karl Kjelstad: Thanks, Oyvind. Let me round off this presentation with some ownership agenda reflections. Firstly, on Slide 16, our investment portfolio was in the quarter reduced from 9 investments to 8 following the mentioned exit from Odfjell Drilling. Let us then move to Slide 17, covering HMH, been already covered by Eirik to some extent, but let me anyhow add some few reflections as HMH owner. First of all, our ownership agenda for HMH remains firm. It is to expand the business through organic growth and also do value-adding acquisitions. It is to maintain a leading market position and also continue to target to make HMH investment liquid at some point in time. We remain somewhat cautious regarding the short-term outlook for the drilling market. That said, and also, as Eirik stated, we do see encouraging signs when looking further ahead. 2026, 2027 show signs of becoming a start of a new offshore rigs up cycle, driven by the deepwater offshore development. Regarding the listing process, there is no concrete news at this point, but HMH is steadily keeping its S-1 registration filing updated and is as such, continuing to prepare for a listing. Timing of possible public offering is subject to a variety of factors and difficult to comment at this time. Let us move to Slide 18 and covering NES Fircroft. NES Fircroft continues to deliver solid results with both revenue and EBITDA increasing by 5% compared to the third fiscal quarter of 2024, despite a continued somewhat challenging environment for recruitment. As mentioned earlier, the company is exit ready. And together with the main owner, AEA Investors, we have, for some time, been exploring several alternatives for an exit. There is nothing specific to report at this stage, and we will revert with an update when there is more clarity on this. In addition to our focus on making this investment liquid, a key priority is to continue growing the company, both organically and also through M&A to enhance value for all shareholders. Slide 19, covering AKOFS Offshore. As mentioned, all AKOFS vessels remain on contract through the quarter. Aker Wayfarer achieved a revenue utilization of 97%, while AKOFS Santos delivered 94% revenue utilization in the quarter. As noted last quarter, AKOFS Seafarer earnings was impacted by its scheduled 5-year class renewal survey, resulting in a 45 days off hire. We are pleased to see that the survey was completed in line with budget and on planned time, but it led to a revenue utilization of 49% for the period due to this. The total revenues for AKOFS [indiscernible] were USD 28 million with an EBITDA of USD 3 million. Looking ahead, Seafarer will transition to a new contract terms late in the fourth quarter. This will increase the running rate earnings. We were also pleased to see that AKOFS formally awarded the new 4-year MPSV contract with Petrobras commencing in January 2027. And this contract value, as previously disclosed, will further strengthen AKOFS' earnings and cash flow once it commenced. During the third quarter, we also reached an agreement with our co-owner MOL to restructure Santos financing, addressing historical, what I would call, misalignment from the shareholder loan structure and fully aligning ownership interest. As a part of this, Santos senior debt will be extended by 1 year to first quarter 2027 with commitments in place. Then DDW Offshore. All 3 vessels remain on contract in Australia throughout the third quarter, delivering 100% revenue utilization. EBITDA for the quarter was NOK 43 million, impacted by certain nonrecurring vessel costs. Scandi Emerald's contract with Petrofac ended in late October and the vessel has since demobilized to Singapore, where it's currently on a short-term contract before entering to the spot market ahead of its scheduled classing -- 5-year classing early next year. Looking ahead, our focus remains on maximizing fleet utilization, supported by solid contract backlog that provides operational and financial visibility. Our ultimate target is unchanged, and we continue to actively assess secondhand market opportunities for potential sale of all 3 vessels. Then finally, let's look at Slide 21 regarding some key priorities for Akastor going forward. Our strategy remains firm in place. Our core objective is to develop the companies in our portfolio and when timing and values are right to execute value-enhancing exits. With a strong net cash position and no drawn on corporate facilities, we are well positioned to maximize values when opportunities arise at the right time. Today, we are pleased to announce our second ever dividend of NOK 0.40 per share, marking another important milestone in our commitment to return value to our shareholders. So I believe that concludes the formal part of this presentation, and we will move over to a Q&A session and take a brief pause to allow you to submit questions. There are already some questions on the screen here. So Oyvind, can you please facilitate that session. Øyvind Paaske: Yes. Thank you, Karl. I guess we can go right to the questions. So first, a question for you, Karl. With the current liquidity position of Akastor, would you be able to pay a Q4 dividend from existing resources? Or do you attempt to maintain the policy of distributing proceeds from asset realizations only? I'll hand that over to you. Karl Kjelstad: Yes. Thank you. No, as I said, we are committed to distribute the value to shareholders, but the future distributions will be when we do transactions when we -- because we also want to maintain a solid financial state with flexibility to act in the most optimal way when it comes to realize our assets. Øyvind Paaske: Thank you. Then we have a few questions on the same topic. So I'll take one of them regarding HMH, so I'll pass that over to Eirik. So Eirik, this is a question from the audience. Do you see potential for increased revenues related to reactivations of some of the rigs that are now experiencing white space? And it's commented that you might have the BOP for a few of the Noble and Valaris rigs currently idle with contracts commencing in late 2026. So I'll pass that question to you, Eirik. Eirik Bergsvik: Yes, thanks. Well, limited what I can say about that. But if you look at what we've been hearing from our clients, from the drillers, what we've been seeing and have been presenting on the various events this autumn, it looks very clear that we could expect some reactivations because of utilization becoming as high as, I would say, never been before, according to what the driller says. So yes, we look positive on that -- those possibilities. And yes, that I think is what I can say about that right now. Øyvind Paaske: Thank you, Eirik. Then I guess lastly, there's also a few questions on the same topic, but I'll pass that to you, Karl, even though you commented on it briefly. But given the appetite for IPOs, do you see an opportunity to list NES Fircroft? And is the company ready for an IPO? Karl Kjelstad: The company is ready for an IPO. So that's, of course, an option to make the investment liquid or any other alternative is to do a trade sale of the company. So all options are on the table is what I can say. Øyvind Paaske: Thank you. And with that, I think we are actually through the questions. And we'll just then like to thank you all for your attention and welcome you back for our presentation of the fourth quarter results on February 12 next year. Thank you very much.
Operator: Good afternoon. My name is Natasha, and I will be your conference operator today. At this time, I would like to welcome everyone to the Amerigo Resources Q3 2025 Earnings Call. [Operator Instructions] Mr. Graham Farrell of North Star Investor Relations, you may begin your conference. Graham Farrell: Thank you, operator. Good afternoon, and welcome, everyone, to Amerigo's quarterly conference call to discuss the company's financial results for the third quarter of 2025. We appreciate you joining us today. This call will cover Amerigo's financial and operating results for the third quarter ended September 30, 2025. Following our prepared remarks, we will open the conference call to a question-and-answer session. Our call today will be led by Amerigo's President and Chief Executive Officer, Aurora Davidson; along with the company's Chief Financial Officer, Carmen Amezquita. Before we begin with our formal remarks, I would like to remind everyone that some of the statements on this conference call may be forward-looking statements. Forward-looking statements may include, but are not necessarily limited to, financial projections or other statements of the company's plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties. The company's actual results may differ significantly from those projected or suggested by any forward-looking statements due to a variety of factors, which are discussed in detail in our SEDAR filings. I will now hand the call over to Aurora Davidson. Please go ahead, Aurora. Aurora Davidson: Welcome to Amerigo's earnings call for the third quarter of 2025. Q3 2025 was a quarter of strong execution and resilience for Amerigo and our MVC operation in Chile. On July 31, El Teniente faced a tragic accident resulting in MVC ceasing to receive fresh tailings for 10 days. Since the accident, MVC has received lower throughput from fresh tailings than normal under the original annual budget. This condition led to a decline in monthly production in August, followed by a production recovery in September. The timely adjustments made by MVC to reduce the impact of lower fresh tailings throughput included increased historic tailings processing and fine-tuning of the concentrator plant. The lower August production forced us to adjust our copper production guidance from 62.9 million pounds to a range of 60 million to 61.5 million pounds. Our production results in October have been strong, and we remain confident in the revised guidance. Despite the impact of El Teniente's accident, during the third quarter, MVC maintained a high plant availability of 98% and continued to operate without lost time accidents or environmental incidents. These metrics reflect the strength of our operational planning and the dedication of our underground team. Stable copper prices and strong moly contributions supported total revenue of $52.5 million in the third quarter. The LME copper prices rose from an average of $4.32 per pound in the second quarter to an average price of $4.44 per pound in Q3, peaking at a monthly average price of $4.51 per pound in September. I will provide my comments on the copper market later in the call. Net income for the quarter was $6.7 million with earnings per share of $0.04. The company generated operating cash flow of $12.4 million, excluding changes in working capital and free cash flow to equity of $11.1 million. In line with the company's capital return strategy, or CRS, a quarterly dividend of CAD 0.03 per share of $3.5 million was paid. Amerigo's quarter end position was $28 million. Moly production was 350,000 pounds and moly prices averaged $24.11 per pound during the quarter. When looking at the cash cost metric, this resulted in a credit of $0.57 per pound, enabling MVC to post a cash cost of $1.80 per pound, which was lower than the $1.82 per pound of the second quarter and the $2.22 per pound of the first quarter. Based on the strong cash cost results, we have maintained our original annual cash cost guidance of $1.93 per pound. This guidance excludes MVC's collective bargaining costs. Amerigo's financial performance continues to reflect the strength of our business model and the resilience of our operations. Carmen will walk you through the detailed financials shortly. I want to discuss 3 important events that occurred in October subsequent to the end of the third quarter. On October 27, MVC fully repaid its outstanding debt. At the end of September, this debt totaled $7.5 million. Eliminating outstanding debt was one of the objectives for this year and marks the conclusion of a transformational 10-year period for Amerigo. When the company took on $100 million in debt, it was part of a strategic decision to invest in Chile and MVC's growth. This decision laid the foundation for a long-term copper producing operation that could navigate market cycles without diluting shareholder ownership. But from the beginning, we were clear, debt should not be a permanent fixture. It was a tool and like any good tool, it had a purpose and time line. Every debt repayment was a step towards greater financial strength and flexibility. Our final debt repayment affirmed the correctness of that strategic decision. It also reflects the company's resilience and commitment to shareholders. Also on October 27, Amerigo's Board of Directors increased the quarterly dividend paid to shareholders to CAD 0.04 per share. This is a 33% increase from the prior dividend and double the initial dividend under the current CRS. This dividend increase will allocate roughly 50% of the annual additional free cash flow that will become available from not carrying debt. It is an important signal of the Board's vision for the future because, as we mentioned from day 1 of the CRS, the quarterly dividend is set at a rate that is sustainable in the foreseeable future, irrespective of short-term copper price cyclicality. This is a new floor for shareholders. And as has been the case in the last 4 years, additional distributions will continue to be made through share buybacks and performance dividends. The final significant event I want to comment on occurred on October 22. On that day, MVC signed a 3-year collective agreement with its main union, the operators' union, which has 210 members. Collective agreements play a crucial role in Chile's mining industry. These agreements maintain labor peace and provide a structured framework for negotiating wages, working hours, benefits and bonuses. The agreements must balance the strength or weakness of copper prices at the time of negotiation while ensuring access to a skilled workforce and the specific economics of the operation. We had a constructive negotiation with our workers and reached a fair agreement for both parties. Now I will move on to our commentary on the copper market. The long-term themes of surging demand and supply constraints remain significant. A third important element that cannot be ignored is geopolitical interference in the marketplace. Let's start with the obvious supply constraints and disruptions. A copper supply deficit between 300,000 and 500,000 tonnes is now forecast for this year. This has already pushed copper prices upwards as evidenced by October's average LME price over $4.84 per pound. In addition to the trend of declining ore grades, specific mine disruptions at Grasberg, Kamoa-Kakula and El Teniente have resulted in the loss of around [ 518,000 ] tonnes of copper this year. Looking beyond 2025, companies such as Antofagasta Minerals and Teck have already downgraded their 2026 copper guidance. Freeport and Ivanhoe mines will likely do the same following physical inspections of their impacted mines. As I mentioned a minute ago, the current global copper supply has tightened, resulting in a deficit. This bottleneck is driven by copper concentrate availability, which has been affected by production shortfalls at the mines. At the same time, due to overinvestment, the world now has too many smelters to refine copper concentrates. The situation is reflected by the size and the movement of treatment and refinery charges or TCRCs. These are the fees that smelters charge miners to process copper concentrates into refined copper. Treatment charge or TC is the cost to process the concentrate at the smelter. Refining charge or RC is the cost to refine the metal from the concentrate. TCRCs are subtracted from the copper price to determine how much miners actually earn per tonne of concentrate. When TCRCs are low, miners earn more and when they're high, smelters take a larger share. Until 2025, TCRCs were negotiated annually between major copper miners and smelters. The agreed terms known as the TCRC annual benchmark governed long-term contracts. There is also a spot TCRC market for short-term or one-off deals, which reflects real-time market conditions and is volatile. Smelters are currently struggling to secure feedstock, which has pushed spot TCRCs into negative territory. Despite the negative spot TCRCs, smelters have been able to survive, thanks to byproduct credits from other metals in the concentrates they process such as gold or silver. However, negative TCRCs clearly put significant financial pressure on smelters whose business models depend on virtually continuous operation. In recognition of the financial stress imposed on smelters, Freeport, which is one of the traditional benchmark sellers has just abandoned the global TCRC benchmark model and has proposed a new floor cap contract model to protect the smelter margins. This model sets minimum and maximum TCRC levels, providing greater stability in volatile market conditions such as the recent negative TCRC spot terms. So in 2026, we may see a different landscape moving from the traditional stable benchmark-based system to floor cap models. However, we could also continue to see negative TCRCs under which instead of miners paying smelters, smelters will pay miners. We may also see multi-year contracts instead of annual or shorter-term contracts and a shift from TCRCs being the primary revenue source for smelters to a reliance on byproducts. In other words, one of the longest-term features of the copper market is currently under review. And this is all because of long-term stresses in copper supply, which we do not anticipate will change anytime soon. On the demand side, the global need for copper is expected to rise year-on-year, at least until 2035. Demand may be shifting regionally, but global total demand is not slowing. The main drivers of growth fall into 2 big buckets: electrification and digitalization. A few years ago, digitalization was not even discussed seriously, it announces the future copper demand. Tariffs such as a 50% U.S. tariff on most finished and semi-finished copper products are also affecting trade flows and regional inventory balances. Speculative trading continues, and we know it was very pronounced earlier this year as shown by the differences between LME and Comex copper prices. Geopolitical conflicts or the resolutions can also strengthen or weaken the U.S. dollar, which affects copper prices. Governments are now actively investing in mining companies and in some cases, prioritizing certain projects. Political intervention, resource nationalism and regulatory shifts will impact market behavior. All of these factors could lead to a copper market in 2026 that remains volatile but elevated. To end my macro comments, I will mention that Chile will now -- will hold general elections shortly. The first round will be on November 16, followed by a runoff, which is usually the case on December 14, 2025. The presidential inauguration will be on March 11, 2026. Current polls suggest that none of the candidates will get 50% or more of the votes on the first round, and that will be the contenders to our runoff with Jeannette Jara of the center-left coalition Unidad por Chile and Jose Antonio Kast of the Republican Party, who have a part right stance being the most likely candidates. In this run-off scenario, Jose Antonio Kast, a pro-business, pro-mining candidate would likely win the election. I will conclude my remarks with a few comments about the continued success of our capital return strategy. Only a month ago, we reached the fourth anniversary of the CRS, which, as you know, comprises quarterly dividends, performance dividends and share buybacks. Over the past 4 years, we have used the 3 components to return $93.7 million to shareholders. 60% of the return has come from dividends, paying a cumulative dividend of CAD 0.51 per share and 33% from buybacks, retiring 25.6 million shares or 14% of the shares outstanding at the start of the CRS. We recently published a video that illustrates the benefits of the CRS for shareholders. The video is on our website and in it, we noted that on a total return to shareholders basis, Amerigo has outperformed mid-tier copper producers, copper ETFs and copper futures since October of 2021. Total returns measure share appreciation and dividends, but they cannot capture the benefit of share buybacks, which ultimately benefits shareholders by reducing the number of shares in which dividends are paid. To better capture the effect of buybacks, we undertook another analysis. That analysis identified another powerful aspect of investing in Amerigo. Buying Amerigo shares is a very cost-effective way to own copper. We have shown that over the last 4 years, it has been cheaper to buy a pound of copper by buying Amerigo shares than to buy it at the LME. In relation to a pound of copper produced by Amerigo in each CRS year, we have shown that it was extremely inexpensive to purchase a pound of copper through owning Amerigo shares. In other words, in relation to the underlying commodity, there was a clear undervaluation of Amerigo's share price, especially before the CRS was introduced. The other avenues of return provided by Amerigo, share appreciation, dividends and buybacks were all magnified by the positive impact of that discount on a per pound of copper produced basis. Since the CRS was launched, Amerigo's share price and therefore, the cost of its shares per pound of copper produced has increased. This is what we wanted, and that is what investors wanted as well. Consequently, that original discount to LME copper has become smaller over time. However, even if the discount has decreased, buying Amerigo shares still remains the most cost-effective way to own a pound of copper compared to a basket of benchmarks. Our analysis also showed that in all cases except Amerigo, investors in the benchmark companies have been purchasing 1 pound of copper at a premium to LME copper prices. In other words, controlling a pound of copper through holding other shares in the benchmark has a higher cost than the LME copper price. For investors seeking maximum exposure to copper per investment dollar, this outcome is crucial. It shows that Amerigo is a here and now copper play. In Amerigo, you are not paying for future growth or for investing in other metals. When buying shares of Amerigo, you have not been paying the high earnings multiple that is expected for growth stocks. You are controlling amount of copper as cheaply as possible and more effectively than peers in copper itself. So to conclude, Amerigo's returns over the 4 years of the CRS have come in 4 flavors: share appreciation, dividends, buybacks and the discount to the LME copper price. As share appreciation has increased, the discount has decreased. Dividends and buybacks have fueled this performance. Amerigo CRS has been a game changer for shareholders, outperforming other copper investments. This has occurred on a total return per share and on a per pound of copper basis. Amerigo rewards shareholders with predictable, consistent dividends, performance dividends when copper prices rise, no dilution and the most efficient way to control a pound of copper. And now we are debt-free. We look forward to many more years of success for the company and its shareholders. Amerigo's CFO, Carmen Amezquita, will now discuss the company's financial results. Carmen, please go ahead. Carmen Amezquita Hernandez: Thanks, Aurora. I'm pleased to present the financial report for the third quarter of 2025 from Amerigo and its MVC operation in Chile. During the 3 months ended September 30, 2025, the company posted a net income of $6.7 million, earnings per share of CAD 0.04 or CAD 0.06 and EBITDA of $18.7 million. The increase in net income to $6.7 million compared to $2.8 million in Q3 2024 was a result of stronger fair value adjustments to copper revenue receivables and lower smelting and refining charges in response to the 2025 annual benchmark terms. Specifically, in the third quarter, there were $1.3 million in positive fair value adjustments compared to $2.7 million in negative fair value adjustments in Q3 2024 and smelting and refining charges decreased by $3 million. Revenue in Q3 was $52.5 million compared to $45.4 million in Q3 2024. This included copper tolling revenue of $44.1 million and molybdenum revenue of $8.3 million. In Q3 2025, the gross value of copper sold on behalf of DET was $67.2 million. From this gross revenue, we deducted notional items, including DET royalties of $20.6 million, smelting and refining of $3.4 million and transportation of $0.4 million and then added positive fair value adjustments to settlement receivables of $1.3 million. Revenue also included molybdenum revenue of $8.3 million. We reported a provisional copper price of $4.54 per pound on our Q3 2025 sales. This provisional price includes mark-to-market adjustments based on the LME price curve as of September 30. The final settlement prices for July, August and September 2025 sales will be the average LME prices for October, November and December 2025, respectively. A 10% increase or decrease from the $4.54 per pound provisional price used on September 30, 2025, would result in a $6.8 million change in revenue in Q4 2025 regarding Q3 2025 production. Tolling and production costs increased 4% from $38.1 million in Q3 2024 to $39.5 million in Q3 2025. The most significant cost variances between the 2 quarters included an increase in lime costs of $0.8 million as more lime consumption is in line with more historic tailing processing, increased inventory adjustments of $0.5 million for more copper delivered than produced during the quarter and an increase in DET moly royalties of $1.3 million as the result of stronger prices and production during the quarter. The gross profit after revenue and production costs was $13 million compared to $7.4 million in Q3 2024, a $5.6 million increase. General and administrative expenses were $1.2 million compared to $0.9 million in the prior year quarter. These expenses include salaries, management and professional fees of $0.6 million, office and general expenses of $0.4 million and share-based payments of $0.2 million. Other losses were $0.6 million compared to other gains of $0.6 million in the third quarter of 2024, which were driven mainly by foreign exchange fluctuations. And finance expense was $0.3 million, down from $0.9 million with the difference driven by lower interest expense from a lower loan balance in Q3 2025 as well as a $0.3 million expense in Q3 2024 related to the fair value of interest rate swaps. Income tax expense was $4.5 million compared to $3.3 million in Q3 2024. Included in the income tax expense in Q3 2025 is $4.9 million in current tax expense and $0.4 million in deferred income tax recovery. Deferred income tax is an accounting figure used to reconcile timing differences and in Amerigo's case, primarily arises from the differences in timing of financial and tax depreciation. Current tax expense in Q3 2025 was $4.9 million compared to $4.4 million in Q3 2024. Before moving on to the statement of financial position, I want to mention some non-IFRS measures used by the company, cash costs, total costs and all-in sustaining costs. In Q3 2025, Amerigo's cash cost was $1.80 per pound, decreasing from $1.93 per pound in Q3 2024, with the reduction primarily coming from a $0.16 per pound decrease in smelting and refining charges and an increase of $0.25 per pound in moly byproduct credits, offset by increases of $0.07 per pound in power costs, $0.07 per pound in lime costs, $0.04 per pound in maintenance and $0.03 per pound in other direct costs. Total costs increased to $3.71 per pound, up $0.17 from Q3 2024's $3.54 per pound. This was the result of an increase of $0.27 per pound in DET notional royalties as a result of higher copper prices and $0.03 per pound in depreciation, offset by a decrease of $0.13 per pound in cash costs. All-in sustaining costs increased to $3.85 per pound from $3.72 per pound in Q3 2024 due to increases of $0.17 per pound in total costs and $0.02 per pound in corporate G&A expenses, offset by a decrease of $0.06 in sustaining CapEx. Moving on to the statement of financial position. On September 30, 2025, the company held cash and cash equivalents of $28 million and restricted cash of $3.1 million with a working capital of $0.9 million, up from a working capital deficiency of $6.5 million on December 31, 2024. Trade and accounts payable decreased from $24.6 million as of December 31, 2024, to $20.2 million at the end of September 2025. Current income tax liabilities decreased from $8.5 million at the end of December to $0.1 million at September 30, 2025, due mostly to the $8 million in taxes related to 2024 that were paid at the end of April when MVC's annual tax declaration was filed in Chile. For 2025, MVC's income tax at the end of September is almost fully offset by the $5.1 million in monthly tax installment payments made by MVC during the year. You will notice that the company's debt was shown as $7.3 million net of transaction fees. This debt was fully paid in October. This puts Amerigo in a 0 debt position, providing additional free cash flow capacity. Regarding cash flows during the quarter, Amerigo generated $12.4 million in cash flow from operations. Net operating cash flow, which includes the changes in noncash working capital was $11.8 million. In terms of cash during the quarter, $1.3 million was used for investing activities, in other words, for CapEx payments and $5.7 million was used in financing activities. These financing activities included Amerigo's quarterly dividend payment of $3.5 million and a transfer of $2.2 million to restricted cash, which was used to pay the debt in October, leaving the company with a no balance in restricted cash going forward. Briefly touching on the results for the first 3 quarters of the year. Our cash cost for the 9 months ended September 30, 2025, was $1.93 per pound and was in line with guidance. Our forecast indicates that we're on track to meet the company's 2025 guidance of an annual normalized cash cost of $1.93 per pound. Our normalized cash cost guidance excludes the signing bonus paid in Q4 in connection with MVC's 3-year collective labor agreement with the operators' union. The agreement will be effective until October 29, 2028, and MVC will pay $4 million to its operators in Q4 2025 as a signing bonus. In 2025, MVC is expected to incur CapEx of $13 million, of which $4.4 million is optimization CapEx, $4.4 million is sustaining CapEx and $4.2 million is CapEx associated with the annual plant maintenance shutdown and strategic spares. In the first 3 quarters of 2025, CapEx additions were $7.8 million and CapEx payments were $9.5 million. We currently expect actual CapEx to trend slightly below our annual CapEx guidance. We will report Amerigo's full year 2025 financial results in February 2026 and want to thank you for your continued interest in the company. We will now take questions from call participants. Aurora Davidson: Operator, can you start on the Q&A? Operator: Sorry. I must have been on mute. Sorry about that. [Operator Instructions] And your first question will be coming from Dale Miller, an investor. Unknown Analyst: Aurora, I think you and your team have done an outstanding job, both from the miners all the way through your organization. However, I do have one minor question. I am surprised that the Board of Directors has been selling actively stocks as opposed to buying stocks. Now I know you can't explain why they're selling in particular, but the picture ahead seems very rosy with the debt being paid down to 0, a 3-year agreement and copper prices on a trend upward. I don't understand the lack of interest in buying your stock from the Board of Directors. Thank you. Again, thank you for your total organization and your efforts. Aurora Davidson: Dale, thank you for your question. It is a good question. There -- you mentioned that there are directors selling. There we have indications of 2 of 7 directors with sale transactions this year. So just to complete the picture here, 5 directors have not sold anything. And in fact, most of the directors when we exercise -- acquire additional options through the exercise of in-the-money -- excuse me, when we acquire additional shares through the exercise of in-the-money options, we are holders of those shares, and we keep them. If there are individual sale events from independent directors, they have their own personal reasons to do so. And you would be -- it would be probably fair to see them in the context of their total holdings and the time that they have held shares of the company. There was one significant transaction by a long-time director that has been a thorough supporter of the company to do a [indiscernible], and he had some sales to make for personal reasons. And in the process of being a decade or longer director, there may be times when you have to sell shares. So I wouldn't take it out of context. I wouldn't misinterpret it as a sign of a misalignment or lack of interest in the company. There are personal requirements for either tax planning or estate planning or diversification that come through from time to time, and we have to acknowledge them. But in overall terms, when you're looking at the overall picture, there is obviously a keen interest in directors, including myself and including the founder of a company, Dr. Zeitler, to hold on to our shares for the long term. We are happy recipients of the CRS benefits as well. I hope that answers the question. Operator: Your next question comes from Terry Fisher with CIBC. Terry Fisher: Yes. Well, congratulations again, another terrific quarter, particularly given the problems at El Teniente. But I guess we're getting used to that now. It's almost boring these wonderful quarters that keep coming out. I hope you're not building expectations too high, but we're very happy. Anyway, I only have 2 quick ones for you. Number one, moly is becoming even more important these days, and it's been notoriously volatile over the years. I'm wondering if you could give us a little bit of color on the moly -- outlook for the moly market. And my other question, I'm just going to table both questions, is that -- I heard, and I can't remember the source that Codelco is looking at maybe under some pressure perhaps from the government or to get a bit more active with CapEx and adopting more modern technology in order to expand production and also to reduce the risk of accidents and so on. And I'm wondering if that is true. And if so, would it open up any further opportunities for Amerigo? Aurora Davidson: Terry, on the moly market commentary, it has been quite stable for the last years. We saw a price spike in moly prices 2.5 years ago around the range of $30 per pound. If you look at our numbers for the Q3, it was -- we had an average price of $24 per pound, which is really good. we had budgeted a lower number than that. So we're happy with the results. The moly market has -- it's a volatile market. No one seems to understand it a bit of a black box. We don't consider ourselves experts on moly. You will see that I don't waste any of the shareholders' time with my commentary in the moly market because there is really nothing I can contribute to it. We try to dig for as much information as we can. And even from our clients, we don't get very clear responses. So we'll take it as positive when we see the -- sorry, the price appreciation that we saw in Q3. It's a good additional layer to have in the business. But that's about it. I think that we have to remain focused on the copper operation on the copper outlook and consider moly a good addition that we really don't have a lot of control on. With respect to your second question, the only thing I can comment on was a recent press article where the Chair of Codelco was explaining different initiatives that they're following up in terms of automation, specifically for more -- for the deeper levels of their underground mines, which, of course, is making a reference to El Teniente. That's good. That's good news. The fact that they are looking actively and investing as they have done in the past. This is not something new. I think they're just expanding or magnifying their efforts, but they're not initiating their efforts in terms of automation. So that's all good news that the strength of Codelco could represent additional opportunities for us in the future. So that's all I can say about it. Operator: [Operator Instructions] Your next question comes from Ben Pirie with Atrium Research. Ben Pirie: Congrats on another strong quarter considering the shutdown and certainly great to see the debt being fully paid down and the dividend increase. Just on the shutdown quickly, and I think I can speak for most investors that we're pleased with how you managed and minimize the production loss or at least the loss in tailings flow. So can you actually just touch on what initiatives the company took to minimize that impact and just where we're at in terms of that fresh tailings flow coming back online? Aurora Davidson: Yes. Thanks for the question, Ben. It was a challenge that the team at MVC faced quite well. So our production impact was twofold. One was the immediate one for 10 days of not receiving fresh tailings at MVC. Immediately, we ramped up on the ground the processing of historic tailings to minimize the impact. So to the extent that, that was done quickly and continues in place to that to date, that is one of the significant aspects that we did. In addition to that, we have taken advantage of having more plant capacity. The most volume-centric part of our operation are the fresh tailings, and that's where we get most of the volume. And it is the feed that takes up most of the real estate in our concentrator plant. So to the extent that we have had some of that freed up, we've been able to tweak part of the operation in terms of improving classification. We have less material to classify. We have a very good dilution at the moment that further increases the classification. We are redirecting some of the flows within the concentrator, and that has also allowed for increased residency times during the -- which have a positive impact on recovery. We also have 2 projects that have come online, which were part of our optimization projects for this year, which included improvements to the cascade operation, and that has also contributed to increased recovery. So we have lower volume of fresh. We are compensating for that with more processing of historic tailings, but we have been able to increase recoveries of fresh, and that is one of the drivers that has helped us mitigate production losses in fact. The only -- I think it's fair to state that we only had a production impact during the month of August. September was back to normal, and we have strong results as well for October. Ben Pirie: Great. And certainly impressive considering the small drop in your guidance for the annual guidance there. Just sort of reflecting on Q1 and Q2 in terms of share buybacks, we saw a lot of action on the NCIB in the first half of the year, but little to none in Q3. Was this primarily because of the shutdown and you just wanted to sort of hold back a little cash in the till? Or can you provide a little bit of color into that Q3 drop on the buybacks? Aurora Davidson: I think it's difficult to try to revise the activity on buybacks on a quarter-on-quarter basis. There are a series of factors that go into play as to how to allocate the surplus cash to additional distributions. So as you know, one of our key commitments, the minimal commitment we have with respect to buying back shares is not to have dilution for shareholders year-on-year. So it makes sense to get your commitments out of the way as soon as you can in the year. And so there was significantly more activity. In fact, in the second quarter, we had completed our sort of weaker quarter of the year in terms of production associated with maintenance shutdowns. Copper prices were doing good. We were committed to buying back at least the amount of shares that were being issued on exercise of options. And we still had 6 months ahead of us to continue with the key objective of reducing debt. So we were not in a hurry to repay the debt in the second quarter. Come the third quarter, we had this interruption in the month of August, which always makes us more careful about managing the capital. We're always careful but even more careful. And we also saw the opportunity as copper prices started to strengthen in September of basically taking care of the debt first in the third quarter. So there are a series of annual objectives. How you organize them throughout the year depends on a number of circumstances. A lot of management judgment and Board decisions get -- also have to be considered in terms of the intra-quarter allocation of the funds. But I think what's important to consider here is not so much the comparison of activity of one quarter to the preceding one, but just a general annual path of continuing to return cash to shareholders. We know our timing. So we have a good view on what's happening around us and ahead of us. So we try to organize it as best as we can. But the general objective is the important one, that is do what you said you're going to do, produce what you said you were going to produce and keep returning that additional cash to shareholders. Ben Pirie: Absolutely. I think you made the right call with paying down the debt as shareholders clearly liked that news yesterday with the stock being up so much. Just staying on this line of question, and I'll be quick here, so other people can get in the mix. Just around the conservative approach you just mentioned with allocating some of your cash flow. Obviously, with paying down this debt, now you have additional cash flow. And in the press release yesterday, you mentioned roughly 50% of that new cash flow will go to the increased dividend. Can you just touch on what you guys plan to do with that remaining 50% and that sort of goes with the conservative approach, I think you're taking your time with that decision. Aurora Davidson: Yes. Thanks for the question, Ben. So just to give some numbers and provide the context here, we were amortizing our debt at the tune of $7 million in principal payments per year. And last year, our debt expense was $2 million. So we have in front of us a figure of $9 million that is being freed up. And the decision of allocating essentially 50% of that, the additional CAD 0.04 in dividends will have a cost of $4.7 million this year -- not this year on an annual basis. So give or take, 50% of the cash that has been freed up now has a placeholder and that placeholder is the increased quarterly dividend. And the cash that remains as cash that is available to the company. The company does not have intensive capital requirements. That has been the stable position and one of the premises of having the CRS. So the obvious avenue of allocation would be additional distributions, which, as you know, are performance dividends and buybacks. So I hope that answers the question. We wanted to have a clear path of showing the shareholders how that cash was going to be allocated. And now 50% of it has been already committed in what we think is a structural change through the quarterly dividend increase and the rest remains to be allocated in the normal course of business, let's call it that. Operator: Your next question comes from John Polcari with Mutual of America Capital Management. John Polcari: Congratulations on achieving key strategic objectives. And I really only have one question, and that is what are your thoughts regarding royalty payments as the price escalates -- price of copper escalates perhaps into the mid- to [ high-$50 ] $5 a pound range or maybe even higher. I think the agreement on the royalties when it was originally constructed had limits on the upside. Can you just address that or give your thoughts on where that would go and maybe any changes to the agreement as prices escalate? Aurora Davidson: John, that's a good question. Let me pack up a little bit here to give you a well-rounded answer. So the royalty is essentially the compensation that we give El Teniente for letting us work with our tailings. And it is a significant driver of the success of the long-term relationship between MVC and El Teniente because it basically provides a mechanism for sharing of the economic benefits of the business between the purveyor of the tailings and the processor of the tailings. Our agreement has both lower and higher copper limits, which are separate for the fresh tailings and for the historic tailings. The limit for the fresh tailings is $4.80 per pound and the limit for the historic tailings is $5.50 per pound. So -- when we are outside of these ranges for 2 consecutive months, and there is also an indication that these prices will continue, then we basically have to do one thing and one thing only, and that is to discuss the continuation of the royalty scale. It is a sliding scale. So the higher the copper price, the higher the royalty factor with El Teniente. So it is not a full renegotiation of anything else other than the royalty scale. And we expect that should these conditions arise, in fact, we have -- we're almost completing October, and October is the first time in history where we've seen an average LME copper price over $4.80. So if this condition were to continue in November, then starting in December, but not before then, we have to discuss with El Teniente the continuation of the royalty factor only. I hope that answers your question. John Polcari: Yes. And just once again, I'm sure I speak for everyone on [ my job. ] Operator: There are no further questions at this time. I will now turn the call over to Aurora Davidson for closing remarks. Please continue. Aurora Davidson: Thank you, and thank you for attending today's call. The recording and the script will be available on the Amerigo website in the next few days. This is our last earnings call of the year. So we wish you all the best as we wrap up 2025 and look forward to our next earnings call in February of 2026. Please visit our website regularly for updates and feel free to contact us with any questions at our convenience, Graham, Carmen and myself, we're always there on the other side of the e-mail or the phone to answer any questions. Thank you for your continued interest in Amerigo. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Welcome to the Third Quarter 2025 Stryker Earnings Call. My name is Robbie, and I'll be your operator for today's call. [Operator Instructions] This conference call is being recorded for replay purposes. Before we begin, I would like to remind you that the discussions during this conference call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's most recent filings with the SEC. Also, the discussions will include certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release that is an exhibit to Stryker's current report on Form 8-K filed today with the SEC. I will now turn the call over to Mr. Kevin Lobo, Chair and Chief Executive Officer. You may proceed, sir. Kevin Lobo: Welcome to Stryker's third quarter earnings call. Joining me today are Preston Wells, Stryker's CFO; and Jason Beach, Vice President of Finance and Investor Relations. For today's call, I will provide opening comments, followed by Jason with the trends we saw during the quarter and some product updates. Preston will then provide additional details regarding quarterly results and guidance before opening the call to Q&A. Our third quarter results demonstrate our broad business strength and ongoing commitment to margin expansion. We delivered strong organic sales growth of 9.5% against last year's high 11.5% comparable. We also delivered double-digit adjusted EPS growth of 11.1% despite tariff headwinds, which picked up meaningfully versus Q2. Our organic sales growth was driven by widespread demand across our businesses and included high single-digit growth for MedSurg and Neurotechnology and double-digit growth from Orthopedics. Geographically, our U.S. organic sales growth of 10.6% included double-digit organic growth from our Vascular, Trauma and Extremities, Neuro Cranial and Instruments businesses and high single-digit organic growth in Hips, Knees and Endoscopy. We delivered 6.3% organic international sales growth with notable contributions from South Korea, Japan and emerging markets. We continue to view international markets as a significant opportunity for long-term growth and look forward to launching many products that have already demonstrated success in the United States. We completed 2 small acquisitions during the quarter. The first, Guard Medical's NPseal products brings simplified solution for negative pressure wound treatment that strengthens our orthopedic instrument offerings. The second, advanced medical balloons brings novel patient care products to our Sage business. These acquisitions demonstrate our commitment to deals that deepen our portfolio and enhance growth. Backed by a healthy deal pipeline and strong balance sheet, we plan to stay active on the M&A front. We have good momentum exiting Q3 and expect a strong finish to the year. As a result, we are raising our full year 2025 outlook. We are firmly on track to deliver a second consecutive year of 100 basis points of adjusted operating margin expansion backed by strong execution and conviction in the sustained growth and earnings power of our businesses. I would like to thank our teams for their dedication and passion and living our mission each and every day. With that, I will now turn the call over to Jason. Jason Beach: Thanks, Kevin. My comments today will focus on providing updates on the current environment, the integration of Inari and a preview of Investor Day. Procedural volumes remained healthy in the third quarter, in line with our expectations. We anticipate continued strength in procedural volumes through the end of the year. Demand for our capital products was strong once again in the quarter, and we exited Q3 with an elevated backlog. With a steady hospital CapEx environment, we expect continued strength in our order book. We delivered our best ever Q3 for Mako installations, both in the U.S. and worldwide. Mako continues to see high utilization rates, further bolstering our #1 position in U.S. hips and knees. In addition to Mako 4, our numerous recent product innovations continue to drive growth and interest in the marketplace. Notably, LIFEPAK 35 launched in Europe at the end of the quarter. Next, the Inari integration continues to progress well. We continue to convert the business to our Stryker offense with the successful onboarding of our sales professionals. The Inari business delivered double-digit pro forma organic sales growth in the quarter, highlighting robust procedural growth in the teens, partially offset by destocking, which we continue to work through. Inari remains on track to deliver double-digit pro forma sales growth in 2025, and approximately $590 million in sales for the 10 months this year as a part of Stryker. Lastly, we look forward to hosting our upcoming Investor Day on November 13, which will be webcast live on the Investor Relations page at stryker.com. During the event, various leaders from across our businesses will discuss our long-term strategy and illustrate how we are built for growth. For our in-person attendees, we will conclude with a product fair that will showcase exciting products and innovations across our MedSurg and Neurotechnology and Orthopedic businesses. Also, you will be able to interact with many of our leaders. With that, I will now turn the call over to Preston. Preston Wells: Thanks, Jason. Today, I will focus my comments on our third quarter financial results and related drivers. Our detailed financial results have been provided in today's press release. Organic sales growth was 9.5% for the quarter compared to the third quarter of 2024, with the same number of selling days in both periods. Pricing had a 0.4% favorable impact as we continue to see positive trends from our pricing initiatives across many of our businesses. Additionally, foreign currency had a 0.7% favorable impact on sales. Our adjusted earnings per share of $3.19 was up 11.1% from the same quarter last year, driven by our strong sales growth and margin expansion, partially offset by higher interest expense. Foreign currency translation had a favorable impact of $0.03 on adjusted earnings per share for the quarter. Now I will provide some highlights around our quarterly segment performance. In the quarter, MedSurg and Neurotechnology had an organic sales growth of 8.4%, which included 9.4% of U.S. organic growth and 5.1% of international organic growth. Instruments had U.S. organic sales growth of 11.5%, led by a double-digit performance from the Surgical Technologies business, which includes our Neptune waste management, SurgiCount and smoke evacuation products. Endoscopy had U.S. organic sales growth of 7.9%, led by a robust double-digit performance from our Sports Medicine business and near double-digit growth from our core endoscopy portfolio, somewhat offset by lower sales in the Communications operating room business due to the timing of infrastructure installations. Medical had U.S. organic sales growth of 6.5% that included a double-digit performance in the Acute Care business, which was driven by ProCuity and Vocera. We continue to expect Medical to achieve 10% organic sales growth this year, while we manage the previously discussed supply chain disruptions affecting our emergency care business. Vascular had U.S. organic sales growth of 13.4%, led by the recent launches of our Surpass Elite flow diverting stent and Broadway aspiration system. As a reminder, organic sales growth figures do not include Inari. And finally, Neuro Cranial had U.S. organic sales growth of 12.9%, led by strong double-digit growth in our IBS, Craniomaxillofacial and Neurosurgical businesses. Internationally, MedSurg and Neurotechnology's organic sales growth was 5.1% despite the ongoing supply disruptions affecting our medical business and against a very strong prior year comparable growth rate of over 11%, which was driven by our Medical, Endoscopy and Neuro Cranial businesses. The growth this quarter was led by our Neuro Cranial and Instrument businesses. Geographically, this included healthy performances in South Korea and Japan. Orthopedics had organic sales growth of 11.4%, which included organic growth of 12.9% in the U.S. and 7.8% internationally. Our U.S. Knee business grew 8.4% organically, reflecting our market-leading position in robotic-assisted knee procedures and continued momentum from new Mako installations. Our U.S. Hip business grew 8.7% organically, highlighted by the ongoing success of our Insignia Hip Stem and the continued adoption of our Mako robotic hip platform that now has the expanded ability to address more difficult primary hip cases as well as hip revisions. Our U.S. Trauma and Extremities business grew 13.2% organically with robust double-digit sales growth in our Upper Extremities and Core Trauma businesses. Our multiyear strong Shoulder growth continues while our Core Trauma performance continues to be driven by Pangea, our differentiated plating portfolio. Our U.S. Other Ortho business grew 38.5% organically, driven by robust installations in the quarter and amplified by Mako deal mix and a strong performance in navigational technology products. Internationally, Orthopedics organic growth of 7.8% included a strong performance from our emerging markets. Our international results also include a nominal amount of Spinal implant revenue because of previously accepted tenders that we are fulfilling before exiting those markets. Now I will focus on certain operating and nonoperating highlights in the third quarter. Our adjusted gross margin of 65% was favorable by 50 basis points over the third quarter of 2024 despite tariff headwinds, which we now estimate will have a net impact of approximately $200 million for the full year 2025. The adjusted gross margin improvement was primarily driven by business mix and cost improvements as we continue to optimize our supply chain and manufacturing processes. Our adjusted operating margin was 25.6% of sales, which was 90 basis points favorable to the third quarter of 2024, driven by the gross margin favorability I just discussed as well as lower adjusted SG&A as a percentage of sales due to ongoing spend discipline as part of our long-term focus on continued margin expansion. Adjusted other income and expense of $116 million for the quarter was $74 million higher than 2024 due to increased interest expense from the most recent debt issuances and lower interest income. We now expect our full year 2025 adjusted other income and expense to be approximately $415 million. The third quarter had an adjusted effective tax rate of 14%, reflecting the impact of geographic mix and certain discrete tax items. For 2025, we now expect our full year effective tax rate to be at the lower end of our previously guided range of 15% to 16%. Turning to cash flow. Our year-to-date cash from operations was $2.9 billion, driven by year-over-year working capital improvements. And now I will update our full year 2025 guidance. Considering our year-to-date results, continued strong demand for our products and our operational momentum, we are raising our full year guidance and now expect organic net sales growth of 9.8% to 10.2%, and adjusted earnings per share to be in the range of $13.50 to $13.60. Our updated sales guidance includes a modestly favorable pricing impact. In addition, foreign exchange is expected to have a slightly positive impact on both sales and earnings per share should rates hold near current levels. With that, I will now open the call for Q&A. Operator: [Operator Instructions] Our first question will come from Robbie Marcus with JPMorgan. Robert Marcus: Congrats on a nice quarter. Two for me. First, Kevin, you always have great insight into procedure volumes and the equipment market. You clearly had a great quarter on the ortho side, some bright spots on the CapEx side, also a little bit of softness, particularly in medical. I was hoping you could just walk us through what you're seeing globally in terms of procedure volume market and the health of it as well as some of the puts and takes on the capital equipment side globally? Kevin Lobo: Yes, sure. Thanks for the question. I would tell you that nothing has really changed if you think about what we've said in the past couple of quarters. Procedure volumes are very healthy, which affects, obviously, our implants as well as our small capital. And the capital markets are really strong. The balance sheets are strong with hospitals. You saw this quarter, in fact, a lot of Mako purchases, which helped -- obviously, we had strong installations, but a lot of those were cash purchases. And a year ago, those were being more leased. So balance sheets are strong. Procedure growth is strong. As it relates to our business mix, sometimes you see in the Communications area, there was a bit of timing. A lot of these installations of ORs are going to be delayed a little bit, but we have a very healthy order book in Communications. Medical, as you described, sometimes goes up and down. We had a big quarter last year in the third quarter. We're going to have a very strong fourth quarter, off to a fast start in October, and it will be a very strong fourth quarter. And as you've seen in the past, Medical does kind of move from quarter-to-quarter. There can be variability. But over the full year, very strong and healthy business. Obviously, we've had some supply chain disruptions in emergency care. That's continued all year. But in spite of that, still going to be a double-digit growth year. It would have been even higher if not for the supply chain challenges. But I would say across the board, the markets that we play in are very healthy. Robert Marcus: Great. Maybe one for Preston. Your business every year has a big step-up third quarter to fourth quarter, both on sales and margins. Obviously, we can back into what's implied in guidance. But just help us walk through some of the things to consider, particularly on the margin side and the levers that you pull to get to the step up there? Appreciate it. Preston Wells: Absolutely, Robbie. I appreciate it. So I think the thing to keep in mind as you think about the guidance range, particularly as we talk about margins, obviously, we do have a larger sales number that we'll be building on. We're going to continue with our focus around margin improvement that's driving upside on our gross margins as well as in the SG&A lines. The big offset this year is tariffs. So we look at the tariff impact, it's more second half weighted. And so that is going to certainly be the offsetting piece of what we would normally see as much bigger margin expansion in the fourth quarter. So we're still expecting operationally to drive better margins, but then that will be partially offset by tariffs in the fourth quarter to get to where we've guided to. Operator: Our next question is from Larry Biegelsen with Wells Fargo. Larry Biegelsen: Congrats on another nice quarter here. So Kevin, you're guiding to 10% organic growth at the midpoint in 2025. How are you thinking about maintaining this momentum next year? What are some of the puts and takes we should consider? And can you expand margins next year with the tariff impact increasing on a year-over-year basis? And I had one follow-up. Kevin Lobo: Yes. Sure, Larry. We have an Investor Day coming up pretty soon, and we'll share kind of our longer-term outlook at that time. What I would tell you is this is our fourth consecutive year of growing roughly 10% organically. Of course, last year was a little bit higher than that, over 11%. But this is a sustainable, durable high-growth business. So you're going to see more of the same for years to come. Larry Biegelsen: That's helpful. And Kevin, I'm sure everybody listening picked up on your M&A comments. So maybe just refresh us on areas of interest, if anything has changed, deal size, et cetera. Anything new? Kevin Lobo: No change, Larry. All of our businesses are lining up their targets that would help enhance their businesses. And as you know, there are adjacencies that we're going to continue to explore. I've been pretty clear about what those are. As you know, peripheral was one of those adjacencies that we pulled the trigger on in the first quarter of this year. And so there's no new ones. The same ones I've been talking about. We do have a strong balance sheet. We can do larger deals if they are going to be value creating for the company. It's always hard to predict the exact timing on deals. And so we do plan to be active. It is the #1 use of capital. That is our first priority is to use it for acquisitions. And so we remain on the hunt. Operator: Our next question is from Ryan Zimmerman with BTIG. Ryan Zimmerman: Let me echo the congratulations on the quarter. Kevin and Jason, your Knee number in the U.S. stands out pretty in stark contrast to your other competitor that has announced the spin out of its Orthopedic business. And I'm just wondering kind of Kevin, how do you think about the health of the orthopedics market, how you're preparing to maybe capitalize on any disruption that may come of that and just kind of your outlook on orthopedic. One thing I did notice was price pressure. We did see a little bit of price pressure in this quarter. We haven't seen that for a few quarters. So maybe you could comment on maybe what was driving that as well. Kevin Lobo: Yes. Sure. I'll take the first part, and I'll let Preston comment on the price pressure. Listen, we're in a great position with our Knee business. It's not new. This has been building over a number of years with our lead in cementless, the tremendous adoption of Mako for knees. We also have a new hinge, which is the revision system for knees. So this momentum has just been building. And with every Mako that gets installed, we know there's going to be a high adoption of our products. And so we've been growing above the market for quite some time. It was a terrific quarter, especially if you consider last year, we had a very big Q3 and so the Knee business is performing extremely well. We're very excited about additional changes that are coming, more software changes for Mako to make it even better to use, actually some new product innovations that we'll talk about on the investor call in a couple of weeks. And so the Knee business is really poised to continue this high growth. And then on price, Preston? Preston Wells: Yes, as far as pricing is concerned. When we think about where we are, we're pleased with the fact that we've been able to drive positive price for the overall organization over the last several quarters. That's really come out of the work that happened a few years ago. And so we're still driving that. The other thing to consider is now we're anniversarying some of that price improvement year-over-year-over-year. So now we're driving compounded price that we're seeing. And so when you think about the split between the multiple business on the MedSurg side, we're certainly seeing continued price improvement on that business. And with Orthopedics, we're not back to where we were historically. So we're still performing above historic levels on a pricing standpoint, and we expect that we're going to continue to try to work through the pricing muscle that we've learned to develop and that we have developed to continue to drive positive prices in the future. Ryan Zimmerman: Okay. And then second one for me. Thank you for both those answers, appreciate that. On Inari, Kevin, as you like to say, the U.S. business is humming. But maybe if I could ask about the OUS side and when you think you can kind of really take Inari to a bigger international presence maybe than prior -- when it was a stand-alone company. Kevin Lobo: Yes. Thanks. Look, our focus really has been on the U.S. I mean we've really been all hands on deck. We went through some real challenges in the second quarter, enforcing people's noncompetes, going through a lot of churn in the sales force, bringing on new Stryker leaders. That's been -- we've been laser-focused and I love the recovery and the bounce back in Q3. It was really terrific. And the outlook for Q4 is very good. We launched the first arterial product that's getting really favorable feedback. We have started to expand internationally, but I don't really -- hasn't really taken off yet. That will start to, I really think, have a big impact in the second half of next year. It's going to take a bit of time, but we do have infrastructure in Stryker that Inari did not have. And that clearly is one of the thesis for us in doing the deal is that international will be very exciting. But I really think it will start to take hold in the second half of next year. Operator: The next question comes from Travis Steed with Bank of America. Travis Steed: I will start with a follow-up on Inari. Just curious if maybe you can elaborate on some of the integration process in the sales force. And like is this quarter, you think kind of a low point in the growth and so we should kind of be sustaining this kind of double-digit growth going forward? And any comment on some of the P/E data that came out. Curious if you had any comments on that. Kevin Lobo: Yes. Look, we put our own Stryker sales leader in charge of the sales force, and we've been hiring pretty rapidly given the churn that we went through in the second quarter. It takes time for those sales reps to be fully productive. They had a really good Q3. I'm pleased with that. I'm not sure that I call this a low point. We do expect double-digit growth in Q4 and then again in Q1. However, we are still burning through some of that stocking that had occurred. The stocking will be completed, the burn-through will be completed by the end of the first quarter. So we still have some more of that in Q4 as well as Q1, and then that will be something we don't talk about any more after that. But we are excited about getting sort of the teens level of growth in procedures. That translated to double-digit growth. We do expect a strong Q4 as well as Q1 next year, and then it will really start to take off after that without having that drag of the stocking. Travis Steed: That's helpful. And maybe a question on the Siemens partnership that happened over the quarter in Neurovascular and if there's any more you can kind of say on kind of the goals and timing and kind of what you're trying to do with Siemens and Neurovascular robotics. Jason Beach: Travis, this is Jason. I would say, when appropriate, we'll certainly disclose more. But at this point, really nothing else to add in as far as that. Operator: The next question comes from Matthew O'Brien with Piper Sandler. Samantha Munoz: This is Samantha on for Matt today. We'd like to start off with asking about the Ortho other category that was -- had really nice performance this quarter. Can you just talk a little bit about what all is driving the strength there? And how durable do you see that growth? Jason Beach: Yes, this is Jason. I'll take this one. I would say a couple of different things, and it goes back to some of the prepared remarks. I mean if you just look at again another quarter of record installation of Mako, that certainly fuels that category and then there is a bit of, I'll call it, business mix. And I think Kevin touched on this, where outright purchases will drive revenue in that. So really, really strong strength. Is it going to grow at that level every quarter, I would say no, but certainly pleased with the performance in the quarter. Samantha Munoz: Great. And then also, just could you provide a little bit more commentary on the supply chain disruption in the Medical business? It was a little bit weaker than we were expecting. And does imply a steep rebound in Q4. So just any more commentary you could provide there would be great. Jason Beach: Sure. It's Jason again. So I would say, look, even if you go back to last quarter, we said some of these supply issues would kind of linger throughout the year. Certainly not going to quantify. But as you think about Medical performance in the fourth quarter, in order to get to this 10% growth on the year that we're talking about, you can imagine there's going to be an acceleration in the fourth quarter. October was off to a good start. And so we certainly expect that we'll have positive performance as we go throughout the quarter. Operator: Our next question comes from Vijay Kumar with Evercore ISI. Nicholas Amicucci: This is Nick on for Vijay. Would you break down the drivers of that 10% sales growth for Medical for the year? What's driving that? Jason Beach: Yes. I mean when you think about Medical, this is Jason, I mean we don't really get into product level drivers or even business unit level drivers. But when you think about products like LP 35 just launching in Europe, I mean, you'll see an -- start to see an acceleration there. Well, we would say across the lines of business in Medical, very good performance. If you look at Vocera as an example, that accelerated in the third quarter. That will continue to accelerate in the fourth quarter. So it's a big diverse business, frankly, that we expect to perform well in the fourth quarter. Kevin Lobo: And frankly, it's been a business that's performed double-digit for years. Year after year, it tends to report double-digit growth. They have a very strong order book as well. And in spite of the supply chain challenges, still on track to deliver double digits. Operator: Our next question comes from Matt Miksic with Barclays. Matthew Miksic: I wanted to just get a sense of the competitive dynamics in the ASC. It's been a place where you've been leading and it's been a place where you've had great success in knees, opportunities for bringing other businesses in there and leveraging your position across some of the other business lines. Any kind of color would be great. Kevin Lobo: Yes. Thanks, Matt. Listen, we love the ASC and the trend in procedures moving to the ASC because we can leverage our full portfolio, and our growth continues to be very high in the ASC. The additional products are really -- that are starting to emerge at a higher level, our torn shoulder, where we're the market leader and you're seeing more shoulders being done in the ASC, even some total ankles potentially moving to the ASC. So some of the higher acuity cases, I wouldn't say revisions, but certainly, many other procedures are starting to move to ASC, where we have a very strong position. So the more that procedures move to the ASC in the orthopedic world, the better it is for Stryker because we can then leverage an even broader portfolio than we're already leveraging, including our capital, our disposables and our inputs. Operator: Our next question comes from David Roman with Goldman Sachs. Jennifer Reena Rabinowitz: This is Jenny Rabinowitz on for David. Just a quick one for me. You mentioned briefly at the beginning of the call that you did 2 smaller product acquisitions in the quarter. I was just curious, can you go into any detail about what those products actually are or the markets they participate in? And are these smaller product acquisitions something we should expect going forward? Kevin Lobo: Yes. Small tuck-in acquisitions are clearly a part of our offense. The NPseal product is a negative pressure wound treatment that does not require capital equipment. So today, the other options on the market have a pump that's required. This is a really elegant solution, easy to use for the customer and then lower cost solution that drops right into the sales bag of our orthopedic instrument sales reps. They're already there in the procedure. So it's a beautiful tuck-in. The other product, the balloon is for fecal incontinence and that's part of the Sage business, which works in the intensive care units of hospitals and a very good product solution for a really troubling condition that patients have to go through, provides them with dignity and provides really good care. So we're really excited about that solution, and that's new for us. We have not been in the fecal incontinence space thus far. Operator: Next question comes from Philip Chickering with Deutsche Bank. Pito Chickering: One more question on Ortho. There's been an investor debate around the pull forward of demand of some neglected procedures due to the uncertainties around health care exchanges. Just curious if you view 3Q as just the core growth you're seeing due to market share or pull forward of demand? Kevin Lobo: We see it as core growth market. As we enter fourth quarter, we're seeing a continued strong demand. So we don't really foresee any pull forward. And obviously, osteoarthritis, when you have the pain, you want to get your procedures done. And so I think that's a much bigger driver. And I think it's more about the fact that we're growing at a robust rate. If you look at our growth rate, obviously, other people -- not everyone's reported yet, but we believe that we're growing considerably faster than the market. But we're seeing order -- like if you look at the surgery schedules and talk to surgeons, they don't really have any anxiety whatsoever about a falloff in procedures. At least we're not hearing that. Pito Chickering: All right. Perfect. And then I think you talked about the elevated backlog and CapEx is pretty good. Can you share that the feedback that you're hearing with hospitals as they're talking about the uncertainties around health care changes next year and the views of CapEx depending upon what will happen? Jason Beach: Yes. Peter, it's Jason. I'll take this. I mean, when you think about feedback from a hospital perspective and you think about the categories that we play, we play in categories that are moneymakers for the hospitals and they need our capital equipment, right? And so I would say, I think even Kevin said this earlier, environment for us really hasn't changed. If you think about the mix of our capital where the majority of our capital is the smaller capital that is closely tied to procedures. We continue to believe in the feedback that we continue to get is that as long as procedures remain strong, we're positioned well in the fourth quarter and well into 2026 as well. Kevin Lobo: And if you look at this quarter in particular, even the large capital, Mako was very strong with a lot of outright purchases and then you look at ProCuity, it was extremely strong, which beds are obviously large capital and expensive and the orders are very strong. So those orders are very rarely canceled. And so our hospitals have the budgets. They have the plans. They are planning to go ahead and purchase our capital in spite of what's happening around them. Operator: Next question comes from Joanne Wuensch with Citibank. Joanne Wuensch: Can you hear me okay? Kevin Lobo: Yes, I can. Joanne Wuensch: Excellent. I remember to maybe 2 years ago that we were talking about sprinting back to pre-pandemic levels and margins and 200 basis points of expansion. And you've hit it. The 25.6% you just did in the third quarter went to 2020, 2021. Where do you go from here? And how do we think about continued margin expansion? And I'm sorry if I'm sort of stealing some of the thunder from the Analyst Day. Kevin Lobo: Well, we're going to just defer this question to the Analyst Day, Joanne. So I apologize. We're going to duck the question because that, for sure, is going to be one of the topics that we discuss in a couple of weeks. Joanne Wuensch: Okay. Can I get a second question then? Kevin Lobo: Sure, you can. Yes, because we didn't answer your first one. Joanne Wuensch: I guess I'm going to go to Trauma and get a feel from you of what you're seeing in that particular industry or that particular segment of your business? Kevin Lobo: Yes. You've seen for quite some time, our Trauma and Extremities business is absolutely on fire. We have great leadership in that business. We have -- the Shoulder business had a phenomenal quarter again in Q3, really tremendous market-leading growth. And this is really without much an impact at all from Mako. So we are still in limited launch with Mako Shoulder. It's being very well received. We're not going to move until full launch until sometime in the first half of next year. So that's still a ways out, but we're very excited about that. It's just the core underlying portfolio of products with Blueprint software, really good, strong leadership. And then core Trauma has been amazing with Pangea. We've also launched volar plates for distal radius. Just a series of great product innovations and a tremendous commercial offense has core Trauma really growing at very robust rates. If you look at Foot and Ankle, it's actually a bit soft for us. So we see upside in Foot and Ankle going into next year. Our Total Ankle performs well. Our Augment performs well. But if you think about the core plates and nails, not quite as good as we would like that performance. We're getting after it, and we think that will be better going forward. But tremendous momentum overall and great business for us, and we're very excited about it. Operator: Our next question is Michael Matson with Needham & Company, Inc. Michael Matson: So guess I just a couple more on Inari. So the PEERLESS II trial, just can you give us an update on where things stand with that and when we could potentially see the results? And then the Artix product, I think that's been launched. Can you maybe comment on how that's doing? Kevin Lobo: Yes. I'll take the second question on Artix. It's our first arterial thrombus product that Inari has launched, everything else was venous. It's been extremely well received. It's doing well in the marketplace, performing really as good or if not better than we expected in the market. So off to a very good start. Jason Beach: It's Jason. In terms of the trial, it will be sometime next year before we start to see results. So you'll hear us talk about that as we get into next year, for sure. Michael Matson: Okay. And then just with the Guard Medical acquisition, looking at the website, it looks like it's more for surgical incisions, but is this a sign that Stryker has interest in kind of the broader advanced wound care market? Kevin Lobo: Yes. Listen, I wouldn't read too much into this. If you think about Zipline, that was a product for skin closure that we dropped right into the bag of the orthopedic instruments reps. This, of course, is -- its wound treatment with negative pressure, but it drops right into the back of that existing sales rep. Think about it more as a call point sale that drops right into the bag versus the creation of some new business. That's not how we're thinking about it today. That may change in the future. But for today, we're not thinking about a broader wound strategy. It's really more about optimizing the call point, dropping it into the bag and really providing an elegant solution for the customers. Operator: Next question is from Danielle Antalffy with UBS. Danielle Antalffy: Just [indiscernible] question. And I guess this goes to margins going towards guidance here. But we're seeing positive price in MedSurg. You mentioned you anniversaried some price upticks in Q3 in Orthopedics. So how do we think about go forward from here? You still have a pretty positive product cycle, but specifically in Ortho, do you think it's more like flat going forward from here? Or do you still have pricing power there, too? Jason Beach: Dan, thanks for the question. So from a pricing standpoint, yes, I mean, we do believe that based on our overall execution of our business from a contracting perspective with new products and innovation across our portfolio, we will have opportunities from a pricing standpoint as we go forward. And that will be in all businesses. It won't be exactly the same across the different business lines. But across all of our businesses, we do believe we have certain levels of pricing power that we will be able to continue as we go forward. Operator: Our next question is Shagun Singh with RBC. Kendall Au: This is Kendall on for Shagun. I just had one question on the upcoming Investor Day. I know last time you gave some targets on organic growth, operating margin, EPS growth and free cash flow conversion. I was wondering if those kind of targets will be laid out again? And if you could add any other color on that? And also, if you had any update on the current tariff environment and any impact on 2026? Jason Beach: Yes, this is Jason. I don't want to spoil any surprises that you'll hear in a couple of weeks. But yes, you're absolutely right. We will update our long-term financial goals, including, I think Kevin mentioned earlier, kind of our current view on margins as well. So expect to see that for sure. As it relates to the tariff environment, Preston, feel free to add on here, but I think Preston said in his script, we're now forecasting roughly a $200 million impact for the year. As you know, this is a fluid environment that we continue to monitor, but that's our latest outlook right now. Operator: There are no further questions. I will now turn the call over to Kevin Lobo for any closing remarks. Kevin Lobo: Thank you for joining today's call. We look forward to sharing updates on our business and strategy with you at our Investor Day on November 13 and our fourth quarter results with you in January. Thank you. Operator: This concludes the third quarter 2025 Stryker earnings call. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. My name is Colby, and I'll be your conference operator today. At this time, I would like to welcome you to the SkyWest, Inc. Third Quarter 2025 Results Call. [Operator Instructions] I will now turn the call over to Rob Simmons, Chief Financial Officer. Robert Simmons: Thanks, Colby, and thanks, everyone, for joining us on the call today. As the operator indicated, this is Rob Simmons, SkyWest's Chief Financial Officer. On the call with me today are Chip Childs, President and Chief Executive Officer; Wade Steele, Chief Commercial Officer; and Eric Woodward, Chief Accounting Officer. I'd like to start today by asking Eric to read the safe harbor, then I will turn the time over to Chip for some comments. Following Chip, I will take us through the financial results, then Wade will discuss the fleet and related flying arrangements. Following Wade, we will have the customary Q&A session with our sell-side analysts. Eric? Eric Woodward: Today's discussion contains forward-looking statements that represent our current beliefs, expectations and assumptions regarding future events and are subject to risks and uncertainties. We assume no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. Actual results will likely vary and may vary materially from those anticipated, estimated or projected for a number of reasons. Some of the factors that may cause such differences are included in our most recent Form 10-K and other reports and filings with the Securities and Exchange Commission. And now I'll turn the call over to Chip. Russell A. Childs: Thank you, Rob and Eric. Good afternoon, everyone. Thank you for joining us on the call today. Today, SkyWest reported net income of $116 million or $2.81 per diluted share for the third quarter of 2025. These results reflect a seasonally strong third quarter and ongoing strong demand for our products. Year-to-date through the third quarter, SkyWest has achieved more than 185 days of 100% controllable completion, a significant accomplishment with over 2,500 daily scheduled departures. Our people continue working with focus and teamwork to plan, execute and deliver an exceptional and consistent product. I want to thank our team of nearly 15,000 aviation professionals for their continued teamwork and dedication to excellence. Our teams have delivered well despite the ongoing federal government shutdown in navigating the challenges of a strained ATC system with professionalism and vigilance. We're working with each community we serve and evaluating our capabilities in the event of a longer-term government shutdown. It is our intent to honor our service commitments, including those under the Federal EAS program who rely on SkyWest reliable air service as an essential economic lifeline. Also during the third quarter, the Department of Transportation finalized SkyWest Charter or SWC's commuter authorization. This approval comes after a lengthy review process that took over 3 years, and we look forward to the future opportunities this authorization will provide. SWC is in the midst of busy sports charter season and we are evaluating additional opportunities this commuter authority will provide. You'll recall last quarter, we announced an agreement to purchase and operate 16 new E175s under a multiyear contract with Delta, with deliveries expected to begin in 2027. We also secured firm delivery positions with Embraer for 44 more E175s from 2028 to 2032. As we shared previously, it is our intent to deliver those aircraft. These agreements continue to deliver unparalleled fleet flexibility for the future, and that flexibility has never been more important. With today's announcement to extend CRJ200s with United and our continued deployment of additional CRJ550s for our partners, we expect our existing CRJ fleet to produce accretively well into the next decade. In the near term, we anticipate our remaining Embraer deliveries scheduled for this year will be delivered in fourth quarter or early 2026. Demand for our product is very strong, and SkyWest continues to lead our segment in the industry in service and in the value of our diverse assets. We remain disciplined and steady as we execute on our growth opportunities to: one, restore or bring new service to underserved communities; two, redeploy and fully use our existing fleet; and three, prepare to receive our deliveries in the coming years for a total of nearly 300 E175s by the end of 2028. We have spent several years strengthening our balance sheet and fleet flexibility as well as reinvesting in our future growth. Overall, with our well-positioned fleet operation and our strong partnerships and demand, we remain optimistic about 2026. We continue to play the long game and to invest in our fleet and future to ensure we are in the best possible situation to respond to market demands. Rob will now take us through the financial data. Robert Simmons: Today, we reported a third quarter GAAP net income of $116 million or $2.81 earnings per share. Q3 pretax income was $157 million. Our weighted average share count for Q3 was 41.4 million, and our effective tax rate was 26%. Let's start today with revenue. Total Q3 revenue of $1.1 billion is up from $1 billion in Q2 2025 and up 15% from $913 million in Q3 2024. Q3 revenue includes the contract revenue of $844 million, up from $842 million in Q2 2025 and up from $761 million in Q3 2024. Prorate and charter revenue was $167 million in Q3, up from $145 million in Q2 and up from $123 million in Q3 2024. Leasing and other revenue was $39 million in Q3, down from $48 million in Q2 and up from $29 million in Q3 2024. These Q3 GAAP results include the effect of recognizing $17 million of previously deferred revenue this quarter, down from the $23 million recognized in Q2 2025. As of the end of Q3, we have $269 million of cumulative deferred revenue that will be recognized in future periods. We anticipate recognizing approximately $5 million to $15 million of previously deferred revenue in Q4, subject to production levels and other factors. Now let's discuss the balance sheet. We ended the quarter with cash of $753 million, up from $727 million last quarter and down from $836 million at Q3 2024. The ending cash balance for the quarter included the effects from: one, repaying $112 million in debt; two, buying back 244,000 shares of SkyWest stock in Q3 for $27 million. With the volatility in the equity markets in Q3, we opportunistically repurchased 25% more shares than we bought in Q2. As of September 30, we had $240 million remaining under our current share repurchase authorization. And three, investing $122 million in CapEx, including the purchase of used CRJ aircraft spare engines and other fixed assets. We ended Q3 with debt of $2.4 billion, down from $2.7 billion as of 12/31/2024. Cash flow is obviously an important component of our capital deployment strategy. We generated approximately $500 million in free cash flow in 2024 and deployed it primarily to delever and derisk the balance sheet to the benefit of our partners, our employees and our shareholders. We generated nearly $400 million in free cash flow in the first 3 quarters of 2025, including $144 million in Q3. Our balance sheet and strong liquidity are powerful tools as we pursue a variety of growth and capital deployment opportunities, including acquiring and financing 30 additional E175s to be placed under our flying agreements by the end of 2028 and repaying approximately $500 million in debt in 2025. As we remain focused on improving our return on invested capital, we'd like to highlight the following: both our debt net of cash and leverage ratios continue at favorable levels at their lowest point in over a decade. Our total debt level is $1 billion lower today than it was at the end of 2022 in spite of acquiring and debt financing 9 E175s during that time. We anticipate that total 2025 capital expenditures funding our growth initiatives will be approximately $550 million, including the purchase of 5 new E175s, CRJ900 airframes and aircraft and engines supporting our CRJ550 opportunity. This implies approximately $190 million in CapEx in Q4. We are scheduled to take delivery of 3 E175s in Q4 2025 and 11 E175s during 2026. We expect approximately $575 million to $625 million in CapEx in 2026. Consistent with our policy and practice, we're not giving any specific EPS guidance today, but let me give you some updated color on Q4 and some commentary on 2026. We now anticipate our 2025 block hours to be up approximately 15% over 2024. We now expect our 2025 GAAP EPS could be in the mid-$10 per share area for the year. This implies Q4 EPS in the $2.30 area. For 2026, we expect to see low-single-digit percentage growth in block hours translate into mid-to-high single-digit percentage growth in EPS in the area of $11. For modeling purposes, we anticipate our maintenance activity in 2026 will continue approximately at current rates as we invest in bringing more aircraft back into service. We also anticipate our effective tax rate will be approximately 26% to 27% for Q4 and in the area of 24% for 2026. We are optimistic about our growth possibilities going into 2026, including the following 3 focus areas: First, growth in our ability to increase service to underserved communities, driven partially by the redeployment of approximately 20 parked dual-class CRJ aircraft; second, good demand for our prorate product; and third, placing 14 new E175s into service for United and Alaska by the end of 2026 and 16 new E175s for Delta in 2027 and 2028. We believe that our strong balance sheet, operating leverage, free cash flow and liquidity and the actions we will be taking to deploy our capital against a variety of accretive opportunities will position us well to drive total shareholder returns. Wade? Wade Steel: Thank you, Rob. Last quarter, we announced a new flying agreement with Delta for 16 new E175s under a multiyear flying contract. The 16 new E175s are expected to replace 11 SkyWest-owned CRJ900s and 5 CRJ700s that we are currently operating. We expect the 16 new E175s will be delivered in 2027 and 2028. We expect to redeploy the 16 SkyWest-owned CRJ aircraft with our major partners. We also currently operate 24 Delta-owned CRJ900s. We anticipate most of these aircraft will be returned to Delta over the next couple of years and are preparing to return 4 of them during the fourth quarter of this year. Today, we announced an agreement with United to extend up to 40 CRJ200s into the 2030s. These aircraft were set to expire at the end of this year, and we are pleased that the continued -- we are pleased with the continued strength of our United agreement. As we previously announced, we have a multiyear flying agreement for a total of 50 CRJ550s with United. As of September 30, we had 21 CRJ550s under contract and expect to operate 30 by the end of this year, with the last 20 entering into service during 2026. We also have 20 E175s coming up for contract extension in 2026 with United. We are currently in discussions to extend these aircraft and look forward to enhancing our partnership with United. We also began a prorate agreement with American during the second quarter. We are currently operating 4 aircraft under this agreement with up to 9 anticipated by the middle of next year. We are very excited to expand our relationship with American. We currently have 74 E175 on firm order with Embraer, including 16 for Delta, 13 for United and 1 for Alaska. We expect delivery of 3 aircraft during the fourth quarter and 11 next year. We did not receive any E175s during the third quarter. And as we continue experiencing delivery delays with Embraer, we expect that some of the aircraft previously planned for this year will push into 2026. Let me talk a little bit more about our firm order of 74. Of the 74, 30 are allocated to major partners and 44 have not been assigned yet. Our long-term fleet plan has positioned us well and re-fleeting continues to be an important part of that strategy. This order locks in delivery slots starting in 2027 through 2032. However, the order is structured with good flexibility to defer or terminate the aircraft in the event we don't arrange for a partner to take them. After we finish the Delta deliveries expected in 2028, our E175 fleet total will be nearly 300, continuing to enhance SkyWest's position as the largest Embraer operator in the world. Let me review our production. Q3 block hours were up 2% compared to Q2 2025. Based on our current Q4 schedules from our major partners, we anticipate a 4% decrease in Q4 as compared to Q3. This decrease is due to the normal seasonality we see in our business. For the full year, we anticipate an increase of approximately 15% in 2025 compared to 2024, similar to our 2019 levels. We anticipate that our 2026 block hours will be up low-single-digits compared to 2025. For 2026, we anticipate taking delivery of 11 new E175, placing 20 CRJ550s into service and capitalizing on strong prorate demand. These increases are offset by the return of approximately 24 Delta-owned CRJ900s over the next couple of years. Our revenue seasonality has returned to the model as utilization improves during the strong summer months. We still have approximately 20 parked dual-class CRJ aircraft that will be returned to service. Many of these aircraft are currently under flying agreements and will begin operating in late 2025 and 2026. We also have over 40 parked CRJ200s, further enhancing our overall fleet flexibility. Under a previously announced agreement with another regional carrier, we expect to purchase 30 used CRJ900 airframes for $29 million. We expect to utilize many of these airframes for parts to mitigate any supply chain challenges we may face over the next few years. We do anticipate operating 6 of these aircraft in the future. As of September 30, we had closed on 18 of these aircraft. As far as our prorate business, demand remains extremely strong with great community support. We are seeing opportunities to return SkyWest service to several communities and we will continue to work with the airports we serve in the best way to expand our service. As we discussed last quarter, the increase in our prorate business will reintroduce more seasonality into our model. Consistent with the airline industry, we expect Q2 and Q3 to be strong revenue quarters and Q1 and Q4 are softer. We feel good about our ongoing efforts to reduce risk and enhance fleet flexibility and remain committed to continuing our work with each of our major partners to provide strong solutions to the continued demand for our products. Robert Simmons: Okay. Operator, we're now ready for our Q&A session. Operator: [Operator Instructions] Your first question comes from Tom Fitzgerald from TD Cowen. Thomas Fitzgerald: It seems like a really constructive outlook for 2026. I was just wondering if you'd mind walking us through some of the puts and takes on the fleet and the mix benefit you guys get as you bring on more E175s and then some of the CRJs come out. Wade Steel: Yes. Tom, this is Wade. I can give you a little bit more color on that. As we talked about, we still have CRJ550s that are parked or being transitioned. So we still have -- by the end of the year, we think there'll be additional 20 that we'll put into service during 2026. We have 14 more E175s that need to go in. 3 of them, we believe, will go in, in the third -- or in the fourth quarter of 2025 and then 11 more in 2026. And then we also have strong prorate demand. As we said, we believe there'll be some increase in our prorate flying during 2026. Some of those will be offset -- some of those increases will be offset by some of the Delta-owned CRJ900s that we have that will be going back to Delta, and we've already started returning a few of those, and we think 4 of those will go back by the end of this year. So I hope that helps, Tom. Thomas Fitzgerald: Yes, yes. That's very helpful. And then I guess maybe just on prorate, where -- as a percentage of like where you were pre-pandemic, I just wonder if you'd mind updating us on where prorate stands today? And then I guess maybe unpacking a little bit more like the opportunities you see next year. Wade Steel: Yes. So we're about at 70% of where we were at in 2019 pre-pandemic. We're seeing strong demand throughout the whole country on prorate. There's still a lot of opportunities with small community service, both enhancing frequency and then also restoring dots on the map. And so we are working with each of our major partners on prorate agreements. As I said, we do a lot of that for United. We also have started an agreement with American. We also do that with Delta as well. So all of our major partners, we're working with them on additional dots on the map. And so we're excited about the opportunities that are in front of us and we'll continue to execute on those. Operator: Your next question comes from the line of Mike Linenberg from Deutsche Bank. Michael Linenberg: Chip, can you just update us on the EAS funding? I think the last I heard was that they had found money that would get you into November. Where -- what's the latest on that? They seem to be finding pockets of money from various activities, whether it's the military or whatever. Where do we hit the wall on that? And then what's the mechanism if you continue to fly and serve but not receive a subsidy? What's the recourse for like SkyWest to get -- to ultimately get repaid or maybe not? Russell A. Childs: Yes, Mike, those are outstanding questions and something that's very pertinent to today. The latest that we've heard is that we believe that there's funding for the program through the 18th of November. So that gives us a lot of good leeway for the government to continue to deal with this shutdown. We've said early on since when it started, like we really value the communities that we serve. We know that through the captain shortages and that type of stuff, it's a difficult process to make sure we're executing on our commitments, but we are committed to the communities as much as we possibly can, not knowing how long this is going to go on. And after the 18, I think the message has been pretty clear. It's unsure if we will get reimbursed or not, but it is clearly our intention to continue to fly and execute on some of the commitments that we've made with these communities. And if it continues to go on without funding after November 18, we'll see what we can do to best serve those communities. But it's going to take a conversation likely, because clearly, the essential air service communities do need the subsidies to make it viable. We're trying to develop them to where they can continue to be stronger and stronger, but we still definitely need those subsidies, and we'll work with the communities depending on how long this shutdown goes. So from that perspective, I hope it's clarifying. We're all over working with our partners and the communities and the associated government agencies that we can do under the circumstances. But as of now, we feel pretty good about at least the current short-term time line. Michael Linenberg: Okay. Just my second question to Wade. The multiyear agreement with United on the CRJ200s into -- I heard -- I think I heard the 2030s. So obviously, a much longer time frame than I think anybody has anticipated about these airplanes. You currently have 80 with United, 50 under contract, 30 under prorate. Presumably, the 40 that are extended, are those all contract or is that a mix of contract and prorate? Wade Steel: Yes, Mike, that's a great question. So the 40 that were extended are all contract airplanes. So we'll continue to fly the prorate, expand the prorate. But the 40 contract, as you said, they're extended into the 2030s and we're excited about continuing to enhance our partnership with United on all of that. Michael Linenberg: Okay. I just to follow-up on that, though, you said expand the prorate. So it sounds like you're going to go from maybe a mix of 50-30 potentially to 40-40. Is that a reasonable potential? Wade Steel: Yes. Directionally, I think we'll continue to -- as we said, we have 40 parked CRJ200s still available to us. There's still great opportunities. Small communities need air service. So we will continue to find opportunities. But yes, I like your breakdown. I think it's directionally correct. Michael Linenberg: Okay. And then just my last one. I hate to ask all these questions, but the nuances, there are just so many from this call. The prorates going into American, it looks like they're all CRJ900s, at least, and I want to confirm that. But when I think about your prorate business historically, it was single class with CRJ200s. It now seems like we're moving into a prorate world of dual-class CRJ900s. And as we think about just the upgauging across the industry among all the carriers, it seems like it may be opening up a whole bunch of opportunities in small and medium-sized markets to go in with dual-class on a prorate business. That seems like that's kind of a new angle for you. Can you just clarify or confirm what... Wade Steel: No, Mike, you're -- once again, you're spot on. You're very good at this. So the American agreement, yes, we are flying CRJ900s and prorate for American. As you know, their scope is a little bit unique. They also have the large RJ scope that could fly in 65 seats. And so if they hit their scope caps in their large RJ, we could obviously transition those still into a 65-seat dual-class fleet. We are also flying CRJ550s, as you said, for Delta under prorate. And so there's great opportunities there as well. So we do like it. We like the model. We like the opportunities and it does expand the opportunity into some different markets with the larger gauge airplanes for sure. So we're excited about what's going on. Russell A. Childs: Mike, this is Chip. I'll add on to that just real quick. I think you've heard some conversation from our partners about their premium service. Clearly, there's a strong element of what their models are evaluating and within their network of having good premium service throughout their networks. And I think it's being reflected in some of the deals that we're trying to do even in small communities. So your assessment -- is the momentum there is good. Operator: Your next question comes from the line of Savi Syth from Raymond James. Savanthi Syth: Actually, just following up a little bit on Mike's question. You addressed the EAS side of the government shutdown. I was curious if there's any other impacts that you're seeing or you're watching because you do fly into smaller communities. And just a little bit tied to that, too, just with the -- I think Brazil is still at a 10% tariff and just if there's any kind of meaningful impact on that or that's just something you're observing? Wade Steel: Yes, Savi, good question. Thank you so much. To start with, when it comes to TSA and ATC, we really hats off to the work being done with those groups to continue to show up and work and do the things we need to, to keep the NAS system operational. From our perspective on the small community [ stepping ], I mean, like I think we've said before, we fly to a lot of untowered airports. So from our perspective, a lot of our small community flying is actually not affected. But when you go back into the hub, it's every bit as affected as everything else. So look, we monitor all of the things that we do with our major partners along the same lines. We're in constant conversation with the authorities as well as with our partners to manage these operational challenges with the shutdown. And hats off to our people as well. They're doing a fantastic job. The team is doing a great job. And so far, things are really, really well. Relative to the 10% tariff, Brazil, I think the last time we were talking on the call, it was at 50%, and that was a no-go absolutely for us. We do not like 10%. But nonetheless, we have an environment where we've got to continue to execute on some of the commitments that we have, but also be strategic in how we're continuing to deploy our capital. And so far, we're going to continue to give our opinion about what the tariff is doing to small community service as well as us as a company. But at some point, you still have to continue to move forward and do the best that you can. And so it's not that we've accepted the 10% tariff, but in our strategy as of today, we are dealing with it. And I think that's what we would say is that we're dealing with it. But from our perspective, we do believe that this does have an impact on small community service in the long run. But our job is to be the best in the industry evolving, and we'll continue to evolve with some of these issues. Savanthi Syth: That's helpful. And just actually another follow-up on Mike's question as well. Just on the CRJ200 front, they are getting long in the tooth, but you're also having these opportunities, whether it's SkyWest Charter or continuing to operate them on the kind of the 50-seat side. Could you talk about like just if you look out to like '27, '28 or particular year -- a couple of years down the road, just where could we see that fleet size be considering that some probably have to get retired or maybe they don't. But just curious across the network, like how big do you see the CRJ fleet being or a range for it? Wade Steel: Savi, that's a great question. This is Wade. We just announced today, we extended 40 of those through the early 2030s. The prorate demand is still very strong that we have today in SkyWest Charter, the demand is very strong in all of that. So between all of that, we do anticipate flying somewhere around 100 CRJ200s well into early 2030s. We're investing in maintenance. We've invested in these engines. A few quarters ago, we were talking about 5 million cycles that we have on those engines that we still have. We've obviously reduced that number as we continue to fly, but we have definitely made a lot of investments in that airframe to continue to make that work and continue to have it go. We're also investing in the customer experience and other things on that. So we're -- we think that airplane, the CRJ200, is going to go for well into the 2030s. Operator: Your next question comes from the line of Duane Pfennigwerth with Evercore ISI. Duane Pfennigwerth: Just focus on the contractual capacity purchase business. I wonder if you could speak more comprehensively about net fleet additions for 2026. You noted the 11 E175 deliveries in the table. You talked about 20 additional 550s. I understand there can be movement between now and next year. But based on what you know today, what else will be added? And what will likely be rolling off? How do we think about that net fleet change? Wade Steel: Yes. No, that's a great question. We talked about it a little bit in my prepared remarks. Like you said, we have 20 CRJ550s that are on the books that are coming in next year. We have the 11 E175s. And then we have the 24 Delta-owned airplanes that are coming off over the next couple of years. So net-net, it's flattish to small increases in our capacity purchase flying next year just when you net it all up. So small -- like we said in my prepared remarks, it's low-single-digit growth next year in the block hours. Duane Pfennigwerth: Got it. Got it. And then in the table, I wonder for the deliveries, do those numbers -- like are there options embedded in that 40 or are there options over above the numbers in that table? Wade Steel: You're talking about the CRJ200s, the 40? Duane Pfennigwerth: Sorry, the E175s. Are those firm orders or are there options embedded in the future? This 40 and the 10 for 2028 and the 40 thereafter, do those include options? Wade Steel: Those do not include options. Those are firm orders. Those will be very helpful in fleet replacements and continuing to enhance the fleet. So those are all firm orders. We do have flexibility. They are not allocated to our partners yet. There -- I said in my prepared remarks that there are 44 of those that have not been allocated at this point. And so we'll continue to work with our partners to allocate those, but we do have flexibility if we do not get them allocated to a partner to defer or cancel those. But they are firm orders going through 2032. Duane Pfennigwerth: Great. And then just one last one. Does the mid-to-high single-digit EPS growth guidance for '26, what does that assume around about incremental buyback, if anything? Robert Simmons: Yes, Duane, this is Rob here. So in terms of the EPS denominator, we'll continue to be opportunistic as we have been in the past. As you've seen, this quarter, we bought -- in a fairly volatile market, we bought another 25% more shares than we did the quarter before. So it will depend on the markets, but we'll continue to be opportunistic in how we look at deploying capital against share repurchase. Operator: And with no further questions in queue, I would like to turn the conference back over to Chip Childs, CEO, for closing comments. Russell A. Childs: Thank you, Colby. I appreciate really everybody's interest in the call today in the quarter. We obviously had a very good quarter. We've got some good challenges ahead of us. I want to reiterate that we continue to play the long game and make sure that some of the current effects that are happening to the industry do not affect our long-term strategy. We know that we can evolve with the best aviation professionals in the world, continue to do the things in which we need to, to provide good shareholder value as well to that as our partners. And with that, we will end the call and see you next quarter. Thank you. Operator: This concludes today's conference call. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the Independence Realty Trust Q3 2025 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Stephanie Krewson. You may begin. Stephanie Krewson-Kelly: Good morning, and thank you for joining us to review Independence Realty Trust's Third Quarter 2025 Financial Results. On the call with me today are Scott Schaeffer, Chief Executive Officer; Jim Sebra, President and CFO; and Janice Richards, Executive Vice President of Operations. Today's call is being recorded and webcast through the Investors section of our website at irtliving.com, and a replay will be available shortly after this call ends. Before we begin our prepared remarks, I'll remind everyone, we may make forward-looking statements based on our current expectations and beliefs as to future events and financial performance. These statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results to differ materially. Such statements are made in good faith pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and IRT does not undertake to update them, except as may be required by law. Please refer to IRT's press release, supplemental information, and filings with the SEC for further information about these risks. A copy of IRT's earnings press release and supplemental information is attached to IRT's current report on the Form 8-K that is available in the Investors section of our website. They contain reconciliations of non-GAAP financial measures referenced on this call to the most direct comparable GAAP financial measure. With that, it's my pleasure to turn the call over to Scott Schaeffer. Scott Schaeffer: Thanks, Stephanie, and thank you all for joining us this morning. Third quarter results were in line with expectations due to our continued focus on managing revenues and expenses. During the third quarter, our average occupancy remained stable as we continue to prioritize occupancy over rental rate in this competitive leasing environment. We finished the quarter at 95.6% occupancy, a 20 basis point improvement from the end of the second quarter. Our resident retention of 60.4% helped support this stable occupancy. Same-store revenue also increased in the quarter, driven by higher average rents per unit and improved bad debt versus a year ago. We outperformed expectations on bad debt in the quarter, which now represents less than 1% of same-store revenues and demonstrates the effectiveness of the improved processes and technology we have implemented since early 2024. Our value-add renovations contributed to revenue growth as well. We completed 788 units during the quarter, achieving an average monthly rent increase of approximately $250 over unrenovated market comps, which equates to a weighted average return on investment of 15%. During the quarter, same-store operating expenses decreased over the prior year, driven primarily by lower property insurance and turnover costs. In terms of transactions, during the quarter, we acquired 2 communities in Orlando for an aggregate purchase price of $155 million. These acquisitions more than double our number of apartment units in Orlando, improving our market presence and our ability to realize meaningful operating synergies. We currently have 3 communities held for sale, one of which is expected to close later this year, the other 2 early next year. While we maintain an active pipeline of acquisition opportunities, we recognize the current disconnect between our implied cap rate and market cap rates. We will continue to evaluate all investment opportunities, including value-add renovations, acquisitions, deleveraging, and share buybacks as we allocate capital to drive long-term shareholder value. Market dynamics remain competitive, but green shoots are emerging in several of our markets as supply pressures ease. Signs of market recovery are most evident in Atlanta, where occupancy has increased 60 basis points since January 1, all while our asking rents have increased 5%. Jim will provide more detail on other markets, but the point here is that we are seeing early and encouraging signs of recovery. New deliveries in IRT submarkets have declined 56% from the 2023, 2024 quarterly averages and supply is forecasted to grow by less than 2% per year for the next several years, which would be meaningfully below the trailing 10-year average of 3.5% per year. Against these improving supply fundamentals, we expect apartment demand to remain steady in our markets, driven by employment opportunities, quality of life dynamics, and a rent versus buy economics that will continue to favor renting. We have seen positive net absorption in our markets for 2 consecutive quarters. During the third quarter, over half of our markets, encompassing 60% of our NOI exposure registered positive net absorption. Atlanta, which is our largest market, moved into positive net absorption for the 9 months ended September 30, with occupancy increasing 50 basis points. Other markets like Coastal Carolina and Charleston are also seeing positive net absorption, while markets like Tampa, Denver, and Dallas are still working through their supply challenges. Before I turn the call over to Jim, I just wanted to reiterate a few things. Market fundamentals are improving. And while it's taking longer than we all expected, there is light at the end of the tunnel, and we see pricing power increasing. We will remain focused on optimizing near-term performance through stable occupancy, managing expenses, and investing in our value-add program with its consistent outsized returns. Over the long term, the 3 factors that underpin our cash performance will drive our future outperformance. First is our differentiated portfolio of Class B apartment communities in markets that will continue to outperform the national average for employment and population growth. Second is the efficiency of our management platform, which has a proven track record of optimizing revenues while also diligently managing expenses. And third is our disciplined approach to allocating capital. We will continue to be deliberate, patient, and nimble in deploying capital to the highest best uses, including our value-add program, capital recycling, deleveraging, and share buybacks. And with that, I'll turn the call over to Jim. James Sebra: Thanks, Scott, and good morning, everyone. Third quarter 2025 core FFO per share of $0.29 was in line with our expectation. Same-store NOI grew 2.7% in the quarter, driven by a 1.4% increase in same-store revenue and a 70 basis point decrease in operating expenses over the prior year. During the third quarter, our point-to-point occupancy increased 20 basis points against the slower-than-normal leasing season, while our new lease trade-outs were lower than we anticipated at negative 3.5%. We've been clear about our desire to maintain stable high occupancy to position us well as we head into 2026. Our renewal rate increases of 2.6% came in line with our general expectations as we expected lower renewal increases to support retention and help maintain and grow occupancy during the third and fourth quarter. That strategy is working as expected with retention at 60.4% in the third quarter. We're beginning to see signs of stabilization across several of our markets through improvement in asking rents, along with the ability to maintain occupancy. Let's look at a few of our markets that are experiencing these green shoots since the beginning of this year through the end of September. As Scott mentioned, Atlanta's occupancy has increased 60 basis points since January, new lease trade-outs were 410 basis points better, and asking rents are up 5% this year. Indianapolis asking rents are up 3.5%, while maintaining stable occupancy at 95.3%. Oklahoma City's asking rents are up 80 basis points and new lease trade-outs have improved 260 basis points, all while maintaining stable occupancy of 95.5%. Nashville asking rents have improved 240 basis points this year with stable occupancy of 96%. Cincinnati's asking rents have increased 11 percentage points with occupancy increasing 100 basis points to 97.5%. The Coastal Carolina market has seen asking rents improving 5.7% and occupancy has grown 2.1% to 95.9%. And lastly, Lexington, Kentucky asking rents are up 22% this year with occupancy growing 70 basis points to 97%. These markets highlight that fundamentals are firming and pricing power is beginning to return in key regions of our portfolio. For the third quarter, bad debt was 93 basis points of same-store revenue, which represents a 76 basis point improvement over Q3 of last year, as well as a 46 basis point improvement sequentially from second quarter. Our team's efforts and the technology enhancements we implemented since early 2024 are the drivers behind this improvement as underlying collection fundamentals have improved such that overall charge-offs as a percentage of revenue were down 40 basis points compared to third quarter 2024. In addition, accounts receivable balances were 40% lower at September 30 as compared to Q3 of last year and recoveries from our third-party collection firm were also higher. All in all, the improved performance on our bad debt is exciting to see, and we expect to see continued progress in the coming quarters as we focus on stabilizing our bad debt sustainably below 1% of revenues. Same-store operating expenses decreased 70 basis points over the prior year quarter, reflecting our continued focus on managing expenses. Within controllable expenses, which were flat year-over-year, higher advertising spend was offset by lower repairs and maintenance expenses. Our strong resident retention contributed to lower repairs and maintenance expenses in the quarter. Within noncontrollable expenses, the 2.3% decrease over the prior year quarter reflected our favorable renewals on our insurance premiums from earlier this year. During the quarter, we further enhanced the long-term growth prospects of our portfolio by acquiring 2 communities in Orlando for an aggregate purchase price of $155 million at an average economic cap rate of 5.8%. One of these properties is Phase 2 of an existing IRT community and the other is in close proximity to another IRT community, such that we expect to realize meaningful operating synergies. We used $101 million of our forward equity proceeds to fund these acquisitions and now have $61 million of forward equity remaining. On our assets held for sale, we now expect 1 asset to transact in 2025 and the 2 remaining assets will be sold in 2026. On our asset held for sale in Denver, we recorded a $12.8 million impairment in the third quarter due to the recent pressures observed in the Aurora submarket and its impact on the performance of this community. The third quarter was also busier than normal with respect to our joint venture investments. In July, our JV partner enrichment completed the sale of Metropolis at Innsbrook. We received $31 million in cash, which included a $10.4 million gain in our income from unconsolidated real estate investments line item. This gain was excluded from core FFO since it is associated with a property sale. In October, our partner in Nashville redeemed our preferred investment, which resulted in the return of our initial investment and the receipt of $3.3 million in preferred return, which we will recognize in the fourth quarter. This preferred return will be included in core FFO consistent with historical treatment as it is not associated with an asset sale. From a capital allocation perspective, we will continue to prioritize our value-add program as it represents the best use of capital given the steady mid-teen returns and the margin expansion renovated units create from increased rents and reduced turn costs. We will continue to evaluate other capital allocation decisions between buying back shares, pursuing acquisitions, and/or deleveraging. Our balance sheet remains flexible with strong liquidity. As of September 30, our net debt to adjusted EBITDA ratio was 6x, and we are on track to further improve this ratio in the fourth quarter to the mid-5s as expenses decline seasonally. We continue to have very manageable debt maturities with only $335 million or 15% of our total debt maturing between now and year-end 2027. And nearly all of our debt is either fixed rate or hedged. With respect to our full year 2025 guidance, we are narrowing our ranges on same-store revenue and expense growth while keeping the midpoint unchanged. With respect to transactions, we are reducing our acquisition and disposition guidance ranges due to timing. Our updated acquisition guidance of $215 million reflects only the acquisitions that have closed to date. Our updated disposition guidance of $161 million reflects the disposition that closed earlier this year and the sale of one asset expected to close in November. These reduced volumes are the primary driver behind our lower expected interest expense and the lower weighted average shares for 2025. And lastly, from a core FFO per share perspective, we have narrowed our guidance range and our midpoint of $1.175 is unchanged. Scott, back to you. Scott Schaeffer: Thanks, Jim. For the past few years, the residential sector has navigated historic levels of apartment deliveries. While supply pressures are receding, it's too early to call a broad market recovery, but we are cautiously optimistic that 2026 will be a better operating environment than 2025. With our differentiated portfolio of Class B assets in highly desirable markets, our efficient management platform, proven value-add program, and strong balance sheet, we are well positioned to generate attractive core FFO per share growth. We thank you for joining us today. And operator, you can now open the call for questions. Operator: [Operator Instructions] Your first question comes from the line of Brad Heffern with RBC Capital Markets. Brad Heffern: You talked about the green shoots in the prepared remarks. Can you just talk through how the pressure of supply today feels different than it did last quarter or earlier in the year? And when do you expect things to get back to something resembling normal? Janice Richards: Well, we have some markets that were a little softer than anticipated, such as Raleigh, Dallas, Denver and Huntsville. Raleigh was more of a lingering effect of the supply that was produced. And so we're seeing stable occupancy. Asking rents are a little bit lower than anticipated, feeling the pressure of supply and concessions. We feel that this one is rather short-lived, and we'll start to see some movement early next year. Dallas, obviously has had some pretty heavy supply entering in the market. Occupancy has been stable above that 95.5% that we're looking for, but still feeling some supply from -- or pressure from supply and competitive market with concessions entering in and making a major play. Denver, Denver is challenging occupancy decline of about 200 basis points as well as asking rents feeling the pressure from supply. There's 7.5% delivered in '25. So we'll work through that and make sure that we are definitely being patient as well as disciplined within all of our strategies in Denver to maximize. And then Huntsville, one of our smaller markets, has seen an occupancy decline year-over-year, but holding stable above that 95%. Asking rents are feeling pressure from the supply, and we're working through that 5.7% that was released. We feel that each one of these markets has potential to start movement on the asking rents and work through the supply. We do see 2026 supply decreasing in all of these markets, which is the light at the end of the tunnel that we're going to be working through. And I think we'll start to see some benefit in the second half of 2026. Scott Schaeffer: Yes. And Brad, just to kind of bring it all full circle, I think the supply pressures we definitely feel are waning. We definitely see a light at the end of the tunnel coming. If you look at some of the most recent CoStar forecast for fourth quarter now of 2026, the forecast now in 2026 are much lower than what they were earlier this year because as we've been all highlighting, it does seem like supply was delivered earlier this year than what was supposed to be delivered next year. So again, really great positive opportunity here in 2026. The one thing we do watch in terms of, obviously, each day and each quarter and each month is just this kind of the conversion, right, from leads to leases, and that has been improving for us, right, from month to month to month throughout the third quarter. So that tells us that the pressure of new supply is certainly waning and we're being able to see more throughput into the leasing. Brad Heffern: And then, Jim, on the forward equity, you obviously need to settle that by the end of the year, but there's no additional acquisitions contemplated in the guide. Are you planning to extend that? Or is there a chance that you'll let that expire? James Sebra: So we can obviously always extend it. We do have 2 forward equities, one from September that got closed out, and that will be kind of closed out this quarter. And then the one that we did in the first quarter of 2025, we actually have until the end of the first quarter of 2026. So the $61 million that's left remaining is primarily that, and that we have until March 31 to close that one out. Operator: Your next question comes from the line of James Feldman with Wells Fargo. James Feldman: Given the sequential moderation in blends, especially on the renewal side, can you talk about what your latest thoughts are on earn-in for '26 and your current loss to lease? James Sebra: Jamie, that was a good one. Great to see you. Loss to lease today is actually a gain to lease of about 1.5% and that our earn-in right now for 2026 looks to be about 20 basis points. Obviously, we have to finish the year before the earn-in is actually locked in, but it's about 20 basis points. James Feldman: And then I guess just thinking about renewals down so much sequentially. I think if you look across the peer group, it's at the lower end. I know you said you wanted to keep occupancy at the expense of rate. Are there certain markets where you're really kind of surprised at how hard you have to fight to keep people? Just maybe talk us through the different regions, if it's any -- or different markets? Or is it pretty similar to what you said before on the renewals? James Sebra: Yes. I would say similar to the markets that Janice went through before in terms of the more supply-heavy markets certainly have a little more competition that we have to work harder to keep people at blend. I would say, generally, the retention rate that 60% has been a focus of ours. And we baked into our original guidance early this year, a steady decline in that renewal rate because we knew that we wanted to keep occupancy high heading into the slower seasonal periods of the fourth quarter. So I would say, even though it's sequentially lower, we've been pretty clear about we've expected this all throughout the year. What we see right now so far for fourth quarter, that renewal rate is actually about 40 basis points higher. So we see a little bit of strength redeveloping. But the difficulties in terms of really we're having to "work hard", we're working hard every day, right? But no, it's definitely in those markets that Janice mentioned. James Feldman: You're saying renewals are up 40 basis points already in the fourth quarter off of the '26? James Sebra: The spread, yes. James Feldman: Okay. And what about new leases and blends? James Sebra: New leases are pretty much in line with what you saw in the third quarter and blends are about, call it, 50 to 60 basis points. And about 90% of our expectations for renewals for the fourth quarter have already been signed. Operator: Next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Austin Wurschmidt: So going back to some of the green shoots that you referenced in your prepared remarks, coupled with, I guess, the softness in the back half of this year and just broader uncertainty, I mean, how do you approach the 2025 outlook and kind of the sequential improvement in fundamentals and think about sort of that ramp in the first part of next year? Scott Schaeffer: Be a little more specific in terms of ramping because obviously, we're staying away from really talking about any kind of 2026 guidance. I would say that our expectation is to continue to drive occupancy here in the fourth quarter. As I just mentioned, we're definitely seeing some improvements on the renewal spreads and just continue to manage the business for the long-term value creation of our shareholders. Austin Wurschmidt: I guess there was this expectation for lease rate growth to inflect in many of the Sunbelt markets late this year. So is that more likely a first half of '26? Do you see new lease rate growth, which I think you referenced are kind of in line with where they've been trending. Does that begin to improve over the several months ahead? What's sort of the thought on how that trajectory looks from here? Scott Schaeffer: Yes. So as we've mentioned, the desire that we have is to continue to keep occupancy at a nice stable high level for us as we end the year and get ready for 2026. That's always been our goal, and we've been talking and been pretty vocal about trading rate, especially on new leases to accomplish that goal. So as a result, right, new leases have kind of flattened out, right, where they are today in the third quarter when we were expecting them to continue to get better. We do see some progress in future months. They are getting better, but we're obviously being cautious because, again, we want to continue to maintain this high stable occupancy. If you look at our expiration schedule, you look at what leases are expiring month by month for next year, and again, without kind of prognosticating on market rent growth and so on and so forth, yes, we do expect that new leases should begin to kind of hit that breakeven point in the first half of next year. Austin Wurschmidt: And then can you just talk about how concessions have trended in some of the markets where you're seeing sort of some of that competition, Janice, you highlighted some details in the market. But I mean, are concessions getting worse? Are they stable, getting better? Just trying to get a sense high level of that competition that you're facing from the new lease-ups. James Sebra: Yes. So I don't have -- Janice will in a moment, talk about maybe individual markets. I would say, generally speaking, if you look at all of our leasing activity, so renewals, new leases, everything, in the third quarter of this year, 23% of all of our leases had some type of concession associated with it. That is down from 30% in Q3 of last year. The average concession is up slightly to $735 per, call it, lease, and that's up from $710 in Q3 of last year. As you look at it kind of looking from sequentially from quarter-to-quarter, that 23% is slightly higher from second quarter. But if I look at in October, we're down from where we were in the third quarter in terms of overall volume. So hopefully, that helps. Janice Richards: And as we monitor our competition very closely in the 4 softer markets that we talked about, we are seeing some ebbs and flows in concession, obviously, based on the lingering supply and/or what we would consider stalled lease-up. Nothing that has been outlandish or very surprising. However, we've seen a slight increase of concession usage in what I would say Dallas and possibly in Raleigh in specific pockets. Denver is definitely a concessionary market and will probably continue to be so as we work through that 7.5% of supply that was released in '25 and doesn't anticipate to add as fast as some of the other markets that we are in. Operator: Next question comes from the line of Eric Wolfe with Citi. Eric Wolfe: It looks like your net acquisition guidance came down and you got some assets that teed up for early next year. So can you just talk about your appetite for buybacks and how you think about the spread between where your stock is trading today versus where you can sell assets? Scott Schaeffer: Thanks. This is Scott. So the acquisition guidance came down because we had a small portfolio under contract. And in due diligence, we became aware of some significant structural issues, and it was an all or nothing. So we walked away from it. And at this point, we clearly recognize the disconnect between where markets are trading and where properties are trading relative to our implied cap rate at our share price. So we have a strong appetite for buybacks. We want to be disciplined, obviously. Clearly, it's a very good use of capital at this point. But we also continue to work down our leverage. So we're going to do it with retained earnings and other capital that won't impact our EBITDA. Eric Wolfe: Yes, I guess I was trying to think through like to what extent you could sell additional assets and try to take advantage of that spread if you thought it was material. I know there's sometimes tax implications from that. There's also sort of a descaling of the enterprise that you have to be sort of careful about. But I was just curious to what extent we could see you sort of ramp up the dispositions next year and then try to use those proceeds to be a bit more aggressive on the buyback in a leverage-neutral manner. Scott Schaeffer: Well, I think it's a balance, and it's a balance with the deleveraging strategy. And we still want our leverage to come down, which it has been doing, and we want it to continue to come down. So the thought of selling assets and giving up the EBITDA of that asset and then using the capital to buy back stock, while it might be a great return, it's going to increase our leverage, and I'm not sure anyone wants to see that. So we have the $60-some million on the forward available to us, and we also have some of the JV programs that are not EBITDA producing during the construction. So as those funds come back to us, that's available for us to use as capital for share buybacks. James Sebra: And just to clarify, the $61 million on the forward, we can net share settle that today. So we don't actually issue a bunch of shares and have to buy back a bunch of shares. But to Scott's point, that forward was issued at, I think, an average price of $20.60, and we're trading well below that. So there's an opportunity there to take some of that "gain" and buy back incremental shares. Operator: Next question comes from the line of John Kim with BMO Capital Markets. John Kim: I wanted to go back to your renewals you signed this quarter. Back in September, in your presentation, you talked about the renewal trade-out being in line or tracking expectations. So I'm wondering if something happened in September where it decelerated quicker than you had thought? Or was this the 2 what you anticipated? James Sebra: No, I think the point I was trying to make earlier is that we actually anticipated the renewals to go down in the third quarter. So when we kind of talked about them tracking in line with our expectations, that was clear that, that was our expectations. Certainly, as we've mentioned earlier, we are obviously working in a very competitive environment, and we are obviously looking to renew and retain as much of our residents as possible because not only are you saving a negative lease trade out, but you're also saving the vacancy costs, turn costs and all the other stuff that goes along with it. So no, I would say that the 2.6% was very much in line with our expectations. John Kim: And just to clarify, that 40 basis point improvement, is that what you're sending out sending renewals out today or what you're signing… James Sebra: What we signed. John Kim: My second question is the cap rate on the Aurora sale. I'm wondering if you could disclose that. And I think you said in the prior call that this was related to the Steadfast portfolio. But I'm wondering if you're looking at Denver as a market that you're looking to potentially sell more assets out of just given the supply pressures. James Sebra: Yes. I don't have the cap rate on the Aurora Denver held-for-sale asset. That is not closed yet, obviously. It's not even under contract. So I would say it would be a cap rate based on our internal view of valuation, but I can get back to you on that specifically. John Kim: And then Denver as a market? Scott Schaeffer: We're not looking to exit the Denver market. The property in Aurora was a steadfast property. It's an older property, expensive to run, high CapEx, and that's why it was identified as up for sale. Operator: Next question comes from the line of Wes Golladay with Baird. Wesley Golladay: I just want to look at your #2 market, Dallas. It looks like your same-store revenue growth is accelerating. But I believe I heard you in the commentary talking about more concessions in the market. So I'm just trying to see what's going on there. Janice Richards: Yes. I think in Dallas, what we're seeing is targeted markets and submarkets that have had high supply are becoming more concessionary as we go into the slower seasonal months in order to maintain that occupancy. And so we're just making sure that we're staying competitive within the market. Concessions are increasing as we've kind of seen a lingering effect of that supply. We're still able to maintain our occupancy. So the demand factor is still stable. It's just making sure that we can work through that supply and a timing factor. James Sebra: Yes. And I think yes, specifically with Dallas, I think you saw the average occupancy this quarter, up 40 basis points over the third quarter of last year. So that's a contributor to the acceleration. Wesley Golladay: And then looking at this year, you talked about your tech contributions being a bit of a tailwind. Do you think that momentum continues into next year? And then will the bad debt expense coming down lower be a tailwind again next year? Scott Schaeffer: I'll start with the last one, bad debt. Yes, we expect that the bad debt will continue to be, as I mentioned in the prepared remarks, we're working to keep that sustainably below 1%. So that should be a nice tailwind or support to 2026 and beyond. I would say that on the technology side, yes, obviously, we've implemented a series of pieces of technology, both on the kind of front of house leasing and sales and tours and as well as back of the house, so payables processing, other things that we are definitely working on, and we're going to continue to expand that to continue to drive lower expenses and better property improvements throughout the chain. Operator: Next question comes from the line of Ami Probandt with UBS. Ami Probandt: I'm wondering, were there any moving pieces within the same-store revenue guide such as blended rent assumptions, occupancy changes, bad debt? Scott Schaeffer: Ami? Ami, are you there? Ami Probandt: Can you hear me now? Scott Schaeffer: Yes. Okay. Great. Would you mind restating that? You broke up there. Ami Probandt: Yes. Sorry about that. I was wondering if there were any moving pieces within the same-store revenue guidance such as changes in blended rent occupancy or bad debt? Scott Schaeffer: For what, fourth quarter? Ami Probandt: Yes, within the guidance. If you had maybe, yes, increased your assumptions on occupancy and decreased on rent, any moving pieces to get you to that the guidance midpoint? James Sebra: Yes, sure. So the assumptions in guidance for occupancy was 95.5% in the fourth quarter, blended rent growth of 20 basis points, other income growth of about 3%. And then we've assumed a similar improvement in bad debt as we saw in the third quarter. Bad debt in fourth quarter last year was about 2%. So if you kind of reduce that by that roughly 70, 80 basis point improvement we saw this quarter, that's kind of what's factored into Q4. Ami Probandt: And then you mentioned materially lower supply delivery levels, but I'm wondering if you think that we may see extended lease-up periods and if you're factoring that into your thought process at all? James Sebra: We are thinking about that. We are -- as you can imagine, we have not put out 2026 guidance yet. So we are evaluating that with respect to what those -- what that budget will look like for next year and how significant it will be. The deliveries have come down quite significantly even throughout 2025. Even though the deliveries are higher than we all anticipated, the level of deliveries in '25 are still significantly under 2024. So we are expecting to see a lot of the lease-ups if not done. But if there is some extension, it should be a very small effect in the kind of early to mid part of 2026. Operator: Next question comes from the line of Omotayo Okusanya with Deutsche Bank. Omotayo Okusanya: Really good color in regards to kind of supply and what's happening in your markets. Curious if you could just talk a little bit on the demand side. I mean is some of the pressure on blended rates really more because there's just a lot of supply and people have options? Or is there like an actual demand issue where whether it's because of slowing job growth or things like that, you're getting a little bit more pushback as well in terms of asking rents and renewals. James Sebra: Sure. I mean I think that you've heard us previously as well as a lot of our partner peers, the leasing season kind of started a little earlier, ended a little earlier. I would say, just generally speaking, on the demand side, if you look at just our submarkets and you look at absorption levels and demand levels, it's -- in second quarter and third quarter, their peaks, right, over historical recent history in terms of what they were. Obviously, that's because of lease-ups, everything else. So I would say the demand is still quite healthy for apartments. A lot of our resident base that we cater to in our differentiated Class B product is not the white collar jobs that might be experiencing job losses that it's hospital workers, it's nursing home workers, it's retail workers, it's, again, not the typical white collar, including we have factory workers and blue collar workers. So it's a much -- what we think more defensive in the AI era than what folks appreciate or think might be affecting apartments down the road. We do track reasons for move-outs because of job losses. And I would say there's really no elevation there over the past 6 to 9 months. So it's not something we are watching. It's not something that we're overly concerned about at the moment, but we are watching and paying attention to it. Omotayo Okusanya: And then last one for me, just this election season at this point. Anything on any ballots in any of your key markets that you're kind of watching that could potentially impact your business? James Sebra: Well, the school district in my local town, I like very much, but that's a different story. No, we're not aware of anything in our markets where we should be concerned. Operator: Our final question comes from the line of Ann Chan with Green Street. Ann Chan: So are you seeing any labor availability issues we service for any type of employees or geographic markets? James Sebra: You mean inability for us to hire employees? Ann Chan: Yes. James Sebra: Yes. No, I would say, generally speaking, from our renovations team to our on-site teams to our corporate teams, jobs are filling kind of in the expected time frame. So there's no real concern or issue there with availability. Scott Schaeffer: We've also seen a marked reduction in the turnover within our on-site teams, which is encouraging going forward. Ann Chan: And second question for me. I know you mentioned earlier that you haven't seen any larger demand shift with the tenants. I'm just wondering if you've observed in 3Q and over 2025, any kind of emerging shifts in just general tenant behavior that might influence rent growth different between the markets, such as like shorter lease terms or higher concessions move-in timing, shifts towards the Class B product type or anything like that. And from that perspective, which markets appear more resilient versus more vulnerable to these types of tenant behaviors? James Sebra: Yes. We haven't seen, I would say, tenant behaviors in terms of payment patterns or work order developments that would cause us any level of concerns. I would say that the one thing that continues to shift, and we continue to try to be on the leading edge of it is the whole -- how does the prospect find us, right? The whole marketing engine, the advertising engine. You see us spending more money on advertising dollars between iOS services, paid search as well as just pure organic SEO and then also getting deeper into kind of how the AI tools are working where you can type into ChatGPT, show me an apartment for whatever in Atlanta and how do we show up in that list of each and every time. Today, we're ranking on page 1 of some of the Google searches, just organic searches on -- for many, many keywords. We still have more room to go, and we're going to keep pushing on that, but it's -- that's an area that we're spending a lot of time and energy on. Operator: Seeing no further questions, I would now like to turn the call back over to Scott Shaffer for closing remarks. Scott Schaeffer: Thank you all for joining us this morning, and we look forward to speaking to you again next quarter. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Thank you for standing by, and welcome to the Rocket Companies Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I'd now like to turn the call over to Sharon Ng, Head of Investor Relations. You may begin. Sharon Ng: Good afternoon, everyone, and thank you for joining us for Rocket Companies earnings call covering the third quarter 2025. With us this afternoon are Rocket Companies CEO, Varun Krishna; and our CFO, Brian Brown. Earlier today, we issued our third quarter earnings release, which is available on our website at rocketcompanies.com under Investor Info. Also available on our website is an investor presentation. Before I turn things over to Varun, let me quickly go over our disclaimers. On today's call, we provide you with information regarding our third quarter performance as well as our financial outlook. This conference call includes forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions we mentioned today. We encourage you to consider the risk factors contained in our SEC filings for a detailed discussion of these risks and uncertainties. We undertake no obligation to update these statements as a result of new information or further events, except as required by law. This call is being broadcast online and is accessible on our Investor Relations website. A recording of the call will be posted later today. Our commentary today will also include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings release issued earlier today, as well as in our filings with the SEC. And with that, I'll turn things over to Varun Krishna to get us started. Varun? Varun Krishna: Good afternoon, everyone, and thank you for joining our third quarter 2025 earnings call. Today, I'll walk through 4 key areas: Third quarter results, continuing progress on AI, integration with Redfin and Mr. Cooper, and finally, the new Rocket we're building for the future. The third quarter was a defining moment for Rocket, and I am so proud of our team. We gained market share, we beat our adjusted revenue guidance, and we brought 3 public companies together. This performance reflects our ability to balance short- and long-term execution. You know a company and a team are special when they don't take their eye off the ball while still dreaming big. Only the best can deliver today while shaping tomorrow, and this team proves it every single day. Let's start with our Q3 execution in the context of the market. We operate in a complex housing environment. Affordability is slowly improving as rates ease. In the third quarter, the 30-year fixed rate dropped by 40 basis points to 6.3%, giving those buying and refinancing some much-needed rate relief. Home price growth also continued to moderate, slowing to 3.1% year-over-year in Q3, down from 5.5% in January. These trends signal a purchase market that's beginning to thaw, but that recovery still has a ways to go. Existing home sales continue to hover around 4 million units, putting 2025 on track to be the slowest year for existing home sales since 1995. Despite this, people want to buy homes. That pent-up demand is very real. Buyers are watching the market closely, they're waiting for clear signals and increased affordability before making their move. The true measure of a company is its ability to grow in a challenging market. Rocket's Q3 results demonstrate exactly that. We delivered $1.783 billion in adjusted revenue, exceeding the high end of our guidance. We generated $36 billion in net rate lock volume, up 26% over the second quarter and $32 billion in closed loan volume, up 11% over the second quarter. We gained market share in both purchase and refinance. And in fact, Q3 was our strongest purchase and refinanced quarter in the last 3 years. Gain on sale margin remained stable sequentially. Adjusted EBITDA reached $349 million, expanding margins to 20% from 13% in the prior quarter. Adjusted diluted EPS came in at $0.07. Our guidance beat was driven by a surge in refinance activity as rates move lower and our execution that drove our market share gains. Rocket's platform enables our team to shift into overdrive and capture market opportunities on a dime. We consistently gain market share when these opportunities arise. We also closed the Mr. Cooper transaction on October 1, and will consolidate their financials in the fourth quarter. Let me now turn to AI. The reason that we are so obsessed with this technology is because it helps us with every single aspect of our business. It helps us grow the top of the funnel. It helps us lift conversion rates. It helps us reduce production costs, and it helps us increase recapture. The Agentic era of AI has been particularly impactful. This quarter, we launched three AI agents that have changed the game. First, our Pipeline Manager Agent, ranks banker leads in real-time, highlights who to call next, and drafts custom texts based on past conversations to drive responses. Managing our massive and complex sales pipeline is critical. That's exactly what this agent helps our loan officers do using our own data and market knowledge to surface the right leads and engage them instantly. During the September refinance wave, this agent drove a 9-point jump in client follow-ups and a 10% lift in conversion for both daily credit pools and refinance applications directly increasing locked loan volume. Second, we deployed a purchase agreement review agent, previously reviewing a single purchase agreement required more than 80 manual steps, ranging from extensive paperwork and data entry to countless validation and compliance checks. This agent cuts processing time by 80% and achieves accuracy that exceeds the legacy review process. This translates into more than 150,000 team member hours saved annually. Third, our Rocket Pro broker underwriting agent gives our mortgage broker partners speed and certainty. It verifies documents, checks e-sign compliance, confirms eligibility, and creates task summaries. What took 4 hours now happens in less than 15 minutes. What gets me excited is that we build each of these enterprise-grade agents in less than 3 weeks with some even going live the same day. This is thanks to proprietary technology. as we extend these tools across all our teams and partners, we expect the impact on capacity, conversion and volume to keep accelerating. This quarter was also significant as we began integrating 2 public companies into the Rocket family. The true value of these acquisitions lies in combining distinct strengths to create something greater than the sum of its parts. In a nutshell, Redfin brings a low-cost, high intent lead pipeline that enhances the top of our funnel, while Mr. Cooper adds an ongoing servicing revenue stream that expands our ability to drive recapture. Now recapture means turning servicing clients into repeat borrowers by proactively offering new loans when they're ready to refinance or purchase a new home. Combined, we now have relationships with approximately 60 million clients and prospects who are now part of the growing Rocket ecosystem. We've seen momentum accelerate 4 months into our integration with Redfin, giving homebuyers on Redfin the ability to get prequalified with Rocket is fueling engagement. In September, over 500,000 Redfin users started applications for home financing. That's more than double the number we saw in July. The combined power of Redfin and Rocket is driving Redfin's mortgage attach rate, defined as the percentage of Redfin buy-side clients who use Rocket Mortgage for their home purchase, from 27% to nearly 40%. Homebuyers are seeing the benefits, better matches with agents and loan officers, bundled pricing through Rocket preferred and a stronger mortgage platform offering for more products and greater scale. And the results speak for themselves. In September, 13% of Rocket Mortgage retail purchase closings came from clients who use both Redfin and Rocket. We expect this to only increase. Now let's talk about Mr. Cooper. We are combining the industry's largest servicer and the top originator to create a massive recapture engine. Making this integration a success has been a top focus for our team. We closed the transaction on schedule, and we were ready to hit the ground running from day 1. On October 1, we rolled out our co-branded identity, Mr. Cooper powered by Rocket Mortgage, and set the pace for everything that followed. Our servicing and origination platforms connected seamlessly, data and documents move smoothly between systems, no disruption, no hiccups for clients. On day 9, 40,000 leads for Mr. Cooper's servicing book flowed directly into the Rocket pipeline. By day 12, we closed our first Mr. Cooper client start to finish in just 3 days. And just this week, 400 Mr. Cooper loan officers are fully onboarded into Rocket Mortgage, leveraging our technology and tools to raise the bar for service. With a combined servicing portfolio nearing 10 million clients, we're now running the largest, most powerful recapture engine in the industry, fully integrated and delivering right here at Rocket. The recipe for success is simple. When you get the people right, strategy and solid execution follow. With a combined team across Rocket, Mr. Cooper and Redfin, we've got the best team in the business, bar none. This team represents experience, capability and the best track record on the planet. If there's one thing I hope you take away from today, it is simply this, that Rocket is in a category of one. Historically, our industry has operated in silos. Companies have typically been either originators, servicers or real estate companies, each focused on a narrow slice of the client experience. Rocket breaks that mold. We are not just one part of the process, we are all of them. We are a homeownership company, bringing end-to-end integration to housing at a scale the industry has never seen. Our platform is vertically integrated by design, powered by AI, and it represents the future of home buying. This platform also reflects a new type of business model. Traditionally, each of these business models, originator, servicer, real estate, has its own strengths and limitations. Servicers tend to excel in higher rate environments with predictable recurring cash flows that attract value investors. But growing and replenishing mortgage servicing rights often require significant capital. Origination companies shine when rates are low, capturing market growth, but they can struggle with volatility, high client acquisition and capacity costs. Real estate companies excel at attracting millions of consumers to the top of the funnel, but they often fall short on monetizing that traffic effectively, lacking a comprehensive monetization engine. So by bringing together Rocket, Mr. Cooper and Redfin, we've created something unique, one company solving the industry's most complex challenges in three transformative ways. First, we've built a business model that thrives in any interest rate environment. When rates rise, our servicing portfolio, the largest in the industry delivers stable, recurring cash flow and increased value in our mortgage servicing rights. And when rates fall, portions of our portfolio become eligible for recapture, generating significant refinance and purchase opportunities. Meanwhile, our origination business continually replenishes and strengthens our servicing pipeline. Second, we've cracked the code on unit economics by transforming how we acquire clients and manage capacity through the combined lead funnel of Redfin, Rocket and our servicing book, we attract high intent clients at scale and we do it efficiently. Our AI-powered tools further amplify our impact unlocking team member capacity, so our team members can serve more clients with greater efficiency, driving higher client lifetime value and a better, faster experience. And finally, speaking of clients, what matters most is the consumer. Everything we build, every integration we pursue centers on delivering for our clients. When we execute on this vision, our brand comes to stand for speed, certainty and low rates in fees. That is the new Rocket. We take care of every client, every time, which earns us lifetime value and the privilege of being their lender for life. We are setting a new standard for homeownership and the journey is just beginning. And with that, I'll turn things over to Brian. Brian Brown: Thank you, Varun, and good afternoon, everyone. We are executing with focus and intensity at Rocket, and I'm excited to share our progress with you today. I'll recap our third quarter performance, provide updates on the Redfin and Mr. Cooper integrations, and discuss how the Rocket business model is transforming. Finally, I'll conclude with our outlook for the fourth quarter. Q3 was a standout quarter for Rocket. We delivered strong operating results while moving full speed ahead on the Redfin integration and completing the largest acquisition in our industry, right on schedule. And even though we're just 30 days into the Mr. Cooper integration, we're already seeing the kind of traction that gives us tremendous confidence in what's ahead. Let's start with our third quarter results. Adjusted revenue was $1.783 billion, exceeding the high end of our guidance range. Net rate lock volume totaled $36 billion, up 26% quarter-over-quarter and 20% year-over-year. This growth outpaced the broader market in both purchase and refinance, resulting in market share gains and our largest purchase and refinance quarter in over 3 years. Gain on sale margins remained healthy, coming in at 280 basis points, right in line with the previous quarter. Redfin revenue performed in line with expectations. Total expenses for the quarter came in at $1.789 billion, up $450 million from the second quarter, driven by 3 factors: one, the inclusion of Redfin's expense base; two, higher variable costs tied to the increase in production; and finally, roughly $90 million in onetime costs. We delivered $349 million in adjusted EBITDA or a 20% adjusted EBITDA margin. We reported adjusted net income of $158 million and adjusted diluted EPS came in at $0.07. All of this took place against the backdrop of a housing environment and the third year of a gradual recovery. As Varun shared, when the going gets tough, the strong standout. And the results of this quarter are clear proof of that. The third quarter began with the 30-year fixed rate at approximately 6.7% in early July, easing to 6.5% by early September. During a 2-week period in September, ahead of the Fed's first rate cut of the year, the 30-year fixed edged down another 20 basis points to reach 6.3%. This favorable rate move sparked a surge in our refinance volumes. We moved swiftly to capitalize on this opportunity, leveraging AI tools that enable us to rapidly scale up our capacity. This execution drove our outperformance and market share gains. For those of you that have followed Rocket for a while, this shouldn't be a surprise. We have a track record of outpacing our competition during market shifts. It's also worth noting that our home equity product continued its momentum, doubling year-over-year. And on the purchase side, the third quarter marked our strongest performance in over 3 years, as Redfin is already contributing meaningfully to our retail channel. Redfin's source purchase closings make up 13% of our direct-to-consumer purchase closings today, and that's a number we're excited to keep growing. Now I'd like to provide an update on our capital position. In June, we proactively issued $4 billion of unsecured notes in anticipation of refinancing Mr. Cooper's unsecured debt and pay down of existing MSR debt. Upon closing, $3 billion of Mr. Cooper's legacy unsecured notes were refinanced with the proceeds from that issuance while the remaining $2 billion were refinanced through an exchange offer. Importantly, the total combined corporate debt balance remains unchanged with a simplified capital structure. In addition, we upsized our revolving credit facility from $1.150 billion to $2.300 billion, further enhancing our liquidity profile. As of October 1, inclusive of Mr. Cooper, Rocket Companies pro forma available cash was approximately $4 billion, and total liquidity stood at approximately $11 billion. Next, let me highlight the progress we're making with the Redfin. Our integration is exceeding expectations and showing strong momentum. Redfin's robust lead funnel of nearly 50 million MAUs, the related mortgage experience and the real estate brokerage are now fully integrated with Rocket Mortgage. Since launching in July, we've seen the number of Redfin users going directly to home financing through the get prequalified button more than double, surpassing 0.5 million by September. Mortgage attach rates, which are the primary driver of revenue synergies, have climbed from 27% to 40% today, that's ahead of our goal in just the first 4 months since closing, and puts us well on the way to hit our 50% target attachment rate. The feedback from Redfin agents has been extremely positive in the months since closing, and the power of the Rocket preferred pricing bundle is helping to drive up those attach rates. These early results reinforce our confidence in achieving $60 million of revenue synergies over the course of 2026, with full run rate realization expected in 2027. And on the expense side, I'm pleased to share that we have already executed the majority of our $140 million annual expense synergy as measured against Redfin's Q1 2025 cost structure. We realized a portion of these savings in the third quarter, and we expect to see the full run rate benefit in the fourth quarter results. Turning now to the Mr. Cooper integration. Our planning began well before day 1, and executing a seamless integration remains our top priority. For six months, leading up to our October 1 close, our leaders and integration teams from both organizations work side by side to ensure we're ready to hit the ground running. To lead this process, we tapped Kurt Johnson, Mr. Cooper's former CFO. Kurt is a seasoned leader with deep industry expertise and a proven track record of managing large complex integrations. We are fortunate to have him guiding these efforts. The integration connects Mr. Cooper's servicing portfolio directly into Rocket's recapture engine. Rocket Mortgage and Mr. Cooper loan officers are working side by side and have access to a massive lead pipeline and deep client insights. Just 30 days in, we're already seeing strong momentum in an increased conversion on Mr. Cooper's servicing portfolio leads. While more work remains, we are even more confident in our ability to capture the full value of our planned synergies. With those integrations underway, let me take a step back and look at how Rocket's business model is transforming. This is a stronger rocket, a company in a category of one. By combining Redfin's broad real estate consumer reach, Rocket's origination engine, and Mr. Cooper's servicing expertise, we have unified three industry leaders to unlock even greater potential at scale. Rocket has a more durable business model grounded in three pillars: Stability through recurring cash flow, a larger platform for growth, and a cost advantage that creates sustainable operating leverage and superior unit economics. First, our combined servicing portfolio, the largest in the industry, generates $5 billion in stable recurring annual cash flow, providing a dependable earnings base in any environment. Origination and servicing naturally offset each other as rates move. Lower rates drive origination, while higher rates increase MSR value, stabilizing earnings. Even in the toughest mortgage market in decades, a combined Rocket and Mr. Cooper would have delivered positive GAAP earnings every quarter from early 2023, through the third quarter of 2025, on a pro forma basis. This shows our resilience through cycles. Second, our opportunity for origination growth is even bigger. Redfin and Rocket together have the industry's largest purchase funnel, 62 million monthly active visitors, reaching 1 in 5 prospective homebuyers. We have a robust recapture engine tied to our servicing portfolio of nearly 10 million homeowners. Recapture means turning servicing clients into repeat borrowers by proactively offering new loans when they are ready to refinance or move. With advanced data and AI, we target the right client at the right time. Rocket's recapture rate is 3x the industry average. Here's an example. If the 30-year fixed rate falls to 5.5%, 25% of our servicing portfolio or about $300 billion in unpaid principal would be positioned to refinance, representing significant growth potential and all at a very low cost of acquisition resulting in strong operating margins. Third, we have a clear cost advantage in both origination and servicing. Historically, the bulk of origination expenses come from client acquisition and supporting production capacity. By leveraging Redfin's MAUs, Rocket's brand, and our servicing recapture capabilities, we efficiently attract high intent clients at scale. Our AI-powered platform further expands our lead funnel and improves conversion, driving even greater efficiency. AI unlocks capacity of our production team members so that we can grow origination while keeping fixed costs flat. Every loan requires a licensed loan officer and a licensed underwriter. With AI, our production team members can now handle 63% more loans than they could just 2 years ago. We're building the foundation for infinite capacity at Rocket, allowing us to scale without limits and pursue growth unconstrained by human capacity. As we scale, our structural advantages and client acquisition and capacity provide sustainable operating leverage. Once fixed costs are covered, 70% of additional revenue goes to EBITDA, supporting further margin expansion. In servicing, Mr. Cooper operated at a cost to service roughly 1/3 lower than the industry average. With our larger combined service portfolio, focused on recapture and low servicing costs, we are optimizing the strengths of both companies. With this new Rocket, we define our own future, and a resilient business model thrives in any market environment. Looking ahead to the fourth quarter, Q4 will be the first quarter that both Mr. Cooper and Redfin are fully consolidated into our operating results. We expect adjusted revenue, inclusive of these acquisitions, to range between $2.100 billion and $2.300 billion. On a Rocket stand-alone basis, excluding Mr. Cooper and Redfin, we expect adjusted revenue at the midpoint of the range to be up roughly 7% year-over-year. This guidance reflects our expectation for continued market share gains and the typical seasonality we experienced in the fourth quarter with softer housing activity and slower mortgage demand during the holidays. As always, our forward-looking guidance reflects the latest market data in our current visibility. Now switching to expenses. On a consolidated basis, including Redfin and Mr. Cooper, we expect total expenses of approximately $2.300 billion. This figure includes $140 million of onetime transaction-related costs and $120 million of new amortization of intangible assets associated with the Redfin and Mr. Cooper acquisitions. Excluding these items, underlying expenses are expected to be roughly $2 billion in the fourth quarter. This expense guidance includes $215 million of interest expense related to unsecured debt in MSR facilities. To wrap up, we are executing at a high level. Integrations are on track. Our teams are focused and we're delivering results. We are well positioned to finish the year strong and carry this momentum into the New Year. Rocket's future is bright, and we are in control of our destiny. With our AI-powered vertically integrated homeownership platform, we're setting a new standard for homeownership in America, helping everyone home in driving long-term shareholder value. Operator, we are now ready to open it up for questions. Operator: [Operator Instructions] Your first question comes from the line of Jeff Adelson from Morgan Stanley. Jeffrey Adelson: I guess just maybe to dig in on the revenue guidance a little bit more closely here, appreciate the breakout of what the ex-Redfin, Cooper guide would look like up 7%. At the midpoint, I guess just a couple of questions there. Could you maybe help us understand how the core ex-Redfin, Cooper, what's trending this past quarter and how that relates to the 7% at the midpoint for the fourth quarter? And maybe just what's embedded in your outlook for the Cooper and Redfin business in the fourth quarter as well. And then as you think about the momentum you're highlighting from all the businesses and the Cooper transaction so far, how are you thinking about the 2026 outlook as it relates to the market and the combined entity today? Varun Krishna: Jeff, thanks for your question. So let me start with just a little bit on Q4, and then I'll comment on the outlook for '26, and then Brian is going to unpack just some specifics on our guide for Q4. So just as a reminder, obviously, we're in Q4, but as always, historically in Q4 in the mortgage market, it's a little bit softer traditionally, and that's just for some basic reasons. You've got fewer working days. You've got Thanksgiving, Christmas, New Year's and the holidays, and consumers in general are just not as focused on the housing market. But the great news is that even with that seasonality taken into account, our purchase pipeline is at record levels. And so that gives us a lot of confidence in the quarter, which is reflected in our guide. And again, Brian will unpack that in just a minute on why that guide is not just strong, but it also reflects taking share. But what gets me pumped up about 2026 is that when we look ahead, we think it's going to be a very strong year for Rocket. And what gives us confidence, in particular, is when you look at like the Fannie Mae forecast, they're expecting the market to grow 25% year-over-year. And there's also some forecast that has rates potentially dipping below 6%. And I think as you know, that is a great thing for Rocket when you consider both the purchase and the refinance funnels that we have at scale. And that's a stand-alone observation. So what's particularly interesting is when you look at Rocket with Redfin, with Mr. Cooper, all of this becomes force multiplied because you have significantly improved lead flow, you have this recapture pipeline between origination and servicing, and you also have these new revenue streams. So we feel very excited about 2026. We see our momentum just continuing to accelerate. But just coming back to Q4, Brian, maybe you can unpack the quarter in some more detail. Brian Brown: Yes, sure, happy to do it. Jeff, thanks for the question. Good to hear from you. Let me actually start a little bit with Q3 and build on that because I think that will help understand the transition from Q3 to the outlook. But the third quarter was really strong. Obviously, you heard the numbers, we did great on a revenue perspective, but I'm actually more impressed with the share gains in the third quarter. We got a little help in the month of September from rates. There's no surprise there. But the good news is we capitalized on that, and we took share using AI and technology. So we believe that the fourth quarter was one of our biggest share gains. So looking forward to the fourth quarter, Varun mentioned it, but we do expect some of that traditional seasonality to come through, particularly the week around Thanksgiving and the two weeks around the Christmas holiday, consumers get distracted. When I look at some of the mortgage forecasts in the fourth quarter, I see some that have it about flat with Q3, some that have Q4 actually up. And that's just not normally what we see. So that's probably worth pointing out. Even on the purchase side, it kind of makes sense because consumers aren't necessarily looking for homes during those times, but even on the -- I'd argue on the rate and churn and cash outside, consumers are just focused on other priorities. So the range, as we said, was $2.100 billion to $2.300 billion. And just a little color, Jeff, on October. The purchase pipeline that we have that Varun mentioned is at record highs, and Redfin is starting to contribute to that in a meaningful way. About 13% of our purchase pipeline today is generated from Redfin clients, clients that were searching for homes on Redfin and looking to connect with the real estate agent and then connect to mortgage. So that gives us a lot of excitement there as you can see that synergy value starting to transpire. And then when I look at the refi side in the month of October, the beginning of the quarter started really nice from rates. Obviously, the Fed meeting didn't necessarily help yesterday. So there's more to be seen. But the thing I look forward to is on the Cooper side. As we mentioned, we are starting to work the servicing portfolio of Mr. Cooper on the Rocket platform, and we're starting to see a really nice conversion lift there. And I mentioned this in the prepared remarks, but to give you a little more transparency on Rocket on a stand-alone basis, if I look at Q3 Rocket only, the results would be up 14% year-over-year. And if I take the midpoint of the guide in Q4, that's 7% up year-over-year. So look, we think both the jumping off point of Q3 is really impressive, and we think the Q4 guide is very strong and incorporates market share gains. Operator: Your next question comes from the line of Mihir Bhatia from Bank of America. Mihir Bhatia: Maybe just going to the Mr. Cooper acquisition. Can you just talk a little bit more about the confidence and timing of the synergies associated, maybe both on the revenue and cost side? And then while you're on that note also just in terms of the OpEx for Q4, just a stand-alone Rocket OpEx or just to be able to track that. Varun Krishna: Thanks, Mihir. So I think we'll jump into the synergies in a minute, but I think it probably -- maybe it would be helpful for me to just give a general integration progress update as well. So I'll start there. So look, we closed the deal on October 1. And this deal was transformational, not just for Rocket, but we think for the housing industry itself. It's the first time that origination and servicing have ever been connected at this scale. And the combined companies have a balanced business model, as we shared earlier, to thrive in any market and rate environment. And so we've been executing pretty strongly right out of the gate, very similar to the Redfin acquisition. And it is a large integration, but we've made pretty significant progress. And I just want to give you a few highlights. Day 1, we had a co-branded identity, Mr. Cooper powered by Rocket Mortgage. By day 9, 40,000 leads were flowing through our pipeline from the Mr. Cooper servicing book, and that number only continues to increase. Day 12, we had our first Mr. Cooper client close a loan with Rocket Mortgage, and the turn time on that was unbelievable, it was 3 days. And just within 30 days now, we've integrated the servicing and origination platforms. We've onboarded our loan officers and mortgage bankers and we've had zero client disruption. And so with an acquisition of this scale, that's something that we're very proud of. And look, there is obviously a lot of hard and fun work ahead, and we're taking it seriously. Right now, we're focused on the system integrations, the data integrations, the culture integrations. But the good news is this is what we do. And it's why we're good at what we do and what we do best. So the teams are clicking very well. The leadership is deeply integrated. The culture is already starting to feel very strong. And that gives me a lot of confidence in our synergy and our goal targets. And so we're very pleased with the progress thus far. And that's probably a good time, Brian for maybe to go a little deeper on to the synergies. Brian Brown: Yes. Thanks, Mihir. I mean, I think you said it well. On the Cooper side, Mihir, the only thing I'd add is the work, Varun mentioned, around the pre-closed planning is really key to hitting those synergy numbers. And we talked about $500 million in total synergies, $400 million is expenses and $100 million is revenue. And you can see all that laid out in the IR deck. But I mean I'd tell you at this point, I'm happy to report that we have line of sight to the $400 million of expenses, and that's been identified. Probably just on the revenue side, what I can say is just take you back to those comments about the lead flow to the Rocket platform from the Cooper servicing book and the increase in conversion there, that really will translate to the enhanced blended recapture rate that will drive those revenue synergies. So we feel really good. It's early days. We're only a month in, but we feel really good. And just, Mihir, to make sure you caught the comment, I can go more into the expenses as well. But on the Redfin side of the house, we talked about $140 million of synergy numbers, and that is all identified and will be realized in the fourth quarter. So you're talking about $35 million of full quarter realization in Q3. If I just kind of zoom back out, excuse me, in Q4, Mihir. But if I kind of zoom back out just to give you color on expenses, we said we expect Q4 to be about $2 billion, that's all three companies combined, and that's net of onetime costs and the purchase price amortization. There's probably a couple of call outs for you as you're thinking about your models. In Q4, I have about $140 million of onetime expenses. These are things like severance and deal-related expenses. That compares to about $90 million in Q3. And then remember, the other thing to think about is this purchase price accounting amortization. In the fourth quarter, I expect it to be about $120 million, that's the amortization of both Redfin and Mr. Cooper. That was $50 million in Q3, which was just the amortization around Redfin. And the last thing, just in terms of unique items, remember, in June, we issued about $4 billion of additional debt, and that was in anticipation from triggering the change of control provisions on Cooper's unsecured debt stack. So for about 4 months, which was all of Q3, you had $4 billion of additional unsecured debt, and you have that cash. So the net expense, which is essentially the difference from your earnings rate on the cash and the note rates, the interest expense on the debt was about $10 million. That will all go away in Q4. And just to give you a little more color, I expect about $140 million of unsecured debt expense sort of on a run rate go-forward basis, that will come through in Q4. But I think the important takeaways are, look, we continue to be very disciplined on the expense side of the house. We are focused on realizing our synergy values and now even exceeding those, and that's even before AI and technology really unlocking capacity and efficiency for us. Operator: Your next question comes from the line of Doug Harter from UBS. Douglas Harter: I was hoping to talk a little bit more about the revenue progress at Redfin. Can you talk about what you see as kind of what's going to be the driver to get from the 40% attach rate to kind of the target 50% that you had? And whether that's -- I guess, first, whether that 40% was kind of the exit rate for the quarter or the full quarter average. Varun Krishna: Yes. Maybe I can use this opportunity, Doug, just to give a quick overall update on Redfin, and then we can dive into some of the specifics. So I think it's important to highlight that it's just been a fast 4 months since closing, and I'm very, very pleased with the execution. We've got momentum. We're building fast. And a few things that I would just highlight on the execution progress that drive just revenue and client growth. First thing is, we've added a prequalification experience and a funnel to every listing on Redfin. So that's millions of access points that represent every single home listing that's on Redfin. And because of that integration, because of the optimization, the number of clients that actually have started applications using that access point that get prequalified button has doubled. So about 0.5 million clients have started applications in September, and that's doubled since July, where it was around $0.25 million. And what's great about that is, this is the start of what we think is a very performance funnel. So that is the top of the funnel. It's obviously very big. But as you take that funnel down, it represents leads that we can nurture, right? Those are clients that we have long relationships with, not just in days or weeks, but really over months because that's typically how the purchase pipeline works. And what's also important to call out is that Redfin is becoming a very big part of Rocket's purchase pipeline. It's already contributing to 13% of our total retail purchase closings. And for a company of Rocket size and scale, it's obviously a very significant number, and we expect that to grow. And then as you pointed out, we also have our mortgage attach rate, which we talked about, and that's basically Redfin clients that choose to work with Rocket via a Redfin agent. And that's climbed from 27% to 40%, which is ahead of our plan, and we expect to see that continuing to grow. And we think that that's going to exceed expectations. And there are really 2 things that are driving that. The first one is the strength of the integrated brand, Redfin powered by Rocket. And the second is we have a very compelling bundle that's competitively priced, and that's unique to the Rocket-Redfin ecosystem, and it delivers value to clients, and it's something that our agents really like. And what's exciting for me is that moving forward, this is just a lot of progress in a very short period of time. We've only been doing this for 4 months. And we think about next year, we want to blow the doors off this, right? We want to add the refinance funnel into our Redfin ecosystem. We want to take more of the mortgage application process and bring it up into the Redfin app so you can start and finish inside of the Redfin experience. And so we think that, that's going to increase opportunity. We think that, that's going to optimize the funnel and we have a lot of room to grow there. And then lastly, I think similar to Mr. Cooper, strategy is one thing, but these integrations are also really about cultural integration as well. And I'm really pleased with just how well the leadership teams are working together. You just can't tell where one company starts and the other company finishes. Culture is strong, engagement is high, the agents and team members are very engaged. And that just gives me a lot of confidence in what we're going to do next year. So in summary, we've made pretty solid progress in four months, but I really think that's a drop in the bucket compared to what's ahead in '26. Douglas Harter: I guess, Varun, on the top of the funnel, the number of leads that are kind of going through the prequel, I guess are you seeing -- or do you have any data as to like how those are moving through or some falling out and going to competitors or the ones that are falling out just because they're not -- they haven't actually transacted on a home yet. Just any more color on kind of how that -- how leads are moving through that funnel would be helpful. Brian Brown: I mean, Doug, it's typical to, I would say, a regular mortgage funnel where -- I mean, the thing we know is happening today in the home buying world is that there's a lot of intent, but the time to buy is extended when we compare to historical periods. We're seeing the same thing as Redfin is we're seeing the same thing in Rocket stand-alone, which is you have consumers coming in, they have high intent. By the time they're ready to get prequalified, that means they either have started searching in a lot of cases, they're about to start searching for the home, they want to know how much they can afford and they want to be serious about it. So we see them go take the exercise to get preapproved, and then they're in our pipeline, and we start nurturing them. But we also know that in most cases, they're not getting the home, the first home they find and the first offer they make, at least in a lot of the geographies, and we also know that sometimes what they get qualified for isn't quite as exciting as they might have thought just given where interest rates and inventory are. So I wouldn't necessarily call it fall out. I would call it just clients that are very interested. They find out how much they can afford. They begin their shopping experience, but that shopping and looking experience for home is definitely in an extended period, at least compared to historical levels. Operator: Your next question comes from the line of Bose George from KBW. Bose George: Actually, can you give us an update on how you're feeling about the market share targets that you provided last year at Investor Day? And then can you also remind us, is the Cooper market share going to be additive to that? Varun Krishna: Thank you for the question, Bose. So I'll comment on our growth targets in purchase and refinance, and Brian, feel free to jump in. So I mean, in short, we feel really good about our growth targets. We talk a lot about refinance, and that's obviously something that we're very good at. But let me just drill down on purchase in particular because that is a newly declared durable growth lever for the future of our company. And so over the past 2 years, we've been very consistent around our message around transforming our company, to make purchase something that is durable for the long term. And when you think about Mr. Cooper and Redfin joining Rocket, we obviously expect that progress to accelerate. And we have basically three very simple building blocks around how we're going to win and purchase. I think the first one is, you have to have a strong top of the funnel as we talked about earlier. And that's really what Redfin represents. 50 million monthly homebuyers, thousands of local agents. And what's great about Redfin is just the quality of the traffic. Many of those consumers are higher intent, more serious home buyers that use the app every single day. Redfin has the highest weekly to monthly app engagement ratio in that space. And so that represents not just the lead flow. But as Brian shared earlier, it's a pipeline of clients that you can nurture over days, weeks and months, which is the nature of purchase. And then the second building block is the actual funnel itself. And that's where artificial intelligence and automation are so significant to us because we can nurture leads in a low-cost manner. We can improve conversion. We can automate every single part of the experience to make it more efficient, more personalized. We can have better underwriting, better pipeline management, and we could just make the whole experience faster and more accurate. And as a result, we can pass on that savings and value to the client in the form of lower rates, lower fees, and faster turn times. And then the third building block, which we're really excited about is the power of our servicing portfolio. And that is something that is a big unlock for us. With Mr. Cooper, when you have 10 million clients in your servicing portfolio, that is effectively a prebuilt pipeline of high intent buyers that trust Rocket. And the best part of this is when you consider the macro environment, these are the types of clients that are most likely to participate in a purchase, especially in today's housing climate, because they're either a move-up buyer or they're going through a life change. And so we expect a lot of that pipeline and client base to be where these purchase transactions happen, and we have an advantage because we have a relationship with those clients. So these three building blocks are critical to our purchase, but they're also very unique to Rocket and Rocket only. And so when you put them together, we're pretty confident that it's a growth engine for purchase market share. And then coming back, not just for purchase but also for refinance because as rates inevitably change, we can harvest that same lead funnel to drive automated personalized refinance activity as well. So we feel very confident. We're on track to achieve our goals. And these acquisitions and the client distribution they represent, just give us more leverage points to achieve this. And I think the best part is that is agnostic of any potential market tailwinds in like potential rate relief. And so if you add those dynamics and those tailwinds, it just boosts our confidence in achieving and exceeding our market share goals. Bose George: Okay. Great. And just to clarify, so will the Cooper share be sort of incremental to the numbers that you provided earlier? Brian Brown: Yes. Thanks, Bose. We're going to come back out in the coming quarters and talk a little bit about the revision around the market share goals after the acquisitions. But right now, our focus is integration, achieving synergy numbers, and we'll have more to report there later. Operator: Your next question comes from the line of Terry Ma from Barclays. Terry Ma: Do you guys have any more color on the 20% servicing cap from the FHFA and what that pertains to? And if it is on total servicing, can you maybe just talk about how that changes, how you think about the overall business? Brian Brown: Yes. Thanks, Terry. I'll take that one. So I think, first of all, for the group, it's important to understand that caps are not unusual in our industry, particularly when they result from acquisitions, and they can change over time. The regulators want to see a couple of things. They are very focused on the integration and making sure you take care of the consumer. And then, of course, capital and liquidity levels are king. So they want to see that you maintain the appropriate capital and liquidity levels. And the agreements between the GSEs and the counterparties or firms like us are confidential. But what I can tell you is that since the deal was announced in March, we've had really productive conversations with the GSEs and FHFA. And our capital and liquidity levels are well beyond the required standards. So we believe that the current agreement gives us sufficient room to grow and achieve and even exceed our synergy target. So in summary, I'd just say it's not something we're worried about. Operator: Your next question comes from the line of Ryan McKeveny from Zelman. Ryan McKeveny: Congrats on the results and on closing the Cooper deal. On the technology and AI initiatives, encouraging to hear the updates on the three AI agent -- examples you gave and the benefits of those. I think each of those were origination related. I guess now that Cooper has closed and the size of the servicing book has meaningfully expanded, can you talk about the technology and AI strategy more broadly? How that can play into the servicing side of the business as well to provide productivity, efficiency, cost savings? Obviously, you've given a lot of updates on the origination benefits, but hoping you could maybe speak to the servicing side as well. Varun Krishna: Yes. Thanks for the question, Ryan. This is an area that we are incredibly excited about. And I would go as far as to say the future of servicing is Agentic AI. And when you think about the use cases in servicing, a lot of it has to do with helping clients solve meaningful problems but also handling simple tasks and automation that drive day-to-day efficiency. So when you think about things like managing your payments, handling things like forbearance, property taxes, dealing with issues, escalations, those are all things that we have significant opportunities to automate, personalize and add value with AI. And one of the things that I think is particularly exciting is that there's just a lot of technology evolution in the space. One of the things that we have recently done is we partnered with a company called Sierra. And Sierra is an AI-first company that builds native, fully automated digital assistance. And this is an opportunity for us to really drive massive innovation in the servicing space, not just an agent that can handle those day-to-day tasks and issues, the one that can anticipate things that may come down the line, one that can give advice to clients to help them manage their future, one that's available 24/7. And so the great thing about this is, we think that the space is going through a pretty dramatic evolution. We're betting very big on technology here. And the thing that's important for us is that we care very deeply about owning and building our own technology. And so our servicing technology is proprietary. We have deep vertical integrations. They're built around data, and we're going to continue to evolve that with the expanded client base that we get with Mr. Cooper. And then when we partner, we're very selective with who we partner, and we picked an example like Sierra because they are born of the kind of the AI world. And so lots of opportunity here, I think, for us to really transform the way servicing works from the ground up, and this is a big area of focus for us. Operator: And your final question comes from the line of Mark DeVries from Deutsche Bank. Mark DeVries: Sticking with AI theme, I was hoping you could drill down on some of the benefits you got from the investments you made in responding to the big surge in demand you saw in September and on a go-forward basis, how you're thinking about the real benefits you'll drive, whether it's just faster return times, higher efficiencies and anything else? Brian Brown: Yes, Mark, I can start on that one. I think particularly during that September window, like I said, it was a really nice case study because the thing I think people don't think about is you think about, hey, you have to have capacity to underwrite process and close loans. And there's no question that some of the AI initiatives have made a big impact to us there. But on the loan office or the mortgage banker side, I would say equal, if not bigger impact because when you have those rate surges, you get an influx of clients coming into the pipeline. And so being able to interact with those clients through digital chat experiences where the relationship is not one to one, like a client on the phone really increases your capacity. Also leveraging AI to collect documents and follow-up items that traditionally loan officers and mortgage bankers would be doing in the time where they really should be understanding the client situation and helping them understand how they can save money on a rate and term refinance could be a distraction from the actual revenue generation opportunities. So I think when I look at traditional mortgage companies and they have inbound leads coming, the only way they can do them is pick up the phone and work longer hours. When I think about how Rocket can handle them with the digital experiences, particularly on chat, interacting through our website in messenger, and then when we actually are making phone contact with the client, knowing that, that client is high intent, knowing that, that client, in some cases, has already provided some information so we can let the loan officers do what they do best. Those are the things that not only increase the capacity of the business, but in a meaningful way, also increases the efficiency of the business. Operator: And that concludes our question-and-answer session. I will now turn the call back over to Varun Krishna for some final closing remarks. Varun Krishna: Well, thank you, everyone, for listening to the call today, and we look forward to seeing you in the New Year. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the OneSpan Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Joe Maxa, Vice President of Investor Relations. Please go ahead. Joe Maxa: Thank you, operator. Hello, everyone, and thank you for joining the OneSpan Third Quarter 2025 Earnings Conference Call. This call is being webcast and can be accessed on the Investor Relations section of OneSpan's website at investors.onespan.com. Joining me on the call today is Victor Limongelli, our Chief Executive Officer; and Jorge Martell, our Chief Financial Officer. This afternoon, after market closed, OneSpan issued a press release announcing results for our third quarter 2025. To access a copy of the press release and other investor information, please visit our website. Following our prepared comments today, we will open the call for questions. Please note that statements made during this conference call that relate to future plans, events or performance, including the outlook for full year 2025 and other long-term financial targets are forward-looking statements. These statements involve risks and uncertainties and are based on current assumptions. Consequently, actual results could differ materially from the expectations expressed in these forward-looking statements. I direct your attention to today's press release and the company's filings with the U.S. Securities and Exchange Commission for a discussion of such risks and uncertainties. Also note that certain financial measures that may be discussed on this call are expressed on a non-GAAP basis and have been adjusted from a related GAAP financial measure. We have provided an explanation for and reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures in the earnings press release and in the investor presentation available on our website. In addition, please note that all growth rates discussed on this call refer to a year-over-year basis unless otherwise indicated. The date of this conference call is October 30, 2025. Any forward-looking statements and related assumptions are made as of this date. Except as required by law, we undertake no obligation to update these statements as a result of new information or future events or for any other reason. I will now turn the call over to Victor. Victor Limongelli: Thank you, Joe. Hello, everyone, and thank you for joining us today. Before turning to our results, I'd like to recap our progress in the transformation of OneSpan. 2024 was about fixing the cost structure of the business, ensuring that we could operate both business units in a profitable manner. The OneSpan team did a great job working through those challenges, and we entered this year in a much improved operating position. In fact, that improved operating position will enable us to return about $25 million to shareholders between dividends and buybacks by the end of this year. And in addition, we also completed an acquisition and made a strategic investment, all funded by cash generated by the business. In 2025, as we have discussed previously, has been about putting the pieces in place while continuing to operate with strong profitability to enable growth. It has been a remarkable year in that respect. Indeed, today, we announced that our software business, now over 80% of the overall business, delivered double-digit subscription revenue growth and ARR growth. Turning to the specific components that we've been putting in place to drive growth. First, right before the year started, we hired a new CTO, Ashish Jain, to lead our R&D efforts and improve our internal development efforts. Second, in June, we acquired Nok Nok, bringing the best FIDO2 software product called S3 to our portfolio. I'm happy to report that in the first 4 months since the acquisition, we've already closed 2 new logos for S3, both in the low 6-figure range, and we have built additional pipeline for Q4. We believe that there is a large opportunity in the coming years for S3 as FIDO2 becomes more widely adopted. Initially, we see the U.S. and Japan as the leading markets for FIDO2, but over the coming years, we expect Passkeys to become the standard around the world. Third, in October, we announced a strategic investment in and partnership with ThreatFabric to further enhance our value proposition to customers by offering mobile threat intelligence and fraud risk insights. We are in the midst of sales enablement so that our team can effectively sell the ThreatFabric products and are optimistic that those products will add to growth in 2026. Finally, you should not in any way consider OneSpan to be finished in our efforts to improve the value that we provide to customers, and hence, our growth prospects as a business. We are working on additional initiatives. While there might not be announcements each and every quarter, we will never be done improving our value proposition to customers, whether through internal development, through acquisitions or through strategic partnerships. And we expect these efforts to drive growth, particularly in our software business as we continue to work towards achieving a Rule of 40 performance. Turning to our results. I'm pleased with the team's efficiency, which drove another strong quarter of profitability and cash generation, including $17.5 million of adjusted EBITDA or 31% of revenue and $11 million in cash from operations. I'm especially proud that over the first 9 months of the year, we generated record adjusted EBITDA of $58 million, representing 32% of revenue and $47 million in cash from operations. We ended the quarter with annual recurring revenue of $180 million, up 10% year-over-year. In regards to revenue, we have seen strong bookings in certain regions, including our security business in North America, our Latin America business and the southern portion of our EMEA region. I'm also heartened by the progress in APAC. And our DA business grew subscription revenue by double digits. And as I mentioned a few minutes ago, we're encouraged by the progress we've seen with our new S3 product acquired as part of the Nok Nok deal. With respect to hardware, as we have discussed many times, there has been a long-term secular shift away from consumer banking tokens to the point that in the first 9 months of the year, hardware was less than 20% of our overall business. That trend is part of what drives us to broaden and strengthen our product offerings. In the quarter, total revenue grew 1% to $57 million, driven by double-digit organic subscription revenue growth. This growth was primarily offset by a reduction in security hardware revenue due to the shift described earlier in consumer banking strategies in EMEA and APAC, where banks continue adopting mobile-first authentication approaches. Subscription revenue grew 12%, led by 13% growth in security and 11% growth in digital agreements. The increase in security subscription revenue was driven by both cloud and on-prem authentication software, along with mobile app shielding software. Both business units remained solidly profitable at the segment level, with digital agreements delivering record high segment operating income. Security absorbed a modest cost impact from the Nok Nok business in Q3, although we expect it to be accretive to Security's operating income in Q4. As I mentioned earlier, we continue to generate significant cash from operations, $47 million in the first 9 months of the year, and we ended the third quarter with $86 million in cash on hand. In Q3, we used $6 million to repurchase shares of our common stock and combined with our quarterly dividend payments, we returned more than $20 million to shareholders in the first 9 months of 2025. We also used cash to make the strategic acquisition of Nok Nok and after the third quarter ended, to obtain a 15% equity stake in ThreatFabric. Our investment in ThreatFabric as well as our acquisition of Nok Nok in Q2 and our internal development efforts are designed to enhance our product portfolio and move faster to deliver great products that provide additional value to our customers. To that end, we will continue investing in internal R&D and pursuing targeted technology-driven investments with proven market fit to enhance our product portfolio. Our Board remains committed to a balanced capital allocation strategy weighing shareholder returns, organic investments and targeted M&A. Accordingly, the Board will consider additional share repurchases and has approved another $0.12 per share dividend to be paid in the current quarter. In summary, we're making solid progress in building the foundation for growth in our journey towards achieving Rule of 40 performance. At the same time, we remain committed to driving efficient revenue growth while maintaining strong profitability and cash generation and returning capital to shareholders. With that, I'll turn the call over to Jorge. Jorge Martell: Thank you, Victor, and good afternoon, everyone. I am pleased that we reported another strong quarter of adjusted EBITDA and cash generation and that we are making good progress in building our long-term growth foundation. Before I review our third quarter results, I want to remind you that our acquisition of Nok Nok Labs, which closed in June 2025, modestly contributed to our Q3 operating results this year, but did not contribute to the same period in 2024. ARR increased 10% to $180 million and NRR, our net retention rate increased sequentially to 103%. Third quarter revenue was $57.1 million, an increase of 1% compared to last year's Q3. Subscription revenue grew 12%, including 10% organically and was largely offset by the secular decline in our hardware token business, which is directly related to banks continuing with a mobile-first authentication approach and to a lesser extent, maintenance and professional services revenues. Third quarter gross margin was 74%, consistent with last year's Q3. GAAP operating income was $8.2 million compared to $11.3 million in Q3 of last year. The change in operating income primarily reflects an increase in operating expenses, including share-based compensation and other nonrecurring items, along with the expected dilution related to our acquisition of Nok Nok. As a reminder, we expect the acquisition of Nok Nok to be accretive to earnings in Q4 2025. GAAP net income per share was $0.17 as compared to $0.21 in the same period last year. Earlier this year, we made changes to our non-GAAP net income and non-GAAP net income per share reporting framework to better reflect our profitability trajectory and to ensure consistency across interim periods in 2025 and in future years. Please refer to our 2025 quarterly earnings releases and investor presentations for additional details. Non-GAAP earnings per share was $0.33 in both the third quarter of 2025 and 2024. This metric excludes long-term incentive compensation and related payroll taxes, amortization, restructuring charges and other nonrecurring items and the impact of tax adjustments. Adjusted EBITDA and adjusted EBITDA margin was $17.5 million and 30.7% compared to $17 million and 30.2% in the same period of last year. Turning to our cybersecurity business. ARR increased 11% to $115.5 million. Revenue decreased 1% to $40.3 million. Subscription revenue grew 13%, driven by cloud and on-prem authentication software, including a modest contribution from Nok Nok and app shielding software. This growth was offset by the expected decline in hardware revenue and to a lesser extent, maintenance and professional services revenues. Subscription revenue primarily benefited from expansion of licenses and to a lesser extent, new logos, the acquisition of Nok Nok and conversion of customer contracts to multiyear terms. Gross margin was 74.4%, similar to last year's third quarter gross margin of 74.7%. The change in gross margin was primarily driven by product mix. Operating income was $16.7 million or 41% of revenue compared to $20.2 million or 49% of revenue in the prior year quarter. The year-over-year change primarily reflects increased operating expenses related to the Nok Nok acquisition, higher share-based compensation and other nonrecurring expenses, such as advisory-related expenses. Turning to digital agreements. ARR grew 8% to $65 million. Revenue grew 9% to $16.7 million. New SaaS contracts, expansion of renewal contracts and an increase in onetime revenue was partially offset by reduced maintenance revenue from the sunsetting of our on-prem e-signature product. Subscription revenue grew 11% year-over-year to $16.7 million. Maintenance and support revenue was negligible compared to $0.3 million in Q3 of last year. The year-over-year decline is attributed to the sunsetting of our on-premise e-signature solution. As mentioned previously, we have substantially completed the transition to a SaaS business model in our digital agreements business. Gross margin was 72%, consistent with last year's third quarter. Segment operating income was $4.2 million or 25% of revenue compared to $3.4 million or 22% of revenue in Q3 of last year. The year-over-year increase in operating income was driven by increased revenue. Now turning to our balance sheet. We ended the quarter with $85.6 million in cash and cash equivalents compared to $92.9 million at the end of Q2 and $83.2 million at the end of 2024. We generated $11 million in operating cash flow during the quarter. Uses of cash in the quarter included $6.3 million to repurchase approximately 450,000 shares of common stock, $4.7 million to pay our quarterly cash dividend and $1.9 million deferred consideration payment related to our acquisition of Nok Nok among other items. We have no long-term debt as of the end of Q3 2025. Geographically, our revenue mix was 46% from the Americas, 38% from EMEA and 17% from APAC. This compares to 39%, 40% and 21%, respectively, in the third quarter of last year. The year-over-year changes by region were primarily driven by growth in the e-signature business and mobile application security in North America. The acquisition of Nok Nok in June 2025, which has its largest presence in North America, growth in hardware revenue in Latin America and a decline in hardware revenues in both Europe and Asia Pacific, consistent with mobile-first strength in those regions. Moving to some modeling notes on our financial outlook. We are very pleased with our Q3 profitability and cash generation and the progress we've made in positioning the company for long-term growth. As Victor mentioned, we are seeing strong bookings in most geographic regions, but have also seen challenges in some regions, largely due to the secular shift away from consumer banking hardware tokens. We are working hard to improve our sales momentum in all regions and believe the steps we have taken this year, combined with our continuous focus on improving the value proposition we provide to customers better positions us for stronger growth in future years. For the full year 2025, we are updating our revenue guidance to be in the range of $239 million to $241 million as compared to our previous guidance range of $245 million to $251 million. We expect software and services revenue to be in the range of $190 million to $192 million, representing an increase of between 3% and 4% in 2025. We also expect hardware revenue to be in the range of $49 million to $50 million, representing an approximately 16% decline from 2024. As Victor mentioned previously, OneSpan as a business is approximately 80% software and 20% hardware. We are updating our ARR guidance to be in the range of $183 million to $187 million, up from $180 million at the end of the third quarter and as compared to our previous guidance range of $186 million to $192 million. And we are maintaining our adjusted EBITDA guidance in the range of $72 million to $76 million. That concludes my remarks. I will now turn the call over to Victor. Victor Limongelli: Thanks, Jorge. To recap, we are making progress in strengthening our foundation for long-term growth while continuing to deliver strong profitability and cash generation and returning capital to shareholders. We are working hard to deliver greater value to our customers and to create value for our shareholders. Jorge and I will now be happy to take your questions. Operator: [Operator Instructions] Our first question comes from the line of Anja Soderstrom with Sidoti. Anja Soderstrom: I'm just curious, what do you think now compared to last quarter that leads you to scale back on the revenue and ARR guidance? If you can just double click on that a bit more. Jorge Martell: Okay. Anja, can you -- sorry, you were -- there were some feedback. So can you repeat your question for me? Anja Soderstrom: Yes. Can you just sort of double-click on the -- on what you're seeing now compared to last quarter that leads you to scale back on the revenue and ARR guidance for the year? Jorge Martell: Yes. I can start and then Vicky, if you want to chime in as well. So there's a couple of things, Anja. First is we saw a little bit of a higher headwinds with respect to our hardware business, about a couple of million dollars. And I think the other large component was on the security business specifically, we saw lower activity with respect to net expansions and new logos, primarily net expansions as we have a large market share in our security business outside of North America. So I think EMEA and APAC have some of that, primarily EMEA. Now I think it's important to understand a couple of things. One is when we think about -- I'm getting some feedback. One is when you think about where we are with our guide, our updated guidance of, say, $240 million at the midpoint, that is modestly lower versus prior year, about 1% lower, Anja. And I think we need to take a step back in terms of understanding the position of the company is today versus what it was, say, 12 months ago. We've done a lot of good work, as Victor mentioned in his remarks, with respect to building the foundation for growth, the Nok Nok acquisition that we did, very, very good capabilities that we're adding to our product portfolio, the ThreatFabric strategic investment that we are very excited about as well. So we're looking at enhance -- we've been enhancing our product portfolio this year to deliver on that software. And it really -- when you think about what we've done is primarily on the software areas, right? So we really enhanced our software product portfolio and capabilities to really position the company for future growth in the next few years. And so more and more as the hardware secular decline continues, so that's going to be less and less impactful to us. And we mentioned this, software is about 80% of our business. Hardware is 20% and potentially lower in the next few quarters. And all of this with, obviously, the strong cash flow generation and profitability that we should expect to continue. And so I just want to -- sort of take a step back and walk you through it because what we're doing is really transforming the product capabilities for the organization. And so the decline in the guide, although partly due to hardware and also a little less activity, we're really thinking about 2025 as the foundation here, the building blocks from our product capability. I don't know, Vicky, you have any additional thoughts? Victor Limongelli: Yes. Let me just add to what Jorge said. So obviously, the specifics he gave are correct. But if I zoom out a little bit and just think about the business from when I joined, it's almost 2 years in a few months. And 2 years ago, about 1/3 of our revenue was hardware. And now it's about 20%. We ended 2023 2 years ago with ARR of $155 million and the midpoint of our guidance for the last quarter would have us ending up at $185 million, so $155 million to $185 million. And a couple of years ago, from a product standpoint, we had not introduced any new capabilities in quite some time. In fact, you saw us sunsetting products. So it was important for us to, first of all, build the foundation of profitability so that we could invest back in the business while returning capital to shareholders. And we've started to do that, not just with the acquisition and the strategic investment, but also internally with the hiring of a new CTO and internal investment. And so that's what we're working on to transform the business. And keep in mind that the Nok Nok acquisition happened in June, the ThreatFabric strategic investment was October. So we'll get some positive impact from Nok Nok, but we expect more in the future and ThreatFabric is largely a 2026 story. So -- and we're continuing to work on other things as we continue to try to improve the value proposition that we're offering our customers. Anja Soderstrom: Okay. And then in terms of the hardware, do you see that being shifted out to the right? Or is it just a sort of a decline in demand overall? Victor Limongelli: Well, if you talk to our customers, 10 to 12 years ago, customers in EMEA and in APAC, they might have had 100% of their consumers using consumer banking tokens to log on to authenticate. I was in Europe last month, and we had a meeting with 8 banks, and we were surveying them, what percentage are using hardware now, it was about 20%. So most of their customers have moved over to mobile authentication. And we see that in our business. Look at our business 10 years ago to what it is now on the hardware side, it's probably 20% of the size. We don't think that number is going to 0, by the way. There are people who prefer hardware, and we don't -- maybe that goes down to 15% of their consumers or 12%, but we don't think it's going to 0. But that's been a long-term trend. And it's important for us to manage around that, not only with our mobile authentication offerings that we entered a few years ago, but also with newer protocols like FIDO that we acquired through the Nok Nok acquisition. Anja Soderstrom: Okay. And then in terms of the margin, how should we think about that? It seems like even though we'll have more hardware in the fourth quarter this quarter compared to last year's fourth quarter, the gross margin is going to be higher, if I get it right here. But -- how should we think about the gross margin altogether? And then also on the operating expenses, do you see that now after you done all your cuts, how should we think about growth in that in the coming years? Jorge Martell: Yes, I can answer that, Anja. Thanks for the question. So from a hardware perspective, I think it's probably going to be even with last year, Anja, the hardware revenue, we mentioned that during the last call in terms of the split. And that's we have today. And then from a gross margin perspective, it's going to be, I would say, probably similar to last year's Q4, Anja. And so that will put the full year gross margin in around 73-ish percent, slightly higher than last year's, which I think was 72%. And then from an operating expense perspective, one thing to keep in mind in the year-over-year is the Nok Nok acquisition. So for the quarter, it's around -- I'm just going to do a round numbers, it's around $2 million on a run rate basis that we'll be adding year-over-year. And then obviously, we've done some also incremental investments in R&D and things like that. I don't expect it sequentially to increase dramatically compared to what you saw in Q3, but there will be maybe a modest increase because of that. Operator: Our next question comes from the line of Catharine Trebnick with Rosenblatt Securities. Catharine Trebnick: Can you just in a snapshot, your product road map where you feel that the deficiencies, these headwinds that you've been experiencing, just really what are the 2 or 3 products you think in the next 12 to 24 months are going to make up for this gap we've been having? Victor Limongelli: Yes, sure. Let me talk a little bit about that. I don't know that I would describe it as a deficiency. We have very good mobile authentication technology. But as you know, multifactor authentication has been around for a long time. Everyone is familiar with getting -- in the U.S., you get an SMS or a text message with it or you might get an e-mail and overseas onetime passcodes are widely used as well, although not via SMS. So everyone is very familiar with multifactor authentication. So that protocol or approach has been widely adopted. And as Jorge mentioned, we have good market share there. And even our NRR in security in Q3, I think, was 101% or it will be about 101% for the year. So it's very solid. But over time, technologies change, and we're seeing that with the adoption of passkeys. With FIDO2, we're going to see much broader adoption of passkeys as we move through the rest of the decade. And we think it's important for us to broaden our offering so that we have not just the mobile authentication on top of the hardware authentication that existed many years ago and still exists for a portion of their customers, but also enables passkeys at a very, very scalable level. It also has very good latency and we've proven it out at scale with many different customers. So we think that's going to be a very interesting area for growth. Catharine Trebnick: That was very helpful. And then anything you can add on digital agreements and what you're seeing there and how you expect the growth there to pan out in the next 12 months? Victor Limongelli: Yes. We've been doing pretty well there. I think if you look at the growth, it's been in the mid- to upper single digits, and we expect -- it's October 30. So you can't be too certain about how Q4 is going to go, but we feel pretty good about the Q4 pipeline. And we think we have an opportunity to not just expand with customers we already have, but also to land some new ones. And that's an area where our internal development, I mentioned internal development, and that's an area where we'll be using AI in the product more in the coming 12 months. That's an area for us -- a focus area for us in the coming months. So we think that's going to be a strong product -- continue to be a strong product. And obviously, we're always trying to do better and have better results, but I think we're making very good progress on the DA business. And the other piece, Catharine, on the DA business, Jorge mentioned this, is record operating income this quarter, I think, 25%. So when you layer that on top of the growth there, the numbers start to -- that business starts to look more and more appealing. Operator: The next question comes from the line of Erik Suppiger with B. Riley Securities. Erik Suppiger: First off, you're taking a lot of steps this year to start accelerating growth as you get into '26, and it's mostly on the software side. Can we assume that your subscription revenue growth in '26 should accelerate over '25 if we anticipate double-digit growth in '25, can it accelerate from there in '26? Victor Limongelli: Jorge, I don't know if you want to talk about the specifics, but that's absolutely our aim is to continue to improve the software business. I think software as a percentage of revenue, we're at 80% now, and it probably gets to, I don't know, 82% or 83% next year. Jorge, I don't know if you want to talk to any of the specifics on. Jorge Martell: Yes. So I think just the one thing that I would add is, Erik, is the -- I think the subscription, yes. I think when you look at the different components of revenue for security, you have to take into account maintenance and some of that -- those dynamics in terms of the professional term. So maintenance will be a little bit choppy, right? But I think if you focus on the subscription security, I think that's a fair assessment. Erik Suppiger: Okay. Good. Good. I know you don't have much exposure to federal, but any comments on federal and if the shutdown is giving you any pause? Victor Limongelli: We have a ton of exposure. Yes, go ahead, Jorge. Jorge Martell: Sorry I would say, no, I think we're lucky in that sense, Erik, that we really haven't felt it. We have a little bit of exposure in our digital agreements business, but it has not been anything material at all, luckily, knock on wood. And so I think from that standpoint, the shutdown has been a nonevent for us. Erik Suppiger: Okay. And then lastly, just a follow-up on Catharine's question. What is -- is there any change or any -- has there been any intensity of competition? Or has the market dynamics changed at all in terms of software authentication for banks? Is there any change in that market? Victor Limongelli: No, I think if you actually look at our business, we've been doing quite well in North America. We started a North American security sales effort about 15 months ago, July of '24. But that's historically a small portion of our business. So although the -- there's been good progress, it's from a small base. So we're doing well there. We've mentioned on previous calls quite a few times, I think, that the economic environment in Europe was a little bit more challenging for us. And I think that's historically been a very large part of our business. So I think that has impacted us to a certain extent, it hasn't been the strongest economy there. Erik Suppiger: Okay. But it's not -- there's no particular change from a competitive perspective? Victor Limongelli: No. No. If anything, I think we're becoming more competitive as we add new capabilities. I've mentioned S3 a few times, but it has some large customers that we're going to start rolling out. And I think it overall helps our competitive position compared to 6 months ago. Erik Suppiger: Okay. Then last question. In terms of the FIDO2 push, how -- what progress have you made with channel partners? Have you been -- what progress have you made with channel partners on that front? Victor Limongelli: Well, I want to talk in general about the FIDO2 push and the S3 product. I mentioned we got our first 2 new logos, which is good within 4 months of closing the deal. And we have others in line, some of which are from channel partners. One of those 2 actually was from a channel partner, one of those 2 new logos I mentioned. And we think that, that is obviously going to be an important method for sales heading into 2026. That product, I mean, just to -- FIDO2 is an open protocol, right? So you can stand up your own FIDO2 server if you want. But what you get from S3 is extreme scalability where you can scale it up to millions and millions and millions of users. I alluded to this earlier, you get excellent performance with respect to latency, a great management console to make it easy to administer. And also flexible deployment. This is something that we're well known for. You can deploy it in the cloud or on-prem, and there are customers with both deployment modes. So it's a very appealing offering, I think, in the financial services world because some banks, as everyone knows, some large banks still prefer on-prem. So we give them maximum flexibility. Erik Suppiger: Are those customers buying the tokens from you as well, the FIDO 2 tokens? Victor Limongelli: So the FIDO2 tokens, this is an interesting another area, right? So we started developing those internally. That was internal development. And we feel good about that business as we move forward. We have quite a bit of pipeline. We're expecting orders. We've gotten some orders already. And we expect that to be a more meaningful revenue contribution in 2026 than it is today. So if you think about consumer banking tokens, if that continues to decline, the FIDO2 security keys could perhaps offset some of the secular consumer banking token decline. Operator: The next question comes from the line of Gray Powell with BTIG. Gray Powell: Okay. Great. Look, I only have one question, but I'm going to break it down into 27 parts. Is that okay? Victor Limongelli: Sure, Greg. Go ahead. Gray Powell: So really just 2 questions on my side. And you more or less hit on this. When a customer elects to not renew hardware tokens, I'm going to assume it creates an opportunity to upsell your mobile security suite. And then I just like is that the case like is a direct shot? Or is there more of a jump ball situation where you have to send off that customer from other competitors? Victor Limongelli: Well, it could be a jump ball situation. But in a lot of these cases, I alluded to customers saying they have 20% of their consumers using hardware. So in many cases, it's already happened. They were a dozen years ago at 100% of their consumers using hardware, and now they've moved over to mobile for the majority of their consumers, younger consumers, new accounts. And they might have been 5 years ago, 40% of their consumers using hardware. And so that number has been declining over time. It does tend, by the way, to have heavier use cases in the corporate banking market where you might see 50% of consumers -- not consumers, but companies using hardware tokens. Why is that the case? Well, corporate banking very often still happens in front of a large screen, in front of a computer, not on a mobile phone. The more you're using a mobile phone, the more mobile authentication is likely to be used. So Greg, when you see a bank go from 40% consumer banking token to 20%, it's not really a jump ball situation. Yes, there's more opportunity for mobile authentication licenses, but we're not getting as much revenue upfront from those as we are from the hardware tokens. Gray Powell: Understood. That's helpful. And I guess maybe the bigger question for me personally is just on the ARR side. Can you talk about the visibility you have on late-stage deals and pipeline, just like the overall confidence level you have in the Q4 ARR guide, just because it does imply a decent uptick in the pace of net adds from what we've seen the last 4 or 5 quarters. And look, I know it's Q4, which is some seasonality. But any color there would be greatly appreciated. Jorge Martell: Yes, I can start. Victor Limongelli: Jorge, do you want to talk about the -- you can talk about the model. I'm happy to talk about the outlook. So go ahead, I'll let you start. Jorge Martell: Well, I think -- so from a model perspective, so we obviously take into account what is going to renew, right? What is the potential expansion based on opportunities that we see in pipeline and obviously, talking to our sales leaders and all that. So we have weekly calls. We have visibility to that. And that is part of how we build our ARR forecast, okay? What is the risk? Is there any slippage going in it? Obviously, as you know, with term and something falls out of it for more than 90 days, we take it out of ARR. And so it's an active, it's an active discussion and conversation with the sales leader to understand what is the potential risk, what is the potential expansion. This applies to both business units, major agreements as well as security. And it's an active dialogue. And so it is sort of like a bottoms up, if you would, what we try to -- when we model a forecast, it is -- when it's a Q plus 1 or the same quarter, it is sort of like a bottoms up, Greg. And it's all about just execution, making sure that we can close those. And not everything is going to be perfect like everything else. Sometimes it's art, it's not a science, but we try to -- so we do have, I would say, within the quarter, some visibility, right? There are some [ bluebird ] that happen that we don't anticipate. Like we mentioned the HDFC situation last quarter. And sometimes we see some contraction, and that's because our sales leader or the client is not -- they don't know yet, right? And so those we have less visibility. But for the most part, I think within the quarter, we have a fair amount of visibility. So I'll turn it to you, Vik to talk about the other component. Victor Limongelli: Yes. I mean we feel pretty good about it. I mean it's October 30. So you -- we have pretty good visibility. You don't know for sure what's going to close. I think our sales team, if you could go back in time 12 months to now, feels a lot better about our competitive position. I mean we've introduced the FIDO security keys. We bought Nok Nok. We have the partnership with ThreatFabric. There's a lot of exciting stuff happening and a lot of good conversations happening. You can't book exciting conversations and people feeling good about things, but it's definitely an optimistic vibe. Operator: The last question comes from the line of Rudy Kessinger with D.A. Davidson. Rudy Kessinger: Kind of just a follow-up to some questions that have been asked. Just with respect to the cut for this year, specifically on revenue and ARR, is that more so related to gross churn? Is it more so related to lower than previously expected new logo or lower than expected -- lower than previously expected cross-sell and upsell? Victor Limongelli: Yes. Jorge can give you the details. Go ahead, Jorge. Jorge Martell: Yes. So it is primarily related to lower activity in net expansion. We did have, I would say, this quarter in Q3 that impacted one contraction. But I think overall, taking a step back, Rudy, it is primarily the lower activity for expansion. New logos was is to a lesser extent, but it's primarily more the net expansions, Rudy. Victor Limongelli: Well, and also hardware, right, to a certain extent, have $2 million of hardware lower than. Jorge Martell: For sure. On the revenue side, yes. Rudy Kessinger: Yes. Okay. And I guess as we think about maybe '26, I mean, do you feel like -- I guess, could you give us maybe kind of a time line maybe for when you think you might start to see some more traction with some of these newer products and maybe you might be able to reignite growth here? Victor Limongelli: Yes. So let me talk a little bit about -- I think we're going to see traction in '26 with S3. I think we've already seen traction with a couple of deals closing and more pipeline for Q4. But keep in mind that if that business grows 30% or 40% next year, that will be a vast acceleration over what they were doing prior to the acquisition. But that will have a $3 million or $4 million impact on our business in terms of bookings. So the scale of it will take a little bit while to build even if we can accelerate growth to a much faster growth rate than the business was before or than we have been as a business over the past number of years. ThreatFabric is a partnership and an investment. And that's going to -- it's a little bit harder to tell because it's only been 3 weeks. But we think that will contribute, not as meaningfully as Nok Nok. But for our business, like every bit of improvement helps. If we pick up $3 million or $4 million of ARR somewhere, I think that is a real positive for us overall. And of course, we're not -- we alluded to this on the prepared remarks, we're not just doing one thing. We're working on lots of different things, trying to get lots of -- we can score a bunch of runs by hitting a bunch of singles. It doesn't all have to be a home run. Operator: This does conclude the question-and-answer session. And I'd now like to turn it back to Joe Maxa for closing remarks. Joe Maxa: Thank you, everyone. I'm glad you could join us today. We look forward to sharing our results with you again next quarter. Have a great night. Operator: Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.
Operator: Greetings, and welcome to Weave's Third Quarter 2025 Financial Results and Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Mark McReynolds, Head of Investor Relations. Thank you. You may begin. Mark McReynolds: Thank you. Good afternoon, and welcome to Weave's Third Quarter 2025 Earnings Call. With me on today's call are Brett White, CEO; and Jason Christiansen, CFO. During the course of this conference call, we will make forward-looking statements regarding the anticipated performance of our business. These forward-looking statements are based on management's current views and expectations, entail certain assumptions made as of today's date and are subject to various risks and uncertainties described in our SEC filings. We've disclaims any obligation to update or revise any forward-looking statements. Further, on today's call, we will also discuss certain non-GAAP metrics that we believe aid in the understanding of our financial results. Unless otherwise noted, all numbers we talk about today will be on a non-GAAP basis, which excludes onetime acquisition-related compensation. A reconciliation to comparable GAAP metrics can be found in today's earnings release, which is available on our website and as an exhibit to the Form 8-K furnished with the SEC before this call as well as the earnings presentation on our Investor Relations website. Before I turn the call over to Brett, we want to let you know that we'll be participating in the Stifel 2025 Midwest One-on-One Conference on November 6 at the Waldorf Story in Chicago and also at the Raymond James TMT and Consumer Conference on December 8 at the Lotte New York Palace Hotel in New York City. And with that, I'll now turn the call over to Brett. Brett White: Thank you, Mark, and thank you to everyone joining us today. We are very pleased to report that the Weave team delivered another strong quarter, marked by accelerating revenue growth, non-GAAP profitability and free cash flow as well as significant advancements across our product road map. Weave is a vertical SaaS platform that delivers AI-powered patient engagement and payment solutions, purpose-built for the unique needs of small and medium-sized healthcare practices. Our platform powers communication, scheduling and payment workflows that free teams from repetitive manual work, giving them time to focus on meaningful patient relationships and higher-value activities. We combine operational insights into one seamless experience to help practices grow and improve the efficiency of their teams. The result is a fuller schedule, stronger revenue capture, happier patients and teams empowered to focus on people rather than paperwork. We solutions work around the clock to convert missed calls into booked appointments, helping to ensure practices never miss an opportunity. Our AI is trained on over a decade of real-world patient interactions, including billions of phone calls, voice messages and text messages. This gives us a deep understanding of how practices and patients actually communicate. Weave integrates directly into a practice's system of record through authorized APIs, which allows us to deliver automated workflows that feel like an extension of the practice. This quarter, we generated $61.3 million in revenue, accelerating our year-over-year growth rate to 17.1%. This also marks our 15th consecutive quarter of exceeding the top end of our revenue guidance. Gross margin reached a record high of 73% this quarter, more than 15 percentage points higher than our gross margin at our IPO 4 years ago. We again exceeded the high end of our operating income guidance. This strong performance translated into another solid cash flow quarter with $5 million of free cash flow. This continued improvement reflects our disciplined execution and underscores the efficiency and scalability of our business. The SMB healthcare market is evolving rapidly with technology playing a greater role in how practices attract, engage and retain patients. We believe the future of software and SMB healthcare will deliver intelligent automation that works hand-in-hand with office staff to improve patient experiences. As we execute on this vision, we are laying the foundation for our next chapter of growth. Patient care will remain deeply personal, while routine operations quietly run in the background. We believe that the most successful practices will adopt technology purpose-built for modern patient interactions with automated workflows, actionable insights and intelligent agents that anticipate and act. Dental service organizations or DSOs and other group practices understand and share our vision for a connected automated front office. Industry momentum is clearly moving in this direction as healthcare practices look to adopt unified, intelligent solutions built with compliance, reliability and patient experience at the forefront. Weave is uniquely positioned to lead in this next phase of transformation. Our scale, brand and deep expertise in SMB healthcare gives us an advantage. Our platform is differentiated by our authorized integrations with leading practice management systems. In an environment where lawsuits are putting unauthorized integrations at risk, Weave's secure architecture and HIPAA-compliant infrastructure gives practices confidence and peace of mind. Security, regulatory compliance and reliability are table stakes in healthcare, but we believe they are also barriers that our competitors may not understand and cannot afford to meet. One of our largest customers recently shared with me at a trade show. He said, "We're so glad you acquired TrueLark because of your proven scale, security and reliability." When I looked at some of these other companies, we have no idea what's under the hood. Weave's vertical focus gives us a unique advantage. Unlike horizontal platforms and general purpose automation tools, we understand healthcare workflows, regulatory requirements and the nuances of patient interaction. That level of precision is critical in an industry where even small errors or misbooked appointments can damage patient relationships and business performance. No other vendor serving SMB healthcare combines unified communications, deep system integrations, intelligent automation and enterprise-grade privacy and security in a single trusted platform. We believe this combination creates a durable competitive moat and positions Weave to capture long-term market share as practices modernize the patient experience. Our strategy builds on this strength by focusing on deepening customer reliance on Weave and expanding our share of practice spend. With each new feature, we are striving to enhance automation, engagement and efficiency for our customers, driving stronger retention and expansion across our base. As intelligent automation becomes more deeply embedded within our unified platform, we believe it will unlock new recurring revenue opportunities and strengthen the long-term economics of our business. This advantage is not theoretical. It's already transforming how healthcare practices operate. Across healthcare, the front desk is the hub of the patient experience. For years, practices have been constrained by staffing shortages, fragmented software, disconnected workflows and missed call from patients seeking to book appointments. Staffing remains the #1 challenge for SMB healthcare practices. More than 70% report difficulty in hiring and retaining front desk staff, a problem that disrupts patient communication and daily operations. By helping practices operate reliably regardless of staffing levels, weave solves one of the biggest operational risks in healthcare today. One of our largest customers, a leading dental group comprised of hundreds of practices nationwide, was facing these same challenges across its network. Before Weave, their average answer call rate hovered around 60%, meaning 2 out of every 5 patient calls went unanswered. A regional leader who oversees 50 of their practices decided it was time for a change. She and her team turned to Weave to bring patient interactions together, phones, messaging and scheduling, all in one place. The results have been extraordinary. Today, nearly all of those practices run on Weave with answer rates now exceeding 90%. In addition, 17 of these practices have recently adopted our AI receptionist powered by TrueLark to automate the handling of after-hours calls and scheduling. In just 1 quarter, those locations booked more than $320,000 in additional appointments with 75% of those appointments scheduled without any staff involvement. As a result, new patient volume has increased by over 25% year-over-year. This is a powerful example of how Weave unites communications and automation to help practices grow efficiently while delivering a superior patient experience. Results like this demonstrate how Weave is delivering the next generation of intelligent communication. We are solving the real problems that every practice faces. Throughout the patient journey, our AI receptionist delivers always-on engagement and ensures consistent service even when staff levels fluctuate. It acts as a true extension of the practice, answering questions, confirming appointments and managing scheduling 24/7. Over the next few quarters, we intend to expand its capabilities meaningfully. Later this quarter, we plan to introduce voice capabilities, enabling the AI receptionist to handle incoming patient calls directly and intelligently route complex inquiries to staff. It will complete tasks via voice or text, including scheduling, confirmations, backfilling cancellations, all within the same unified conversation thread our customers rely on every day. We continue to deepen the integration between TrueLark and Weave. As we laid out in our last call, we began the go-to-market integration by introducing our AI receptionist product to the mid-market accounts. And this month, we extended sales efforts to our existing single location customers, where we are already seeing strong interest. In November, we plan to launch sales to new single location customers, incorporating our AI receptions directly into our standard sales motion. In addition to our AI receptionist, we are building a range of AI solutions that reinforce Weave's position at the forefront of intelligent automation in SMB healthcare. Over the last year, we've seen strong adoption of call intelligence, an AI-powered analytics engine that transforms every phone interaction into actionable insights. Call intelligence analyzes call recordings, detects customer sentiment and identifies both patient needs and additional revenue opportunities. One recent customer example illustrates its impact. Call intelligence flagged a missed call from a patient who reached out about a dental emergency and staff followed up the same day. The patient received the treatment and decided to move forward with an $80,000 cosmetic treatment. As the practice manager explained, opportunities are everywhere and tools like this help you catch them before they slip through the cracks. In coming quarters, we're expanding call intelligence capabilities to provide visibility across every conversation, whether automated or handled by staff. It will proactively surface action items to guide next steps for the AI receptionist or the front desk. By unifying all human and intelligence-driven interactions into a single conversation thread, Weave uniquely enables practices to capitalize on opportunities for revenue growth, improve patient experience and continuously coach teams for better performance. Finally, our AI-powered in-app assistant serves as a true copilot for busy front office teams, helping practices work smarter, faster and more efficiently. In the coming quarters, it will simplify setup and assist with customized workflows to help practices get the most out of Weave's advanced features. The opportunity ahead of us is significant. The combination of strong demand, a proven platform and AI innovation positions Weave to drive sustainable growth and long-term shareholder value. Weave is leading this transformation, unlocking the full potential of intelligent automation to power the next generation of connected, efficient, patient-focused practices. In addition to the developments in AI, we continue to make positive strides in the other growth vectors we outlined earlier this year. Specialty medical continues to emerge as a key growth driver for Weave. This vertical delivered record results again this year with the highest number of medical location additions in company history. As a reminder, the specialty medical vertical is more than triple the size of the dental, optometry and veterinary combined, underscoring the significant long-term opportunity it represents for Weave. Mid-market also continues to be a powerful growth engine for Weave with expanding traction across multiple healthcare segments. Our mid-market pipeline continues to diversify with meaningful contributions coming from outside the core dental base. For example, we've recently signed a contract with a 600-plus location specialty medical group. The initial phase includes roughly 50 locations, which have already begun onboarding. This account has the potential to be one of our largest customers. This group came to Weave through an EMR partnership and is a great example of the opportunities that we can unlock when we partner closely with practice management systems. Over the past several quarters, we've launched multiple new integrations. In the first year after launch, sales of the integrated solutions have grown 2x to 5x year-over-year, demonstrating strong demand and the immediate impact of integrated offerings. These integrations are expanding our reach and reinforcing Weave's position as the most connected platform in small and medium-sized healthcare. Payments continues to be one of our strongest growth drivers with Q3 revenue growing at more than double the rate of total revenue. We continue delivering on our payments platform road map, focusing on the most requested customer features. At the top of this list, were surcharging and bulk collection features, both of which were recently launched. Surcharging helps our customers manage rising costs by enabling them to pass credit card fees on to the payer if they choose. Bulk payments allows practices to initiate multiple payment requests simultaneously. This capability saves significant time for office staff and strengthens our value proposition for multi-location and enterprise customers. To conclude, I want to thank our customers, partners, team and shareholders for your continued trust and belief in Weave. Looking ahead, we are incredibly excited about the future we are building with our AI platform, which we expect to transform how practices communicate, automate workflows and deliver care. With the foundation we've built and the innovation ahead, I'm very optimistic about the future for Weave. I'll now turn the call over to Jason for a deeper discussion of our financial results. Jason? Jason Christiansen: Thanks, Brett, and good afternoon, everyone. It was another solid quarter for Weave, reflecting continued momentum in our key growth initiatives and disciplined execution across the business. We delivered revenue of $61.3 million, exceeding the midpoint [Audio Gap] an acceleration of our revenue growth rate to 17.1% year-over-year. Excluding TrueLark and the effect of last year's price increase, Q3 revenue grew more quarter-over-quarter than any quarter in the past 4 years. Specialty medical, where we are still less than 1% penetrated, grew more than -- more in Q3 than in any previous quarter as it continues to ramp. Payments revenue again grew more than double our total growth rate. Gross revenue retention held steady at 90% in Q3. Net revenue retention was 94%. We have discussed the resiliency of the end markets we serve, and that remains true today. Demand remains strong, and we continue to be successful in customer acquisition. I would like to highlight a few aspects of our retention metrics. First, our net revenue retention in the second half of 2024 and the first half of 2025 was bolstered by the effects of a price increase in Q2 of 2024, which accounted for approximately 250 basis points of uplift. We have lapped the effect of that price increase and our net revenue retention rate has decreased commensurately back to within 1 percentage point of Q3 of 2023 prior to the price increase. Second, when we enter new verticals, it is typical for us to see higher churn and lower average sales prices initially. In the early phases of a new vertical, we are selling newer integrations and often nonintegrated solutions, which have a slightly higher churn profile. That is true for specialty medical, our fastest-growing vertical, where strong new customer adoption creates pressure on overall retention metrics, similar to what we experienced in the early stages of more established verticals. Over time, we expect churn to normalize and average sales price to increase as we achieve greater product market fit and industry presence through more mature integrations and greater integration coverage. Lastly, it's also important to note that our reported retention metrics are measured on a location basis, not a customer or logo basis on a weighted 12-month average. For example, adding another location to a multi-location customer does not improve our retention metrics as each location is viewed separately. If we were to report net revenue retention on a logo basis, it would be higher than our net revenue retention on a location basis. Let me now turn to our operating results for the quarter. Gross profit grew to $44.8 million, an increase of nearly $7 million year-over-year. That represents a gross margin of 73%, up 50 basis points year-over-year and 70 basis points sequentially. The improvements were largely driven by leveraging cloud data center costs and hardware amortization. Sales and marketing expenses were $24.3 million or 40% of revenue. We increased Q3 demand generation expenses to capitalize on strong momentum in specialty medical, recently announced integration partnerships and mid-market. This included demand generation for the solutions recently acquired in the TrueLark acquisition. Research and development expenses were $9 million or 15% of revenue. Our focus includes integrating TrueLark into the Weave platform and accelerating the development of our product road map and AI strategy. General and administrative expenses were $9.9 million or 16% of revenue, which provided the most year-over-year operating leverage in our business as these expenses improved from 17.5% in Q3 of 2024. Operating income for Q3 was $1.7 million, an improvement of $300,000 compared to Q3 of 2024 and exceeds the high end of the guidance range we provided in July by $700,000. This represents an operating margin of 2.7%. Turning to our balance sheet and cash flow. Weave's liquidity remains strong. We ended the quarter with $80.3 million in cash and short-term investments, an increase of more than $2 million sequentially. The third quarter was another period of strong cash generation with $6.1 million of cash provided by operating activities and $5 million of free cash flow. Year-to-date, free cash flow totals $8.5 million, representing a $4.3 million improvement compared to the same period last year. Looking ahead, we are raising the midpoint of our full year revenue guidance and updating the range to $238 million to $239 million. We are also raising our full year non-GAAP operating income guidance to be in the range of $3.3 million to $4.3 million. This outlook reflects meaningful year-over-year improvement in profitability. For the fourth quarter of 2025, we expect total revenue in the range of $62.4 million to $63.4 million and non-GAAP operating income in the range of $1.5 million to $2.5 million. Our expected weighted average share count for the full year is approximately 76.3 million shares. In closing, our business continues to perform well and momentum across the company remains healthy. Q3 was a strong quarter marked by accelerating revenue growth, record gross margin and solid free cash flow. As we look ahead, we're confident in our ability to balance growth and profitability as we execute on our strategy. Thank you for your continued support. And with that, we'll now turn the call over to the operator for Q&A. Operator: [Operator Instructions] Your first question comes from the line of Alex Sklar with Raymond James. Alexander Sklar: Brett, maybe first for you on payments and then some of the additive functionality that TrueLark bring, particularly around payments. Can you just talk about what you're seeing from that solution broadly? How are you doing in terms of new lands in specialty medical with landing with payments out of the gate? And when do you think you're going to be in a position where you can integrate some of that TrueLark functionality on the revenue cycle management opportunity and automating some of the collections processes? Brett White: Alex, sure. So first, we'll talk about payments. So we had very strong volume growth this quarter. So we continue to improve there. As we mentioned, we had revenue growth in aggregate was greater than -- more than double the total growth rate. So continue to add customers, continue to add volume. Average volume per customer continues to be strong. As far as when do we think we can add TrueLark capabilities, that's absolutely on the road map. Our road map is really to release the stand-alone product, which is not yet integrated with payments, but it's on the road map. We're going to be upselling -- we just started upselling it to our existing customers. We're going to introduce the sales to our new single locations this month. And then we're going to be building an integrated solution that we're calling internally called infusion, where we integrate the TrueLark technology into the Weave inbox. So you have one combined inbox. And then shortly after that, we'll follow with what we're calling intelligent actions, which one of those will be working payments and RCM type activities into the automated workflows. So follow-ups on past due payments, active outbound invoicing, intelligent insurance verification and insurance eligibility. So over time, probably next couple of quarters, be building that functionality into a lot of the intelligent actions that the system is going to deliver to our customers. Alexander Sklar: Okay. Great color there. And I don't know if this one is for you, Brett, or Jason, but really strong commentary on specialty medical again this quarter. You had a nice group win. Can you just kind of update us on how some of these group integration or implementations have gone? We're about 12 months past, I think, the ACI one. Where does that one stand? How is the overall pipeline for middle market kind of larger practice opportunities stand within the overall growth algorithm? Jason Christiansen: Great question. So we continue to make great progress in the mid-market. Sales are very strong. On ACI specifically, we continue to make progress. We continue to see adoption and rollout. We have seen great growth in that business. If you'll remember, they also selected Weave because of the payment workflows and solutions that we're able to integrate with the overall Weave offering. And that's been a nice contributor and a benefit to us. And one of the things that they're really excited about and looking forward to is this integrated inbox that Brett shared. he's had -- he could speak to this better, but he's had several conversations with a number of these large group practices. And as they understand what we're developing as we acquired TrueLark and what we're now building together, they really get excited about what that can mean for their business, the ROI can deliver, the centralized reporting and analytics. And so we continue to remain quite optimistic about the opportunity ahead of us in the mid-market front, where it still feels like we're very early in that life cycle. Brett White: Yes. I'll add a little bit there. We just recently had dinner with our management team, and the rollout is on track. So that's great news. And then we shared with them kind of our plans for the automated front desk, and they were very, very interested in the value that, that can bring to their practices. So the relationship is very strong, and I'm very optimistic about our future there. Operator: Your next question comes from the line of Hannah Rudoff of Piper Sandler. Hannah Rudoff: Nice to see that subscription growth reaccelerate this quarter. Just wanted to follow-up on Alex's first question around payments. It's nice to hear about that strong growth in payments, but it seems like the base is still relatively small there. I guess what is it going to take for payments adoption to really accelerate? And how much will it benefit from this TrueLark integration you're talking about? How much will it benefit from the surcharging and bulk payments functionality added in? Is there other functionality you need to build in to really get a step function change in payments adoption? Brett White: Sure. Thanks, Hannah. So I think we've been saying all along, the real unlock for our payments business is the workflows, really nailing the workflows and then also nailing the integration with practice management software. I listed 2 of the top features that customers were looking for, especially multi-location customers. In my prepared remarks that they really wanted, and we've delivered on those. We've actually -- on surcharging, we've actually seen in the short period that's been live, very positive results there. So again, it's nailing the workflows and then nailing the integrations. We've just ticked off 2 of the major items on the list. And then the integrations, we continue to make really good progress there. Our strategy of only going through authorized front door integrations, only using authorized APIs is paying off. So I think we just keep delivering the features and functionalities that we need. And then I think the automation technologies that are coming from TrueLark, but also being developed organically with the 2 combined teams should also be a pretty significant unlock, and we'll see how that rolls out over the next few quarters. Hannah Rudoff: Good to hear. And then how do you think about balancing the rollout of new integrations on the specialty medical side and different subverticals you're expanding into versus growing the ASPs and customers in existing specialty medical subverticals that you're in? Brett White: Well, it's interesting. So we take a very programmatic approach to rolling out new integrations. We kind of start with where the largest presence are when it comes to practice management software, work with them, develop those integrations. And unlocking those integrations actually drives quite a bit of ASP growth. So a non-integrated Weave is generally -- let me say it differently, integrated Weave is more valuable to our customers. So it has a higher ASP, and it has a higher retention rate. And so one kind of begets the other. We get the integration done, we roll them out and then we can either upsell existing customers who are on a nonintegrated version or we can go to market with the integrated version, which [Audio Gap] Operator: It seems we have Lost the main speaker line. Please hold. Brett White: Okay. Are we back? Operator: You are back. Loud and clear. Brett White: Awesome. Are there any additional questions? Operator: Yes. Your next question comes from the line of Matthew Kikkert of Stifel. Matthew Kikkert: Specialty Medical continues to outpace the overall growth. Can you break down the driver of that success? Is a lot of the success coming from deeper penetration within existing subverticals like med spas or is it expansion into new subverticals? And then maybe more importantly, how can you replicate that success across other verticals? Jason Christiansen: Yes. Thank you for the question, Matthew. We continue to remain focused on the primary verticals that we've been talking about around med spa, plastics and aesthetics, physical, opto, physical, occupational therapy. And so there's a significant opportunity there just within the 4 specialties that we're targeting, the size of the opportunity is roughly the size of dental, optometry and vet combined. And we're still less than 1% penetrated. So our approach to opening up the verticals we look at, one, the integration opportunity and our ability to go get those integration unlocks with the EMRs in the healthcare space. And then two, the economics and the demand from the customer base. And so there's a lot of opportunity where we're at. We remain focused there. Integrations lead our expansion. And so while we're growing there, it's -- we have a business development group who continues to evaluate other opportunities. And that's something that we'll continue to assess is where we expand. It is something that we can replicate. But for now, right now, we're just -- we're targeted on capturing the opportunity ahead of us there. Matthew Kikkert: Okay. And then secondly, I'm curious, as you embed payments more deeply. Could you give a deep dive into how you're differentiating Weave payments from both legacy payment processors and then modern vertical SaaS players who are also bundling their own payments? And then are you able to share roughly what percentage of the customer base is now using Weave for payments? Jason Christiansen: Yes. We haven't broken out payments separately. You know it makes up about -- it makes up less than 10% of our revenue because we don't break it out. It continues to increase as a percent or a mix of our overall revenue. The real differentiators for us is when you think about the industries that we serve, increasingly, the point of collection where payment happens is outside of the walls of the practice. And so offices are stuck trying to collect either on the front end or the back end when the patient is not right in front of them. And so you could say payment happens at the point of interaction. Weave owns all of those interactions. We manage the trusted business phone numbers when you think about the text-to-pay capabilities and the ability to deliver online bill pay links through e-mail or through text. Weave sits right at that intersection of the day-to-day operations and workflows that the front desk staff who's trying to collect those dollars is already managing. And so the points of differentiation for Weave is the ability to integrate and bring the payment or collection process into the existing interactions and communications that the front desk is already having with the patients. And that's just going to improve over time as we execute on the vision Brett laid out with bringing those collection workflows in through the AI receptionist as well. Operator: We're going to check back with Hannah Rudoff of Piper Sandler for a follow-up. Hannah Rudoff: I think, Brett, you dropped a little during the answer. You were talking about the programmatic approach you're taking in integrated versus nonintegrated solutions and integrated driving higher ASPs. I was just wondering if there's anything else you wanted to add to that. Brett White: I think that's -- those are the key points that integrations drive higher ASPs, higher retention. And we focus our integration activities, think of large to small. So go for the largest players in the space first and then just kind of have a rolling thunder of integrations from there. And then also an important concept is we get a fair bit of upsells when we introduce an integration. So we'll put up -- we'll go to a trade show and we'll say, put up sciences. We are now integrating with XYZ EMR practice management software, and we'll get a lot of interest from existing customers saying, yes, I want to upgrade to the integrated version. And it's just a better performing product for them, and it's just kind of a win-win. Hannah Rudoff: Got it. And it sounded like that 600-plus location deal in specialty medical was due to an EMR integration. Is that correct? Brett White: That's correct. And this one is interesting because it was actually -- the deal was struck in concert with the EMR. Operator: Your next question comes from the line of Kylie Towbin of Citi. Kylie Towbin: You've got Kyle on for Tyler Radke. It was good to see the beat and raise on profitability, especially the step down in G&A spend as a percent of revenue. Where are you expecting to find leverage from here? Is that sustainable moving beyond Q4? And was this through synergies or curious, any details on profitability? Jason Christiansen: Yes. Thanks, Kylie. We've talked about 2025 as a year where we are making some targeted focused investments, especially on the go-to-market side and the engineering side to enable these integrations and whatnot. The leverage in the model, we believe the investments that we're making are things that will ultimately provide additional leverage within our model. As we look at 2026, we're in the middle of our planning cycles right now. We'll provide a lot more color on what 2026 will look like in our next call. But we continue to be committed to striking that balance between growth and managing incremental profitability. We have a bias towards growth, but it's something that we remain very focused on making sure that we can strike the right cord on both sides. Kylie Towbin: Got it. And then just on the AI receptionist adoption. Can you talk about the competitive landscape for this product? Does it replace the need for a practice to hire a receptionist outright or more alleviating the lower-value tasks? Brett White: Yes. It's definitely the latter. What practice owners want to do is get their front desk staff much more engaged in patient care, increasing their acceptance rates on proposed treatment plans, basically engaging in much higher value activities and leave a lot of the kind of paperwork, administrative follow-up tasks to automation. And we're seeing a lot of interest there, a lot of traction. It works great. And over the next couple of quarters, we're going to be delivering an increasing level of functionality to really up-level the roles and then provide a much higher level of patient service and then just capture more revenue for the practice. Operator: Your next question comes from the line of Mark Schappel. Mark Schappel: Brett, in terms of the success you're seeing in your payments business this year, how much of that success would you attribute to, I guess, you could say the new go-to-market focus that you put on that solution over the past year or so versus, say, the new product capabilities that have been added to the product over, say, the last 18 months? Brett White: I think they all go hand-in-hand. The #1 driver is really creating a stand-alone business unit that encompasses all aspects of the payments business. So understanding at a very, very detailed level how a practice actually operates, designing the product, figuring out what are the key workflows, building those, standing up the appropriate go-to-market engine, whether it be sales reps, marketing, comp plans, having the right kind of onboarding, having the right kind of customer support. So it all works together synergistically. And so it's -- obviously, having the product is paramount and knocking a number of these top requested items off the list is great progress. And then also advancing our partnerships with practice management software platforms is also great progress. Mark Schappel: Great. And then as a follow-up, this year, you've seen accelerated investments, particularly in go-to-market, integrating TrueLark and just the deeper integration with the practice management systems. I realize it's still a little bit early, but I was wondering if you could just maybe comment on how you see next year shaping up, whether it's going to be as big of an investment year. Jason Christiansen: Yes. Thanks, Mark. As I said with Kylie, we're right in the middle of our planning for 2026. As we look at the next year and how we're going to frame that. A lot of it comes down to the opportunities that are ahead of us. And a couple of things as we look at the go-to-market investments, these are generally small, targeted investments in a handful of sales reps in like the mid-market side. And the thing I'd highlight is even with those, we've really been able to leverage some of the scale within like our G&A line to help facilitate that so that here in 2025, we're delivering more profitability than we did in 2024 while also growing nicely. And so that's a balance that we're going to continue to strike. We're going to look at where our opportunities lie. We still have a bias for growth, but very conscientious about profitability and our ability to deliver incremental profitability. And so more to come on that in our next call, but hopefully, that helps you understand how we're thinking about it. Operator: There are no further questions at this time. I will now turn the call back to CEO, Brett White, for closing remarks. Brett White: Thank you all for joining the call, and thank you again [Audio Gap] Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to Owens & Minor's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Will Parrish, Vice President, Investor Relations. Will Parrish: Thank you, operator. Good evening, everyone, and welcome to Owens & Minor's third quarter earnings call. Our comments on the call will be focused on the financial results for the third quarter of 2025, all of which are included in today's press release. The press release, along with the third quarter 2025 supplemental earnings slides are posted on the Investor Relations section of our website. Please note that during this call, we will make forward-looking statements that reflect the current views of Owens & Minor about our business, financial performance and future events. The matters addressed in these statements are subject to risks and uncertainties, which could cause actual results to differ materially from those projected or implied here today. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them. However, there can be no assurance that our expectations, beliefs and projections will result or be achieved. Please refer to our SEC filings for a full description of these risks and uncertainties, including the Risk Factors section of our annual report on Form 10-K and quarterly reports on Form 10-Q. Any forward-looking statements that we make on this call or in our earnings press release are as of today, and we undertake no obligation to update these statements as a result of new information or future events, except to the extent required by applicable law. In our discussion today, we will refer to non-GAAP financial measures and believe they might help investors to better understand our performance or business trends. Information about these measures and reconciliations to the most comparable GAAP financial measures are included in our press release. Today, I am joined by Ed Pesicka, Owens & Minor's President and Chief Executive Officer; Jon Leon, the company's Chief Financial Officer; and Perry Bernocchi, the EVP and CEO of the company's Patient Direct segment. I will now turn the call over to Ed. Ed? Edward Pesicka: Thank you, Will. Good afternoon, everyone, and thank you for joining us on the call today. Earlier this month, we announced a definitive agreement with Platinum Equity to sell our Products & Healthcare Services segment, which includes both the Medical Distribution and Global Products divisions. Built on a strong foundation, we believe P&HS will be better positioned to compete in today's evolving market under Platinum Equity's private ownership model. We are also excited to be retaining an equity interest in the business due to Platinum's operational expertise and commitment to building on the customer-centric legacy of the business, which will be critical to the future growth of P&HS. The Owens & Minor name has long been associated with our P&HS business and thus will follow that business in the transaction. As we near the close of the transaction, we are excited that we will be rebranding the public entity to better represent our trajectory going forward. So as I think about the future, following the divestiture of a Product & Healthcare Services, I am thrilled that we can fully align around a single business. Our capital allocation, strategic priorities and execution are no longer split. They are unified around advancing the future of home-based care through Patient Direct. And by retaining our higher-margin Patient Direct business, we will generate improved and more consistent cash flow. Accordingly, we will prioritize debt repayment in the near term to grow our financial flexibility while investing in technology to lower our cost to serve and improve the customer experience. Now I would like to begin by sharing some of the opportunities we're seeing in the market and how these trends we're tracking continue to support our business, a business that we have grown and strengthened over time. Beginning with our acquisition of Byram in 2017, we have spent the past 8 years firmly establishing ourselves as a leader in the home-based care space. During this time, we have expanded and diversified our payer relationships while broadening our product offering and capabilities. This, combined with our coast-to-coast network gives us the reach and infrastructure to provide support for patients across multiple chronic conditions, including diabetes and sleep apnea. These conditions are not only widespread, they're growing, which creates a tremendous opportunity for us to make a meaningful impact. Over 37 million people in the United States have been diagnosed with diabetes and an estimated 96 million adults aged 18 and older are living with prediabetes according to the National Institutes of Health. In order to capture future growth from these tailwinds, we will focus our investments on technology and automation, which will, one, improve the patient's experience; two, allow us to quickly scale our business; three, increase awareness; and four, further reduce our cost to serve. Another core area for us is sleep apnea, where it is estimated that 85 million adults in the United States have some degree of OSA with approximately 70 million of those presently undiagnosed or undergoing the diagnosis process. While the use of GLP-1s has increased in recent years, recent studies published by the Lancet expect the use of GLP-1s to reduce the prevalence of OSA by only 4% over the next 25 years. This is a significant opportunity for us to serve these future patients. It also further demonstrates the value of our preferred provider agreements where new patients are encouraged to begin their lifelong treatment journey with us, supporting better health and a better quality of life. Earlier this year, CMS proposed rules regarding competitive bidding around home-based health care and DME. Since entering the home-based care space, our top priority has always been and will continue to be ensuring patients receive the products and services they need, reliably and on time. While competitive bidding programs have historically raised questions about patient choice and supplier access, we believe our scale, expertise and the quality of the products we distribute positions us as a standout partner in any environment. As we await further guidance from CMS, we are actively collaborating with industry partners and advocacy groups to maintain a strong, transparent dialogue that keeps patient outcomes at the center of the conversation. Before I turn the call over to Jon to discuss our third quarter financial performance and our thoughts on the year-end, I would like to close my thoughts today on where we're going in 2026. With the divestiture of Product & Healthcare Services expected to close in the first quarter of 2026, we are incredibly excited about the future as a Pure-Play business in the home-based care space. As our business grows organically through our preferred provider agreements such as our recently announced agreement with Optum and an aggressive sales strategy, we are diligently focused on controlling our balance sheet through debt paydown, managing operational cost controls and lowering the cost to serve and accelerating our cash flow generation. As we close out 2025 and look forward to 2026, we will begin the next evolution for Owens & Minor, with myself, Jon and Perry Bernocchi, the Executive Vice President of our Patient Direct business, remaining at the helm of our organization. I would like to thank all our teammates who have done a great job of staying focused on serving our customers. With that, I will now turn the call over to Jon to discuss our financial performance in the third quarter and our outlook for the rest of 2025. Jon? Jonathan Leon: Thanks, Ed, and good afternoon, everyone. We were very excited to announce the signed agreement for the sale of the Products & Healthcare Services segment a few weeks ago. I've had the pleasure of getting to know and working with the Platinum Equity team and absolutely believe they are the right owners for the P&HS business. Further, we're extremely excited about our future as a Pure-Play Home-Based Care company with all the positive attributes that come with it, as Ed detailed. We look forward to having a simpler business model and a cleaner investment thesis. We also believe our ability to dedicate investments solely into the subtractive space will lead to much greater results for all stakeholders. As you will recall from last quarter, the Products & Healthcare Services segment is being accounted for as an asset held for sale discontinued operations. So unless stated otherwise, my remarks today will focus solely on the continuing operations, which, as a reminder, is made up of our Patient Direct business and certain functional operations and identified stranded costs from the separation. Also, please note that any discussion about the financial results and outlook for the business will cover only non-GAAP financial measures. You can find GAAP to non-GAAP financial reconciliations in the press release filed a short time ago and residing on our website. Turning now to the third quarter results. Revenue was $697 million compared to just under $687 million in the third quarter of last year. Last year, in the third quarter, there was a $6 million onetime revenue benefit from a multiyear claims reprocessing matter. This impacted the growth rate by about 80 basis points. In the quarter, there was decent year-over-year growth in the key categories of sleep therapy, ostomy and urology. Diabetes was nearly flat compared to the third quarter of 2024, but showed better year-over-year performance compared to the second quarter. We continue to ramp up efforts to recapture stronger diabetes growth through improved therapy adherence and capturing more customers across our entire ecosystem of both DME and our own pharmacy channel. Overall, we would expect revenue in Q4 to show a similar year-over-year growth rate but be seasonally improved from the third quarter in absolute dollar terms. For the 9 months ended September 30, revenue was nearly $2.1 billion, up 3.4%, with last year's Q3 onetime benefit that I just mentioned, having a 30 basis point impact on growth compared to 2024. Similar to the quarter, growth for the year-to-date period was led by sleep therapy, ostomy and urology as well as smaller categories, including chest wall oscillation, which although is still small, has shown a phenomenal growth and demonstrates our ability to successfully expand our therapy portfolio. Adjusted EBITDA for the third quarter was $92 million compared to $108 million in last year's third quarter. Here, that same onetime $6 million benefit from last year falls straight through to adjusted EBITDA and hindered reported EBITDA growth by nearly 500 basis points. Additionally, product cost increases and higher health benefit costs were only partially offset by lower general costs such as delivery, outsourcing and occupancy expenses. It is important to realize that the third quarter adjusted EBITDA from continuing operations, of course, includes the normal adjustments to EBITDA of interest, income taxes, depreciation and amortization and less than $1 million of exit and realignment charges. So the $92 million earn is an appropriate representation of cash earnings before interest and taxes. This return to a higher earnings quality is quite different from what we've been able to report over the past several quarters. There will certainly be periods of time where there are cash adjustments in the adjusted EBITDA figure, but this is an example of what is meant when we refer to a cleaner and simpler investment story as a result of the divestiture. For the year-to-date period, adjusted EBITDA was $285 million, a reported 6.3% increase compared to $268 million for the 9 months ended in 2024. On the larger year-to-date adjusted EBITDA amount, last year's third quarter onetime $6 million benefit was an approximate 230 basis point drag on the year-to-date growth rate. Third quarter results include $11 million of stranded costs, which is the same as last year's third quarter and the second quarter of 2025. Year-to-date stranded costs were $25 million versus $39 million for the same period in 2024. We continue to believe the annualized stranded costs from the divestiture will be approximately $40 million. Adjusted net income was $0.25 per share, which compares to $0.36 per share in the third quarter of 2024. For the 9 months ended September 30, adjusted net income per share was $0.80 versus $0.64 in the same period last year. We are affirming our guidance for 2025 full year of revenue between $2.76 billion and $2.82 billion, adjusted net income between $1.02 and $1.07 per share and adjusted EBITDA between $376 million and $382 million. Based on my earlier comments around fourth quarter revenue, we expect full year revenue to come in toward the bottom of the guidance range. On the guidance assumption slide that has been posted to the Investor Relations section of our website, you will notice that the interest expense range has increased as a result of a change in the allocation of these expenses between continuing and discontinued operations. We believe the increase in interest expense will be offset by lower stock compensation expense. And as a result, the EPS guidance range is unchanged. Turning to the balance sheet and cash flow. At September 30, net debt was $2.1 billion. Since year-end 2024, the increase in debt is related to the expenses to exit the previously planned Rotech acquisition, which were paid in June of approximately $100 million and more recently, cost to remedy a challenging start-up of a new kitting facility for the Products & Healthcare Services segment, which has led to a temporary inventory imbalance. Work needed for that P&HS kitting facility is ongoing. And as a result, the net debt level at the end of this year is expected to be only slightly lower than at September 30. While detrimentally impacting third quarter cash flow, as shown in the consolidated cash flow statement, the overbought inventory from the start-up will benefit customer demand across the P&HS business lines in the coming months and reduces the cash needed to be spent over that same time period. It's important to recognize that more than 100% of the cash used from operating activity in the 3 and 9 months ended periods was due to the discontinued operations and that continuing operations, inclusive of stranded costs, generated cash from operating activity. In fact, in measuring levered free cash flow as adjusted EBITDA from continuing operations, less CapEx from continuing operations and less all interest costs across both continuing and discontinued operations, there was $28 million of free cash flow in the third quarter and $78 million through the first 9 months of the year. Before taking questions, I'd like to say we're very bullish on the outlook for the Home-Based Care business and recognize that it's a very exciting time in the history of Owens & Minor. We look forward to getting on the road, sharing our enthusiasm and having the market better appreciate the attractiveness of the home-based care space. With that, I'll now turn the call back to the operator for Q&A. Operator? Operator: [Operator Instructions] Your first question comes from the line of Michael Cherny with Leerink Partners. Daniel Christopher Clark: This is Dan Clark on for Mike. First one from us. I appreciate all the color you gave on kind of results in 3Q and how you're thinking about the rest of the year. At a high level, how should we think about the durability of these trends going into 2026? And then would love to hear as a follow-up, just kind of how you're selling into the Optum channel is going thus far. Edward Pesicka: This is Ed. I'll start. Selling in the Optum channel, it's new. We're -- we just recently signed the preferred provider agreement. We're tracking where we expect to track on that, but it's going to create more and more opportunities for us as we move forward. Regarding going forward in '26, we haven't published '26 data or information yet. We'll do that when we get closer to -- when we get -- when we report the full year results for the business. Jonathan Leon: Yes. I would just add, Dan, there's really not much secular going on that would change those trends. I'll remind you that we discussed in our 10-Q filed tomorrow morning that there'll be a large customer loss in the continuing operations in 2026 that will impact the full year. But absent that, we expect a fairly strong 2026. As I said, we'll put guidance out with the fourth quarter results. Operator: The next question comes from the line of Kevin Caliendo with UBS. Kevin Caliendo: I guess it's sort of a follow-up to that in terms of trends. Like how should we be thinking about this company's business or outlook for 2026? Is there anything you can kind of lay out in terms of how the trends are migrating, how we should think about modeling it broadly speaking? I know you're not here to provide guidance, but there's obviously so many moving parts and how to think about run rates or anything like that would be super helpful. And the same sort of around free cash flow for 2025 and maybe how to think about free cash flow trends beyond where we are? I appreciate the color on what the sort of normalized cash flow was this quarter? Jonathan Leon: Yes, Kevin, it's Jon. I'll take a crack at starting that. So if you think about the trends going forward, the continuing operations, you can see not dissimilar trends on an organic basis as you would normally see. I think we'll have -- absent the exiting one customer, which we have talked about quite a bit. And as I said, there's more detail in our 10-Q, you'll see tomorrow all of that. But absent that, I think we'll have a pretty decent top line growth rate, call it, organically, if you will, absent that loss and some margin improvement and cash flow improvement given the absence of that loss of that contract because that we've talked about before, that is not a margin attractive or necessarily cash flow positive contract that's being lost. So that will certainly improve. From a free cash flow perspective, on a continuing ops basis, as I tried to outline in my prepared remarks, I think you expect Q4 to look a lot like Q3 from a continuing ops basis. I think we will have some nice free cash flow. As we go to '26, again, the trend shouldn't necessarily change. We'll be losing the heavy CapEx burden of that one large contract, but we will have stranded costs that we have to -- we'll begin to actively take out once the divestiture closes. And as well, there's the start of the other divestiture-related costs that we'll be paying really more so in the back half of 2026. So I would expect it to be not terribly dissimilar to '25, recognizing that we'll have a number of those one-off costs around the divestiture, which we have generally sized and are part of the press release we put out around the divestiture itself. Kevin Caliendo: That's helpful. If I can ask a quick follow-up. The balance sheet -- there's so many moving pieces on here and current debt and timing. I know there's a lot going on here. So it's hard to get a full picture just on this one point in time. But relative post the acquisition or post the divestiture, excuse me, and where you sit, you have obviously talked with your credit agencies and everything else, your lenders. Are there -- is there any risk to covenants or anything that needs to change within those covenants coming out of this post sort of now that you've announced the deal and everything else is done and you're a month past -- or is that all fine? Jonathan Leon: No, we're good. Not at all. We just actually sent our covenant compliance to lenders and agencies in the last 48 hours. Very comfortable in compliance, and we expect to remain comfortably compliant throughout. Operator: [Operator Instructions] The next question comes from Daniel Grosslight of Citi. Daniel Grosslight: I was hoping you could provide a little bit more detail on how these preferred vendor agreements work and as we think about the loss of Kaiser next year, you've mentioned many times that, that's not an attractive piece of business from a margin perspective. But how many of these larger preferred vendor agreements do you think you would need to sign to kind of fill that Kaiser hole on the profitability from a profitability standpoint? Edward Pesicka: I'll start with that. And then obviously, we'll have Perry add some color onto this too. I mean, I think we did lose the large customer contract. It was a unique contract in that sense. And as Jon talked about it, when we looked at the EBITDA compared to CapEx on it, it was not a very positive cash flow generating business. So that alone will take very, very little additional revenue to pick up and cover that. And again, not to cover the revenue, but to cover the EBITDA and the cash flow. And then in addition to that, Perry, let me let you add additional color on what you're seeing and how you're thinking about those preferred provider agreements and the ramp of them. Perry Bernocchi: Thanks, Ed. And from a standpoint of the Optum agreement, it's in its early stage. As Ed said, we have 450 forward-facing salespeople that are marketing to over 100,000 potential referral sources within Optum. What it does do is give us a preferred position within the Optum closed network as Apria and Byram as the leading home care home-based DME provider. So that is a go-to-market strategy from a push and a pull perspective within Optum. To Ed's further point, it will take less contracts or less revenue growth to cover the loss of the contract that we are losing, given everything that Ed outlined and Jon outlined. It won't take much for us to replace from a margin -- from a gross margin and an EBITDA perspective. Daniel Grosslight: Got it. And just as a follow-up, I wanted to dig a little bit more into that issue in P&HS that is weighing on free cash flow. I think you mentioned with the kidney client. Can you just maybe explain that in a little bit more detail? And it is a little bit tough to look at your cash flow and balance sheet given cash flows on a consolidated basis and balance sheet is continued and discontinued operations. So maybe if you can help just parse out where in that -- in the cash flow statement, that headwind sits? Edward Pesicka: Yes. So I think there's a couple of things. I know Jon in his script, he tried to basically parse out as much as he possibly could, what the free cash flow looks like from a continuing operations basis based on continuing ops EBITDA, the CapEx as well as consolidated interest in the space. This has to do with -- we are opening up a new kitting facility outside of the U.S. There's normal start-up costs associated with that. And the biggest thing was the over acquiring of inventory to make sure we could make the kits and had it on there for scale. It's something that will work itself out through the next quarter plus, but it really is associated with a brand-new start-up of our kitting facility outside of the U.S. to make sure we have the ability to have diversified kitting both in the U.S. and external U.S. for our customers. And the bulk of that will show up in inventory as well as the change in payables we saw in this quarter. So Jon, I don't know if you want to add additional... Jonathan Leon: No, it's basically right. In my remarks, I mean, what we're doing now is making sure that, that burns off effectively that we serve all the customers' needs in the kitting business. And that has -- that defers other need for other capital across the business, both kitting and otherwise for the rest of the year. So it should burn itself off, but it will take a few months to do so. Operator: This concludes the question-and-answer session. I'll turn the call to Ed for closing remarks. Edward Pesicka: Great. Thank you, operator. It's really an exciting period in the history of Owens & Minor. We're incredibly excited about the future as a pure-play supplier in the home-based care. And I look forward to sharing this progress with everyone early next year. So thank you, everyone. Operator: This concludes today's conference call. Thank you for joining. You may now disconnect.
Operator: Good day and thank you for standing by. Welcome to the Laureate Education Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Adam Morse, Senior Vice President of Finance. Please go ahead. Adam Morse: Good morning and thank you for joining us on today's call to discuss Laureate Education's third quarter and year-to-date 2025 results. Joining me on the call today are Eilif Serck-Hanssen, President and Chief Executive Officer; and Rick Buskirk, Chief Financial Officer. Our earnings press release is available on the Investor Relations section of our website at laureate.net. We have also posted a supplementary presentation to the website, which we'll be referring to during today's call. The call is being webcast, and a complete recording will be available after the call. I would like to remind you that some of the information we are providing today, including, but not limited to, our financial and operational guidance constitutes forward-looking statements within the meaning of applicable U.S. securities laws. Forward-looking statements are subject to risks and uncertainties that may change at any time, and therefore, our actual results may differ materially from those we expected. Important factors that could cause actual results to differ materially from our expectations are disclosed in our annual report on Form 10-K filed with the U.S. Securities and Exchange Commission, our 10-Q filed earlier this morning as well as other filings made with the SEC. In addition, all forward-looking statements are based on current expectations as of the date of this conference call, and we undertake no obligation to update any forward-looking statements. Additionally, non-GAAP measures that we discuss, including and among others, adjusted EBITDA and its related margin, adjusted net income and adjusted earnings per share, total cash and equivalents, net of total debt and free cash flow are also detailed and reconciled to their GAAP counterparts in our press release or supplementary presentation. Let me now turn the call over to Eilif. Eilif Serck-Hanssen: Thank you, Adam, and good morning, everyone. Today, we are pleased to report strong operating and financial performance for the third quarter, along with the results of our recently completed intake cycles. Third quarter revenue was $400 million and adjusted EBITDA was $95 million. Both metrics were ahead of the guidance we provided in July. Favorable results for the quarter were driven by improved foreign currency rates and double-digit growth in Peru's secondary intake, led by fully online working adult programs as we continue to scale in that segment, albeit from a smaller base. The primary intake in Mexico was up 4%, excluding campus closures and in line with our expectations. The solid results during the intake were against the backdrop of a softer macroeconomic environment, reinforcing the resiliency of our business model. During the intake cycle, we also opened 2 new campuses for our value brand institutions, one in Monterrey, Mexico and one in Lima's Ate District in Peru. Both campuses opened on time, on budget and performed as expected. These campus openings were our first new campus launches since 2019. We also have 2 additional new campus projects underway, one in each market and expect these to open late next year or early in 2027. Beyond that, we have identified numerous other cities and site locations in both Mexico and Peru that are ripe for development over the next several years. The completion of the intake cycle provides us with strong visibility for the remainder of the year, and we are announcing an increase to our full year 2025 outlook, which Rick will cover in more detail later in his prepared remarks. Our balance sheet remains exceptionally strong. And today, we are also pleased to announce that our Board has authorized a $150 million increase to our stock repurchase program, underscoring our disciplined approach to capital allocation and focus on long-term value creation for our shareholders. From a macro perspective, Peru's economy continues to perform well, driven by robust domestic demand, new mining projects, strong commodity prices, rising wages and low inflation. GDP growth for this year is projected at approximately 3% with a similar pace expected to continue through 2026, reinforcing the country's path towards sustainable growth. In Mexico, President Sheinbaum's administration marked its first year in office with a public approval rating above 70%. The government has maintained fiscal discipline, advanced industrial modernization and promoted infrastructure investments through stronger public-private collaboration. U.S. trade policy uncertainties have caused the current macroeconomic environment to be a bit sluggish. However, Sheinbaum's pragmatic approach to managing the U.S.-Mexico relationship has helped maintain a constructive tone ahead of the upcoming U.S. MCA review. Most economists anticipate an increase in economic activity in the second half of 2026 and into 2027 following completion of these trade negotiations. That concludes my prepared remarks, and I'm now handing the call over to Rick for the financial overview of the third quarter as well as guidance for the fourth quarter and the full year 2025. Rick? Richard Buskirk: Thank you, Eilif. Before I discuss our financial performance for the quarter, let me provide a few important reminders on seasonality. Campus-based higher education is a seasonal business. Although the third quarter is a large intake period, from a P&L perspective, it is seasonally low as classes are out of session for much of the quarter. In addition, the timing of the start of our classes can shift year-over-year depending on various factors such as when public universities begin classes or when holidays occur. This, in turn, affects the timing of enrollments and revenue recognition and quarter-over-quarter comparability. In 2025, the beginning of classes, particularly in Peru, started later versus 2024, extending the enrollment cycle into mid-April and beyond the first quarter cutoff. As a result, we expect approximately $26 million of revenue and $23 million in adjusted EBITDA will shift from the first quarter to the second half of the year, primarily to the fourth quarter. As we review our operating results, I will provide additional color on these timing-related impacts. Let's start with Page 10 and 11 of the supplementary presentation, which highlight our operating and financial performance for the third quarter and year-to-date. For the quarter, new and total enrollment volumes increased 7% and 6%, respectively, versus the third quarter of the prior year. Third quarter revenue was $400 million and adjusted EBITDA was $95 million. Both metrics were ahead of the guidance we provided 3 months ago, aided by the favorable secondary intake in Peru, favorable price/mix and improved currency rates. On an organic constant currency basis and adjusted for the academic calendar shift discussed earlier, revenue for the seasonally low third quarter was up 6% year-over-year and adjusted EBITDA increased by 3%. Third quarter net income was $34 million, resulting in earnings per share of $0.23 per share on a reported basis. Third quarter adjusted net income was $37 million and adjusted earnings per share was $0.25 per share, an increase of 14% as compared to Q3 of the prior year. Now turning to year-to-date performance. On an organic constant currency basis and adjusted for academic calendar timing, results for the 9 months of 2025 were strong, with revenue and adjusted EBITDA growth of 8% and 13%, respectively, versus the prior year period. Let me now provide some additional color on the performance of Mexico and Peru, starting with Page 13. Please note that all comparisons versus prior year are on an organic and constant currency basis. Beginning with Mexico. Mexico's new enrollments for the third quarter increased 2% versus the prior year period on a reported basis or 4% excluding campus closures during their primary intake. Total enrollment volume for the third quarter increased 4% compared to the prior year period on a reported basis or 5% when adjusted for the impact of campus closures. As Eilif noted earlier, the macroeconomic environment in Mexico is currently a bit sluggish. The growth we delivered during this intake cycle demonstrates the resiliency of our business model and the value proposition our institutions offer to parents and students. Mexico's revenue for the third quarter increased 5% compared to the prior year period, and adjusted EBITDA was up 25%. Overall, pricing for the intake was in line with inflation for our traditional face-to-face students. On a year-to-date basis, Mexico's revenue grew 8% and adjusted EBITDA increased 21% versus the prior year period. The resulting margin increase of 240 basis points was led by productivity gains and revenue flow-through. Let's now transition to Peru on Slide 14. New enrollments in Peru increased by 21% for the third quarter compared to the previous year. Results were driven by strong growth in our fully online programs that serve working adults as we continue to scale in that segment. Total enrollments were up 8% versus the third quarter of the prior year, supported by a strengthening macroeconomic backdrop and the expansion of our fully online programs. Adjusted for timing of the academic calendar, Peru's revenue for the third quarter increased 8% year-over-year, driven by higher enrollment volumes. Overall, pricing for the secondary intake was in line with inflation for our traditional face-to-face students. Going forward, we do expect a price mix impact on average revenue per student due to the higher growth rate of our fully online programs. Adjusted for timing of the academic calendar, adjusted EBITDA declined 2% versus the comparable period in the prior year. This was due to timing of expenses, which we expect to be offset in the fourth quarter. On a year-to-date basis and adjusted for timing of the academic calendar, Peru's revenue increased 7% versus the prior year period. Adjusted EBITDA increased 5% and was impacted by the timing of certain expenses, which we are expected to normalize in the fourth quarter. Let me now transition to our balance sheet position. Laureate ended September with $241 million in cash and $102 million in gross debt for a net cash position of $139 million. Through September of this year, we repurchased $71 million of common stock under our previously announced $100 million repurchase program. Our strong balance sheet, cash accretive model and disciplined capital allocation supported our Board's decision to authorize a $150 million increase in our stock repurchase program. In total, $177 million remains available under our current upsized authorization. Upon completion of this authorization, we will have returned more than $3 billion of capital to shareholders since 2019 through a combination of share repurchases, cash distributions and cash dividends. Moving on to our outlook, starting on Page 18. Today, we are announcing an increase in our full year 2025 guidance at the midpoint by $61 million for revenue and $17 million for adjusted EBITDA. Our improved outlook for 2025 is resulting from the favorable secondary intake in Peru and better price/mix and favorable currency movements in the Mexican peso and Peruvian sol. Based on our assumed spot FX rates, we now expect full year 2025 results to be as follows: total enrollments to be approximately 494,000 students, reflecting growth of approximately 5% versus 2024. Revenues to be in the range of $1.681 billion to $1.686 billion, reflecting growth of 7% to 8% on an as-reported basis and approximately 8% on an organic constant currency basis versus 2024. Adjusted EBITDA to now be in the range of $508 million to $512 million, reflecting growth of 13% to 14% on an as-reported basis and 12% to 13% on an organic constant currency basis versus 2024. Adjusted EBITDA margin expansion of approximately 150 basis points, primarily driven by Mexico's continued margin optimization and operating leverage. Adjusted EBITDA to Unlevered Free Cash Flow Conversion of approximately 50%, reflecting our strong cash accretive business model and disciplined capital approach. Now moving to the fourth quarter guidance. For the fourth quarter of 2025, we expect revenue to be in the range of $521 million to $526 million, adjusted EBITDA to be in the range of $194 million to $198 million. Our fourth quarter outlook reflects the catch-up benefit from the intra-year academic calendar changes in Peru. That concludes my prepared remarks. Eilif, I'm handing it back to you for closing comments. Eilif Serck-Hanssen: Thank you, Rick. Our operations in both Mexico and Peru continue to perform very well, resulting in strong performance on a year-to-date basis and causing us to guide to an improved outlook for the remainder of the year. With leading brands, strong digital capabilities, disciplined capital allocation and a strong balance sheet, we are very well positioned to execute on our growth agenda and advance our mission of transforming lives across Mexico and Peru through high-quality, affordable education. Operator, that concludes our prepared remarks, and we are now happy to take any questions from the participants. Operator: [Operator Instructions] And our first question comes from Jeff Silber of BMO Capital Markets. Unknown Analyst: This is Ryan on for Jeff. On Peru, revenue for the quarter was really strong, especially in the context of the $7 million of revenue falling out from the calendar timing. I was just trying to understand some of the moving pieces with FX enrollment and pricing versus your initial forecast. Eilif Serck-Hanssen: Well, we are benefiting in Peru, of course, having the recession behind us, which means that we are seeing a little bit of a catch-up on delayed demand or deferred demand from last year. But we're also just seeing strong consumer sentiment. We have a very strong value proposition, which works well in the premium segment, in the value segment as well as a very rapid increase in demand for fully online working adult products. In terms of pricing for face-to-face, we have been pricing in line with inflation with the working adult product that's fully online. We have adjusted pricing to optimize our revenue production, but it has been from a relatively small base. It shouldn't have a material impact on the overall price dynamics in the market. But net-net, on the fully online product, we have taken a slight reduction in headline pricing. Unknown Analyst: Appreciate that. And just for the follow-up on the Mexican new enrollment growth for the quarter. I was hoping you could parse apart the plus 2% or the plus 4%, I guess, on an organic basis. I think last quarter, you had highlighted some working adult strength. So I was just wondering how that evolved. And then if you could give us anything on how the face-to-face new enrollment evolved in Mexico as well for the intake cycle. Eilif Serck-Hanssen: Yes. So the third quarter is really the main enrollment. So the focus is really young students. And what we call C1, cycle 1 and cycle 2 in first and second quarter are primarily working adult markets. So the vast majority of the volume momentum is driven by traditional 18- to 24-year-old undergraduate students in Mexico for third quarter. Operator: [Operator Instructions] And our next question comes from Lucas Nagano of Morgan Stanley. Lucas Nagano: We have a question about the intake in Mexico. If you could quantify the contribution, the percentage points from the new campus launched this quarter? In other words, how much did it grow without the new campus? Eilif Serck-Hanssen: So we had 4% growth when excluding campus closures and 1 point of that came from new campus launches. So 3% same store. Lucas Nagano: Perfect. And also, you mentioned that going forward, you expect pricing in Peru in line with inflation. How much should the average revenue per student be impacted due to the mix of [indiscernible] fully online? Eilif Serck-Hanssen: Rick, do you want to take the mix impact? Richard Buskirk: I mean overall inflation in Peru is trending very well. It's a headline around 2%. So that's as a starting point of what our target would be to match that in the market. And then mix impact could be upwards of 2% as we continue to aggressively go after the fully online working adult segment. And as a reminder, we're just getting started in Peru. We have over 100,000 students approximately in Mexico. We have a fraction of that in Peru, and we're starting to really see solid growth in that segment as we've seen posted in Q3 of this year. Operator: Thank you. This concludes our question-and-answer session and also today's conference call. Thank you for participating, and you may now disconnect.
Operator: Greetings, and welcome to the Adtalem Global Education First Quarter 2026 Earnings. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jay Spitzer, VP of Investor Relations. Thank you, Jay. You may begin. Jonathan Spitzer: Good afternoon, and welcome to our earnings call for the first quarter fiscal year 2026 results. On the call with me today are Stephen Beard, Chairman and Chief Executive Officer of Adtalem Global Education; and Bob Phelan, Chief Financial Officer. Before I hand you over to Steve, I will, as usual, take you through the legal safe harbor and cautionary declarations. Certain statements and projections of future results made in this presentation constitute as forward-looking statements that are based on current market, competitive and regulatory expectations and are subject to risks and uncertainties that could cause actual results to vary materially. We undertake no obligation to update publicly any forward-looking statement after this presentation whether a result of new information, future events, changes in assumptions or otherwise. Please see our latest Form 10-K, Form 10-Q for a discussion of risk factors that relate to forward-looking statements. In today's presentation, we use certain non-GAAP financial measures. We refer you to the appendix in the presentation material available on our Investor Relations website for reconciliations to the most directly comparable GAAP financial measures and related information. You will find a link to the webcast on our Investor Relations website at investors.adtalem.com. After this call, the presentation will be webcasted and archived on the website for 30 days. I will now hand you over to Steve. Stephen Beard: Thanks, Jay, and good afternoon, everyone. Thanks for joining us today. We delivered an outstanding start to fiscal year 2026. This marks our ninth consecutive quarter of enrollment growth. Total enrollment is up 8% year-over-year to 97,000 students. Revenue grew nearly 11% to $462 million, and we expanded our adjusted EBITDA margins by 100 basis points while delivering adjusted earnings per share of $1.75. That's growth of nearly 36% year-over-year. This performance demonstrates the power of our growth of purpose strategy and the operational excellence we've embedded across the enterprise. Walden grew enrollment for the ninth straight quarter and achieved record total enrollment. Our Medical and Veterinary segment posted its third consecutive enrollment cycle of growth. Chamberlain grew enrollment for the 11th straight quarter, and we're continuing to generate strong free cash flow while maintaining attractively low net leverage. Before I dive into the quarter, let me place our performance in the context of what's happening in health care. The health care workforce crisis continues to intensify. It's being driven by our aging population and accelerating retirements among practicing clinicians. This challenge is particularly acute in rural settings where nursing shortages alone are projected to triple by 2027 according to the National Center for Health Workforce Analysis. The shortage spans the entire health care workforce from physicians to technicians and represents a defining characteristic of health care for the foreseeable future. The industry is working to accelerate modernization through AI to augment practitioner efficiency, but these innovations don't solve the structural workforce challenge, and that's precisely where our opportunity lies. As the largest provider of health care-focused education in the country, we're well positioned to play a vital role as essential talent infrastructure. That opportunity has never been clearer or more compelling. Now, let me address Chamberlain's performance in the quarter directly. Chamberlain grew total enrollment by just over 2% in the first quarter to nearly 40,000 students, but that growth fell short of our standards. The primary driver was execution failures within our marketing and enrollment operations. We've completed a rigorous diagnostic, so let me be specific about what we found. First, we underperformed in local marketing effectiveness during our critical September intake cycle. Our local market campaigns didn't resonate as effectively as they could have in key metropolitan areas. And we failed to optimize our marketing mix quickly enough when we saw early warning signs. Second, we failed to convert inquiry volume at historical rates. Our enrollment funnel conversion rates fell below our benchmarks, which means we generated strong interest, but didn't close enrollments efficiently. That's an operational issue, and it's fixable. To be clear, this quarter's variance is driven by execution. The fundamentals of our Chamberlain platform remain attractively robust. Nursing demand has never been stronger. Chamberlain has a powerful brand that resonates with students and employers, significant capacity, a full breadth of nursing programs across multiple modalities. We have everything we need to serve this market effectively. We simply need to execute better at converting that demand into enrollment. Put another way, we're execution constrained, but not capacity constrained. So we've taken decisive action to strengthen performance. First, we've made operational improvements to our marketing mix with enhanced local market focus. We're reallocating resources to the channels and geography that drive the highest quality enrollments, and we're moving faster to optimize underperforming campaigns. Second, we streamlined our enrollment processes to reduce friction in the student journey. Every unnecessary step in our enrollment funnel is an opportunity to lose a student. So we're eliminating those barriers. Third, we've made key leadership changes at Chamberlain. Following the recently announced retirement of our current President, we're conducting a national search for Chamberlain's next leader. We've also restructured the senior leadership team to accelerate decision-making and sharpen accountability. These changes reflect our commitment to accountability. When we don't execute to our standards, we address it decisively. Looking ahead, we anticipate continued softness in post-licensure enrollment through the second and third quarters as we implement these changes. That's a realistic assessment based on enrollment cycle dynamics and the time required for our operational improvements to gain traction. However, we expect to return to stronger new enrollment in the back half of the year. We're already seeing early positive signals from our adjusted marketing approach and our restructured leadership team is moving with urgency and precision. To be clear, we believe this is fixable. We're leaning in to correct it with speed and discipline. And most importantly, this doesn't change our conviction in Chamberlain's long-term trajectory, its strength as a brand or our full year guidance as an enterprise. I also don't want to focus on this quarter's challenge to obscure Chamberlain's fundamental strengths and strategic progress. Our pre-licensure BSN programs continue robust enrollment. In just its fourth year, our online offering added nearly 750 students sequentially, now serving over 4,000 students in aggregate. Our second Atlanta campus in Stockbridge, which opened just 2 years ago, now has 600 students and our 24th location in Kansas City is now enrolling its first cohort starting this January. Taken together, that's all a testament to how quickly we can meet the market's demand for flexible, high-quality nursing education. We recently expanded our practice-ready specialty focused model through a partnership with the American Association of Post-acute Care Nursing. This addresses the critical shortage of post-acute care nurses. This new specialization joins existing tracks in critical care, emergency care, home health care, nephrology, oncology and perioperative nursing. Taken together, it further positions Chamberlain to meet the evolving needs of the health care workforce. Again, our fundamentals are strong, the market opportunity is massive, and we're addressing the execution gaps with rigor and accountability. Turning to Walden University. We delivered our ninth consecutive quarter of enrollment growth at nearly 14%, achieving record total enrollment of over 52,000 students. Walden's digital learning platform and flexible offerings continue to demonstrate strength as we innovate and deliver an increasingly seamless experience for working adult learners. We're optimizing our marketing mix, curating content for large language model recognition and building upon Walden's strong brand recognition. Our investments in program enhancements, the Believe & Achieve Scholarship offering and AI-enabled technology are translating directly into enrollment growth. We recently streamlined our professional doctoral programs, creating a more intuitive student experience with a simplified tuition structure, integrated scholarship support and a redesigned capstone process that enables students to build toward degree completion throughout their studies. Technology is enabling our faculty and advisers to spend less time on administrative tasks and more time on student-facing support. Walden's value proposition is clear and it is reflected in total enrollment growth across all degree levels and very, very strong persistence rates. In our Medical and Veterinary segment, we're showing consistent progress. Total enrollment grew 2.4% to approximately 5,300 students and key leading indicators across our medical schools are pointing to sustainable long-term growth. Notably, Ross Med had its largest September new student start in the last 5 years. And Ross Vet continues to operate near capacity, maintaining its position as a leader in veterinary education with a one-of-a-kind experiential learning model. Our partnership philosophy extends across all of our institutions as we create innovative ways to enhance educational access and remove learning barriers. AUC's partnership with the University of Lancashire in the U.K. remains our international hub. And we've established a new direct admittance partnership with the University of Wolverhampton, creating an additional pipeline for prospective students. We're expanding our global reach through a partnership with Sage in India, offering a pathway for Indian students to attend Ross Med upon completion of an advanced medical preparation program. And here in the States, we announced a partnership with ScribeAmerica, creating the MedPath program designed specifically for existing frontline health care workers to advance into medical school. This is an excellent pathway for experienced U.S. health care professionals to step up and help fill the physician gap. These partnerships aren't opportunistic. They're strategic investments in expanding access to in-demand health care education while strengthening our long-term enrollment pipelines. I also want to highlight our continued leadership in preparing students for technology-enabled careers. We recently launched a strategic partnership with Google Cloud to prepare health care workers for an AI-enabled future. This is the first partnership of its scale designed specifically for health care students and practicing clinicians, and it's fully complementary to our partnership with Hippocratic AI. We'll codevelop customized AI credentials for our students, including a foundational AI fluency course for every Adtalem student, plus specialized courses tailored for each career pathway, including nursing, physicians assistance, counseling and other disciplines. This partnership directly addresses one of health care's most pressing challenges while differentiating our institutions for prospective students and practicing clinicians. It's exactly the kind of forward-thinking investment that positions us as the leader in health care education. Our financial position remains exceptionally strong, giving us significant flexibility to execute our strategy and return value to shareholders. We're generating trailing 12-month free cash flow of $319 million. We have cash and equivalents of $265 million as of September 30. We increased our revolving credit facility by $100 million to $500 million, and we extended the maturity to August 2030. In addition, we repaid over $50 million of outstanding Term Loan B balance on October 29. We repurchased $8 million of shares in the first quarter with $142 million remaining on our $150 million Board-authorized share repurchase program through May of 2028. We're executing our capital allocation philosophy with discipline, investing first in student growth and then in strategic initiatives. We're maintaining financial strength and flexibility. We're returning excess cash to shareholders, and we're thoughtfully pursuing strategic M&A where we can find attractively valued assets that extend our capabilities or expand our presence in in-demand health care education markets. This brings me to our upcoming Investor Day on Tuesday, February 24, 2026. We're going to use that forum to provide much deeper visibility into our strategic road map, our capacity expansion plans, our long-term value creation framework and our capital allocation philosophy. You'll hear directly from our institutional leaders about how we're executing at the operational level. You'll see the operational discipline that allows us to invest in growth while expanding margins, and you'll gain a comprehensive understanding of how we're positioned to serve as the essential talent infrastructure for America's health care workforce. I encourage you all to join us either in person or virtually. Let me close with 3 clear statements. First, we're maintaining our full year fiscal 2026 guidance. That's revenue of $1.9 billion to $1.94 billion and adjusted earnings per share of $7.60 to $7.90. Second, our strategic opportunity has never been greater. The structural health care workforce shortage isn't going away. It's actually intensifying. We have the scale, the brand strength, the program breadth, the technology leadership and the financial resources to serve as the essential talent infrastructure for America's health care system. Third, we're going to continue to allocate capital with discipline, return value to shareholders and hold ourselves accountable to the highest standards of execution. That's our commitment to you, and we'll deliver on it. As I've said before, my objective above all else is creating category-leading long-term value for shareholders through operational excellence and strategic discipline. This quarter demonstrates that commitment. Our strong enterprise results show the power of operational discipline. We started the year with momentum. We're addressing challenges with clarity, speed and accountability. We're positioned to deliver on our commitments, and we're building a health care education platform that will create sustainable long-term shareholder value. I look forward to discussing all of this with you in greater detail at our Investor Day in February. And with that, I'll turn it over to Bob to walk through the financials in more detail. Robert Phelan: Thank you, Steve, and hello, everyone. We started the fiscal year with financial strength in line with our expectations as we continue to sustain our momentum. We are generating significant cash flow and have taken proactive actions to strengthen our balance sheet while also increasing our financial flexibility. We are well positioned to continue to execute our growth with purpose strategy and we will continue to be disciplined capital allocators. We are deploying capital to high ROI growth opportunities, focusing on maximizing our existing capacity. Further, our robust financials uniquely provide us with the ability to optimally invest in additional growth opportunities, bringing new capacity to market and providing innovative student-facing technology while continuing to increase our level of profitability. I'll now review our financial results and key drivers for our first quarter performance. Later in my remarks, I'll discuss our expectations and assumptions for the remainder of fiscal year 2026. Starting with the top line. Revenue in the first quarter increased by 10.8% to $462.3 million, driven by all 3 segments, in particular at Walden. Consolidated adjusted EBITDA came in at $112 million, up 15.8% compared to the prior year. This growth was led by Walden with Med/Vet contributing, partially offset by Chamberlain. Adjusted EBITDA margin of 24.2% expanded 100 basis points from last year. Adjusted operating income was $90.3 million, up 19% compared to the prior year as revenue growth and efficiencies generated operational leverage, which was partially offset by investments in our strategic growth initiatives. We continue to balance our strategic growth investments with our more efficient, integrated and scaled operational foundation. Our margin can fluctuate quarter-to-quarter as we remain flexible on how we deploy capital to generate the highest long-term return. Adjusted net income for the quarter was $64.9 million, up 28.5% compared to last year, attributed to adjusted operating income growth and lower interest expense resulting from our actions to reduce outstanding debt and our borrowing costs, partially offset by a higher provision for income taxes. Adjusted earnings per share was $1.75 or a 35.7% increase compared with the prior year. We repurchased 57,000 shares of our common stock at an average price of $134 within the quarter, resulting in first quarter diluted shares outstanding of 37.1 million or $2.1 million lower than last year. Next, I'll discuss the first quarter financial highlights by segment. Chamberlain reported first quarter revenue of $179.2 million, an increase of 6.7% compared with the prior year, driven primarily by growth in enrollments and pricing optimization. Total student enrollment during the quarter increased 2.2%, the 11th consecutive quarter of growth and our investments to grow our pre-licensure BSN online offering are yielding returns. Total enrollment growth in pre-licensure programs, along with high continued persistence rates was partially offset by post-licensure programs. Adjusted EBITDA decreased by 5.1% to $35.1 million for the quarter. Adjusted EBITDA margin of 19.6% was 240 basis points lower compared to the prior year as we reinvested revenue growth, focusing on bringing new capacity to market and continuing to invest in our students to support enrollment growth and academic outcomes. Turning to Walden. First quarter revenue of $190 million, an increase of 17.6% versus the prior year was driven primarily by strong growth in enrollments. Total student enrollment was up 13.6% compared to the prior year, the ninth consecutive quarter of growth from robust enrollment growth across all degree levels, particularly in master’s and undergraduate and continued high persistence rates. Growth in our health care programs was led by social and behavioral health and nursing. Our non-health care programs also grew in the quarter. Adjusted EBITDA increased by 29.5% to $61.9 million. Adjusted EBITDA margin expanded by 300 basis points versus the prior year to 32.6% as our operational excellence generated efficiencies and leverage that outpaced increased brand, student-facing digital investments and additional student support commensurate with the high level of new enrollment. For the Medical and Veterinary segment, first quarter revenue was $93.1 million, an increase of 5.9% versus prior year. Total student enrollment was up 2.4% as a result of our execution against our long-term strategic growth initiatives at our medical schools, and vet continues to operate near capacity. Adjusted EBITDA increased by 11.6% versus the prior year to $21.4 million. Adjusted EBITDA margin increased 120 basis points versus the prior year to 23% as we remain focused on operating our institutions efficiently while making long-term growth investments, leveraging our existing capacity and delivering academic outcomes. We started the third year of our growth with purpose strategy with strong results. Our operational excellence continues to fuel increased investments in future growth off of record levels of enrollment. We are sustaining momentum and in turn, we are maintaining our fiscal year 2026 guidance as we continue to execute our strategic and financial goals. Revenue in the range of $1.9 billion to $1.94 billion, approximately 6% to 8.5% growth year-over-year, with adjusted earnings per share in the range of $7.60 to $7.90, approximately 14% to 18.5% growth year-over-year. Looking forward to the remainder of the year, we continue to anticipate revenue growth to be higher in the first half of the year than in the second half. As Steve mentioned in his prepared comments, our maintained guidance contemplates softness in Chamberlain's top line in the second and third quarters. And as a reminder, for Walden, one academic week shifts from the third quarter into the second quarter this fiscal year. Our top priority remains to reinvest into our institutions and deliver positive student outcomes through our financial strength and dynamic capital allocation approach. And while we plan to make targeted investments during the second quarter, we remain committed to expanding our fiscal year 2026 adjusted EBITDA margin by approximately 100 basis points. Included within our guidance are the recent capital allocation actions as well as our continued strong cash flow generation. Finally, we continue to anticipate an effective tax rate to be higher than fiscal year 2025. We started the fiscal year with strength in line with our expectations. We will continue to execute on expanding access and delivering positive student outcomes, deploying capital to meet the health care education market's growing demand, maximizing long-term value and ultimately generating high returns for all stakeholders. And with that, I'll now turn the call over to the operator for Q&A. Operator: [Operator Instructions] Our first question comes from the line of Jack Slevin with Jefferies. Jack Slevin: Nice work on the quarter guys. I want to start the commentary on Chamberlain and all the color you gave. But maybe just to get a little bit more granular there. I just want to understand sort of the range of outcomes that you're thinking about moving forward here given the really strong ramp you've had the last 2 years in enrollment. And sort of are we thinking this is something where we might see sequential declines in enrollment as you sort of get new starts back online? Or I'd just love to think through sort of the range of outcomes that you're thinking about in that second and third quarter guidance as you look at the Chamberlain volumes. Stephen Beard: Yes. So I'd encourage you to put the deceleration in post-licensure nursing into a discrete box. We don't believe this represents a go-forward trend in that part of the Chamberlain portfolio. We believe that our market position in post-licensure nursing remains strong. We've historically taken share in RN to BSN and expect to continue to do that. This is really, I think, a misstep on our part in relation to how we thought about marketing in advance of the September enrollment cycle. And so we've taken a hard look at where we went wrong, what we can do to remedy that. And we expect that while we'll see a tail on that deceleration flow through the balance of the year, we will recover, and we will continue to defend our position in post-licensure nursing at the same time, growing really, really attractively what we're doing in pre-licensure nursing, particularly with our BSN online program. So again, this is not a trend that has legs in our view. This is a onetime dislocation that's a result of our execution miss. But because it's within our control, we feel very confident about what that means for purposes of the out periods in post-licensure nursing, and that's why we're confident enough to maintain our guide for the full year. Jack Slevin: Okay. Got it. Super helpful. One follow-up on that front. So just to maybe look at the margin in the quarter pulls back a little bit in Chamberlain. Should I think about that as a reaction to some of the trends you were seeing intra-quarter? Or can you sort of spell out what you think about sort of that trajectory going forward on the cost side? Stephen Beard: Yes. Look, I think as we begin to recover the top line at Chamberlain to something consistent with what we would expect ordinarily, you'll see the margin expansion over the course of a full year period. So that, too, is a reflection of the temporary pressure on the top line from the performance miss in September. We expect to recover that as we approach the end of the fiscal year. Jack Slevin: Got it. Okay. Super helpful. Last one for me and more just sort of out of an abundance of caution given your stock traded off 5% yesterday. Just want to sort of clarify that you feel comfortable with where your systems, backbone and platforms from a technology standpoint are across your business, but probably in Walden would be the most relevant one. Stephen Beard: Just want to clarify the question. Just our technology infrastructure generally. Jack Slevin: Yes. I guess you had a peer yesterday or someone in the peer set that had sort of large issues around -- yes, do you get the question now? Stephen Beard: Yes, perfect. Thank you for the clarification. No, we feel great about the tech stack that we use to support the operations, both on the front end of the funnel as well as everything we deploy in support of the student journey. And in fact, we are really excited about some of the innovations that we're rolling out to both enhance and differentiate that student journey. So certainly sympathetic with what happened with one of our peers, but no analogous dynamic in our model to be concerned about. Operator: Our next question comes from the line of Jeff Silber with BMO Capital Markets. Jeffrey Silber: Sorry to go back to the Chamberlain issue. How do you know that this is not a competitive issue where you're losing share? Stephen Beard: Because as recently as 2 quarters ago, we were taking share in RN to BSN. We know -- you know and we know that's not a growth area in the way that it was many years ago, but we believe we still have one of the most attractive brands in RN to BSN. We believe that employers, in particular, are keen to see their RNs make the leap to BSN through Chamberlain's program. So there's nothing we're seeing in the competitive landscape that gives us any concern that we've lost our positioning relative to the alternatives. I just think as we've looked to move from an historical national-based marketing campaign to one that's more market specific, we had a misstep along the way. I think we've diagnosed that well. And I think you'll see the product of that correction over the course of the fiscal year. We intend to defend our position to RN to BSN given our legendary strength there, even as we grow our pre-licensure presence through BSN Online. So I don't believe we are suffering from any adverse competitive dynamics in post-licensure nursing. Jeffrey Silber: Okay. That's really helpful. Last quarter, you announced a partnership with Sallie Mae, and I was just wondering if we can get an update on how that's progressing and when we may see some announcement in terms of the specifics. Stephen Beard: Yes. We're working to finalize definitive documentation with Sallie Mae. My hope is that we'll be able to close that relatively soon, and I expect we'll be able to announce that. We're really encouraged by what that means for all the students we have across the portfolio and Sallie Mae's willingness to step up and support the broad program mix we have. But that work continues to be in flight, and we're certain we'll get it locked down soon. Operator: Our next question comes from the line of Alex Paris with Barrington Research. Alexander Paris: Add my congrats on the strong quarter. I have a couple of questions that are more industry-oriented. Earlier this year, the Department of Education announced increased verification efforts to root out fraud across all of higher education. I've talked with a couple of other companies in this space, one notably that had some issues with friction because of the fraudsters crowding out well-intentioned students, and that had an impact on new student enrollment. I'm wondering what your thoughts are there and maybe just some additional color about what you have to do now that you didn't have to do before? And are you seeing a spike in increased fraudulent activity in the enrollment process? Stephen Beard: Yes. So I'll answer the second part of the question first. We're not seeing any spike in go students or fraudulent enrollments or anything like that. We obviously are subject to the same administrative burdens associated with the department's focus on that as everyone else. But as we sit here today, we don't have any concerns that that's an issue across our program set. But obviously, we continue to monitor it closely. Alexander Paris: Yes, I was wondering if that might have been a contributing factor with the new student enrollment challenges at Chamberlain, but [indiscernible]. Stephen Beard: No. Really, at Chamberlain, 2 issues. One, the marketing mix we deployed in advance of the September cycle wasn't effective as hoped and wasn't executed as well as hoped. And then also at the conversion level, even where we were seeing strong demand with a number of missteps at the conversion level, which resulted in the diminished enrollment growth for that cycle. But I don't believe the verification issue had anything to do with the deceleration in enrollment at Chamberlain. Alexander Paris: Okay. Good. And then kind of shifting gears a little bit. I got 2 more. The Google Cloud partnership and these AI credentials that you're talking about for health care professionals, this would be both existing students as well as noncurrent students at Chamberlain and the other brands within the portfolio. Are these 4 credit courses? And as such, are they Title IV eligible given the increased coverage proposed in the Big Beautiful Bill for shorter-term credentials? Stephen Beard: Yes. As an initial matter, these are programs that will run alongside our existing degree programs. We're ways away from thinking about how to embed them comprehensively in our programs. Obviously, there are accreditation issues that come with that, but we think that's an opportunity down the road. We view this as a way both to provide a differentiated student experience by creating baseline fluency and AI tools across our student populations and to create stackable credentials that have real currency in the clinical marketplace. So Google has been in the certification and stackable credentials business for a while. It's really exciting to be able to partner with them in a way that brings what we do best together with what they do best. So not wholesale modifications to existing degree programs, but ancillary complementary certificate programs that run alongside our degree programs. Alexander Paris: Got you. Is there an additional cost for existing students? And likewise, is there a cost for non-existing students? Stephen Beard: No incremental additional cost for students. Alexander Paris: Got you. Okay. And then my last question is, again, industry-related. Given one of your competitors made an announcement about the impact of military, active duty, tuition assistance, I'm wondering what your institutional, your enterprise exposure is to military. And I suspect that's primarily GI Bill and VA. Stephen Beard: Yes. So active duty military exposure is pretty low, very low actually. Obviously, the platform you're referring to, that's a very large part of their model. So we've not really seen any problems with student disbursements, whether that's veterans benefits or traditional Title IV benefits. Obviously, it's something we continue to monitor as the shutdown drags on. But for the moment, that has not been an issue for our programs. Alexander Paris: Yes. That was my related question, government shutdown related. And then last question, kind of just a silly one. The February Investor Day, is that going to be held at your Chicago headquarters or elsewhere? Stephen Beard: It won't be in Chicago, TBD. I suspect it will be out East, but we'll have details for you pretty soon here. Stay tuned. Operator: Our next question comes from the line of Steven Pawlak with Baird. Steven Pawlak: On the marketing missteps at Chamberlain, I guess just kind of maybe piggyback off an earlier question, what gives the confidence that the marketing mix or marketing message in your other programs is appropriate that there isn't -- or that this is sort of contained and now addressed problem? Stephen Beard: Yes. So we deploy a central marketing center of excellence that then localizes our marketing programs for each of our institutions. So even though our institutions are like in the sense that they're all postsecondary, the unique marketing strategies across the portfolio do vary quite a bit. So we have every reason to believe that the root causes of the misstep in September with Chamberlain are Chamberlain-specific. And no reason to believe that they present any issue for any of the 4 institutions, and that's obviously borne out by what you see in the enrollment trends across those institutions. So it's a Chamberlain-specific issue. We have a tremendous amount of confidence in the steps we've taken to address it, and we're confident that, that will flow through results of operations over the course of the fiscal year. Steven Pawlak: Okay. And then on the sort of conversion challenges, is there a particular part of the funnel that students were sort of falling out of? Or was it maybe more the number of steps and sort of the increased friction points that you referenced? Stephen Beard: Yes. So any time there's a handoff of a student from one part of the enrollment journey to another, that's an opportunity for leakage. And at Chamberlain, we determined that there are opportunities to simplify and reduce the number of handoffs in a way that diminishes the risk of that kind of leakage. When our students are considering our programs, they're also considering other programs and our ability to stay in front of them to ensure they're getting the information they need to make an informed decision about enrollment. It is critical to preserve the kind of high conversion rates that make all the difference in our model. That just didn't happen in September, but we believe we know what needs to happen for the upcoming enrollment cycles at Chamberlain to change that outcome starting with January. Operator: There are no further questions at this time. I'd like to pass the call back over to Steve Beard for any closing remarks. Stephen Beard: I just want to thank the team across the Adtalem family for a really strong and robust start to the fiscal year. This is year 3 of growth with purpose for us. We've been incredibly pleased with the strategy, and we look forward to a strong third year of that strategy, but that is entirely down to the folks that support our students across our 5 institutions. So a sincere thanks to our teams. Operator: That concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, and welcome to the Arrow Electronics Third Quarter 2025 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Michael Nelson, Arrow's Head of Investor Relations. Please go ahead. Michael Nelson: Thank you, operator. I'd like to welcome everyone to the Arrow Electronics Third Quarter 2025 Earnings Conference Call. Joining me on the call today is our Interim President and Chief Executive Officer, Bill Austen; our Chief Financial Officer, Raj Agrawal; our President of Global Components, Rick Marano; and our President of Global Enterprise Computing Solutions, Eric Nowak. During this call, we'll make forward-looking statements, including statements about our business outlook, strategies, plans and future financial results, which are based on our predictions and expectations as of today. Our actual results could differ materially due to a number of risks and uncertainties, including due to the risk factors and other factors described in this quarter's associated earnings release and our most recent annual report on Form 10-K and other filings with the SEC. We undertake no obligation to update publicly or revise any of the forward-looking statements as a result of new information or future events. As a reminder, some of the figures we will discuss on today's call are non-GAAP measures, which are not intended to be a substitute for our GAAP results. We've reconciled these non-GAAP measures to the most directly comparable GAAP financial measures in this quarter's associated earnings release. You can access our earnings release at investor.arrow.com, along with a replay of this call. We've also posted a slide presentation on this website to accompany our prepared remarks and encourage you to reference these slides during this webcast. Following our prepared remarks today, Bill, Raj, Rick and Eric will be available to take your questions. I'll now hand the call over to our Interim President and CEO, Bill Austen. William Austen: Thank you, Michael, and good afternoon, everyone. I am humbled, honored and excited to serve as Interim President and CEO of Arrow Electronics. I have been a Director at Arrow since 2020, and I deeply believe in the management team and strategic direction that we have been charting. I, along with the full board, are committed to maintaining continuity, driving execution and delivering results for our customers, partners and shareholders while we search for a permanent successor. During my first few weeks, I have been meeting with employees, customers, suppliers and investors. The message is simple. There will be no change in Arrow's commitment to excellence and customer service, which has been foundational within this business for 90 years. I have also taken the opportunity to listen to all parties to get an understanding of what makes us unique, respected and sets us apart from the competition. Our management team remains committed to our strategic direction. We remain focused on delivering high-quality innovative technology solutions for our stakeholders. As we review today's results and outlook, you'll see that we are executing well in a market that continues to gradually recover from a prolonged cyclical correction. The fundamentals across both our global components and enterprise computing solutions or ECS businesses remain resilient, and we believe we are positioned to emerge with improved momentum. I would like to comment on the U.S. Department of Commerce's Bureau of Industry and Security, or BIS, placing 3 of Arrow's Chinese subsidiaries on its entity list in early October. The Arrow team took decisive action and 10 days later, BIS informed us that it intends to remove these subsidiaries from the entity list and granted a letter of authorization to resume normal business activities. I am pleased with the prompt resolution to this matter, which underscores Arrow's robust and continuously evolving trade compliance program, a significant reason why suppliers and customers choose Arrow. Starting on Slide 3. In the third quarter, we delivered revenue above the midpoint of our guide as well as earnings per share above the high end of our guidance range. With contributions from both our global components and ECS segments. While we are taking decisive action to navigate the current environment and continue to improve operational and financial performance, I want to remind the investment community of Arrow's strengths and opportunities for growth. Turning to Slide 4. Arrow is a leader in electronic components and enterprise IT industries underpinned by a platform-based data-driven business model. We play a pivotal role in connecting the world's leading technology manufacturers and service providers. Our business operates in a large and growing market. We know that there are ample opportunities to grow our core product distribution business by leveraging our global logistics footprint to deliver the latest technologies to the market. The distribution total addressable market, or DTAM, for our core distribution business is over $250 billion, with demand for value-added services, extending Arrow's addressable market even further. Supporting the DTAM is the strength of 6 primary end markets that we serve, transportation, industrial, aerospace and defense, medical, consumer electronics and data center. We are well aligned with all 6 core markets and believe our strategy is on point for delivering long-term sustainable growth. As our business continues to evolve, we intend to drive profitable growth through a deliberate shift toward an increased mix of higher-margin value-added offerings in relation to the product distribution services. Suppliers and customers can rely on Arrow for a broad range of services, deepening our legacy relationships and opening the door to new opportunities. This has been a natural extension for Arrow, building upon our core distribution platform with accretive value-added offerings like supply chain services, engineering and design services and integration services, drilling down into a few examples. First, within our global components segment, our supply chain services offering is well established and positioned to support growth in AI infrastructure build-out. For example, many of the hyperscalers and even some of the other players that are making massive infrastructure investments in large language models need help with sourcing, managing, staging and provisioning of electronic components globally. Arrow supply chain services provides the support so hyperscalers get the right source in the right region of the world at the right time so they can build out their points of presence. In short, our customers stick to their competency and releverage ours, staging and moving materials throughout a very complex global supply chain, and we do it with confidence and ease. We are effectively enabling customers to outsource a piece of their entire supply chain or a piece of their bill of material to Arrow. They can then focus on what they do best, like research and development or go-to-market, we focus on what we do best and the result is a win-win. Supply chain services are accretive to our core business, and we expect that the global trend toward investment in AI will create a significant tailwind. Second, let's focus on our engineering and design services. Engineering and design services is another area where we become an extension of OEMs and suppliers product development and design team, not for days or weeks, but for quarters and potentially years to help them design the next generation of their product portfolio, gives us a completely different way to not only serve our OEM customers, but in some cases, even our traditional suppliers. Like supply chain services, engineering and design services carry a higher margin profile than the core business. And lastly, in our Intelligent Solutions business, we are involved in designing, building and testing discrete compute hardware and associated software that enables our suppliers to quickly bring unique appliances to the market. This is a growing unit and margin accretive to the core business. Another lever for margin expansion is our ability to create a productivity flywheel that focuses on driving costs out, which in turn creates reinvestment capacity for growth and margin expansion. Our efforts to date have focused on simplifying operations, consolidating resources and geographic realignment. Our productivity and cost-out efforts are becoming part of everyday life at Arrow as it creates reinvestment capacity and leverage in the business. One of Arrow's key differentiators is our diversified business model which enables Arrow to become more relevant to suppliers and customers, and it provides us the right to play more completely throughout the technology life cycle. In other words, we participate from design and planning to deployment and further to management and support of technology solutions. Our ECS business is a nice complement to our electronics business and is comprised of hybrid cloud and infrastructure software, hardware and services to deliver solutions, such as cyber security, data protection, virtualization and data intelligence, much of which is on the ramp to AI. This reflects our ongoing alignment to the higher growth demand trends across enterprise IT, many of which are now served on an as-a-service basis. This continues to contribute to the growth of our recurring revenue volumes, now roughly 1/3 of our total ECS billings. Within our ECS business, we are capitalizing on an opportunity to expand our addressable market and accelerate growth through evolving strategic outsourcing arrangements, which we have implemented with multiple large suppliers. Under the strategic outsourcing model, Arrow becomes the brand and the exclusive partner of the supplier in the region, taking control of the go-to-market activities. Our diversified business model that includes electronic components and enterprise IT solutions contributes to our capital allocation strategy because it creates more resilience on the balance sheet and helps us to continue to generate strong free cash flow over time. Our capital allocation strategy is focused in 3 areas: reinvesting in organic growth opportunities, M&A opportunities and returning excess capital to shareholders. As a reminder, we have returned approximately $3.5 billion to shareholders via share repurchase since 2020. As always, we are committed to carefully and rigorously evaluating all uses of capital with the ultimate goal of generating the highest risk-adjusted return on investment over the long term and maintaining an investment-grade credit rating. Before I turn the call over to Raj, I want to emphasize that Arrow remains committed to disciplined execution, strengthening our supplier and customer partnerships and delivering sustainable value for our shareholders. With that, I'll now hand things over to Raj, who will walk you through the financial results in more detail. Raj? Rajesh Agrawal: Thanks, Bill. On Slide 5, sales for the third quarter increased $890 million year-over-year to $7.7 billion, exceeding the midpoint of our guidance range and up 13% versus prior year or up 11% year-over-year on a constant currency basis. Third quarter consolidated non-GAAP gross margin of 10.8% and was down approximately 70 basis points versus prior year, driven primarily by regional and customer mix and global components and by product mix and a $21 million charge we took in ECS, which I'll detail in a moment. The charge reduced consolidated non-GAAP gross margin by 30 basis points. Our third quarter non-GAAP operating expenses declined $15 million sequentially to $616 million. The decline was largely driven by a reversal of stock-based compensation expense and cost savings initiatives, which more than offset higher variable costs to support top line sales growth as well as the impact of currency exchange rates. In the third quarter, we generated non-GAAP operating income of $217 million, which was 2.8% of sales. Margins remained flat sequentially due to continued headwinds from our regional mix and customer mix. offset by growth in our accretive value-added offerings and continued productivity initiatives. Interest and other expense was $55 million in the third quarter, and our non-GAAP effective tax rate was 22.5%. And finally, non-GAAP diluted EPS for the third quarter was $2.41, which was above our guided range, driven by a number of factors, including favorable sales results and a lower interest expense. The aforementioned charge lowered EPS by $0.31. Turning to Slide 6. Let's take a closer look at our global components business. Global components sales increased $610 million year-over-year and $271 million sequentially to $5.6 billion, above the midpoint of our guidance range and up 5% versus prior quarter. We continue to believe that the business remains in the early stages of a modest cyclical upturn reported by several key data points. Our book-to-bill ratios remain above parity in all 3 regions. Our backlog continues to improve, growing again in the third quarter. All 3 of our operating regions continue to perform at or better than seasonal trends. Sales for both semiconductor and IP&E components grew sequentially in the third quarter. Activity levels across our industrial and transportation markets remain healthy. These are our 2 largest verticals globally. Our value-added offerings, namely supply chain services, engineering and design and integration services performed well and remain margin accretive to our business. Stated lead times remain at low levels, and despite our continued backlog growth, visibility is needed relative to a normal environment. Inventory levels in aggregate have normalized, however, mass market customers are not recovering as quickly as compared to larger OEMs, which is a headwind to profit margins. This is not a typical to prior cycle, and we believe this sale of the market remains healthy and we're still seeing destocking among mass-market customers. Lastly, our APAC business was first in and first out of the downturn and continues to outpace the Americas and EMEA at this stage of the upturn. This again is not atypical, however, it does create a headwind to overall profit margins. Taking a closer look at each of the regions. In the Americas, sales were flat sequentially at $1.7 billion and strength in industrial and transportation markets drove our results. Sales in EMEA were $1.4 billion with industrial and aerospace and defense markets including resilient despite macroeconomic and geopolitical headwinds. And finally, our sales in Asia grew sequentially 12% to $2.4 billion, our growth was once again broad based, highlighted by strength in industrial, compute and consumer, along with continued EV momentum in the transportation sector, similar trends to what we observed in the second quarter. Global components non-GAAP operating income increased $10 million sequentially to $199 million, representing 6% growth. Non-GAAP operating income margin was flat sequentially at 3.6%. Turning to Slide 7 in our global ECS business. Global ECS sales increased $300 million year-over-year to $2.2 billion, above the midpoint of our guidance range and up 15% versus prior year. Global ECS billings were $5.2 billion, up 14% year-over-year. We experienced continued momentum in hybrid cloud infrastructure software, hardware and services to deliver solutions for cybersecurity data protection and data intelligence related to data center activity for AI investment. We again enjoyed healthy backlog growth in excess of 70% year-over-year to an all-time high as our mix of business continues to shift to more recurring multiyear revenue. As Bill mentioned, our ECS go-to-market strategy is broadening as we continue to improve the value that we provide in the distribution channel. From technical expertise and project management to mid-market channel enablement through our Aerosphere digital platform, which supports cloud and AI scale and acceleration, our ECS business is growing beyond the traditional distribution model and expanding our addressable market through new strategic outsourcing engagements. This new motion provides aero exclusivity, cross-sell opportunities and stickier relationships as Arrow becomes the sole operator in the market. From a margin point of view, if we are successful in selling the product well in the strategic outsourcing model, engagement is accretive. In the third quarter, we took a $21 million charge, largely due to lower profit expectations on multiyear contracts that have underperformed. Broadly, we believe these strategic outsourcing agreements will be margin accretive at a key part of our long-term business. We are learning from each agreement and believe it will better position our ECS business for the future. ECS non-GAAP operating income declined $12 million year-over-year to $65 million, driven by the $21 million charge. Non-GAAP operating income margin was 3% as the charge lowered margin by 100 basis points. On Slide 8, net working capital grew sequentially in the third quarter by approximately $450 million, ending the quarter at $7.3 billion, driven primarily by sales growth that led to higher accounts receivables. Our cash conversion cycle increased sequentially by 5 days in the third quarter to 73 days as a result. Inventory at the end of the third quarter remained at $4.7 billion, and our inventory turns continue to improve. We will maintain our focus on matching our inventory to associated demand trends as the current cyclical recovery continues. Cash flow used for operating activities in the third quarter was $282 million. On a year-to-date basis, cash used for operating activities was $136 million, which supported revenue growth of approximately 6%. Gross balance sheet debt at the end of the third quarter was $3.1 billion. Now turning to Q4 guidance on Slide 9. We expect sales for the fourth quarter to be between $7.8 billion and $8.4 billion representing an increase of 11% year-over-year at the midpoint of the range. We expect global component sales to be between $5.1 billion and $5.5 billion, in enterprise computing solutions, we expect sales to be between $2.7 billion and $2.9 billion, which is up approximately 13% at the midpoint year-over-year. We're assuming a tax rate in the range of 23% to 25% and interest expense of approximately $60 million. Our non-GAAP diluted earnings per share is expected to be between $3.44 and $3.64 and Details of the foreign currency impact can be found in our earnings release. I want to provide some color as you build your 2026 model. At this stage, the pace of the cyclical upturn is proving to be gradual given the level of broader macroeconomic uncertainty, many of the primary end markets that we serve are finding momentum and achieving year-over-year growth. However, regional and customer mix dynamics are presenting headwinds to profitability. It is our belief that similar to cycles of the past that the West will catch up to the east along with a recovery among mass market customers. We're seeing this in the leading indicators that we've highlighted. However, the pace of this shift appears measured as we look into 2026. We will provide more color during the fourth quarter earnings call. I'll now turn things back over to Bill for some closing thoughts as we look ahead. William Austen: Thanks, Raj. Turning to Slide 10. Looking forward, our key priorities are clear. First, we are seeing trends in our global components business that suggest we are in the early stages of a gradual recovery. Second, we will continue to leverage the strong secular trends in cloud and AI that is driving strong growth in both our Supply Chain Services business and in our ECS segment. Third, we are focused on delivering profitable growth through a persistent shift toward an increased mix of higher-margin value-added offerings and a continued execution of our productivity initiatives. Finally, we will continue to allocate capital to the highest return on investment opportunities with the goal of increasing returns for our shareholders. With that, Raj, Rick, Eric and I will now take your questions. Operator, please open the call for questions. Operator: [Operator Instructions] We'll take our first question from Will Stein at Truist Securities. William Stein: First, Bill, thank you for this introduction. I appreciate it and congrats on the good results. I'm hoping you can maybe clarify whether you might be a candidate for the permanent CEO position or are you limiting yourself to an interim role? William Austen: Thanks, Will. Nice to meet you. Good question. I'm really happy, humbled and honored to be in the interim role and I'm in the interim role. I am not on the candidate list for the full-time CEO role. At the Board level, we put a search committee together, led by Steve Gunby, our Chair. We have several Board members, and myself, on the initial committee. We are fully moving down the path at this point to finding a candidate. We have selected a search firm, of which I will not name at this point. And we are going to be in the throes of reviewing candidates in the not-too-distant future, but I am not -- I will not be one of them. I will go back to retirement. And I will remain on the board. Thanks for the question. William Stein: Got it. As a follow-up, really sort of taken into a different direction a little bit, whether it's you or Raj, could you maybe linger on the on the charge that the company took during the quarter, maybe explain what this contract was. Is it still in force? Is it completed? Is it abandoned? And what was the economic condition that gave rise to the charge? Rajesh Agrawal: Yes. Well, it's a good question. Let me -- since Eric Nowak is here, let me give it to him first to talk a little bit about what we're -- what these contracts are in terms of the strategy, and then I'll come back to the financial impact that we've seen. Eric Nowak: Thank you, Raj. We are talking about strategic outsourcing, and this is a fast-growing part of our business. Our suppliers are contracting to us diverse noncore parts of their business to focus on their own priorities. So we are implementing these models with several large suppliers in both North America and EMEA. And as Bill said already, under this agreement, Arrow is acting on behalf of the vendor for a given perimeter and becomes the brand. We take control of the go-to-market activities. So this new merchant provide us exclusivity, cross-selling opportunities, better margin and stickier relationships as we become the sole operator in the market, including for the white space of the supplier and sometimes also in other parts of the world. Rajesh Agrawal: Yes. So Will, I would just also add that we're really excited about these contracts. We've already gotten several hundred million dollars of billings this year, and that's going to be a big growth vehicle for us longer term for ECS and for the company. We do evaluate the performance on these contracts every period and the charges related to underperformance I would think about it as underabsorption of fixed fee payments that we're supposed to be making. And what I would say is that we're going to continue to grow through some growing pains. We're going to get some margin variability. But if you were to think forward a couple of years in terms of when these things get to steady state, we should be able to achieve double the gross margins on these versus what we achieve in the rest of ECS. So that's why we're really excited about it. So it should give us really good top line growth and bottom line growth. We called out the $21 million charge this quarter only because it's more material in size. We have taken some smaller charges during the first part of the year, but this one was more material we would hope that we wouldn't have anything material like that in the future, but we're likely to have some additional charges in the future that are just going to be part of our normal P&L. Operator: We'll move next to Ruplu Bhattacharya at Bank of America. Ruplu Bhattacharya: Raj, I want to delve a little bit more into the ECS margins. Typically, you see a strong growth between the September quarter and the December quarter. Can you talk about what you're seeing in terms of mix, hardware versus software? And how should we think about that sequential change in margins given this quarter had the charge and so it was lower than expected. So how should we think about that ramp between September and December? Rajesh Agrawal: Yes. Look, I would think about -- and we quantified the impact of the charge in the third quarter. So it was worth almost 100 basis points, so about 100 basis points. If you were to adjust for that, we would still we expect fourth quarter to be very strong for the ECS business, and that's really reflected in our outlook. You can see we gave you sort of the net sales outlook, but the billings growth, GP dollar growth and operating profit dollar growth should be quite good in the business. And margins should also be strong compared to last year. So we have no concerns about what the performance will be in the fourth quarter for ECS. Ruplu Bhattacharya: Okay. Maybe as a follow-up, if I can ask you, Raj or Bill. Bill, by the way, congrats on the interim role. If you guys can give a little bit more detail on the comment you made about things being recovering a little bit slower, which end markets or which verticals are you seeing slower growth in? And as it pertains to the outlook for regions, it looks like Asia remains strong. So just how should we think about margin progression in this environment? I know you're not giving full guide for '26 right now. But how does this temper your to 90 days ago versus what you have thought about components sgement margins and ECS segment margins going forward? William Austen: Yes. I'm going to -- this is Bill. I'm going to have Rick Marano answer that question to give you the insight as to how the verticals look in Asia. Richard Marano: Yes. So thank you, Ruplu, for the question. I would say kind of touching on what both Bill and Raj said overall, look we firmly believe we're in a recovery in the early stages of a gradual recovery in the marketplace overall. The leading indicators in all 3 markets remain robust, meaning book-to-bill, meaning backlog coverage and design starts as well are very positive for us at this point in time. Transportation and industrial, which are 2 very large verticals for us continue to respond in positive results for us, and they are leading the way for us in our Asian markets as well. And again, as Bill and Raj touched on earlier, we truly believe that based off of what we're seeing in APAC today as the market recovers in the West and the mass market recovers, we'll see both increased sales and margin accordingly as the year goes on in '26. Rajesh Agrawal: Yes. And Ruplu, let me just add on your question around the '26 trajectory. I did make some comments towards the end of my prepared remarks. . Primarily because we continue to see a gradual recovery. As we look at our leading indicators and how we see the business playing out during the course of next year, we do believe that it is recovering, that will be a gradual recovery. As we've looked at some of the models that are out there for the space that we operate in, they seem to be quite aggressive. And so we just wanted to make a point that we see more of a gradual recovery in the business next year. Ruplu Bhattacharya: Okay. If I can sneak one more in. Given the recovery that you're seeing in hardware and maybe it's a gradual recovery, you also talked about some new type of contracts. How would this impact your working capital and inventory requirements going forward? How should we think about cash conversion cycle in this environment? Rajesh Agrawal: Yes. I mean this is more on the ECS side with the newer contracts, newer distribution agreements that we talked about. Yes. I mean, look, we -- as I mentioned, we're still in the early stages. So we're learning from how these things will ramp up. There may be some more working capital required in some of these contracts, but we're still learning in its early stages. I think the key point to remember here, Ruplu, is that these things can be very margin accretive. And so it's okay to deploy a little bit more working capital if we have margins that are coming with it. And that's how we really think about it. So we're certainly going to manage the working capital appropriately. But ECS overall is relatively light working capital business, and it provides us higher returns, and I wouldn't see that changing time. Operator: [Operator Instructions] We'll go next to Joe Quatrochi at Wells Fargo. Joseph Quatrochi: Maybe just a couple, if I could. How big is the supply chain services today and some of the focus that you talked about in the prepared remarks is going after some of these AI insertion opportunities. What type of investment do you need to make on your side to address those? Rajesh Agrawal: Yes. Let me just start off. When we talk about value-added services, one of the items is supply chain services, the other couple areas are engineering design and then the integration services business that we have. Supply chain and most of these are not going to be that impactful from a revenue standpoint, but they're higher-margin businesses because we typically will get paid a fee for the supply chain services offering, and then for the engineering and design services. So we don't really talk about them in terms of what's the mix of the business. And -- but from a profit standpoint, all of these are very margin accretive. And they could easily be, in some cases, double or the gross margins that we get in the regular part, if I can say it that way, in the components business. And the great thing about these things is that we get paid fees for the services that we're providing. So whatever investment we're putting into this, we want to get compensated for it. And yes, and we certainly want to make sure that our costs are being covered in this kind of an offering. So these are -- this is really a win-win, win for all parties involved here. We're getting paid for the services we provide, and we're making money on that, but the parties that we're serving here, the large customers are also benefiting with our supply chain services. So we like the business, and it's a really good margin accretive part of our components business. Operator: And that concludes our Q&A session. I will now turn the conference back over to Bill Austen for closing remarks. William Austen: Thank you. And thank you, everybody, for joining the call today. Once again, I'm excited, humbled and happy to be here. Looking forward to being the interim CEO at Arrow until we find the permanent CEO and I'm really glad to be leading this team amongst this big global powerhouse of Arrow Electronics. So thanks for joining. Operator: And this concludes today's conference call. Thank you for your participation. You may now disconnect.